Synthetix (SNX) is a cryptocurrency token that was developed on the Ethereum blockchain in 2018. It is classified as a small-cap crypto with a market cap of $750 million and a circulating supply of over 114 million SNX. It is a decentralized finance (DeFi) protocol based on the Ethereum blockchain and provides exposure to a multitude of crypto and non-crypto assets.
SNX crypto offers its users access to highly liquid Synthetic assets, commonly referred to as synths. Synths enable their owners to track and provide returns on underlying assets without the need to actually hold that asset. The protocol has ambitions to expand the cryptocurrency space by introducing non-blockchain assets in the hope that it will a more resilient financial market.
Synthetix was developed by an Australian, Kain Warwick, and was first released on June 11, 2018, as a stablecoin, nUSD.
The project was initially known as Havven. It was later changed to Synthetix in 2018, with the ability to support over 20 synths at the time.
The platform has since grown in leaps and bounds, showing rapid progress in the DeFi space and becoming one of the leading names for synthetic assets being traded in the crypto world.
How Is Synthetix Unique?
Synthetix serves as a decentralized exchange (DEX) as well as a platform for synthetic assets. The network is created to give users exposure to underlying assets through synths without having to hold the underlying asset.
SNX crypto enables users to trade and exchange Synths freely. It also includes a staking pool where holders can offer their SNX tokens for rewards that are a share of the transaction fees on the Synthetix Exchange.
Synthetix can track underlying assets through smart contract price delivery protocols referred to as oracles. The protocol enables users to trade Synths effortlessly, without liquidity or slippage concerns. Moreover, it removes the need for third-party facilitators.
SNX tokens are typically used as collateral for the synthetic assets that are mined. In essence, this means that in instances where synths are issued, SNX tokens are subsequently secured in a smart contract.
How Does Synthetix Work?
The most important component of Synthetix is decentralized oracles from which synths monitor the prices of real-world assets. Decentralized oracles relay the prices of real-world assets to the protocol in real-time. In effect, holding synths is almost the same as owning real-world assets as they copy the underlying assets.
Using decentralized protocols, Synthetix enables its users to trade various assets, including gold and silver. Amongst others, the benefit of trading synths of gold and silver on Synthetix is that users can trade them effortlessly and benefit from holding the synthetic version of real-world assets without actually owning them.
The Role Of Synthetic Assets
You may be wondering about the vital role that Synthetic assets play. Well, increasing demand for synthetic assets means that the cryptocurrency market has reached a stage where traders can use these assets to hedge against volatility. In other words, it serves as an indication that the market is becoming mature.
There are two cryptocurrencies that Synthetix leverages for minting Synthetic assets. The first is SNX crypto, the native token of Synthetix. The second is Synth, the token meant to represent real-world assets and copies their prices.
Synthetic assets make use of decentralized oracles. It’s the oracles that track the prices of the represented assets and enable users to either hold or exchange synths as if they were actually holding those underlying assets.
These decentralized oracles are smart contract-based price discovery protocols. By doing this, synths allow users to access specific assets that are not typically available to the everyday crypto investor. They allow these investors to trade with those assets quickly and efficiently.
You must note that synths are not the same as tokenized commodities like Paxos’ PAX Gold (PAXG), which has the backing of gold bars. With PAXG, investors actually own the underlying gold, which is merely being held by Paxos.
In terms of Synthetix’s sXAU, users do not own the underlying assets but have access to the price of those assets.
Since Synths are issued on the Ethereum network, users can deposit them on platforms with DeFi integration. From there, they can use them as a means of liquidity and earn interest.
Synths and its many derivatives make an essential contribution towards building mature markets that have reached equilibrium by facilitating price discovery and assisting with hedges against volatility.
How To Trade Synthetix
When users want to start trading synths, they typically use one of two common methods.
- Users can purchase ETH on a reputable crypto exchange
- They must then exchange ETH for sUSD on Kwenta
- Finally, users must then exchange for other Synths, such as sBTC
- Users must obtain SNX tokens on a reputable crypto exchange
- They must then stake them on Mintr, a decentralized application (Dapp) that Synthetix developed
- Finally, they must then create synths and begin trading them on Kwenta
What Is Kwenta?
By looking through the two trading methods for SNX crypto, you may be wondering what exactly Kwenta is. Kwenta is actually a decentralized exchange (DEX) where users can trade synths.
What sets Kwenta apart from other DEX’s is that it does not have an order book but rather uses peer-to-contract trading. Essentially, this means that all trades are executed against a smart contract.
Chainlink oracles are responsible for relaying information on price feeds that are usually used to set an exchange rate for every asset. There is a fee of between 0.3% and 1% that users are charged for each trade. This fee is sent to a pool where SNX stakers can lay claim to it.
Kwenta users can buy and trade 13 types of cryptocurrencies and inverse cryptocurrencies.
Synthetix is also unique in the sense that it offers two synthetic cryptocurrency indexes to users. These are sDEFI, which monitors a group of DeFi assets, and sCEX, which monitors a group of centralized exchange tokens. Both asset groups were chosen through community governance.
