Synthetix: Synthetic Representations of Real-World Assets

tl;drSynthetix is a decentralized synthetic asset issuance protocol on Ethereum where users can mint synthetic representations of real-life assets (as tokens) that track the value of the said asset. SNX has a $1,559,073,968 Market Cap and is currently ranked 116th by market cap. There are more than 85,000 wallets with SNX. Its ROI in the past year has been 63% and In the last 5 months SNX's popularity grew by 26% on Twitter and 20% on Reddit. You can purchase SNX via Binance, Coinbase and Uniswap.
Synthetix: Synthetic Representations of Real-World Assets
Synthetix: Synthetic Representations of Real-World Assets
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Key Features

Synthetix is a decentralized synthetic asset issuance protocol on Ethereum. Users are able to mint synthetic representations of real-world assets as tokens that track the value of the said asset. For example, a token called sUSD is a synthetic token that tracks the US dollar like a stablecoin. However, unlike a stablecoin, sUSD is backed by collateralized crypto debt and not fiat in a bank account. Synthetic assets are collateralized by the Synthetix Network Token (SNX), enabling the issuance of 'Synths' when locked in the contract. This collateral model allows users to convert Synths directly with the smart contract, eliminating third parties' needs. This mechanism solves the issues with liquidity that DEXs face frequently.

SNX Tokens

Synthetix currently has support for cryptocurrencies, synthetic fiat currencies, and commodities. SNX holders are encouraged to stake their tokens by receiving a portion of the fees. The fees are generated through activities on Synthetix.Exchange and holders are rewarded based on their contribution to the network. The value of the SNX token is derived from the right to participate in the network and capture fees generated from Synth exchanges. Moreover, trading on Synthetix.Exchange does not require the trader to hold SNX.

What SNX Does to Back Synths

Synths are backed by SNX tokens and are minted when SNX holders stake their SNX as collateral. This can be done using Mintr, which is a dApp for interacting with the Synthetix contracts. A 750% collateralization ratio backs synths. However, this might change in the future by community governance mechanisms. SNX stakers collect debt when they mint Synths, and to unlock their SNX, they must pay back the debt via burning Synths.

Synthetix is trialing Ether as an alternative form of collateral, which means traders can borrow Synths against their ETH and trade immediately instead of needing to sell their ETH. Staking ETH requires a 150% ratio of collateralization and creates a debt denominated in ETH. ETH stakers mint sETH instead of sUSD and do not participate in the 'pooled debt.' ETH stakers are not receiving fees or rewards since they don't take risks for the debt pool in this mechanism.

Why SNX Holders Stake

SNX holders are encouraged to stake their tokens and mint Synths in many ways. 

  • Exchange rewards are generated whenever a user exchanges one Synth to another on Synthetix.Exchange. Each trade generates an exchange fee which is then sent to a fee pool. This pool is available for SNX stakers to claim their proportion each week, and the fee is between 10-100 bps (0.1% - 1%, though typically 0.3%) and is displayed during any trade on Synthetix.Exchange. 
  • SNX staking rewards come from the protocol's inflationary monetary policy. The total SNX supply will increase from 100,000,000 to 260,263,816, with a weekly decay rate of 1.25% (from December 2019) from March 2019 to August 2023, and there will be an annual 2.5% inflation rate for perpetuity from September 2023.

Minting, Burning, and the C-Ratio

These mentioned mechanisms ensure SNX stakers are encouraged to maintain their Collateralization Ratio (AKA C-Ratio) at the optimal rate, currently 750%. By doing this, Synths are backed by sufficient collateral to tolerate massive price shocks. If the value of SNX fluctuates, each staker's C-Ratio will also fluctuate, and if it falls below 750%, stakers will be unable to claim fees until they restore their ratio. Stakers can adjust their balance by minting Synths if their ratio is above 750%, or by burning Synths if their ratio is below 750%.

Stakers and Debts

SNX stakers experience a 'debt' when they mint Synths. This debt can be increased or decreased independently from its initial minted value, based on the exchange rates and the Synth supply within the network. In simpler terms, if 100% of the Synths in the system were synthetic Bitcoin (sBTC), and their price is halved, the debt in the system would halve, and each staker's debt would also halve.

Synth Pegging Mechanism

The Synth peg is critical to a healthy system because traders demand both liquidity and stability between synths and other crypto assets to make profits from trading. Some Synths are traded on the open market, so it is still possible for them to fall below par with the assets they track. Incentives need to ensure that deviations from the peg are as minimal as possible and that actors are willing to fix them.

Synthetix.Exchange

Synthetic assets provide exposure to an asset without the need to hold the underlying resource. This has various advantages, including reducing the friction when switching between different assets, censorship resistance, and increasing the accessibility of certain assets.

