Synthetix (SNX) is a cryptocurrency token developed on the Ethereum blockchain in 2018. It is classified as small-cap crypto with a market cap of $750 million and a circulating supply of over 114 million SNX. It is a decentralised finance (DeFi) protocol based on the Ethereum blockchain and provides exposure to many crypto and non-crypto assets.
SNX crypto offers its users access to highly liquid Synthetic assets, commonly referred to as synths. Synths enable owners to track and provide returns on underlying assets without needing to hold them. The protocol has ambitions to expand the cryptocurrency space by introducing non-blockchain assets to create 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.
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 traded in the crypto world.
How Is Synthetix Unique?
Synthetix serves as a decentralised exchange (DEX) and a platform for synthetic assets. The network is created to expose users to underlying assets through synths without holding 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 called 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 mined synthetic assets. In essence, 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 decentralised oracles from which synths monitor the prices of real-world assets. Decentralised 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 decentralised 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 indicates 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 decentralised oracles. The oracles track the prices of the represented assets and enable users to either hold or exchange synths as if they were holding those underlying assets.
These decentralised 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 tokenised commodities like Paxos’ PAX Gold (PAXG), which has the backing of gold bars. With PAXG, investors own the underlying gold, which Paxos merely holds.
Regarding 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 liquidity and earn interest.
Synths and their many derivatives are essential to 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 decentralised application (Dapp) that Synthetix developed
- Finally, they must then create synths and begin trading them on Kwenta
What Is Kwenta?
Looking through the two trading methods for SNX crypto, you may wonder what exactly Kwenta is. Kwenta is a decentralised 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 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 claim 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 centralised 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 decentralised autonomous organisations (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 exposes users to a wide range of crypto and non-crypto assets in a decentralised, permissionless, and censorship-resistant manner.
In short, it allows users to enjoy the DeFi ecosystem, although these users do not 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 created through investors staking SNX tokens are supported by a 600% collateralisation ratio evaluated through community governance. Stakers manually manage their ratio on Mintr by minting sUSD if the value is too high and burning sUSD if it appears too low.
When users choose to stake SNX crypto and mint sUSD, they 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, 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 collateralisation 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 regarding the amount of debt each user has issued. Linking rewards to the collateralisation ratio ascertains that synths are sufficiently backed by collateral at all times. If users desire to un-stake their SNX tokens, they need to burn sUSD.
Due to the debt pool being 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 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, showing 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 they typically cannot access.
For example, an ordinary crypto investor wanting to purchase Tesla shares may need an avenue to fulfil this. Using Synthetix’s platform, users can collateralise SNX tokens and receive sTSLA in return.
Many crypto users across the globe need help to find reputable and established platforms that give them the ability to trade real-world assets. Using Synthetix as a DeFi platform, any user 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 client information.
Another issue that Synthetix aims to solve is slippage and liquidity, which are relatively common problems amongst decentralised 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-collateralised 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 decentralisation, 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, only a few institutional investors 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, an internet connection, and some intermediate understanding of Synthetic assets.
Synthetix is benefiting from being a major contributor to the synthetic assets sphere. The protocol has immense potential and has shown promise in its endeavour to shift the perception of synthetic assets considering the value of the global derivatives market.
While the platform is among the most complicated protocols in 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 and DeFi.