Certainly, 2020 is a year to remember. It is a year where DeFi blossomed and got international traction similar to the 2017 crypto craze. Amid all these DeFi platforms, that we have seen so far there is a derivative trading platform called Synthetix that has certainly caught the eye. So, what do we mean by derivative trading anyway?
In the traditional finance world, derivative trading involves trading a contract called a derivative that has dependent value on an underlying unit. That means the performance of this underlying unit determines the value of the derivative.
The underlying unit can be in any form such as interest rate, currencies, index, or an asset. This brings us to the synthetic assets that are created to mimic the financial effect that another asset entirely would have.
Now in the crypto world that we are in right now, derivative trading has crossed over into the crypto and DeFi space with many crypto synthetic assets on display. One of them is Synthetix which we are about to discuss in this guide.
A Little Background Story
The project we know now as Synthetix started way back in 2018 and it went by another name entirely. Back then, it was known as Havven with HAV an ERC-20 token serving as its native coin.
An ICO was held around February 2018, the aim of the platform then was to serve as a decentralized payment platform that utilizes a two token system to distribute stable coins nUSD with the HAV token serving as collateral. A certain percentage of every transaction fee of issuing nUSD went to HAV holders as a reward in the bid to have nUSD stable.
The Havven team will later realize that there is more to the project potential than limiting it to simply issuing stable coins. Hence, the move to rebrand the Havven protocol to Synthetix with the old native token HAV transforming into SNX.
The move to rebrand was announced towards the end of 2018 on November 30, 2018. With that began the journey is creating synthetic assets on the newly rebranded Synthetix protocol.
Introducing the Synthetix Protocol
As we mentioned earlier, Synthetix moved away from being just a payment platform to a protocol capable of creating crypto synthetic assets. These crypto synthetic assets can imitate the value of various assets, which gives investors and users alike a wide range of portfolios to invest and trade-in.
They can trade traditional and digital assets without leaving the crypto space or needing to interact directly with these assets such as BTC, fiat currencies, bonds, etc.
The Synthetix decentralized exchange is built on the Ethereum network with the ability to issue synthetic assets. The protocol is supported through staking in which users and investors supply liquidity. The platform allows you to follow and speculate on real assets live through oracle feeds, you will be able to track prices of various assets.
All you have to do is stake the platform native token called the SNX. In addition to this, if you create synthetic assets, it is a source of passive income for you through those that interact with these assets.
Synthetix serves as the gateway for bringing large investments from the conventional financial ecosystem into the crypto ecosystem in particular the Ethereum platform.
Synthetix has emerged as one of the darlings of the DeFi space. The service it provides is run through code only to eliminate the need for third parties in the financial chain. So instead, what we have are a series of Ethereum-based smart contracts programmed to deliver the derivative trading DeFi protocol that you know as Synthetix.
Synthetic assets are minted on the protocol through collateralization, and to do that you have to buy the SNX that serves as the collateral. The purchased SNX is then staked by locking them up in a smart contract which is utilized to create new synthetic assets known as synths.
So, a synthetic version of the USD will be sUSD. The same thing goes for other synths like BTC becomes sBTC, etc. The Synthetix protocol has witnessed an incredible rise with $772,727,262 in total value locked as of December 14, 2020, it is among the top DeFi protocols in terms of total value locked.
What Is SNX – the Token That Powers Synthetix?
The native token on the Synthetix protocol is called SNX and it can be seen as the backbone of the protocol. It performs a variety of roles to keep the network running optimally. It is the only acceptable collateral on the Synthetix protocol for the minting of synths.
Users in possession of the SNX token can take part in the creation process of synthetic assets. To do that, your SNX tokens become locked in a smart contract as the protocol mint the synths.
After the whole process is completed, you get 20% of the minted synths based on the locked SNX token. For example, if you lock SNX tokens worth $2000 in value then you will receive minted synths worth $400. There is an optimal ratio for collateralization, which stands at 500%.
So, when you are minting, you have to play an active role to keep the ratio at this level. There is an incentive for active players that are able to maintain their collateral ratio. They will be able to claim more rewards than those whose ratio goes below a specified threshold after which they are blocked.
You can get the SNX tokens from various exchanges both centralized and decentralized. You can now deposit your tokens in wallets that are compatible with the Synthetix protocol for staking purposes.
In March 2019, an inflationary monetary policy was introduced to stimulate staking in order to mint additional synthetic assets. It is expected that come 2025, the total supply of minted SNX will be around 250 million.
