Synthetix Review

What is Synthetix?

Synthetix is a decentralized blockchain protocol for creating and exchanging synthetic assets (synths) on the Ethereum network. Synths are ERC-20 standard tokens that track rates of external assets — fiat currencies, stocks, market commodities, and cryptocurrencies. Synths allow trading assets without owning them, which makes synths a kind of analogue of derivatives.

Created in 2017 by Kain Warwick, Synthetix was originally called Havven protocol. In 2018, it raised about $30 million through the protocol's ICO and token sales in 2018  and in the fall of the same year the project was rebranded to Synthetix.

Synthetix also raised $12 million from venture firms Coinbase Ventures, Paradigm, and IOSG in 2021.

How does Synthetix work?

Synthetix is a set of interconnected smart contracts and incentives that help maintain the synthetic assets (synths) rate. Synths are backed by a Synthetix native token (SNX) that is locked by smart contracts in a collateral-type pool. 

Synths use decentralized price oracles which follow the prices of underlying assets. It is important to note that synths are not a stablecoins backed by an underlying asset. Owning sEUR, for instance, is not the same as owning the euro, but only gives you the opportunity to make money on changes in the price of euro.

Being ERC-20 tokens on the Ethereum network, synths can be easily integrated by other DeFi protocols. Synths can be used in Uniswap or Curve pools to provide liquidity and earn users a commission for trading, just like any other ERC-20 token.

An important feature of the platform is the collateral requirements. When users mint synthetic assets, SNX tokens are used as collateral and must be zapped into the Synthetix pool.

There is a possibility that the value of SNX tokens can start to move in the opposite direction to the underlying assets (the price of SNX falls and the price of the underlying asset rises). To tackle this problem, the platform created infinite liquidity and a number of additional features and characteristics that should ensure that the platform will continue to function regardless of the price movements of SNX tokens and the created synthetic assets. 

For example, Synthetix requires a pledge of 750% on the Optimism network and 400% on the Ethereum network to issue new synths. That is, to mint 100 synthetic U.S. dollars (sUSD), the user needs to lock in the equivalent of $750 (400) in SNX tokens. This large collateral creates a buffer for the outstanding Synth tokens and protects against sudden market movements.

How to use Synthetix?

To use the Synthetix app, wallets like Metamask, Tally, Coinbase wallet, or Ledger and Trezor must be connected to it. 

Synthetix interface currently consists of four main elements: “Staking” — staking and issuing synths; “Stats” — the summary information on the system's finances, staking, and issued synths; “Kwenta Exchange” — the internal exchange for trading the issued synths; and “Governance” for decentralized governance.

The “Staking” tab on the main page of the platform allows minting synths in the Synthetix system and staking SNX as collateral (essentially, staking). When you click on “Staking”, it will redirect you to the application interface through which all basic Synthetix operations are performed. The panel on the left contains summary information about the connected wallet: current and target collateral ratio, number of SNX, sUSD, and synths balance. Hover over Wallet or Staking to expand the menus. For example, if you want to mint synths, hover over Staking and navigate to “Mint & Burn”. Specify the amount of sUSD you want to get for staking SNX. The system will not let you mint more sUSD than your provided collateral with the ratio 750/400% (for example, to mint 100 sUSD in the Optimism network you'll need 750 SNX). In the same window, you can also see the minting fee, edit the fee, and burn sUSD to unlock the staked SNX. 

In addition to the above features, SNX and cUSD tokens can be staked into Yearn Finance and Curve vaults through the Staking app. 

The second important application of the Synthetix protocol is the Kwenta exchange. All assets on the exchange are traded in pairs with each other and with sUSD. This particular synth is pegged to the exchange rate of the U.S. dollar. On the main page, you can see the user portfolio and the interface of the exchange. The full list of synthetic assets available on the exchange can be seen on the dashboard on the right. Alternatively, you can click on “Select Synths” to view the assets divided into categories: Cryptocurrencies, Forex, Stocks, and Commodities. Kwenta Exchange fees are generated whenever a user exchanges one synthetic asset (Synth) for another. Synthetix fees are typically between 10-100 bps (0.1%-1%), though usually 30 bps, and when generated are sent to the fee pool, where it is available to be claimed proportionally by SNX stakers each week.

Synthetix staking

Synthetix staking is vastly different from other DeFi protocols; it allows anyone to earn rewards by contributing collateral (SNX) to the Synthetix protocol. Staked SNX benefits the protocols built on Synthetix in a number of ways, by providing them with deep liquidity, low slippage, and highly competitive fees for traders. 

Users receive two kinds of rewards for staking SNX: sUSD fees generated from traders (Kwenta Futures, Lyra options, Kwenta Spot, Curve cross-asset swaps, etc.) and SNX inflationary rewards. Both of these rewards types must be manually claimed in the one transaction each fee period (i.e., once a week). Otherwise, they will be returned to the pool and redistributed to other stakers.

The SNX token

SNX is a native Synthetix token and the primary form of collateral for synthetic assets available in the Synthetix protocol. STX stakers are entitled to the commissions generated by Synth transactions on Kwenta Exchange.

SNX is an inflationary token, but its inflation is declining by 1.25% per week and will reach an annualized rate of 2.5% on September 6, 2023. The gradual decline in inflation was chosen by the community to prevent the risks associated with a sharp halving.

Of the 100,000,000 coins issued during the ICO, 20% were allocated to the team and advisors, 3% to rewards and marketing incentives, 5% to partner incentives, and 12% to the foundation.

The SNX token also functions as a governance token. At the end of each epoch, the community conducts voting via snapshot’s IPFS infrastructure as specified in SIP-90, when the participants staking in the Synthetix Protocol are assigned a weighted-vote which they can delegate to the member they’d like to see on the DAO.

Is Synthetix safe?

On June 25, 2019, the Synthetix protocol was under attack. The oracle's incorrect operation led to several trades with profits inflated by a factor of 1,000. As a consequence, 37 million synthetic ETH (sETH) were withdrawn from the platform. The negotiations with the owner of the bot that made the transactions led to the owner agreeing to return the funds in exchange for a reward for the error found.

The leader of the Synthetix project is Kain Warwick, who even before he started Synthetix built Australia's largest cryptocurrency payment gateway Blueshyft.

Synthetix's CTO position is held by Justin Moses, who has been with the project since its inception. Prior to joining Synthetix, he was head of engineering at MongoDB. He has extensive experience with large-scale systems, including both their design and deployment.

The principal project architect is Clinton Ennis, who has 18 years of experience in software development. He was previously head of the architecture team at JPMorgan Chase.

What's next?

In addition to fixing some technical problems with the protocol and improving its underlying architecture, the Synthetix team is working on implementing Synth Teleporters that will allow moving and swapping synths across many different networks. There are also plans to add more assets to the platform, including synthetic futures, as well as to increase the APY available on the platform.

Links

https://docs.synthetix.io/