IntroductionAt the core of the Decentralized Finance (DeFi) movement is the aim of reinventing traditional finance products and concepts for the blockchain. To further this aim, the DeFi community has pioneered many mechanisms, most of which are now considered the standard.
Among these mechanisms is the concept of synthetic assets, an asset group that provides investors with exposure to the value of assets unavailable on the blockchain. One of the protocols pioneering the issuance of synthetic assets or synths is Synthetix, a DeFi protocol that is paving the way for synthetic assets to become a significant sector in the cryptocurrency space.
This article will discuss the protocol, the technology behind Synthetix, and its native token, SNX. It will also explore the protocol’s governance model and explain how to begin trading synths as a beginner.
What is Synthetix?
Built on Ethereum, the home of DeFi, Synthetix is a decentralized synthetic assets platform that mints synthetic assets using an over-collateralization mechanism. Synthetic assets, or synths, are on-chain versions of derivatives from traditional finance. With synthetic assets, investors can profit from the value of an underlying asset without actually holding the asset.
Synthetix is a DeFi protocol that issues synths as ERC-20 tokens on the blockchain. Assets supported by the DeFi protocol include fiat currencies, commodities like Gold, and cryptocurrencies, all represented by their token name and an “s” prefix. The platform also has provisions for a different type of synth called inverse synths, created to track the opposite of the underlying asset. In summary, a user who holds the inverse BTC sync (iBTC) stands to make a profit if the price of BTC falls.
Synthetix aims to increase access to assets not existing on the blockchain. Alongside fiat currencies and commodities, Synthetix also allows synths to be created for index funds so that traders can benefit from an asset group instead of a single underlying asset. Synthetix also allows its users to trade synths on its decentralized exchange (DEX), Kwenta.
A Look at the Evolution of SynthetixSynthetix originally began as a platform named Havven. In 2017, Havven was founded by Kain Warwick as a collateral-backed stablecoin issuer. However, the team behind the project decided to go in a different direction.
Thus, in 2018, the company was renamed Synthetix to better represent the protocol’s ability to support synthetic assets other than the premier USD stablecoin. After this decision, the company raised $30m in funding through its ICO and sale of the protocol’s native token, SNX.
Since then, the protocol has evolved into one of the standard names in the DeFi community.
How Does Synthetix Work?The Synthetix architecture is incredibly technical as it features various smart contracts and other complicated mechanisms. Nevertheless, integral to the Synthetix architecture is decentralized price oracles. All price feeds on the Synthetix platform are supplied by independent node operators on Chainlink, the decentralized oracle network. Thus, the value of each underlying asset for a synthetic asset is supplied and updated by the oracles to ensure accuracy.
Instead of relying on actual reserves, as is the case with stablecoins, each synth merely relies on the price of an asset. Smart contracts within the Synthetix infrastructure make it so that owning an sUSD represents exposure to the price of USD and not ownership of USD itself.
Because Synthetix is built on the Ethereum blockchain, all synths are ERC-20 tokens and compatible with other decentralized exchanges such as Uniswap.
Source: Synthetix - Synths
Synthetix EcosystemInfrastructure:
Mintr: Interface for minting and burning synthetic assetsExchanger: Decentralized exchange for trading synthetic assetsDepot: Interface for buying and selling base assets on SynthetixStaking: Interface for staking SNX tokens to earn rewards
Applications: Synthetic assets from Synthetix can be widely used in scenarios such as trading financial derivatives and hedging risks. It has become one of the most active and innovative protocols in the DeFi field. As the Synthetix ecosystem continues to expand, its influence on financial innovation will further increase.
Synthetix V3Synthetix V3 introduces a brand-new architecture with advanced technologies aimed at improving the protocol’s scalability, efficiency, and security. Innovations such as Optimistic Rollups and Chainlink Oracles help significantly increase transaction throughput, reduce transaction fees, and enhance overall system security.
New Synthetic Assets: In addition to the architectural upgrade, Synthetix V3 also introduces a variety of new synthetic assets, including cryptocurrencies, stocks, commodities, and more. The introduction of these new assets further enriches the Synthetix ecosystem, providing users with more trading and investment options.
Liquidity Mining: To attract more user participation, the Synthetix team has launched a new liquidity mining program that offers SNX token rewards. This encourages users to provide liquidity on Synthetix, helping to increase the activity and liquidity of the entire ecosystem.
Integration with Other Protocols: Synthetix V3 also strengthens integration with other DeFi protocols, such as deep collaboration with Curve Finance, allowing users to trade Synthetix synthetic assets on Curve. This cross-protocol interoperability further expands Synthetix’s influence on the DeFi field.
What is the SNX Token?
Like most other decentralized protocols, Synthetix issues its native token. As the platform was formerly named Havven, its native token, HAV, at the time, corresponded with the platform name. HAV was initially launched in the third month of 2018, and the total supply was $100 million. At its launch, 60 percent of the total supply of tokens was issued for a total of $30 million during the Initial Coin Offering (ICO).
The remaining 40 million HAV was split thus:
8 million between marketing and partnerships;12 million to the Havven foundation (to be distributed in a schedule over the next 12 months);And the largest sum, 20 million, went to the founding team, tied to another distribution schedule, lasting over two years.
After the protocol was rebranded, the token was renamed SNX to correspond with the new name, Synthetix. By 2021, a multi-million dollar funding round shot the price of SNX to an all-time high of $28.77.
