Synthetix is a decentralised synthetic asset issuance protocol built on Ethereum. These synthetic assets are collateralized by the Synthetix Network Token ($SNX) which, when locked in the contract, enables the issuance of synthetic assets (Synths). This pooled collateral model enables users to perform conversions between Synths directly with the smart contract, avoiding the need for counterparties. This mechanism solves the liquidity and slippage issues experienced by DEX's.
Synthetix currently supports synthetic fiat currencies, cryptocurrencies (long and short) and commodities. $SNX holders are incentivised to stake their tokens as they are paid a pro-rata portion of the fees generated through activity on Synthetix Exchange, based on their contribution to the network. It is the right to participate in the network and capture fees generated from Synth exchanges, from which the value of the $SNX token is derived. Trading on Synthetix. Exchange does not require the trader to hold $SNX.
Many protocols have built ontop of the Synthetix infrastructure. These include but are not limited to, Kwenta which offers perpetual futures and spot exchanges, Lyra which offers options trading, Curve which offers cross asset swaps, and dHEDGE which allows traders to pool capital and offer a decentralized hedge fund service.
Kain Warwick is the founder of Synthetix. He is also the Co-Founder and CEO of blueshyft, a retail payment network of over 1200 locations across Australia. blueshyft has become the largest cryptocurrency payment gateway in Australia, processing tens of millions of dollars in transaction volume.
His brother Kieran Warwick is the founder of Illuvium, an Ethereum play-to-earn game.
A synthetic asset is a tokenized derivative that mimics the value of another asset. Generally, wrapped token & stablecoins are also categorized into synthetic asset, because they all pegged other asset's price. But usually, synthetic asset's price is feed by oracle.
It is usually issued by any staking users and through through the help of DeFi protocols in form of standardized crypto tokens. Synthetix (formerly known as Havven) was the first DeFi protocol to invent such derivatives in 2018. Theoretically, any asset whose price can be fed by an oracle could be minted into a synthetic tokenized asset.
The mechanism of synthetic assets are divided into two parts, asset-backed minting and trading. For better understanding, we explain each from the perspective of two market participants.
Stakers: stake to mint and bear debts
Stakers need to over-collateralizing stake an asset (protocols native token or ETH, etc) in to the protoco lto mint a synthetic stablecoin asset, e.g. overcollateralizing 750% of $SNX to mint $sUSD. This is equivalent to a mortgage, but only synthetic stablecoins such as sUSD can be borrowed. Stakers incur a ‘debt’ when they mint Synths. The system keeps a ledgerbook for all stakers: recording their initial debts and shares.
What do I get after staking?
- Some stable synthetic assets like sUSD.
- Start to earn a certain amount of synth trading fees (porprotionally).
- A certain amount of variable debt.
What else can staker do when get the above?
- Become a Synth trader, speculate on other synthetic assets or hedge their own debt exposure (see below for details).
- Become a Synths market maker in the over-the-counter market.
- Sell them directly in over-the-counter.
What is the risk of a staker?
Stakers share an unit and volatile debt pool as their debt. One staker could possible encounter the situation that his/her debt is constantly raising and he/she cannot add more collaterals in time, then he will suffer a liquadation risk.
All synthetic assets are added up to a large pool of chips, and the value of this pool should be exactly equal to the value of the total debt on the books, hence it also called debt pool. It is easy to find that the total debt amount is always changing with the amounts, types and anchor price of original assets. The total value of collateral should always remain at or above 7.5 times the total debt pool. The amount of change in the debt pool that increases or decreases is apportioned to each stakers porprotionally, and each time the system directly modifies the staker's debt balance.
When one's debt balance decreases and then the collateralization rate increases, the staker can mint new synths to lower the collateralization rate. When one's debt balance increases and the collateral rate decreases, the staker can burn some synths or replenish the collateral to increase the collateral rate. When the collateral rate is too low and stakers failed to operate in time, the collaterals will be forced to be liquidated by the system.
Two reasons that why most synthetic asset protocols follow the principle of over-collateralizing:
- Collaterals often have high volatility. over-collateralization reduces the risk of under-collateralization. If the collateral value falls too much, the system will liquidate the collateral and sell it early before the minimum requirement is touched.
- The debt pool often has high volatility. Even if the value of collateralized assets is stable, there is a risk that the total debt pool will rise too quickly and be under-collateralized.
Synths traders
Once you have some synths, you are a synths trader. Stakers can trade synths directly after minting.
What can a synth trader do?
Trading of synthetic assets to earn spreads.
- Feature 1: Reduce the friction cost of holding a spot. Users can trade $sXAG (Synthetic Gold) instead real spot gold, which behaves like the underlying asset by tracking its price using data oracles such as Chainlink. Because real gold asset always cost more than its price: carrying cost, transportation cost, security risk. Even with a platfom, you need to KYC and deposit money into the account to get exposed to the volatile of Gold.
- Feature 2: No slippage to trade synthetic assets. Since the synthetic asset price is fed from the oracle, the synths holder does not need to worry about the illiquidity and slippage when trading.
- Feature 3: Synth transactions are not between two players, but are a process of system tracking, burnting, minting, and tracking again. The prices are all feeded from external oracles
Hedging the debts risk. (For stakers only)
The Synthetix protocol has a special synthetic asset that particularly tracks the total debt pool index, and holding this asset can hedges the loss incurred by the stakers' debt increasing.
