What Is Synthetix? All You Need to Know About SNX

IntermediateJan 27, 2023
Synthetix is a DeFi protocol that bridges the gap between on-chain and off-chain asset groups through a tokenized derivative market.
What Is Synthetix? All You Need to Know About SNX

At the core of the Decentralized Finance (DeFi) movement is the aim of reinventing traditional finance products and concepts for the blockchain. In furtherance of this aim, the DeFi community has pioneered many mechanisms, most of which are now considered the standard.

Among these mechanisms is the concept of synthetic assets, an asset group that provides investors with exposure to the value of assets unavailable on the blockchain. One of the protocols pioneering the issuance of synthetic assets or synths is Synthetix. Synthetix is a DeFi protocol that is paving the way for synthetic assets to become a significant sector in the cryptocurrency space.

This article will discuss the protocol, the technology behind Synthetix, and its native token, SNX. It will also explore the protocol’s governance model and explain how to begin trading synths as a beginner.

What is Synthetix?

Built on Ethereum, the home of DeFi, Synthetix is a decentralized synthetic assets platform that uses an over-collateralization mechanism to mint synthetic assets. Synthetic assets or synths are on-chain versions of derivatives from traditional finance. With synthetic assets, investors can profit from the value of an underlying asset without actually holding the asset.

So Sythetix is a DeFi protocol that issues synths in the form of ERC-20 tokens on the blockchain. Assets supported by the DeFi protocol include fiat currencies, commodities like Gold, and cryptocurrencies, all of which are represented by their token name and an “s” prefix. The platform also has provisions for a different type of synth called inverse synths which are created to track the opposite of the underlying asset. In summary, a user who holds the inverse BTC sync (iBTC) stands to make a profit if the price of BTC falls.

Synthetix aims to increase access to assets that do not exist on the blockchain. Alongside fiat currencies and commodities, Synthetix also allows synths to be created for index funds so that traders can benefit from an asset group instead of a single underlying asset. Synthetix also gives its users the option of trading synths on its decentralized exchange (DEX), Kwenta.

A Look at the Evolution of Synthetix

Synthetix originally began as a platform named Havven. In 2017, Havven was founded by Kain Warwick as a collateral-backed stablecoin issuer. However, the team behind the project decided to go in a different direction.

Thus, in 2018, the company was renamed Synthetix to better represent the protocol’s ability to support synthetic assets other than the premier USD stablecoin. After this decision, the company raised $30m in funding through its ICO and sale of the protocol’s native token, SNX.

Since then, the protocol has evolved into one of the standard names in the DeFi community.

How Does Synthetix Work? Architecture

The Synthetix architecture is incredibly technical as it features various smart contracts and other complicated mechanisms. Nevertheless, integral to the Synthetix architecture is decentralized price oracles. All price feeds on the Synthetix platform are supplied by independent node operators on Chainlink, the decentralized oracle network. Thus, the value of each underlying asset for a synthetic asset is supplied and updated by the oracles to ensure accuracy.

Instead of relying on actual reserves, as is the case with stablecoins, each synth merely relies on the price of an asset. Smart contracts within the Synthetix infrastructure make it so that owning an sUSD represents exposure to the price of USD and not ownership of USD itself.

Because Synthetix is built on the Ethereum blockchain, all synths are ERC-20 tokens and compatible with other decentralized exchanges such as Uniswap.


Source: Synthetix - Synths

What Is the SNX Token?

Like most other decentralized protocols, Synthetix issues its native token. As the platform was formerly named Havven, its native token, HAV, at the time, corresponding with the platform name. HAV was initially launched in the third month of 2018, and the total supply was $100 million. At its launch, 60 percent of the total supply of tokens was issued for a total of $30 million during the Initial Coin Offering (ICO).

The remaining 40 million HAV was split thus:

  • 8 million between marketing and partnerships;
  • 12 million to the Havven foundation (to be distributed in a schedule over the next 12 months);
  • And the largest sum, 20 million, went to the founding team, tied to another distribution schedule, lasting over two years.

After the protocol was rebranded, the token was renamed SNX to correspond with the new name, Synthetix. By 2021, a multi-million dollar funding round shot the price of SNX to an all-time high of $28.77.

SNX Use Cases

Asides from being the governance token for the Synthetix platform, the SNX token has some additional use cases.

Staking Rewards and Incentives

Synthetix’s business model provides incentives and rewards to users who stake their SNX tokens. Staking SNX can be done in many ways, and the rewards also vary.

  1. Exchange rewards: A fee is generated on each exchange a user carries out on the Synthetix decentralized exchange platform, Kwenta. The exchange fee varies between 0.1% of the transaction to 0.6%. The coalition of these exchange fees is then distributed to SNX stakers weekly.
  2. Inflation: The synthetix protocol incorporates an inflation monetary policy. As such, stakers stand to make a profit if they hold their SNX tokens for a prolonged period.

