Synthetix is a decentralized finance (DeFi) protocol built on the Ethereum blockchain that enables the creation and trading of synthetic assets. These synthetic assets, known as Synths, can track the price of any real-world asset, including currencies, equities, bonds, commodities, and other cryptocurrencies. This allows users to gain exposure to a wide range of assets without actually owning them.
The Synthetix Protocol
The Synthetix protocol operates with two types of tokens: the Synthetix Network Token (SNX) and Synths. SNX is the native token of the Synthetix ecosystem and is used as collateral to mint Synths. Synths, on the other hand, are synthetic assets that track the price of real-world assets.
To create Synths, users lock up SNX tokens in a compatible wallet. The price of each Synth is determined by oracles, many of which have been provided through a partnership with Chainlink (LINK). The Synths available are primarily currency or cryptocurrency pairs, but there are also Synths available based on commodities like gold and silver. All the Synths can be traded and exchanged at the Synthetix Exchange.
Synthetix offers several unique features:
- Anyone can create and convert Synths without the need for a counterparty.
- Any Synth can be traded for any other Synth on the Synthetix Exchange, providing nearly infinite liquidity.
- Peer-to-contract (P2C) trading allows trades to be executed quickly and easily, all without an order book.
- A distributed pool of token holders is responsible for providing collateral on the platform and for maintaining the stability of the exchange.
Collateralization and Incentives
To issue a new Synth, the Synthetix system requires collateralization of 750%. This large collateralization requirement creates a large buffer for the Synths in circulation and protects against sudden market moves. The SNX collateral is locked up whenever Synths are minted, and those Synths then take the form of an outstanding debt on the platform. If a user wishes to unlock their SNX later, they need to burn a number of Synths that is equal to the current value of the Synths they minted earlier.
Stakers in the Synthetix ecosystem can earn staking rewards, which come from Synthetix Exchange fees, currently set to 0.3% of each transaction. These rewards provide an incentive to hold SNX tokens since they are distributed to SNX holders for providing the system with collateral to back the Synths in circulation.
The Synthetix Exchange
The Synthetix Exchange is where people can buy and sell all the various Synths that have been created. Because the exchange is underpinned by smart contracts, there is no need for reliance on any counter-party or third party in the exchange process. Anyone can buy and sell at any time, tapping into the infinite liquidity of Synthetix.
The Team and Future Plans
Synthetix was originally conceived and created as Havven in 2017 by Kain Warwick in Sydney, Australia. The project was rebranded to Synthetix in December 2018. The team is led by Kain Warwick, who built Australia’s largest cryptocurrency payment platform prior to starting work on Synthetix. The CTO position is held by Justin Moses, who has been with the project since its inception and has extensive experience with large scale systems.
The Synthetix team has a roadmap for 2020 that includes growth/adoption, mechanism/incentive design, user experience improvements, protocol security, decentralization, and system optimization. However, these potential changes are only possibilities and could easily change based on community feedback.
Synthetix is at the forefront of the DeFi movement by offering synthetic assets to users across the globe, thus providing access to specialized trading strategies. Given the massive size of traditional financial markets, which reaches into the hundreds of trillions of dollars, Synthetix has the potential to create a massive tokenized market on the Ethereum blockchain. However, it should also be noted that there is no guarantee their vision will become successful. There are many factors that could limit the spread of the Synthetix Exchange and the use of Synths.