Crypto advocates are often calling for tokenization of everything, and derivatives trading protocols are a step in this direction. One of the most promising platforms for trading assets without even owning them is Synthetix Network. What is Synthetix, how does it work and what are its pros and cons? Find all this in our Synthetix guide.
- Synthetix is a decentralized financial protocol for trading synthetic assets that track the price of real world assets: currencies, stocks, derivatives and indices;
- In Synthetix, the common denominator that allows trading between all these assets without friction is debt. It is nominated and backed by the SNX tokens;
- In 2022, the network is going to migrate to Optimism, an Ethereum layer-two scaling protocol. At the moment, Ethereum Synthetix and Optimism Synthetix coexist and are developed with the merger in mind.
What is Synthetix?
A lot of DeFi protocols rely on synthetic assets – those that imitate the price of a real asset but do not require you to own the original. Some, like MakerDAO, support only one kind of such asset (the DAI stablecoin), while other protocols are more sophisticated.
Synthetix is a blockchain-based platform for creating and trading derivative assets: real-world currencies, commodities, stocks and indices. These derivatives are represented by the blockchain tokens, and their real counterpart prices are tracked by oracles.
Creating Assets and Staking
A synthetic asset can be created by depositing SNX as a collateral into the smart contract, and to receive SNX back these assets need to be repaid. The collateralization to synthesis ratio has to be at least 750%.
If you want to trade a synthetic USD for Bitcoin, you are using debt represented by sUSD. By sending sUSD for an equivalent amount of sBTC, you are claiming that you will be willing to repay this debt in a new asset.
This creates debt in the protocol, which is in turn collateralized by a basket of currencies, Synthetic Drawing Rights (XDR), inspired by the International Monetary Fund debt collateral.
Once the synthetic assets, or Synths, are created, they can be freely traded on the Synthetix Exchange. The best part is, there is way less friction between exchanging one kind of synthetic asset for another than on the traditional markets.
Trading on the Synthetix.Exchange has a trading fee, 0.3% of which is sent to a staking pool. Stakers claim the contents of this pool weekly on a pro-rata basis, provided that their collateralization rate is adequate.
Scaling with Optimism
Originally, Synthetix was built on Ethereum, which became more expensive to use as more users onboarded and the value of ETH grew. Since each transaction incurs a network fee, the team needed to find a solution so that users would not need to waste value on fees.
In July 2021, the team announced transfer to Optimism, a Layer 2 protocol for Ethereum. The transition is still in progress, though the majority of the protocol’s functions are already available on L2.
History and team behind Synthetix
In September 2017, Kain Warwick launched Havven (HAV), a decentralized stablecoin protocol. As the scope of the project increased and it became possible to create other synthetic assets in addition to the stablecoin, it was rebranded to Synthetix in 2018.
At the same time, Sydney-based Synthetix Network was established by Warwick, Peter McKean, Jordan Momtazi and Justin J. Moses. Warwick and Moses worked together on Pouncer, a live auction site, and the team in general had prior experience in blockchain development.
Synthetix was launched with a total of ~$30 million of investitions, raised in two ICOs, a seed round and a foundation sale. Notable investors include Coinbase Ventures and Three Arrows Capital.
What is SNX?
So what is Synthetix crypto, SNX, that we already mentioned? It is an Ethereum token for minting assets on the Synthetix Network.
The initial supply of 100 million SNX was split between founders and investors at the 40/60 ratio. To give stakers an incentive and attract new users, the staking rewards are added to the total supply.
From December 2019, the monetary policy includes a fixed supply with a decreasing rate of inflation. Every year until 2024, the amount of newly issued tokens will halve, until the cap of 245,312,500 SNX is reached.
What is Synthetix Used For?
The SNX token is necessary to collateralize the debt that is backing all synthetic assets on the platform. By staking the SNX tokens in the protocol, users receive an amount of inflation as well as Synth trading fees.
To unlock the stake, the Synths that were minted must be burned. This repays the debt that the collateral secures otherwise.
Comparison with similar cryptos
The project with a similar premise is UMA (Universal Market Access). Their pitch is to allow anyone to create financial instruments, so their scope is not limited to synthetic assets.
At the moment of writing, UMA offers five synthetic assets based on the dominance of popular cryptocurrencies. Synthetix gives exposure to seven fiat currencies, six cryptocurrencies and a DeFi index.
What is Synthetix Criticized For?
Synthetic suffers from quite a few various issues pertinent to its nature, to DeFi, and cryptocurrencies as a whole.
Due to the need for debt overcollateralization, a high degree of volatility in cryptocurrencies presents a problem. The exorbitant ratio of 500-750% is a sufficient measure to prevent liquidations from fluctuations, but a selloff is never off the table.
