In this guide, all things related to Synthetix explained. A cryptocurrency that lives on Ethereum and is making big progress in the DeFi space.
Welcome to the world of synthetic assets. Synthetix is a relatively young asset on the Ethereum blockchain that is one of the first blockchain projects bringing synthetic assets to Ethereum. Although Ethereum currently is facing some troubles to release and upgrade to Eth2.0 this brand new market is seriously taking off.
For example, at the end of 2019, the entire assets locked up in DeFi(decentralized finance) was about $800 million. At the time of writing this brand new market has witnessed gigantic growth to a stunning number of $6 billion. In other words, in just a few months the entire DeFi market went almost 7x and the numbers are counting.
Will this exponential growth in DeFi continue over the coming years? This is a very legit question to ask and this brand new investment vehicle already attracted the attention of institutional investors.
To get to know more about this investment opportunity I will introduce you to the biggest gainer in this space which is called Synthetix. At the time of writing Synthetix network token is ranked 32th on Coinmarketcap website and has the largest market cap of all DeFi tokens in the blockchain space.
First of all, this guide will introduce you to DeFi. Additionally, Synthetix explained in a complete and simple way to give you a headstart in this complex but exciting new asset class. Also, it’s important to know that I have written this as my own opinion and shouldn’t be considered investment advice.
What is Decentralized Finance(DeFi)?
Synthetix is part of the brand new decentralized finance ecosystem. In addition, this new asset class made it’s birth on the Ethereum blockchain where financial assets can be traded in a decentralized way.
In other words, decentralized finance(DeFi) uses blockchain technology to offer complex financial products without the need for a trusted third party. Instead of an expensive broker, DeFi uses software on a network to validate transactions being done among traders.
Ethereum founded in 2015, uses blockchain technology and smart contracts to create a trustless system. Synthetix(SNX) is one of the first protocols that can be used in decentralized finance. At the moment DeFi has three different uses cases:
- Creating monetary banking services(Stablecoins)
- Providing lending/borrowing platforms that are peer-to-peer
- Creating platforms for advanced financial systems such as DEX, derivatives and prediction markets
What is the Benefit of Decentralized Finance(DeFi)?
Before I dive into all things that explain Synthetix, it’s important to know more about the decentralized ecosystem of DeFi. So, what is the main benefit of decentralized finance?
Notably, offering financial services by traditional banks are mostly very complicated and involves a lot of legislation and other overhead. Using blockchain technology and thereby removing the third party simplifies these financial products a lot. Also, it reduces operational costs and lowers the entry barriers for investors.
What is Synthetix?
Synthetix(SNX) is a token that can be used to trade synthetic assets or Synths on the Ethereum blockchain. Moreover, Synthetix offers an exchange(Synthetix.Exchange) to trade these synthetic assets.
In detail, each Synth can be used to track the price of an external asset. This external asset can be anything and doesn’t need to be on the blockchain. Examples of external assets can be US dollar, gold, silver or even the price of a stock like Tesla. In fact, anything that has value in the real world can be transformed to Synth and be tracked and traced.
All in all, Synthetix can be seen as a protocol that has been developed on top of the Ethereum blockchain and offers the possibility to trade synthetic assets. Additionally, it uses decentralized blockchain technology to make these assets censorship-resistant.
What are Synthetic Assets?
When it comes to explaining Synthetix, you must have noticed that it has a very strong relation to synthetic assets. If you are a common investor(or just curious) you are maybe hearing this term for the first time and have no clue about their meaning. So, what are Synthetic assets?
Synthetic assets have been used in traditional finance for over a decade now. You may have heard about options, derivative products, futures, and swaps. All these products are very complex financial instruments that professional traders can use for trading.
Synthetic assets mimic an underlying asset and can be anything like currencies, commodities(gold, oil), or stocks and bonds. You cannot directly profit from these assets by buying or selling. Instead, these assets have a combined underlying value and eventually you can derive profits from it.
Who is behind Synthetix?
Back in 2017 the Havven project started as an ICO on Ethereum and has its roots in Australia. At that time the project had three founders Kain Warwick(current CEO), Justin Moses, and Clinto Annis. The team managed to acquire $30 million in funds from the ICO sale and altogether with investment firm Synapse Capital the project was being launched.
As you might have noticed the project was being launched under another name(Havven). However, in November 2018 the team decided to do a rebrand that made the birth of Synthetix as it is today.
