Evolved and developed after the crypto winter of 2018, Synthetix joins a number of decentralized finance (DeFi) protocols that have helped shape the DeFi ecosystem. The platform has seen tremendous growth in a very short period of time, demonstrating that they are here to attempt to reorganize the world of traditional finance, forex, equity, and commodities trading as we know it.
What is Synthetix and why has the Synthetix platform rocketed forward in the world of DeFi?
Let’s dive in to find out more.
What is Synthetix?
Synthetix is a decentralized finance (DeFi) protocol powered by their native token Synthetix (SNX). SNX are Ethereum based ERC-20 tokens, designed to allow crypto enthusiasts to trade non-crypto assets on the Ethereum blockchain.
Synthetix allows you to mint, trade, and track the real-time prices of derivatives in fiat currencies, bonds, cryptocurrencies, stocks, and commodities, all without needing physical copies of the real assets that you’re attempting to use. A synthetic asset of the underlying stock or commodity is created on the Synthetix blockchain, allowing anyone, anywhere, to trade the underlying asset on the blockchain.
According to available data, Synthetix is one of the DeFi projects with the most value locked in its contracts, with over $1 Billion CAD staked on the Synthetix network.
Who is Behind Synthetix [SNX]?
Kain Warwick, a non-executive member of the Blueshift retail platform, founded Synthetix. Before founding Synthetix, Warwick worked on several other cryptocurrency projects and launched Pouncer, a live auction service available only in Australia.
Kain imagined a world in which anyone with internet access and SNX tokens in their wallet could easily create synth subunits or synthetic assets of the actual asset you want to trade in the real world. These synthetic assets would mimic the prices of real-world assets such as gold, silver, oil, and so on, but would be blockchain-based, built on Synthetix contracts. These Synthetix contracts (smart contracts) would then allow any person to trade synths on the network, giving people the ability to interact with the real world via the blockchain, despite not having access to, or owning the underlying asset.
Why Would Anyone Want to Trade Synthetic Assets?
Because it allows you to have exposure to an underlying asset without having to own it. Depending on how advanced you are as a trader, this can be a very big benefit, allowing you to buy options, leverage your exposure with shorts, or perform derivatives trading as needed.
Additionally, almost anything that has a reliable price feed could theoretically be made into a “synth”, which opens up a world of possibilities.
How Does Synthetix Work?
Synths track the prices of the assets represented using decentralized oracles. Similar in nature to chainlink oracles, Synthetix oracles are smart contract-based price discovery protocols that allow you to hold and exchange synths.
The oracles essentially gather price feeds and data from reliable sources (often centralized price feeds like the New York Stock Exchange (NYSE)) and return that price information to the network. From here users can trade the synthetic version of the real-world asset, using SNX tokens.
All Synths created by staking SNX tokens on Synthetix are backed by a 600 percent collateralization, a ratio determined by community governance. However, the use case extends beyond that to address the liquidity issues that most decentralized exchanges (DEX’s) face.
Solving DEX based liquidity issues
Remember, DEX’s must rely on smart contracts and liquidity pools to ensure that enough liquidity (buyers and sellers of a particular asset or crypto) are available at any given point in time. If for example, you go onto a DEX to trade ETH, but there’s no ETH available, well then your trade simply cannot be processed.
A similar challenge arises when you try to trade a synthetic asset on the Synthetix network, there must be enough liquidity for you to trade.
Using a pooled collateral architecture, traders can make conversions between Synths directly with a smart contract, eliminating the need for third parties like a normal DEX would.
Currently, Synthetix offers synthetic fiat currencies, cryptocurrencies (both long and short term), and commodities.
Staking rewards & encouraging liquidity
Encouraging holders’ to stake SNX requires incentive. Users who stake their tokens get a proportional share of the fees produced by Synthetix.exchange, which is based on their amount of time contributing to the network. Because it grants users the ability to engage in the network and capture fees made by Synth exchanges, it helps contribute to the value of the SNX token as a whole.
However, it’s not absolutely necessary to own SNX to trade on the Synthetix exchange.
Economics Of Synthetix: Trading In An Open Market
The Synthetix platform was designed primarily for trading Synths. For example, holders of Synths might take a long position on an asset by betting on its price increase. Alternatively, they can short an asset or wager on its depreciation without owning the underlying asset as we’ve discussed before.
Like all cryptocurrencies, SNX’s value is determined by the open market. As a result, the number of Synths in circulation may fluctuate as the price of SNX gains bullish momentum or is bearish. At the time of this writing, there are approximately 114-million SNX in the market, with a max supply of 212-million SNX.
Holders of SNX can use it to create new Synths, get prizes, and see their holdings grow via staking their cryptocurrency. This may explain why over 50% of the overall SNX supply is currently locked.
If the price of SNX rises, the system will release new SNX tokens and sell them on the open market to guarantee that new Synths can be created. These SNX tokens can be re-locked on the platform to create new Synths, and the cycle continues.
Can You Generate Passive Income Through Synthetix?
Yes, as is the case with other cryptocurrencies in DeFi, staking Synthetix will yield you a return on your investment.
As you may be aware, typically staking entails locking up cryptocurrency to participate in a proof-of-stake (PoS) consensus, such as is the case with Ethereum 2.0. Staked cryptocurrency coins are locked for a certain amount of time, which ensures the stability of the network and helps verify transactions. For maintaining and securing the network, users that stake tokens are rewarded.
As Synthetix is an asset issuance and trading platform, staking requires depositing and locking up the native SNX token in a collateral pool, and, as such, is different than a traditional PoS staking system.
Trading on Synthetix is enabled via the collateral pool, which is one of the reasons why the Synthetix Exchange may claim to have “infinite liquidity.” This is because dealers place trades against the collateral pool.
When trades are profitable, the pool’s value decreases as gains are dispersed among the participants. Each time a trader loses money, the pool accumulates the losses and grows in value. Individuals who bet SNX are reimbursed for the provision of liquidity on the Synthetix exchange as well as for taking on the risks associated with doing so. In addition to sUSD, rewards are also handed out in SNX.
Those staking SNX earn a proportion of the trading fees paid in sUSD and a proportion of newly minted SNX tokens, which are distributed weekly. Thus, the staking community receives 90% of all freshly created SNX tokens.
Anyone holding the SNX token is eligible to stake on the Synthetix network.
The Past, The Present, The Future Of Finance
Synthetix spent most of 2019 climbing to the top of the DeFi application charts before announcing its intention to transition to a decentralized governance structure by the end of that year.
With a robust ecosystem, Synthetix is likely to continue being a powerful player in the DeFi ecosystem moving forward.
Synthetix (SNX) Resources