The collateralization ratio makes it more profitable to trade synthetics on secondary markets, which dilutes the value of the asset in comparison to its real-world counterpart. Not only this, but the synths’ prices can even be affected by events such as exploits that do not affect the original asset.
Not to mention, protocols like Synthetix are essentially unregulated derivatives markets. Under certain jurisdictions and regulations, this is simply illegal.
Synthetix has also been criticized by fellow crypto developers: in May 2021, Warwick announced four more projects on Synthetix, each with its own governance token. Dani Kulechov of Aave noted that this could lead to a community split and value dilution.
Partnerships and Future Plans
Synthetix is in the process of developing a merger with the Optimistic version. The updates are published in the official blog.
Meanwhile, all Synthetix Improvement Proposals (SIPs) for all branches are available in a repository. Some of the already approved SIPs include dynamic exchange fees, debt shares, Solana synth on Optimism, and removing the centralized oracle.
The most crucial partner for the Synthetix team is Chainlink, which provides price feeds for assets. They are also closely working with the Optimistic team on the Synthetix v3.
In 2022 so far, they have already unveiled a new partner: on-chain risk management platform Gauntlet. They hope that their risk-scoring system will help prevent liquidations early and provide insights for the collateralization ratio balancing.
Synthetix in Social Media
sip 165 is the debt synthesis which allows cross chain swapping.$SNX moves into position to compete with every cross chain bridge – infinite liquidity$SNX $800m mkt
addressable market $5-10b today (30b+ at FDV prices)
— napgener 0xBearMarket (@napgener) January 28, 2022
An upcoming feature being worked on is debt synthesis, according to the user @napgener. The gist of it is that the debt will be tracked across all chains and layers Synthetix is supported on, potentially branching to other platforms via bridges.
— Ahmet Alırsatar 🎠 (@CavalryisBack) January 31, 2022
Trader Ahmet Alirsatar analyses the 4-hour chart of the SNX-USDT pair. The chart is potentially very heated up!
You didn’t ask for it, but you are getting it anyway. My L222 bootleg @synthetix_io roadmap. They even rugged my blog privileges so I had to post on @viamirror which is better than ghost anyway! https://t.co/gu4Vs6B9WJ
— kain.eth L222 (@kaiynne) January 25, 2022
A not very obvious but nonetheless reliable way to get Synthetix Network token news is Kain Warwick, the man himself! In the linked article he shares insider info about the future of Synthetix in 2022.
Which Wallet to Use for SNX Crypto?
Synthetix tokens are ERC-20, meaning most compatible crypto wallets can store it. Popular picks for Ethereum tokens include MetaMask or MEW.
To store and exchange your SNX tokens at any time, you can use the Exodus crypto wallet. It has the built-in exchange feature with the most competitive rates, ChangeHero being one of the providers.
If you’d rather store SNX securely away from any Internet connection, Trezor or Ledger hardware devices are a way to go!
How to Exchange SNX?
You don’t have to search all exchanges that offer SNX pairs for the best rate, because ChangeHero does it for you. All that’s left for you to do is:
- Choose the currencies on the home page, amounts and the type of exchange. Provide your wallet address in the next step and check the amounts;
- Send in a single transaction the sum of cryptocurrency you will be exchanging. Fixed Rate transactions have a 15-minute limit;
- And now, relax! We are doing all the work: checking the incoming transaction and doing the exchange as soon as it arrives;
- As soon as the exchange has been processed, your SNX are on the way to your wallet. Leave a review with your impressions to help us be better for you!
Customer support is available 24/7 in the chat on our website or through the email: [email protected].
With synthetic derivatives, trading becomes more accessible and escapes the friction of traditional markets. Synthetix is striving to be the most approachable one by moving towards even more low-latency layer-two of Ethereum.
Frequently Asked Questions
How does Synthetix work?
In Synthetix, assets called synths can be minted in exchange for collateral represented in SNX. Synths then can be traded for each other or burned to unlock the collateral.
What is Synthetix?
Synthetix is a blockchain-based platform for trading of synthetic assets, representing real-world currencies, stocks and indices. Synthetic assets allow trading of these assets without having to own the original asset.
What is SNX?
SNX is the Ethereum token that is used in Synthetix for debt collateralization and staking.
What is Synthetix used for?
Synthetix is used for minting synthetic assets and trading them for one another. It is a variant of the derivatives market.
What is the future of Synthetix?
Synthetix is currently developing two versions of the protocol, on Ethereum and Optimism. Later in 2022 they are to be merged, and Synthetix is to operate on Optimism entirely.