Synthetix has created an entirely new way to trade derivatives in DeFi.
Synthetix is a decentralized finance (DeFi) platform on the Ethereum blockchain with quite a few functions.
First, it's a Decentralized Exchange, or DEX. The benefit of a DEX is that users don't actually have to open an account with any central body. Everything is executed with smart contracts, so all users have to do is connect to the exchange with a compatible Ethereum wallet like Metamask, and trade away.
Secondly, Synthetix is also a synthetic asset issuer.
We’ll get deeper into what this means in a moment, but basically it means you can create your own synthetic assets—called Synths. Synths are blockchain assets that are pegged to real-world assets like fiat currencies, cryptocurrencies, stocks and commodities.
Their price is tracked in real-time using Chainlink oracle data feeds, allowing investors to buy, sell, and trade on these assets like the real thing — only without a central body.
All Synths minted on the platform are denoted by an ’s’.
For example, sBTC, sUSD, sTSLA, sAAPL, and sAU (s-Gold).
There are also indexes like sCEX, which give investors exposure to a range of Centralized Exchange tokens, like Binance Coin and Kucoin shares.
But while Synths for stocks like sAAPL (Apple share) give investors exposure to real-world assets, it won’t give Synth investors the dividends that actual Apple stockholders get.
Users can also choose to bet the other way, and short prices with synthetic assets known as Inverse Synths. These are denoted with an ‘i’ instead of an ‘s’.
So Inverse Synths like iBTC for example, rise in price when the actual price of BTC falls. iETH and iBNB are other examples of inverse Synths that are available on the exchange.
Next and lastly, Synthetix also offers an incentive staking mechanism, which rewards users for staking SNX tokens to provide liquidity and stability to the ecosystem.
Kain Warwick is the founder of Synthetix. He dropped out of his college in Australia to move to Seattle in the US to start a startup with a friend.
He went to Seattle and became the third employee of a company that was building a payment mechanism for kids and teenagers to pay for things online. But the timing was wrong and the company had a slow death due to the dot-com bubble.
He’d started experimenting with startups in the areas of online retail, AI, and then blockchain.
Warwick was attracted to bitcoin in the early days because he knew how much work fraud prevention was in the online retail business: Preventing chargebacks, preventing a credit card company coming back and saying a purchase was faud, and other such things.
So in 2012 Warwick responded to a post from a crypto company called CoinJar. He was particularly interested in issues with payment rails of traditional fiat currency. That’s how he got deeper into crypto and started working in the space.
He founded Synthetix in 2016, but back then it had the name Haven. It was re-named to Synthetix in 2017.
To mint SNX, you first have to back the amount with a 750% collateralization ratio. So this means that to mint 100 sUSDT for example, you will need to deposit the equivalent of $750 in SNX tokens.
The high ratio is actually required to act as a buffer against big market price swings, and maybe raised or lowered in the future.
When you mint Synths, you also claim a portion of the platform's debt pool, which represents the total value of all Synths in the system.
This means your debt may increase or decrease depending on the exchange rate and supply of Synths within the network.
To unlock your SNX and exit the system, you must pay back the debt by burning Synths equivalent to the amount owed.
What about staking?
SNX holders are incentivized to stake their tokens by earning both staking rewards and a proportion of exchange trading fees.
Every trade on the platform generates an exchange fee of about 0.3%, which is then sent to a fee pool and redistributed to SNX shakers, along with their earned staking rewards every Wednesday.
Unlike other exchanges, the benefit of the Synthetix platform is that it potentially offers investors infinite liquidity and supply, as new tokens can always be minted and burned.
Synthetix has the potential to synthesize every single asset in the world, and lock up the equivalent value in the world of DeFi.
A traditional Synthetic asset is not just a crypto thing. Almost every market in the world uses synthetic assets for trading.
What are they?
In short, a synthetic asset is a simulated representation of a real-world asset. Here’s an example:
In sports, you can have a fantasy league. In your fantasy league, you have representations of different players in the game that you select for your fantasy team.
It’s about simulating real world players and allowing you to flex your sports managerial skills within a simulated environment.
So if you draft Tom Brady to your fantasy football league, you are getting a synthetic version of Tom Brady. The attributes and performance of real-life Tom Brady are tied to the stats and performance of your fantasy player.
By doing so, you are creating a synthetic representation of the real player.
Now let’s take it back to crypto: normal Ethereum would be like the real-world version of Tom Brady. However, sETH on Synthetix is the simulated version of ETH.
The thing to note is Synthetics are a simulated representation of a real-world asset. So if Tom Brady plays poorly for a moment, his poor real-life performance would be reflected in the next database update by reduced attribute stats.
In a nutshell, Synthetic assets track the performance of real-life assets. The same is true of crypto assets like sBTC, sETH, and sBNB on Synthetix.
These Synthetix are not the real asset. They simply track their real-world performance.
Deeper Dive into Synthetix
Synthetix is a trading platform for Synthetic assets built on top of the Ethereum blockchain. Another important thing to note is that the platform is only partially decentralized. However there are plans in the future to make Synthetix fully decentralized.
There are a number of different synthetic asset categories you can trade on the Synthetix platform.
Fiat currencies like the USD, the euro, yen, AUD, or British pound.
Cryptocurrencies like BTC, ETH, and BNB.
