Synthetix is a synthetic asset protocol on Ethereum, the largest decentralized protocol for derivatives. The network makes it possible to trade assets, such as gold, stocks, and so on, without having to leave Ethereum. All synths are tokenized, so they can be traded or used as liquidity on other DeFi platforms.
Many traders consider derivatives risky, although they give them a number of advantages, provided, of course, that users know all the details of the mechanism. Let’s look at this in more detail.
First of all, what derivatives actually are?
Derivative is a contract in which two parties shake hands and enter into a purchase and sale of a fixed price contract. The peculiarity of this is that even if the price of the product increases at the time of the transaction, the buyer will still receive it at a pre-agreed price. The seller also benefits from this type of deal, because this way he/she has a guarantee that the product will be purchased. Experienced investors earn on the instability of the cryptocurrency market with minimum risk with the help of special contracts, which include derivatives.
There are many other derivatives such as futures, forwards, options, swaps, etc. An important part of derivatives in the cryptocurrency world are synths or synthetic assets. They give users access to a variety of different assets without the need to hold the underlying asset. That is, a person can earn money on an asset without being its owner, just by creating a synthetic version of it. And one of the main players on the crypto derivatives market is, of course, the Synthetix protocol.
What is Synthetix?
In 2017, Kain Warwick founded the network on Ethereum and called it Haven. A year later, the project was rebranded. In early 2018, 200 Haven tokens were distributed, and that fall, the platform changed its name to Synthetix.
Synthetix is a protocol where anyone can buy, sell or borrow synthetic assets. The project is one of the fastest growing in the DeFi field with a native SNX token that can be used to create synthetic assets. Using the platform you can synthesize any asset in the world, which will ensure profitability from the underlying asset, without the need to own it directly. An event that simply cannot happen in the traditional derivatives market.
Synthetix has two main branches: Synthetix Exchange and the Staking dApp, where you can stake your SNX or borrow synths. Synthetix has recently expanded their loans feature and integrated it into the Staking dApp. Previously available on Synthetix.Exchange, loans could only be collateralized by ETH and borrowed in sETH and sUSD. Now, Synthetix has added renBTC as collateral, and sBTC as a currency to borrow.
Synthetix was one of the first to do a preliminary launch on the second layer of Ethereum – L2 Optimistic Ethereum in January this year. The platform’s smart contracts are converted to the Optimistic Virtual Machine (OVM) format and users can stake SNX tokens using the new service. Within six months, the company will reportedly monitor the system update process. At the moment of writing, almost 5 million SNX are staked in L2.
In February 2021, the protocol raised $12 million through the direct sale of SNX tokens. The tokens were bought by venture capital companies Paradigm, Coinbase Ventures and IOS.
What are synths?
Synth owners can earn income from trading assets without actually owning them. When users buy synths, they can make money on the fluctuations of the price of the assets on which synths are created. Synthetic assets track the exchange rates of external assets – crypto currencies, fiat currencies, stocks or commodities like gold. However, unlike tokenized commodities, owning a gold synth is not the same as owning the equal amount of real gold. It is merely equal to owning the same amount of money as this piece of gold represents.
Synthetic uses the Chainlink oracle service for their price feeds. Thus, buying a synthetic dollar, you have the same price fluctuations as the owners of the fiat currency. Synths are widely used outside Synthetix and can be traded on such Ethereum-based exchanges as Uniswap or Curve.
There are also reverse synths, their names start with the letter “i” (inverse). They make it possible to bet on a decrease in price of an asset. For example, the owners of iUSD earn when the dollar exchange rate falls.
What is Mintr?
You have two options if you want to get yourself some synths: you can either buy them exchanging your ETH to sUSD or you can earn them through staking.
For these purposes there is a decentralized application called Mintr. The cost of the synthesizer is based on the value of the SNX token that acts as a collateral for the minting of synths. In other words, all Synths need to be backed by staked SNX with a collateralisation ratio of 650% (it is determined by the community governance). The collateralisation ratio is only going to grow – the target ratio is as high as 750%.
This is also called a debt pool, because all SNX stakers create a ‘debt’ when they stake. When someone stakes SNX and mints sUSD, they create a debt that is equal to the amount of sUSD that must be burned to un-stake their initial SNX. A staker must pay off their debt before they can unlock their staked SNX.
Stakers also earn SNX staking rewards that are created using the inflationary monetary policy and receive a reward from Synth deals on Kwenta – a decentralized exchange where users trade synths, stocks and other assets. It was presented by the Synthetix team in October 2020. Unlike many others, Kwenta doesn’t have an order book and works using peer-to-contract trading. The rewards are generated by Synth trades on the DEX. The fees that amount to 0.3% to 1% and are applied on each trade, eventually end up in a debt pool, where SNX stakers can claim them.
Who needs synths?
One can profit from Synths in different ways:
- Market speculation – users can bet on the rise or fall of assets.
- Stablecoins – you can create synthetic fiat, such as sUSD or sGBP and sEUR. They can be used as stablecoins.
- Hedging – when the user is expecting the asset price to drop, they can make a transaction taking this factor into account to cover losses at the expense of profits.
- Margin trading – trading with leverage, the mechanism is exactly the same as a bank loan. The broker gives a loan secured by the client’s shares or money in the account. The advantage is that traders can open large positions without having a lot of capital. The big risk is that they may lose their whole capital because it is secured, so this method is not a good idea for inexperienced traders.
As of now, the top synths minted on Synthetix are sETH (market cap – $318B), sBTC ($114B) and sUSD ($217B). Synthetic assets are getting more and more popular among traders. The second place in Solana DeFi hackathon was won by a project that is analogous to Synthetix.
In early April, the price of the SNX token plummeted and reached almost $20, observers expected that the price would rise to $27, but the maximum growth didn’t exceed $23. By April 15, the level fluctuated by $19-20. The company plans to issue 250 million SNX tokens by 2024. More than half of this amount is already in circulation.
If you own and stake SNX, then you essentially own a share of the exchange’s business. You get your share of the trading commissions. However, just holding tokens in your wallet is not enough. To earn commissions and rewards in the form of SNX, you need to put your tokens into operation: stake SNX, release synths and monitor the level of their provision.