On the participants of synthetic derivative markets

Synthetic asset markets created by Kraken, dYdX, and Variational are really closed-loop simulation casinos. Because synthetic assets aren’t actually “shares” of real equity, synthetic asset markets operate more as a zero-sum equilibrium: every win comes from the wallet of a loser. In other words, the synthetic asset doesn’t actually get put in said company’s book as capital, and there’s no real net “value creation,” other than liquidity. This liquidity is proportional to the number of speculators that actually want to assume risk to make a potential profit.

Participants of synthetic markets:

• Major western institutional investors (e.g. hedge funds). They route their funds offshore, and use these markets to execute higher leverage or lower fee trades that aren’t possible in regulated markets.
• “VPN Retail” investors from Western countries: Frankly, this subset isn’t very smart. Most folks from US and other western countries have local laws prohibiting use. Moreover, most people in Western countries have little incentive to use them, as they have more legal and more safe ways to access the same markets.
• Retail investors from developing countries (Vietnam, Argentina, Venezuela, Turkey, Nigeria): This is probably the clients that make the most sense. Because they don’t have easy access to buy stocks and other securities via more traditional platforms (e.g. brokerages or Robinhood), they often have to resolve to using synthetics.
• Asia: Weirdly, this is one of the largest participant blocks. Many retail investors from Asia prefer the 24/7, high-octane nature of the crypto casino over their local, heavily restricted stock markets.