Synthetix is a pillar of the DeFi movement. The platform is set to boost and expand the crypto space by allowing more liquidity on crypto assets and introducing non-blockchain assets.
Let’s dive in!
So, what are synthetic assets?
Synthetix allows the creation of ‘synthetic’ assets or ‘synths.’ Synths reflect the price of their real-world counterparts. Think of synthetic materials (materials made by people rather than those found in the natural environment).
An example is sBTC, which mirrors the price of BTC (Bitcoin). However, Synths can be used for any real-world asset (oil, gold, FTSE 100, and even property).
This concept may sound familiar. That’s because synths can also be described as ‘derivatives.’ Derivatives are contracts based on the value of an underlying asset- its ‘derived value.’ The two most popular types of derivatives are futures and options.
‘Perpetual futures,’ better known as ‘perps,’ are some of the most popular products in the crypto space and receive billions of dollars in daily trading volume. You might be asking, what exactly is a perpetual future? Well, a future is an agreement to purchase an asset (such as Ethereum) at a point in the future. ‘Perpetual’ refers to the fact that there’s no settlement date. They roll on until you close the position.
As the oldest DeFi blue chip crypto, SNX has a long history. It also has the best DAO (Decentralised Autonomous Organisation) structure in crypto. Its DAO is made up of “councils” that vote on specific actions. For example, the Grants Council votes on who should receive funding, the Treasury Council sets budgets, and the Spartan Council votes on the higher-level management of the protocol.
This system has resulted in very efficient and reactive management of Synthetix.
SNX token and synth minting
Synth minting is extremely complicated, but we’ll try to explain it simply:
To mint a synth, users must “stake” SNX (Synthetix native token). Once staked, they can “mint” sUSD (synth of USD). Stakers are then rewarded by sharing transaction fees from the ecosystem. This requires a collateralisation ratio of 400%, meaning the SNX staked must be 4x the value of the synth minted. This is referred to as the C-ratio. Once minted, this sUSD can be swapped for any other synth in the Synthetix ecosystem.
Note, by minting sUSD, you’re taking a short position against all other Synths. For a more detailed look at this, check out this article.
The V3 upgrade is coming soon and will allow deposits of other assets (not just SNX) to be used as collateral for minting Synths.
The cold start liquidity issue is one of DeFi’s main problems. Let us explain. New protocols need to put considerable time and resources into incentivising liquidity for their tokens. This problem is made worse by the fact that, right now, liquidity is fragmented across different chains.
Synthetix V3 is an ambitious attempt to solve this problem. First, it will allow SNX stakers to choose which asset pools their SNX will supply collateral for. This will allow stakers to implement their own strategies, based on staking incentives and desired exposure.
Second (and more revolutionary), it will enable protocols to create their own assets on Synthetix, and source and incentivise liquidity for them. This will convert the entire Synthetix collateral pool into a unified source of liquidity.
Change of target market
As part of its V3 upgrade, Synthetix is focusing more on business-to-business transactions. Previously, only whales could benefit from Synthetix (due to large fees and its complicated nature).
It’s now focused on making deals with other protocols. Examples include Lyra, a DeFi options exchange, and Kwenta, a perpetual future exchange. If these protocols succeed, SNX stakers and liquidity providers, as well as the Synthetix DAO, will earn fees.
The maximum supply of SNX is 212 million coins. During its seed round and token sale, Synthetix sold more than 60 million tokens, raising $30 million. Of the initial 100 million coins issued during the ICO, the allocations are as follows:
- 61% to participants in the ICO
- 20% to the team and advisors
- 12% to the foundation
- 5% to partnerships
- 3% to marketing incentives
In March 2019, Synthetic created an inflationary token supply mechanism to incentivise stakers. This will end in September 2023, when the maximum supply of SNX will be reached.
The derivatives market is estimated at over $1 quadrillion! Bringing traditional finance on-chain and utilising it in a decentralised manner is hugely promising for DeFi and Synthetix.
Curious about how Cryptonary rates SNX? Browse our Rating Guide to see how it fared against its peers in terms of team, tokenomics, fundamentals and more.
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