Advantages of Synthetix.Exchange

Synthetix.The exchange has advantages over centralized exchanges and order book-based DEX's. The lack of an order book means all trades are P2C, which means they are executed against the contract(peer-to-contract). Assets are assigned an exchange rate through price feeds which are supplied by an oracle. They can be converted using Synthetix.Exchange dApp. It provides infinite liquidity, which goes up to the total amount of collateral in the system without slippage and a need for permission before trading.

How Synths Actually Work

Synths are synthetic assets that track the underlying asset's price and allow holders to gain exposure on Ethereum to various asset classes without holding the underlying assets. Synths are backed by SNX, which is staked as collateral at a ratio of 750%.

Types of Synths

Five categories of Synths are currently available: fiat currencies, cryptocurrencies, commodities, inverse cryptocurrencies, and cryptocurrency indexes. The fiat Synths include sUSD, sEUR, sKRW, and many more. The commodity Synths include synthetic gold and synthetic silver measured per ounce. The cryptocurrencies include sBTC, sETH, and sBNB. The Inverse Synths track the price of available cryptocurrencies inversely, meaning that when BTC's price decreases, iBTC's price increases. The current cryptocurrency indexes are sDEFI and sCEX (and their inverses), which track various DeFi assets and many centralized exchange tokens.

Minting Synths

SNX holders can mint sUSD by locking their SNX as collateral with the Synthetix smart contract. If the price of SNX increases, an equal portion of a staker's SNX is automatically unlocked as collateral. With that being said, if a user locks $100 of SNX as collateral, and the value of SNX doubles, then half of their SNX (total value: $200) is locked, and the other half is unlocked. If the user approves, the extra unlocked SNX can also be staked to mint more sUSD.

Exchanges

No third party is required to exchange, as the system converts the debt from one Synth to another. Also, no order books or order matching is needed, which results in infinite liquidity between Synths. No debt change must be recorded against the debt pool since the equal value is burned from the source Synth and then minted from the destination Synth.

Claiming Fees

When Synths are exchanged via the Synthetix contract, a 0.3% fee is extracted and sent to the fee pool, which is then claimed by SNX stakers. When claiming fees (AKA Synth exchange rewards), a staker actually claims their SNX staking rewards, which is extra SNX for staking the SNX they currently have.

Burning Debt

The SNX staker must pay back their debt to exit or reduce their debt and unlock staked SNX. For example, a staker mints ten sUSD by locking SNX as collateral and must burn ten sUSD to open them. But if the debt pool fluctuates, their personal debt fluctuates, they may need to burn more or less debt than they minted. The process for reducing debt to zero is:

The Synthetix contract determines the amount of debt balance and removes them from the Debt Register.

  • The required amount of sUSD is burned, and the total supply of sUSD is updated with the sUSD balance in the user's wallet.
  • After this, their SNX balance becomes transferrable.

The Debt Pool

The network tracks the debt pool every time an SNX holder burns or mints Synths. It does this by updating the Cumulative Debt Delta Ratio, which measures the SNX staker's proportion of the debt pool when they last minted or burned. It also measures the debt change caused by other stakers who enter or leave the system. The system uses these pieces of information to determine the personal debt of every staker at any time in the future, without having to record the changing debt of every single staker.

The Oracle

The value of all assets in the Synthetix system is determined by oracles that push price feeds on-chain. They use an algorithm with many sources to create an aggregate value for each asset.

SNX’s Tokenomics

At the time of writing this post, there are more than 85,000 wallets with SNX in them. SNX's ROI over the past year has been 63%, meaning if you had invested $100 in SNX a year ago, you would have $163 by now. However, other projects in the 'DeFi, DEX, Yield Farming, Derivations, and Governance' categories have had an average ROI of 279% during the same timespan. SNX has a 81% liquidity score, a max supply of 212,424,133 of which 114,841,533 SNX are in circulation (54%). It has a $1,559,073,968 Market Cap, which makes SNK have the 116th market cap rank.

Financial Analysis and Popularity

SNX hit its all-time high on Feb 14, 2021, at $28, and its current price is in the $7.8 range. In 5 months, SNX's popularity grew by 26% on Twitter and 20% on Reddit. You can purchase SNX via Binance, Coinbase, and Uniswap.

Are You Saying SNX is A Good Investment?

Improvements to the mechanism and functional upgrades, and new Synths will increase the utility of the platform. However, no one can decide on investments better than yourself. We aren't financial advisors, and what we're providing on Cryptologi.st is for educational purposes only. We gather everything you need to compare your options and make investment decisions all in one place.

To quickly compare available options and make the best investment decision, check out our website.

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