Let’s talk more about synthetic assets, which are called synths. As mentioned earlier, these assets mimic the real-life movement of the actual assets they represent in the real world. We now know that they are minted by staking your SNX tokens.
Synthetics assets are represented using “s” and can take various forms. Let’s look at notable examples, fiat currencies like Euro, U.S. Dollars, and Chinese Yuan will look like the following sUSD (US Dollar), sRMB (Chinese Yaun), and sEUR (Euro).
We have other synths too apart from fiat currencies like Binance Coin (sBNB), Tesla (sTSLA) as well as Apple stocks (sAAPL) that are not live yet.
Stakers acquire debt in the process of creating new synths, which must be repaid. The amount to be repaid will be the same value as minted synths. Only when the debt is paid can you withdraw your SNX that was locked.
However, the value of synth varies with time. Therefore, when you want to withdraw your locked SNX tokens, the amount of synth to be repaid will be different.
On the bright side, you can repay the debt with different types of synths and not necessarily the exact type of synths that was minted provided the value matches up with each other. What we are saying here is that an sRMB can be used to pay for sTSLA (once it goes live) if sRMB has the same value as the sTSLA debt.
You must bear in mind that synths are exactly what they are intended for, which is mimicking real assets. They are in no way the same as the real thing. For example, holding the sTSLA will expose you to the Tesla shares volatility.
Nevertheless, in no way will you be able to enjoy the dividends that real Tesla shares offer.
If you are only speculating on synths then there is no need for you to acquire SNX for staking. You can just buy sUSD on exchanges such as Sushi or Curve.
How to Mint Synths – Step by Step
There is a DApp called Mintr that users use to mint or burn synths as well as get rewarded. The following steps are involved in the minting process:
Getting SNX: In line with what we have already mentioned in this article, the first step in the process minting process is getting your hands on the SNX tokens. This you can do by heading to any exchange where the SNX token is listed.
Send SNX to Wallet: After securing the SNX token, you can send it to any of the supported wallets on the Synthetix protocol. You can choose from one of Ledger, Metamask, or Trezor after which you sync the wallet holding your SNX tokens using the Mintr DApp.
Staking Your SNX: After you are done syncing your wallet, you can proceed to stake your SNX on Mintr. At this stage, you can mint your desired synths. Presently, 750% is the required target or optimal collateralization ratio. As of December 14, 2020, the value of 1000 SNX in U.S. dollars is 4760.86. That means when you stake 1000 SNX, you can mint 634.78 worth of sUSD if you choose to mint synthetic U.S. dollars. We arrived at this figure by the value of 1000 SNX in U.S. dollars by 7.5.
Note that minting requires paying gas fees, which is paid in ETH
Last Step: After staking and minting, you are done and set to go. Whatever you choose to do with your synths is totally up to you.
It is also possible to mint sUSD and sETH using ETH as collateral. However, unlike staking with SNX, when you mint using ETH you are ineligible for rewards. You only get rewards when you stake with SNX. At the same time, unlike SNX stakers, ETH minters do not have to cater to the debt pool. They only pay back the amount sETH they own.
The collateralization ratio for ETH stakers is 150%, which means that with 150 ETH locked up as collateral you can mint 100 sETH. As an ETH minter, you will pay an initial fee of 0.5% plus annual interest fees of 5%.
Exploring the Two Groups Involved in Synthetix
The two parties you will find on the Synthetix protocol are the SNX stakers and the synth holders. Now, this is how the two groups interact on the protocol, the holders of synthetic assets are pitted against those that stake SNX. SNX stakers provide collateral and take on the obligation for possible gains of synth holders.
The reward for this role comes in the form of SNX rewards and fees. Stakers stand to gain more when the synths market value diminishes as they don’t have much debt responsibility to cater for in this situation. This has to do with the debt pool, which is the total value of every synth on the protocol represented in U.S. dollars.
The upwards movement of the value of every synth causes the debt pool to increases while the downwards movement causes it to decreases. Now the SNX stakers will prefer the debt pool decreases as they have the role of catering for their own part of the incurred debts by traders on the protocol.
This brings us to the traders or synths holders who purchase synths at the prevailing price in the market and are thus pitted against the SNX stakers tasked with taking on the risk should synth holders make a profit. Although, this is covered in fees and rewards for stakers.
Also, the chance of the stakers paying out shrinks in a situation where we have a neutral debt pool. Meanwhile, as the system changes so will strategies keep evolving to give stakers protection against claims payment.
