What is Synthetix (SNX)?

Synthetix is a DeFi protocol applied to synthetic cryptocurrency assets. It was born out of the ashes of the 2018 bear market, along with Maker, Compound, Uniswap, and several others, laying the groundwork for decentralized finance to become a major part of the cryptocurrency space.

Synthetix started out as a stablecoin project called "Havven" and made a major transition during the cryptocurrency bear market to become a synthetic asset protocol. The community behind Synthetix has pioneered many mechanisms that are now accepted standards in the DeFi space.

Synthetix has been a core component of DeFi on Ethereum and is about to launch a Layer 2 scaling solution. In the foreseeable future, Synthetix will still play an important role in the DeFi field.

What is Synthetix?

Synthetix is a synthetic asset protocol that allows the issuance of synthetic assets in Ethereum. You can think of synthetic assets as a type of derivative. It provides a way to gain exposure without owning an asset.

What does a synthetic asset (or "Synth") consist of? In fact, it includes almost any asset with a reliable price source, such as cryptocurrencies such as Bitcoin or Ethereum, commodities such as gold and silver, and fiat currencies such as the US dollar. There are even reverse Synths that track the underlying asset in reverse, allowing traders to gain short exposure or hedge current holdings and liquidity mining positions.

The core idea is that by using Synthetix, traders gain access to certain assets that do not exist on-chain. Synthetix also supports the creation of various indices, such as a DeFi index that tracks a portfolio of DeFi assets.

How does Synthetix work?

Synths track the price of the underlying asset using a decentralized price oracle. It is important to note that Synths are different from cryptocurrencies (such as stablecoins) that are backed by reserves. Compared with traditional reserves, the value of Synth comes from various complex on-chain mechanisms and smart contracts.

For example, BUSD is a stablecoin where each BUSD represents a $1 reserve. Likewise, Paxos’ “PAX Gold” (PAXG) is backed by physical gold bars. In a sense, owning PAXG is equivalent to owning an equivalent gold reserve. In other words, PAXG is a token that embodies gold ownership.

Synths are different, they track asset prices through a sophisticated smart contract mechanism. Owning sXAU does not mean owning any underlying gold, only exposure to gold prices.

So what's the point of owning such assets? As mentioned earlier, it provides an excellent way to gain price exposure without actually owning the asset. Another advantage of Synths is that they are ERC-20 tokens in Ethereum that can be easily integrated by other DeFi protocols. Synths can be deposited into platforms like Uniswap, Sushi, or Curve, and you can provide liquidity and earn transaction fees just like any other ERC-20 token.

Synthetix Network Token (SNX)

Since there is no underlying asset to back it, what are such tokens backed by? Mainly the token launched by the platform - SNX. Recently, Synthetix also added ether as collateral to provide support.

Synthetix adopts an over-collateralization model, that is, the collateral value of all synthetic assets exceeds its own value.

Synths are created by users staking collateral (SNX) and minting synthetic assets for it. In other words, the essence of Synth is a debt collateralized by posted collateral.

Debt positions must maintain a certain collateralization ratio, which is determined by governance. This move is intended to ensure that Synth has sufficient collateral to eliminate deficits in the system and survive extreme times such as massive market crashes.

Stakers must artificially manage the above ratios by minting and burning Synth (debt) or adding more collateral in order to continue to receive staking rewards.

Unlimited liquidity with zero slippage

Synthetix does not have an order book or a sliding spread in the traditional sense, and its market positioning is to provide a trading platform with "unlimited liquidity". Its pricing method is determined by an algorithmic mechanism, which is closer to the working principle of an automated market maker (AMM) than a central limit order book (CLOB).

Essentially, the trading objects in Synthetix are not individuals or market makers, and traders need to repay part of the debt in the debt pool and borrow an equivalent amount of debt from another Synth.

It's a complex mechanism with many nuances. However, what we must understand is that trading in Synthetix is not the same as trading in Binance order books or Uniswap liquidity pools.

Synthetix and Optimism

Why didn't Nasdaq migrate to the Synthetix trading platform as a whole? In fact, the fee and execution guarantees in the Ethereum mainnet are not completely suitable for most traders and trading styles. It is for this reason that Synthetix contracts have chosen to deploy on a Layer 2 solution called Optimistic Rollup - an implementation from Optimism.

Rollups are an excellent way to scale blockchains. It derives its security guarantees from the Ethereum blockchain, unlike other scaling solutions such as sidechains that "self-insure" with a unique set of validators. This is a key difference. Rollups can create the same scaling benefits as sidechains (such as increased transaction throughput and lower transaction fees), but without the severe impact on security.

However, Synthetix contracts are currently more complex smart contracts, and migrating them to such cutting-edge technology in the safest way is no easy task. Optimism has been running with Synthetix in the background for some time, and the deployment on the mainnet is expected to take place in summer 2021.

Summarize

Synthetix is a synthetic asset protocol in Ethereum. Synths track the price of the underlying asset, but users don't have to be actual owners of the asset. Synthetix is the earliest DeFi project to go online. It has set up a decentralized governance structure through SynthetixDAO. While the principles are hard to understand, as Synthetix is deployed to the rollup implementation that Optimism rolls out, its adoption is likely to increase.