Overcollateralization and Synth minting

The SNX token is a key player in the process of creating synthetic assets on the Synthetix platform. To create a synth, users must deposit up to 400% of the value of their synth token as collateral. Because creating a synthetic asset on the Synthetix protocol means incurring a position of debt, each user’s SNX tokens are held until they burn their minted Synths to pay off the debt.

Synthetix Governance Model

Synthetix was originally overseen by a non-profit foundation in Australia. However, in support of decentralization, the administration of the protocol was shifted and split between four governing councils, Spartan, Grants, Ambassador, and Treasury.

  1. The Spartan council is at the center of the Synthetix governance model, comprising eight members. All eight members vote on the following:
  • Proposals to improve the protocol
  • Changes to the parameters, such as the collateralization ratio and gas fees.
  1. The Grants council has a more specific agenda and is made up of 5 members. The grants council is responsible for grants, initiative bounties, and competition prizes to boost the platform.
  2. With five members, the Ambassador council represents the interests of the Synthetix protocol on the Ethereum blockchain and in the larger DeFi ecosystem.
  3. Finally, the Treasury Council acts like any other treasury body. The members manage the funds of the Synthetix platform and oversee stipend payments and discretionary incentives.

All members of the Synthetix governance bodies receive 2000 SNX tokens as stipends.

How to Interact With Synthetix?

There are two main ways to interact with the Synthetix platform, both of which involve trading or creating synths. One method is through the decentralized exchanges that support Synthetix, and the other is staking.

Decentralized Exchanges

The decentralized exchange platform for trading Synth is Kwenta. Kwenta differs from other DEXs because it replaces the generic order book mechanism with peer-to-contract trading. This means that each exchange on the platform is executed by a smart contract. To trade a synth on Kwenta, you must have ETH and an Ethereum wallet such as MetaMask. Once you have those two, follow these steps:

  • Visit the Kwenta Website and click on “Start Trading.”

  • Click “Connect Wallet” on the next page to link your Ethereum Wallet to the exchange.
  • On Kwenta, exchange your ETH for sUSD
  • Now that you’ve traded your first synth, you can trade the sUSD for other synths like sBTC.

Staking

If a user prefers to start from scratch to create a synthetic asset, the primary way to do this is by staking. As mentioned earlier, Synthetix operates on an over-collateralization mechanism; users must stake SNX to mint synths. These tokens are available for purchase on cryptocurrency exchange platforms like Gate.io.

Once you have purchased SNX, the next step is to deposit it in an Ethereum wallet. After doing that, follow these steps:

  • Visit the Synthetix Staking website.
  • In the right-hand corner of the page, click the dropdown and connect your wallet.

  • Available wallets include Coinbase, Portis, WalletConnect, Torus, and Ledger.
  • Deposit SNX from your wallet and create your preferred synth, using your SNX as collateral. Remember that you must deposit at least 400% of the value of the synth you’d like to mint.
  • To withdraw your SNX tokens, simply burn synths.

Additionally, Synthetix gives users the option of using ETH as collateral. In this case, the Collateral ratio is 150%.

Is SNX a Good Investment?

Synthetix provides access to on-chain derivatives in the form of synthetic assets. Although the concept is fairly complicated, Synthetix’s integration with decentralized exchanges makes the platform easy to use. Even though it is one of the oldest DeFi projects, the Synthetix protocol has not yet reached its full potential. As the larger DeFi space expands and welcomes new technology and innovations, the growth of Synthetix will certainly occur simultaneously.

How to Own SNX?

One way to own SNX is to go through a crypto centralized exchange, so the first step is to create a Gate.io account and complete the KYC process. Once you have added funds to your account, check out the steps to buy SNX on the spot or derivatives market.

News on Synthetix

According to recent news released in December 2022, Synthetix Atomic Swaps V2 is finally live. Due to SNX’s extensive liquidity and affordable costs, the first two protocols to connect with SNX Atomic Swaps are @1inch and @CurveFinance, which help to give the finest fills to DEX traders. On Synthetix, users have already noticed the improved volume. This summer, Atomic Swaps v1 was introduced in beta and began routing sizable volumes through SNX.
After considerable consideration, Synthetix made the decision to suspend the beta instance and reconfigure to directly incorporate 1inch/curve, offering greater flexibility and reduced costs. The Curve DAO has recently been adjusting a few settings for Synthetix Atomic Swaps v2. The plans will increase the amount of deals routed through SNX and drastically lower swap fees.

Useful References

For the latest updates about Synthetix, you can visit:

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Author: Tamilore
Translator: Piccolo
Reviewer(s): Edward、Hugo
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