The commerce world is popular for trading stocks, fiat currencies, commodities, and other real-world assets found in various exchanges and markets globally. This presents a huge potential that, unfortunately, crypto users can’t access directly. Apart from direct access, users also need a cost-effective, borderless, and permissionless way to access the commerce world.
For instance, if you hold 10 Bitcoins and want to buy commodities, you must exchange your Bitcoins for fiat money and sign up with commodity exchange or broker to trade your favorite commodities. This process is definitely tedious and costly – you will incur crypto-to-fiat withdrawal costs and wait for days to set up and pass the verification process.
What if there was a blockchain option for representing such assets and making them easily available to cryptocurrency holders? Well, this is exactly what Synthetix is doing.
Synthetix has developed a set of decentralized features to allow crypto users to access real-world assets like commodities seamlessly. You don’t have to cash your crypto holdings into fiat or sign up with legacy systems to access them.
This article takes you through Synthetix, how it works, what makes it unique, and more.
Synthetix is a decentralized finance (DeFi) protocol that facilitates the issuance and trading of synthetic assets on Ethereum. Similar to derivatives in traditional finance, synthetic assets are assets that derive their value from crypto and real-world assets. Synthetix’s native token (SNX) offers collateral against synthetic assets. Besides, SNX is used to secure the Synthetix network through staking.
You can buy and sell real-world assets by generating synthetic assets that track their real-time prices through oracle feeds. Unlike legacy systems, Synthetix doesn’t require you to provide personal information or pass know your customer (KYC) and anti-money laundering (AML) processes. What’s more, you don’t even need to create an account!
Through the Synthetix platform, you can access stocks, forex markets, raw materials, and other real-world assets. You can do this by simply locking SNX tokens on the protocol. In addition, you can stake synthetic assets to generate passive income from the fees paid by the buyers. The other exciting feature of the Synthetix platform is that you can cash out trillion dollars of assets from legacy markets through price exposure to real-world assets on the blockchain.
Who Founded Synthetix?
Kain Warwick is the founder and CEO of Synthetix. Prior to founding Synthetix, he created multiple crypto payment gateways in Australia, including Blueshyft. Besides, Warwick acted as an Advisory Council Member in Blockchain Australia and an Advisory Board Member at The Burger Collective. Initially, Warwick started Synthetix as Havven, and managed to raise $30 million in 2018 via an Initial Coin Offering (ICO).
Apart from Warwick, there are two more core Synthetix team members – Justin Moses and Clinton Ennis. Moses is the Chief Technology Officer (CTO) at Synthetix and has worked for the company since its inception. He previously worked as an engineering director at MongoDB, gaining extensive experience in large-scale systems, particularly design and deployment. On the other hand, Ennis boasts 18 years of experience in software engineering. He previously worked as an Architect Lead at JPMorgan Chase.
How Does Synthetix Work?
The role of Synthetix requires it to facilitate the issuance of various tokens known as synthetics or Synths. Synths are blockchain tokens issued to represent real-world assets in a market, interact with them, and maximize the properties of the underlying assets without physically holding them. They strive to allow exposure to a broad basket of assets (commodities, fiat currencies, bonds, etc.), remove entry barriers, and improve the liquidity of real-world assets. Synths achieve all these without surrendering the potential of the underlying assets, like their value, liquidity, and global acceptance.
Each Synth is backed by a system of guarantees, participation, inflation control, fees, and governance. Therefore, if you want a Synth representing copper, the protocol will issue you with a token, such as sCOPPER. Since the token is issued on the Synthetix chain, it’s supported by the entire Synthetix infrastructure and governed by smart contracts.
This infrastructure acts as a system of assurance, mitigating unwanted losses, controlling inflation, rates, oracles, and governance over that Synth. Synthetix protocol’s native token (SNX) controls these parameters since you must lock some SNX tokens in the protocol to create Synths. Moreover, Synthetix functions similarly to MakerDAO. The difference is, in MakerDAO, you can use various assets to mint DAI, but in Synthetix, you can only mint various Synths using SNX.
As such, the use of oracles is essential for the proper functioning of the Synthetix network, as they bridge real-world assets to the features of the Synths on the blockchain. For instance, if copper declines in value on the global market, the oracle will relay this information to the Synthetix protocol and realign the price of sCOPPER with the global market.
