DeFi has not yet been exploited to its full potential and many features are likely to appear through the various projects that make up this very dynamic ecosystem. It is now possible to lend your cryptocurrencies to get interest, using decentralized stablecoins , and also pay in everyday life with these. But what about investing in more traditional equities through decentralized finance ? Today, we therefore present to you Synthetix which allows you to invest in ethers in Apple stocks or even to short the Bitcoin!
What is Synthetix?
Synthetix is a protocol decentralized deployment of goods on the Ethereum network. But the project also includes the development of different interfaces to this protocol which have various interesting features such as Synthetix.Exchange . The deployment of these goods is carried out through Ethereum tokens named Synths which can replicate the value of cryptocurrencies such as Bitcoin or Ether, but also more traditional stocks such as Apple (AAPL) stocks for example. The protocol uses its own Ethereum token, the SNX , to ensure the proper functioning of its services. The SNX is therefore used as a guarantee to ensure the stability and liquidity of the various Synths offered to users.
The SNX token
The SNX is not only a loyalty token that allows customers to benefit from various discounts and advantages when using the services of the project. It is indeed at the heart of the functioning of Synthetix and makes it possible in particular to guarantee liquidity and limit the effects of slippage during transactions. In fact, each Synth offered is supported by a guarantee from SNX with a ratio of around 750% currently, which could be modified by a vote of the community.
SNX tokens are mainly doomed to be blocked in the system since the latter offers many advantages when staking them. Indeed, blocking your SNX allows you to receive part of the costs of the Synthetix exchange platform. Having blocked SNXs also allows you to receive new SNXs on a daily basis through the inflation policy implemented by the protocol. SNX’s creation rate is 1.25% per week until August 2023 before dropping to 2.5% per year thereafter. But owning SNXs also allows you to “mine” Synths as we will see below.
The services offered by the protocol
The Synths offered by Synthetix bring many advantages, but they are not the only functionalities of the project. There is also an exchange platform dedicated to the latter which allows their purchases, as well as their creation.
Synths are technically Ethereum tokens that have properties such as exchanges between different users, smart-contracts and transparency of the Ethereum network. But the value of these tokens fluctuates relative to the underlying asset they replicate. To take a simple example, sBTC will have a similar value to traditional BTC. And this will be the case for other currencies, cryptocurrencies and other assets offered on the protocol. This allows you to be exposed to fluctuations in these assets without having to own them directly and to stay in the DeFi Ethereum ecosystem.
These are not the result of a tokenization of the underlying good, but a synthesis of the latter. While a tokenization represents direct value and its full or partial ownership, synthetization derives its value from trust in the protocol, platform or application deploying the goods. This confidence is mainly driven by the creation of a debt, which is guaranteed by an asset which is, in the case of Synthetix, the SNX token. We find the synthesis in the operation of stablecoins SAI and DAI.
Synthetix also has a decentralized exchange platform , called Synthetix.Exchange, which notably allows you to buy and sell Synths, but not only. The main advantage of the platform is the ability to be able to trade different Synths instantly without any problem related to liquidity. The objective is to offer an easy-to-use interface to allow the exchange between all the synthetic assets that the Synthetix protocol offers.
This decentralized exchange requires the use of a wallet such as Metamask , Trezor or Ledger to connect to it and access the functionalities. Once connected, if you have at least one Synth, you can now obtain the conversion ratios between different sTokens and carry out exchanges that are ‘perform directly on the Ethereum network. The transaction fee is 0.3%, which is distributed directly among all users who have blocked SNX tokens as collateral. There is no need for these SNX tokens to perform exchanges, but simply ethereum as well as obviously Synths. The exchanges are without order book and are therefore without spread, which allows not to suffer disappointments due to the lack of liquidity on the market.
This main functionality, which overcomes one of the main difficulties of exchanges with few users, is due to the way Synths work. If you want to exchange sUSD for sETH for example, you are not going to send to another user or to a liquidity pool your tokens to receive others. In reality you will, for a 0.3% charge, destroy your sUSD and create sETH . This is notably possible by ensuring that the value of the collateral after the exchange remains the same and only the synthesized asset changes. It should be noted that the different exchange ratios offered by the platform are provided by a system of oracles private and centralized. These update every three minutes, which is not very comfortable to use for regular trading.
The decentralized application Mintr
Mintr is the decentralized application which allows SNX token owners to create sTokens, these famous Synths. The entire application is therefore intended for use of the protocol and the functionalities require the possession of SNX. You can also collect your debts on the platform, i.e. destroy your Synths to recover your current SNX collateral. Finally, you can also benefit from other possibilities such as obtaining your share of the costs as well as participating in the governance of the Synthetix protocol.
In order to use the platform, you must connect to it through your wallet. Four means of access are available: Metamask, Trezor, Ledger Live and Coinbase Wallet. Once logged in, you can access the sTokens creation system such as sUSD. You will receive them directly on the wallet associated with your SNX tokens and can then use them freely.