Commodities like Gold and Silver
Stocks, like TSLA and AAPL.
Synthetix offers two different types of synthetic assets for each real-world asset they represent. For example, they offer both sBTC and iBTC.
Anything with an ’s’ before the ticker symbol mimics the price of the asset. So if you bought sBTC when bitcoin was 10k, and the price went to 20k, you would have doubled your money. Effectively you were going long.
However, Synthetix also has assets prefixed with an ‘I’, for example iBTC. This is an inverse synthetic asset, which means you can profit from an inverse move by effectively shorting it.
Both types of assets are known as Synths.
Another thing about Synthetix is that anything with a price data feed can technically be traded on the Synthetix exchange. In theory, it’s possible to enable decentralized synthetic trading for every stock, commodity, and cryptocurrency in the world.
That’s the sort of potential we’re talking about here. But it doesn’t stop there:
In traditional finance, there’s something known as an exchange-traded fund or ETF. Many ETFs commonly hold a basket of different assets focused on a particular set to a region of the world, and trade freely on the stock exchange.
What these financial products enable you to do is buy a basket of stocks or commodities. These are very popular in the traditional finance space because with just a few clicks you can get exposure to a big basket of different stocks. It makes things super easy for investors to diversify their holdings.
The really exciting thing is that Synthetix could launch a crypto top-ten synthetic basket, holding the top ten biggest cryptocurrencies which would mimic the performance of these assets. This would be a pretty easy way to get exposure to all of these cryptos.
Essentially, the platform could create baskets of synthetic assets for almost anything, and slice and dice them in an almost infinite number of ways. Given how much value is locked up in a traditional ETF, that could potentially be a MASSIVE market.
Why would someone want to hold a synthetic asset and not the real thing?
In short, for trading purposes. Synthetic assets on the platform are for anyone who wants an easy way to get price exposure without dealing with any centralized entities.
But this technically isn’t trading as we would conventionally think of it. Because you’re not trading with a person.
When you trade on the Synthetix dApp, the synth tokens you’re trading for are created at that moment, and the ones you’re trading away are simply burned.
For example, say you’re trading sUSD for sETH. The moment you execute the trade, your sUSD is burned — it ceases to exist — and your sETH is minted.
So with the Synthetix exchange, you’re not trading with other people like in a regular exchange. Instead, the Synthetix exchange is essentially a “synthetic token minting and burning system.”
How are the prices of synthetic assets determined when trading?
It's all determined by price data feeds — which are also known as Oracles.
The reason why Synthetix is only partially decentralized is because these price feeds are completely centralized and controlled by the Synthetix team.
That said, the project does have plans to decentralize everything in the future.
What is the benefit of all this as opposed to normal trading?
In a nutshell, there are 3 main benefits:
Collateral is pledged as something that is security for repayment of a loan. Here, collateral refers to the crypto that underpins the value of all issued synthetic assets.
Synthetix is the 13th largest DeFi ecosystem at the time of this writing, and has a whopping $1.56B of value locked up in it.
SNX coin is the utility token of the Synthetix ecosystem. Users purchase SNX tokens and lock it up as collateral to create Synths.
An initial 100 million SNX tokens were issued in March 2018, with the amount set to increase to around 250 million by 2-24.
Currently there are about 130 million tokens in circulation.
The Synthetix market cap exploded from a market cap of just under 10M in mid 2019, to over 200M just 7 or 8 months later.
And users are not trying to get rid of them either. Over half of all SNX tokens are locked as collateral, and the value of these tokens is around $1,057,394,342.
The key is that the total SYX token supply is valued at less than that. This means that the value of all the synthetic tokens issued is over-collateralized.
The Synthetix project incentivizes SNX holders to hold a “collateralization ratio” of anywhere from 500 - 700% or more.
This is done through a mechanism where SNX token holders can only hold staking rewards if the collateralization ratio is over this number.
The staking rewards are basically a distribution of the fees generated on this exchange.
Why is the collateralization ratio so high?
In short, because the system is still untested, and SNX is a volatile asset. If you think this sounds very similar to Maker and DAI, you’re correct.
But the difference with Synthetix is that it does not have a liquidation mechanism. That’s why Synthetix has been so conservative when it comes to the collateralization of SNX, and why the collateralization ratio is so high.
So that’s the Synthetix program as it currently sits.
Synthetix opens up a world of future potential to anyone who can imagine it. Though the platform is still untested in the long-run.
With Synthetix it’s possible to enable trading for pretty much anything with a tradable price, and this is the first time we are able to access price exposure to so many assets with crypto.
Also, being able to own inverse synthetic assets and being able to benefit from downward price movements is a brand new feature.
Synthetic also offers users the ability to buy a basket of assets in just a few clicks. So you can buy a DeFi index rather than having to head over to numerous exchanges and process a dozen or so trades.
Also, literally trillions of dollars in assets are parked in similar products in traditional finance markets. Can Synthetix gain even a few percentage points of that market? Only time will tell.
One of the main concerns with Synthetix is that it’s still only really accessible to crypto veterans. Access to Synthetix is of course possible for anyone. But it does have quite a high barrier to entry, and its adoption will depend on whether people come to see the value in non-custodial finance.
This data report is provided by Keystone Investors Research. Keystone is the only Cryptocurrency research firm that is Officially partnered with a government regulated Cryptocurrency Trading Platform.
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