SNX Use CasesAside from being the governance token for the Synthetix platform, the SNX token has some additional use cases.
Governance: SNX holders can participate in Synthetix’s governance decisions.Staking: Users need to stake SNX tokens to mint synthetic assets.Rewards: Users participating in the Synthetix ecosystem can earn SNX token rewards.
Staking Rewards and IncentivesSynthetix’s business model provides incentives and rewards to users who stake their SNX tokens. Staking SNX can be done in many ways, and the rewards also vary.
Exchange rewards: A fee is generated on each exchange a user carries out on the Synthetix decentralized exchange platform, Kwenta. The exchange fee varies between 0.1% of the transaction to 0.6%. The coalition of these exchange fees is then distributed to SNX stakers weekly.Inflation: The Synthetix Protocol incorporates an inflationary monetary policy. As such, stakers profit if they hold their SNX tokens for a prolonged period.
Overcollateralization and Synth mintingThe SNX token is a key player in creating synthetic assets on the Synthetix platform. To create a synth, users must deposit up to 400% of the value of their synth token as collateral. Because creating a synthetic asset on the Synthetix protocol means incurring debt, each user’s SNX tokens are held until they burn their minted Synths to pay off the debt.
Synthetix Governance ModelSynthetix was originally overseen by a non-profit foundation in Australia. However, in support of decentralization, the administration of the protocol was shifted and split between four governing councils, Spartan, Grants, Ambassador, and Treasury.
The Spartan council is at the center of the Synthetix governance model, comprising eight members. All eight members vote on the following:Proposals to improve the protocolChanges to the parameters, such as the collateralization ratio and gas fees.The Grants council has a more specific agenda and is made up of 5 members. The grants council is responsible for grants, initiative bounties, and competition prizes to boost the platform.With five members, the Ambassador Council represents the interests of the Synthetix protocol on the Ethereum blockchain and in the larger DeFi ecosystem.Finally, the Treasury Council acts like any other treasury body. The members manage the funds of the Synthetix platform and oversee stipend payments and discretionary incentives.
All members of the Synthetix governance bodies receive 2000 SNX tokens as stipends.
How to Interact With Synthetix?
There are two main ways to interact with the Synthetix platform, both of which involve trading or creating synths. One method is through the decentralized exchanges that support Synthetix, and the other is staking.
Derivatives TradingSynthetix offers a powerful derivatives trading platform through applications like Kwenta, Polynomial, and Thales, allowing users to trade various synthetic assets (Synths). Kwenta is a decentralized derivatives exchange that provides infinite liquidity and supports 42 different assets, including forex, cryptocurrencies, commodities, and indices. Users can perform zero-slippage trades on this platform regardless of trade size, capturing market growth opportunities. Synthetix’s innovative liquidity model enables these trades without a counterparty, addressing liquidity and slippage issues commonly found in traditional decentralized exchanges.
Liquidity MiningSynthetix’s liquidity mining feature is primarily implemented through the Liquidity App, which allows users to stake SNX tokens to provide liquidity and earn rewards and fees. Users can deposit assets such as SNX, USDC, and ETH and choose different liquidity exposures based on risk preferences. This liquidity mining mechanism not only facilitates the operation of the Synthetix ecosystem but also provides users with a stable income stream, further enhancing the overall liquidity and efficiency of the platform.
Decentralized Exchanges
The decentralized exchange platform for trading Synth is Kwenta. Kwenta differs from other DEXs because it replaces the generic order book mechanism with peer-to-contract trading. This means that a smart contract executes each exchange on the platform. To trade a synth on Kwenta, you must have ETH and an Ethereum wallet such as MetaMask. Once you have those two, follow these steps:
Visit the Kwenta Website and click on “Start Trading.”
Click “Connect Wallet” on the next page to link your Ethereum Wallet to the exchange.On Kwenta, exchange your ETH for sUSDNow that you’ve traded your first synth, you can trade the sUSD for other synths like sBTC.
StakingIf a user prefers to create a synthetic asset from scratch, the primary way to do this is by staking. As mentioned, Synthetix operates on an over-collateralization mechanism; users must stake SNX to mint synths. These tokens are available for purchase on cryptocurrency exchange platforms like Gate.io.
Once you have purchased SNX, the next step is to deposit it in an Ethereum wallet. After doing that, follow these steps:
Visit the Synthetix Staking website.In the right-hand corner of the page, click the dropdown and connect your wallet.
Available wallets include Coinbase, Portis, WalletConnect, Torus, and Ledger.Deposit SNX from your wallet and create your preferred synth, using your SNX as collateral. Remember that you must deposit at least 400% of the value of the synth you’d like to mint.To withdraw your SNX tokens, you simply burn synths.
Additionally, Synthetix gives users the option of using ETH as collateral. In this case, the Collateral ratio is 150%.
ConclusionSynthetix provides users with a channel to access on-chain derivatives through synthetic assets. Although the concept of Synthetix is more complex than other protocols, its integration with other decentralized exchanges makes its usage more convenient. Despite being one of the earliest DeFi projects, the Synthetix protocol has not yet fully released its potential. With the rapid expansion of the DeFi world and the emergence and innovation of various new technologies, the Synthetix protocol will likely grow and thrive with this wave of development.