How Synths Maintain Their Pegs
Since Synths track the values of real-world assets, they must ensure their values mimic those of real-world assets. There are three ways through which Synths maintain their pegs:
SNX stakers experience debt when they create Synths. If the peg drops, they can exploit the situation by purchasing sUSD back at a lower price and burning it to minimize their debt since the protocol always equates 1 sUSD to $1.
sETH Liquidity Pool on Uniswap
When users stake SNX tokens, the system generates an exchange fee and allocates it to a liquidity pool accessible by SNX stakers. The process enables users to buy Synths for various investment purposes.
Synthetix has partnered with dFusion to sell discounted SNX tokens at auction for ETH. The ETH tokens are then used to buy Synths that have fallen below their pegs.
The SNX token dates back to the Havven project and ICO, where $30 million was raised with 100 million Havven tokens. However, when Havven rebranded to the Synthetix network, Havven tokens were also renamed Synthetix tokens (SNX).
According to Synthetix tokenomics, 60% of the SNX tokens are assigned to investors and token sales, 20% to the team and advisors, 12% to the foundation, 5% to partnerships, and 3% to bounties and marketing incentives.
In March 2019, Synthetix developed an inflationary token supply mechanism for incentivizing stakers. The table below shows the overview of this mechanism, based on a weekly 1.25% inflation rate decrease.
The inflationary mechanism will end in September 2023 at a total token supply of approximately 250 million SNX. At this point, the protocol will transition to a constant 2.5% annual issuance rate. However, there is a Synthetix Improvement Proposal (SIP) from Kain to end SNX inflation with a 300M total supply of tokens in 10 weeks.
Just proposed a SIP to end SNX inflation at 300m tokens in ten weeks. After informal discussions today, it seems like it has a decent chance of passing. A formal presentation is planned for next week. Inflation was designed to bootstrap the network and it has done the job.
— kain.eth (@kaiynne) August 25, 2022
SNX is an ERC20 utility token that fuels the Synthetix blockchain by facilitating two primary purposes:
It is used to mint Synths, enabling the participation, buying, and earnings of various Synth tokens.
It is used in the Synthetix DAO governance. SNX holders can vote on Synthetix proposals and shape the project’s future.
Staking SNX to Mint Synths
As mentioned, Synths are baked by SNX tokens. You can mint Synths by staking SNX tokens as collateral through its staking feature. Currently, Synths require a 400% collateralization ratio, but this may be amended in the future via community governance. Essentially, SNX stakers experience debt when they create Synths, and to unlock SNX, they must clear the debt by burning Synths.
Besides, Synthetix accepts ETH as an alternative collateral token. This implies you can mint Synths using your ETH holdings and start trading immediately instead of converting your ETH to SNX first. However, staking ETH requires a collateralization ratio of 150%, creating an ETH-denominated debt. Therefore, ETH stakers are issued with sETH instead of sUSD and do not qualify for pooled debt. A pooled debt is where stakers share risk for the debt pool and are incentivized for that role.
SNX holders are incentivized to stake their assets in various ways.
First, exchange rewards are created when users exchange Synths on the Synthetic decentralized exchange (DEX) – Kwenta. Every trade imposes a transaction fee, allocated to a fee pool where stakers claim their fair share on a weekly basis. The fees range from 10 to 60 bps (0.1% to 0.6%) and are shown during trades.
The second incentive for SNX stakers is SNX staking rewards, which result from the network’s inflationary token mechanism. Currently, the mechanism is based on a target staking ratio, which enforces a target staking ratio of 85%. The policy raises or lowers the inflation weekly based on whether the ratio is below or above the target, incentivizing stakers to reach the target. If it falls between 80-90%, the policy reduces inflation by 5%. The SNX tokens obtained from this mechanism are allocated to SNX stakers weekly on a pro-rata basis as long as their collateralization ratio hits the target.
The second major role of SNX is giving holders voting rights in the Synthetix DAO. The second major role of SNX is giving holders voting rights in the Synthetix DAO. Generally, Synthetix governance is facilitated by two artefacts – SIP and SCCP. SIP is an abbreviation for Synthetix Improvement Proposals, and SNX holders use it to make protocol improvement proposals. SCCP is an abbreviation for Synthetix Configuration Change Proposals, and it permits protocol proposals.
Initially, Synthetix governance participation was limited, meaning the project was partially decentralized. For instance, the core protocol design, setting of the reward mechanisms, and the system development were managed by the Synthetix Foundation, excluding them from governance voting. But since 2020, the foundation has split into three fully decentralized DAOs:
Protocol DAO – Manages funding for protocol upgrades and amendments to the Synthetix smart contracts.