The Newly Added Synths-Giving Traders More Options
In addition to available synths on the Synthetix protocol, more synths have been introduced to give traders more options. You will now find synths of various DeFi protocol on Synthetix. For example, we now have synths for REN, BNT, LINK, ZRX, MLN, LRC, MKR, and more. We also have a synthetic asset of oil (sOIL) that mimics the value of oil in real-time. This makes the platform more appealing to users and investors alike.
Another recent addition is the re-introduction of inverse synths, which is a derivate that enables users to short acceptable assets. The inverse synths are represented by “i”, which will give inverse synths like iBTC, iETH, iOIL, etc.
Inverse synths provide the means for less sophisticated investors to exploit short swings. For inverse synths price of the real assets go down, the value of the inverse synths goes up the same amount.
For example, when BTC goes down by $1 then iBTC rises by $1. Unlike inverse synths that represent short positions, synths that are represented by “s” represent long positions.
The Tokenomics of SNX
The upward and downward movement of the price of the SNX token affects the number of synths that will be in circulation. So, in a situation where SNX price increases, the Synthetix protocol will drop unnecessary SNX tokens to cater for synths that were minted previously.
Let’s say about $2000 worth of SNX were locked up and the price of SNX tokens increased by two-fold. That means the protocol will release half of the amount of the locked-up token ($1000) to mint more synths. So as the price of the token increase so will the number of synths that can be minted.
Synthetic Decentralized Exchange
So far we have talked about the aspect of Synthetix that allows you to mint synths. However, there is an additional edge to the Synthetix protocol, and that is the ability to trade on the protocol without the need to create an account.
There is an in-built Decentralized Exchange that allows that. Synthetix DEX offers around 19 assets that you can trade in with trading pairs on the platform reaching up to 31.
Trading on Synthetix is as easy as simply navigating to its DEX platform where you can now link your web3 wallet that supports the ERC-20 token. The user interface is user-friendly and slick making your trading experience easier.
The fees you will pay include maker and taker fees which stand at 0.30%. These fees go to the SNX stakers as a reward for injecting liquidity. In addition to this, there is also the Ethereum gas price since the protocol is Ethereum based. You must be mindful of the gas price in the process of trading, it is important you do so. You don’t have to pay withdrawal fees on the Synthetix DEX as the trading takes place across wallets directly.
The Synthetix DEX offers several benefits to users that centralized exchanges and some DEXs can’t. Some DEXs use the order book to process transactions, which is lacking in Synthetix.
Instead, every transaction is fulfilled against the contract. This is called peer2contract trading (P2C) and the exchange rate of the assets is determined by the price feeds coming from the oracle, which is then interpreted by the Synthetix DEX app to give you permissionless on-chain trading.
Besides, on the Synthetix platform, there is no slippage and we have infinite liquidity to match the total sum of collateral being held by the protocol
Liquidity Providers Rewards and the Importance of Peg
We have been talking about rewards that are given to SNX stakers who inject liquidity into the liquidity pool. It is time to delve further into these rewards and why pegging is important.
Now, let’s explain what it means to peg the synths. The peg on every synth represents the ratio of the minted synth to the underlying asset. Ideally, every synth should have a peg of 1:1 with the underlying asset irrespective of the trading volume between the two.
We will explore the importance of maintaining these pegs and how developers incentivize users to keep the peg stable while the project is in development.
The key to smooth operation on Synthetix is maintaining a stable peg. Why so? Stakers get their reward in sUSD, therefore, for them to get value for their reward. The sUSD must not be difficult to exchange for real dollars (USD).
Or else, their reward will hold zero value beyond the protocol. Apart from stakers, traders too must have a way to easily exchange their profit for real assets. In the same way, users must have the means to easily turn their real assets into synths.
So, for all these listed operations to go smoothly, the Synthetix protocol requires huge liquidity pools. This way traders will be able to exchange a large number of real assets for the same amount of synthetic assets and the other way round (at the pegged 1:1 ratio).
So, to achieve this ratio, holders of underlying real assets and the respective synths have to inject funds into liquidity pools in ETH so they can exchange at a large scale or in small amounts. Those that inject liquidity are rewarded via trading fees from swaps.
From the inception of the Synthetix project to its metamorphosis into what it is today. The protocol has gained a lot of ground in the DeFi space to rank 7th on DeFi pulse as of December 16, 2020.
Its popularity has attracted many investors and users seeking to gain through derivate trading of synthetic assets. The potential the protocol offers to investors makes it an eye-catching investment.
Should it continue with its current trajectory, Synthetix is sure to be a force to be reckoned with in the crypto market. As the project is not short of admirers, this could happen in the nearest future for the project.
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