Synthetix is a decentralized trading platform for synthetic assets that provides on-chain exposure to real-world assets such as currencies, commodities, stocks, and indices. Synthetix looks to alleviate liquidity and slippage issues of DEX’s through a pooled collateral mechanism that enables users to convert from one synthetic asset to another directly with the contract. These synthetic assets, known as Synths, are backed by Synthetix Network Tokens (SNX) locked into a smart contract as collateral. Synths track the prices of various assets, allowing crypto-native and unbanked users to trade P2C (peer-to-contract) on Synthetix Exchange without liquidity limitations.
How Does This Work?
Synthetix relies on multiple layers, including oracles, DAOs, and two separate tokens to function. The system combines fees, inflation, collateral, and staking to operate, and currently supports assets that track the price of fiat currencies, cryptocurrencies and commodities. Synthetix uses Chainlink’s decentralized oracles, which are more accurate and impossible to manipulate. With accurate current prices, all the synthetic assets have a correspondingly correct value. This functions similarly to the IMF's special drawing right (SDR) and brings currency prices in through an on-chain oracle. The newly created Synths are added to the stakers wallet and must be paid back in order to receive the SNX tokens from the Synthetix smart contract.
Anyone can create Synths by specifying the asset they wish to create and depositing SNX into the Synthetix smart contract so long as they meet the required collateralization ratio (C-ratio). SNX holders are incentivized to stake their tokens and mint Synths in several ways. Firstly, there are staking rewards where they are compensated through protocol level inflation.
From March 2019 to March 2024, the total SNX supply will increase from 100,000,000 to 245,312,500, with an annual halvening. These SNX tokens are distributed to SNX stakers on a pro-rata basis provided their C-ratio does not fall below the optimal threshold. If the C-ratio falls below the threshold, they will need to burn Synths to restore an adequate ratio.
Additionally, SNX holders can earn through Synth exchange rewards. These are generated whenever someone exchanges one Synth to another on Synthetix Exchange. This is done by burning the original asset and paying a 0.30% trading fee that is sent to a fee pool, available for SNX stakers to claim their proportion each week. In the same way Dai represents $1 of debt in the MakerDAO system, synthetic USD (sUSD) represents $1 of debt in Synthetix. If you wish to exchange it, what you are doing is repricing the debt owed where instead of $1 of USD you are saying you would rather pay back $1 of BTC, for example. This creates synthetic bitcoin (sBTC) and now gives you long exposure to the price of bitcoin.
Recently, Synthetix’s moved its protocol to Optimism Layer 2 Ethereum, meaning significantly lower gas prices and higher scalability, allowing the protocol to move forward faster and keep growing with new features.
Governance
On the governance side, the protocol was first governed by the Synthetix Foundation. Though this was a not-for-profit organization, it was necessary to decentralize the control of the protocol even further. Enter three different DAOs, each responsible for other protocols:
Synthetix DAO: A DAO which funds those who participate in advancing the protocol.
Grants DAO: This organization funds community proposals that steer the protocol in the right direction.
Protocol DAO: This governing body is crucial for developing smart contracts and updates of the whole protocol.
The whole governance occurs through two artifacts known as SIP and SCCP. SIP stands for Synthetix Improvement Proposals, and SNX holders use it to make protocol improvement proposals. SCCP stands for Synthetix Configuration Change Proposals, which shows all the proposed changes for the protocol.
When someone creates a proposal, the Spartan Council, which is the main governing DAO consisting of 8 members, discusses SIPs through interviews. After evaluating all the implications of a proposal, they either accept it or deny it. All SIP's are discussed and expanded upon by the community on Github as well as the Synthetix Discord channel.
Long Term Potential
The Synthetix ecosystem is already quite extensive, as there are already several projects relying on the protocol to power their platforms. The biggest ones are Curve, Lyra, Thales, Kwenta, ParaSwap, dHEDGE, Yearn and Aelin. This widespread use and adoption by other projects is what is driving Synthetix to be one of the leading fees earners in the crypto.
As you can see from the chart above, Synthetix is one of the top 10 earners in the space in terms of fees earned from its users. This points to sustainability through bear markets and is a strong indicator of a healthy business, which is far too often overlooked when evaluating projects. When you remove the dApps (in pink above) and only look at Layer 1 and Layer 2 chains (below), the amount that Synthetix is earning is even more impressive, as it is out-performing some of the biggest household names in Cryptocurrency even as a fledgling project.
Not financial, legal or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. All opinions expressed are solely those of the individual author. This newsletter is not legal advice and does not create an attorney-client relationship. This newsletter does not constitute tax advice. Talk to your independent attorney and/or accountant for any questions specific to you. Always do your own research and use caution when interacting with smart contracts or the blockchain