Synthetix - Curve 1 More Inch to the Future of DeFi


Synthetix is a DeFi protocol to create synthetic assets ("synths") such as sUSD, sETH by over-collateralizing its protocol token $SNX. It features "infinite liquidity" and zero slippage for the trading of synth. The protocol has recently taken off in terms of trading volume and protocol revenue after improving trade speed and the integration with 1inch. Through a combination of transaction routes, traders can now trade crypto assets (not just the synthetic asset) with almost 0 slippages.

Synthetic Asset

A synthetic asset is a financial derivative product that exposes you to the same price movement of a financial asset without holding the actual asset. For example, the synthetic $ETH, sETH, gives you the same exposure to the price movement of $ETH without having to own the actual $ETH.

Mint Synths By Over-Collateralizing $SNX

The synthetic asset "synths" are backed by $SNX tokens. Synths are minted by staking $SNX, the native token of Synthetix as collateral in the protocol.

Synths are currently backed by a 350% collateralization ratio, and the ratio could be adjusted through governance from time to time. For example, when you mint 1 sUSD, an amount of $SNX valuing $3.5 need to be staked as collateral.

The mechanism is similar to MakerDAO. To get $DAI, you put up $ETH collateral into the Maker Vaults and borrow out a loan denominated in $DAI. Similarly, sUSD represents a debt to you.

Global Debt Pool

Different from MakerDAO, there is more than an over-collateralized U.S. dollar stablecoin on offer by Syhthetix. The protocol provides a suite of synths ranging from crypto assets like sETH, sBTC to fiat currency pegged assets like sGBP and sEUR.

Source: Kwenta

The staked $SNX is a collective collateral pool, and all synths minted against the pool make a collective debt pool. In practice, only one asset can be minted by users, that is the sUSD, and users can subsequently swap sUSD for another synths asset offered by Synthetix.

When you swap sUSD for other synths, the sUSD debt token is burned and another synth of equal value is minted. Swapping between synths is a peer-to-contract transaction, there is no counterparty involved. It is one kind of debt converted to another kind of debt.

"Infinite Liquidity" and 0 Slippage

The trading between synths, for example, from sETH to sBTC, is neither through order book matching nor from an AMM liquidity pool. People are trading against the debt pool.

Synths are assigned a price through price feeds supplied by an oracle provided by Chainlink (recently Uniswap oracle is also adopted as a second price source). (Related reading: Chainlink - Bridging Real World and On-Chain Economy)

Since the trading between synths is a debt conversion, for example from sETH debt to sBTC debt, the total available liquidity that can be traded is the total debt pool amount, and the transaction price is quoted directly according to the oracle price. No matter how large order is placed, it would not affect the price quote. The price you pay is always the oracle price, with no spread or price impact. That is why it calls itself "unlimited liquidity" and 0 slippages.

The Oracle Problem

The value of all synthetic assets in Synethetix system is determined by oracles that push price feeds on-chain. This naturally raises the problem of front running the oracle price.

Front-running transactions on DEXes are a well-known problem and are usually undertaken in order to gain profits by manipulating transaction order in a block. Such as the famous Sandwich Attack.

The situation with Synthetix is slightly different. The update of the oracle price also needs to be queued in the block, waiting to be executed. Therefore, front-runners can pay higher gas fees to trade before the price of the oracle is updated, and earn risk-free profits. For example, the next oracle price shows that the price of $ETH will rise, buy sETH before the price update, and then sell sETH after the price update. It is front-running an oracle update rather than another transaction.

Synthetix worked around this oracle front-running problem by sacrificing user interaction experience. Whenever a trade occurs on Synthetix on Ethereum, there is a waiting period of 10 minutes. During this waiting period, users cannot exchange, transfer, or burn the Synth they have just traded into. After the waiting period, the protocol will calculate fee reclamations/ rebates if a trade is affected by the oracle latency.

A New Transaction Route for Swapping Cryptocurrency

Synthetix introduced the atomic exchanges of synths function back in November 2021, this solved the front-running oracles problem and removed the 10 minutes waiting period. An optimization proposal to upgrade the atomic exchange was also approved in recent months, leading to the integrations from 1inch - the DEX aggregator.

The integration with 1inch contributed to the recent surge of transaction volumes for synths.

Source: Synthetix Dashboard

It also increassed in protocol revenue.

Source: TokenTerminal

Why? As 1inch channeling the transaction through Synthetix, traders now have a new route to swap large quantities of $ETH or $BTC without suffering the slippage through the standard channel such as an x*y=k AMM DEX like Uniswap.

Say, for a swap between $ETH and $USDC, a trader can utilize the stableswap of Curve with almost no slippage and Synthetix with 0 slippages for even very large orders:

  1. swap $ETH to sETH through Curve with almost no slippage
  2. exchange sETH to sUSD through the Synthetix atomic exchange function, zero slippage
  3. swap sUSD to $USDC through Curve with almost no slippage

and the above trades can be routed through 1inch.

Source: Curve Finance

As long as a sufficient deep liquidity pool can be built on the Curve between synths and their corresponding asset, any cryptocurrency can be traded with almost zero slippage through this route for even the largest order.

Closing Thoughts

Sythetix, 1inch, and Curve all benefit from this new route for swapping. After the collapse of $UST and generally pessimistic regarding algo-stablecoins, for some time, I was bearish on the future of Curve as those algo-stablecoin issuers were once the largest customers for Curve and bid up the $CRV emission for their respective algo-stablecoin pool.

Now I realize these OG DeFi protocols are all matured infrastructure, their value depends on how we can innovatively utilize them. In this bear market, the number of new DeFi protocols has substantially dropped and some small-scale projects even cease to operate. However, these OG DeFi have much more value waiting for us to unlock.







Remember, away from the market, enjoy life.

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