How Synths work
Synths are therefore derivative products that reproduce different goods in a decentralized manner. Today there are Synths linked to fiat currencies like the sUSD or the sEuro, Synths linked to cryptocurrencies such as sBTC, Synths linked to assets such as sXAU or sXAG which represent gold and silver respectively on the financial markets. But how does the Synthetix protocol manage to implement these derivative products in a decentralized manner?
We saw it in the presentation of the SNX token, it is the latter that allows you to over-parkntain the liquidity of the Synths. And it is also these SNXs that are used in the process of nominal anchoring of Synths to replicated goods. We find the notion of arbitrage which allows the market to regulate prices autonomously, based on the opportunities brought by variations in the prices of derivatives with respect to the good. But Synthetix also uses a decentralized finance ecosystem protocol, Uniswap, for this purpose. Indeed, users providing liquidity on Uniswap through the ETH / sETH pair are also rewarded by the protocol for example.
If you have SNXs, you can easily create Synths. In order to mint these you must interact with the Synthetix smart-contract, here are the steps for creating Synths:
- The smart-contract will check that the operation is feasible, especially as the ratio of guarantees of SNX is well above 750%.
- The number of Synths created is added to the Synthetix debt register which allows you to establish the Synths currently in circulation.
- The Synthetix smart-contract will interact with that of the specific Synth which will create new tokens and automatically distribute them to the user. Synths are newly created!
You can then repay your debts in order to recover your guaranteed SNXs. You just have to destroy your Synths using the Synthetix smart-contract so that they are withdrawn from circulation and your debt is removed from the register. Following this operation, the number of Synths in circulation is updated and your SNXs become transferable to your wallet.
Synths currently available
Today there is a panel of Synths available which cover some cryptocurrencies, fiat currencies as well as more traditional indices. Here is the list of these Synths currently available.
Synthetix offers twelve Synths for use, allowing exposure to buy or sell positions on six different cryptocurrencies. It is therefore about Bitcoin , Ether , Binance Coin , Maker , Tez or Tronix . They are represented by their sToken version to bet on the rise, and their iToken version to bet on the downside.
You can also take a position on stablecoins indexed to eight fiat currencies. We therefore find the traditional sUSD and sEuro but also less common currencies in the ecosystem. Indeed, sJPY, sAUD, sKRW, sGBP, sCHF and sCAD are also available.
Stock market indices
For the moment only two stock market indices are available on the protocol and these are the gold and silver, respectively sXAU and sXAG. It should be noted that shares will also be available soon, starting with shares of the Apple company.
The risks associated with the use of Synths
While the Synthetix project seems promising and the features it offers are interesting, using protocol is not without risk. There are obviously the traditional risks that can be found in all projects in the DeFi ecosystem. These include the risks inherent in the use of Ethereum and smart-contracts which may present security vulnerabilities which are limited by the implementation of code audits. But the project also poses specific risks and we can guess at some of those limitations.
First of all, the systematic use of SNX tokens as collateral to allow the creation of new Synth tokens makes them relatively weak. Indeed even if the ratios of 750% are much higher than other similar protocols, it remains only based on SNX, tokens only used within the framework of the protocol currently having a high inflation.
If the creation of sUSD requires the pledging of SNX tokens up to 750% and that of a debt to recover this guarantee, there is no liquidation mechanism to compensate for the drops in price of the token as collateral. For example Maker which allows the syntetization of the USD through the collateralization of ethers (Sai) or other Ethereum tokens (Dai) integrates a liquidation system to guarantee the collateralization rate above their standards that are 150%. If the guarantee goes under this cap, it is then partially put on sale with a reduction of about 5% to encourage buyers. The Synths therefore do not have liquidation and nothing can guarantee that the 750% of collateral is indeed effective, the latter being subject to variations in the price of the SNX. However, there is an incentive to keep a guarantee greater than 750% since only users in this situation can claim the rewards distributed in SNX on a weekly basis.
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The perspectives of Synthetix
If the number of features is already interesting for DeFi users, the project does not want to stop there. Indeed the team is developing new Synths which would allow exposure through the protocol to indices such as S&P 500 , with Apple or Tesla shares for example, but also to go further by adding synthetic positions of several assets. Through this strategy, Synthetix wishes to provide these users with a maximum of investment possibilities in order to become a dominant player in the developing ecosystem.
In the previous section, we exposed the risk issues related to the use of the SNX token for Synth guarantees, making Synths relatively fragile since they depend on a small capitalization token. In order to improve the protocol, the Synthetix team is currently working on setting up a guarantee in ethers to benefit from the greater stability of the latter, without impacting the development of SNX.
Finally Synthetix also wishes to develop synergies with various open protocols of decentralized finance by allowing the community to lend and contract loans from certain Synths such as the sUSD. But also within the framework of the implementation of price flows for Synths which today are mainly based on centralized Oracle services. They are therefore working on an integration of the system using the services of Chainlink which notably provide functionalities of decentralized oracles.
This concludes this presentation of Synthetix, this protocol allowing exposure to goods external to the Ethereum network while taking advantage ofthe DeFi ecosystem and smart-contract functionalities.
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