Governance of Synthetix
Initially, Synthetix was governed by the Synthetix Foundation, a not-for-profit foundation with its head office in Australia.
However, since 2020 it has moved control to three decentralized autonomous organizations (DAOs).
The protocol DAO controls protocol advancements and Synthetix’s smart contracts.
The grants DAO provides resources for community proposals for public goods on Synthetix.
The Synthetix DAO provides funds for entities advancing the network’s improvement and development.
Synthetix gives users exposure to a wide range of crypto and non-crypto assets in a decentralized, permissionless, and censorship-resistant manner.
In short, it allows users to enjoy the DeFi ecosystem, although these users do not actually hold those assets. Similarly, it has taken a primary role in bringing derivatives to the cryptocurrency sphere, further advancing the maturity of this ecosystem.
Dynamics Of Trading SNX Crypto
In terms of Synthetix dynamism, all synths that are created through investors staking SNX tokens are supported by a 600% collateralization ratio that is evaluated through community governance. Stakers manually manage their ratio on Mintr by minting sUSD if the value is too high and burning sUSD if the value appears too low.
When users choose to stake SNX crypto and mint sUSD, they actually adopt debt that mirrors the amount of sUSD to be burned to un-stake their SNX. This adopted debt that represents a proportion of all the debt on Synthetix is assigned in sUSD. Accordingly, it increases and decreases with the supply of Synths and their respective exchange rates.
Since the total debt of the system is dispersed in this way, the stakers act as a pooled counterparty to trades. In essence, users do not need counterparties when they exchange synths but instead convert them directly through a smart contract. This system avoids counterparty risks together with slippage and ensures that there is sufficient liquidity for trading.
When users choose to stake their SNX tokens, they are entitled to receive two types of rewards if their collateralization ratio remains at 600%. These rewards are staking rewards, valued in SNX, and exchange fees from every synth trade, valued in sUSD.
Exchange fees are dispersed in terms of the amount of debt that each user has issued. Linking rewards to the collateralization ratio ascertains that synths are sufficiently backed by collateral at all times. If users desire to un-stake their SNX tokens, they will need to burn sUSD.
Due to the debt pool that is prone to fluctuations, users may need to burn more or less sUSD than they originally minted.
How Does The SNX Network Keep Secure?
The SNX token is compatible with Ethereum’s ERC20 standard, and the Synthetix network is kept secure with proof-of-stake consensus. All SNX crypto holders contribute their SNX and subsequently earn returns from network fees.
In addition, investors have more opportunities to earn rewards through the protocol’s inflationary monetary policy, commonly referred to as staking rewards.
Plans are in place for Synthetix to integrate Layer 2 scaling solutions on the network by working with Optimistic Ethereum, an independent layer 2 technology provider.
Synthetix has also launched Castor, an L2 platform, and has shown promising results since its integration in January 2021.
What Problems Does Synthetix Solve?
One of the main issues that Synthetix aims to solve is that it enables users to get exposure to assets that they typically cannot access.
As an example, an ordinary crypto investor who wants to purchase Tesla shares may not have any avenue to fulfill this. By using Synthetix’s platform, users can collateralize SNX tokens and receive sTSLA in return.
Many crypto users across the globe have great difficulty in finding reputable and established platforms that give them the ability to trade real-world assets. By using Synthetix as a DeFi platform, any user across the globe who has an internet connection and SNX tokens in their crypto wallet can create synths.
The synths copy the prices of real-world assets like Gold, Silver, Bitcoin, Ethereum, and Oil, amongst others. Crypto investors may also want to trade on Synthetix as there are no mandatory user requirements for investors to complete the KYC process to trade on the platform compared to traditional financial platforms that require all information from clients.
Another issue that Synthetix aims to solve is slippage and liquidity, which are relatively common problems amongst decentralized exchanges. Synthetix does not experience slippage and liquidity issues because no counterparties are needed to facilitate trade between Synths on the platform.
Why Are Crypto Synthetic Assets Vital?
There are massive implications for the traditional finance industry when considering the impact of cryptocurrency-collateralized synthetic currency models.
Such models offer crypto investors the opportunity to trade with traditional assets and their derivatives while operating in the digital ecosystem.
Coupled with decentralization, this open-access provides an avenue for a global community of investors that typically would not be able to access such assets. Before products like Synthetix arrived on the market, there were only a chosen few institutional investors that enjoyed access to global derivatives markets.
All this has changed as SNX crypto, amongst others, has access to these investment opportunities with no more than a smartphone that’s got an internet connection and some intermediate understanding of Synthetic assets.
Synthetix appears to be benefiting from being a major contributor to the synthetic assets sphere. Considering the value of the global derivatives market, the protocol has immense potential and has shown promise in its endeavor to shift the perception of synthetic assets.
While the platform is among the most complicated protocols in terms of DeFi, it has displayed great innovation. The future certainly appears bright as SNX crypto has opened up many opportunities for investors by bringing real-world assets onto accessible blockchains. Doing so has shown a genuine connection with the traditional finance industry coupled with DeFi.