Grants DAO – Manages capital for the community proposals for public goods on Synthetix.
Synthetix DAO – Manages funding for parties working on the project’s development.
What Makes Synthetix Unique?
Certain traits distinguish the Synthetix protocol from other DeFi projects. Most conspicuously is the ability for users to trade Synths without intermediaries. You can trade any Synth with another on Kwenta and enjoy high liquidity. Another key functionality of Synthetix that makes it unique is peer-to-contract (P2C) trading, where trades are handled swiftly and easily without using order books. A decentralized pool of SNX holders provides the necessary collateral and ensures the stability of the whole exchange.
Synths come in numerous forms and are labelled with a prefix, ’s’ – e.g., sUSD and sGOLD. You don’t have to trade in the same Synth you initially minted. As long as the Synth that you use for payment has a similar market value to the one you minted, it will be accepted by the protocol.
The Synthetix Ecosystem
SNX – Minting sUSD
To facilitate the process of creating Synths, Synthetix has developed a platform that lets users mint sUSD using SNX as collateral. Whenever you interact with the platform to create Synths, it contacts the Synthetix smart contract responsible for governing minting processes. Below is a step-by-step process on how to go along:
First, visit the SNX minting website and connect your web3 wallet. Ensure you hold some SNX tokens to use as transaction fees.
Secondly, state that you want to create sUSD tokens using a given amount of SNX tokens. The protocol will lock the SNX tokens.
Lastly, you can trade with any Synths on the platform using the sUSD you minted in step 2. Besides, you can stake SNX to generate passive income instead of letting your assets lie idle.
Kwenta – The Synthetix DEX
Kwenta is a DEX where you can trade Synths. It is built on the Synthetix network to enable users to directly trade Synths instead of following the tedious and expensive route of withdrawing assets to a web3 wallet before trading them on a DeFi protocol. Interestingly, Kwenta doesn’t use order books; instead, it relies on P2C trading, where trades are performed using smart contracts. It also leverages Chainlink oracles to source price feeds for setting exchange rates for tokens.
To use Kwenta, you simply connect your web3 wallet, purchase sUSD or any other Synth token, and start trading. The platform comprises three features:
There is a dashboard feature where users create Synths and see available tokens.
There is an exchange feature where you track and trade Synths.
A shorting function provides a quick way to trade tokens.
Kwenta offers unlimited liquidity, zero slippage, and permissionless and non-custodial trading. Currently, it supports these categories of Synths:
Fiat currencies, like sUSD, sEUR, sJPY, etc.
Commodities, such as synthetic gold (sGOLD) and synthetic silver (sSILVER).
Digital currencies, including sBTC, sETH, and sBNB.
Besides the three categories, Kwenta supports inverse digital currencies and crypto indices. Inverse cryptocurrencies like iBTC, iETH, and iBNB conversely track crypto prices. For instance, when the price of ETH rises, the price of iETH drops equally, and vice versa. On the other hand, crypto indices and inverse crypto indices, such as sDEFI/iDEFI and sDEX/iDEX, track a basket of DeFi tokens and a basket of native DEX coins.
Lyra – Options Powered by Synthetix
Lyra is a decentralized trading platform powered by an automated market maker (AMM) mechanism. Notably, it leverages Synthetix’s sUSD stablecoin as its primary quote token – traders use sUSD to pay fees for creating long or short positions. Additionally, Lyra uses Synthetix as a one-stop protocol for receiving long and short insights on its markets’ base tokens, like delta hedging.
Synthetix has already built one of the most demanding and essential protocols on the Ethereum network. It offers exposure to a broad range of crypto and non-crypto assets in a decentralized, permissionless, and censorship-resistant way, facilitating participation in the DeFi space. Similar to derivatives in traditional finance, Synthetix assets are financial instruments in the form of ERC20 tokens called Synths, which track and offer returns of other assets without requiring users to hold the assets.
However, the potential for synthetic assets is still largely unexploited. Further ecosystem developments, functionalities, and new Synths remain to be seen whether future developments will significantly boost the utility and growth of Synthetix.
To learn more about cryptocurrency and DeFi protocols, check out CoinGecko Learn.
Josiah is a tech evangelist passionate about helping the world understand Blockchain, Crypto, NFT, DeFi, Tokenization, Fintech, and Web3 concepts. His hobbies are listening to music and playing football.
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