The leader and CEO Kain Warwick have a strong background in IT and founder of the first cryptocurrency platform in Australia. The other guys are quite technical as well, where Justin Moses was involved in launching database platform MongoDB. Clinto Annis finally, has a total experience of 18 years in software engineering and former employer of JP Morgan Chase.
How does Synthetix work?
Explaining Synthetix can be very complicated so I try to make it as simple as possible here. Basically, the Synthetix ecosystem consists of three main components. First, we have the Synthetix Exchange, a trading dApp that can be used for trading these brand new synthetic assets.
On this decentralized exchange, it’s possible to trade without an order book like any other centralized crypto exchange. Liquidity and order slippery are not an issue here and all trades occur peer-to-peer. As there is no custodian wallet, trading needs to be done from within your own wallet. Meaning you can easily connect from a hardware wallet like Nano Ledger or Trezor. Also, it’s possible to connect by a Coinbase wallet or Metamask.
The second component of the synthetix system is Mintr which is a dApp for staking SNX tokens. Users of this platform can use SNX as collateral and earn passive income over it. This income can be earned in two ways:
- Earning SNX staking rewards
- Synth exchange rewards, that comes from trading fees
The third component of the synthetix ecosystem is the synthetic asset or Synth token. These tokens are minted and represent the price of an external asset.This asset can be a cryptocurrency, commodity(gold, silver), a stock or even an ETF tracker in the Forex markets.
Is Synthetix a fully decentralized blockchain project?
At the moment the answer is no. For example, all price data of the external synthetic assets are handle by a single ‘oracle’ API which introduces the single point of failure problem. However, as this project is still in the works this issue is on the backlog of the development team.
It is also good to know that the team decided to partner up with Chainlink, another very successful project in the space. Additionally, these guys are experts in making ‘oracles’ decentralized, resulting in centralized price feeds being converted into decentralized ones.
What is SNX crypto?
First of all, the SNX token is the blood and veins of the Synthetix ecosystem and these tokens are used to mint the synthetic assets(Synths). Those who hold SNX tokens can stake them and earn a portion of the fees generated by the Synthetix Exchange.
The SNX was deflationary until March 2019, when the Synthetix team added an inflationary monetary policy component to help incentivize users to create Synths. After this inflationary policy was implemented the Synthetix network saw a huge jump in user participation, and an accompanying jump in the value of the SNX token.
Although this project has introduced an inflationary monetary policy where each year new tokens are being created, the SNX token will have a limited supply like any other cryptocurrency. Weekly new tokens will be minted until the final goal will be reached in August 2023. At that moment in time 245,312,500 SNX tokens will exist and this will be the final supply.
How do I get a Synthetix network token?
Earlier in the explanation of Synthetix, I mentioned that the SNX token is ERC-20 and lives on the Ethereum blockchain network. Therefore the SNX token is a cryptocurrency that can be traded on several cryptocurrency exchanges anywhere on the globe. Below a list of reliable exchanges, you can use to buy the token.
Where to Buy SNX cryptocurrency
How do I stake Synthetix network tokens?
Staking SNX tokens can be done in the Mintr dApp. First of all, there is no minimum amount of SNX tokens required for staking. However, it’s wise to start staking with a minimum of 300 SNX otherwise GAS costs may exceed the benefit of staking rewards.
In particular, staking SNX is the process that converts the token into pooled collateral for the network. When an investor stakes their tokens, they’re minting sUSD to be used to trade for synthetic assets, whether by the staker or another investor. Also, the staker can trade the sUSD for a synthetic asset on the Synthetix. Exchange and exchange it for ETH or another ERC20 token on a variety of exchanges.
In general stakers of SNX token can earn Synthetix dividends(48%) but there are also some risks involved. For example, the staker is providing collateral for traders to trade against. If traders are profitable, net of fees, stakers will lose out in the long term.
What is the Collateralisation ratio of Synthetix?
Synthetix uses a 750% collateralisation ratio. Meaning, all Synthetix stakers should maintain at this level for their collateralization and by doing this they make sure that the liquidity of the entire ecosystem remains intact. If the collateralization ratio drops to certain levels a penalty is being charged among the stakers and can even result in liquidation of your position.
Synthetix penalty levels
|Collateralisation ratio||New penalty|
|454% – 500%||None|
|333% – 454%||25%|
|250% – 333%||50%|
|200% – 250%||75%|
|100% – 200%||90%|
What are the main risks for Synthetix?
In the first place, this very young cryptocurrency project is still in the works and no final product has been released yet. As a result, the DEX and the Mintr dApp are potential targets for hackers trying to find loopholes in the system.
Also, there is this Synths burning mechanism that every staker must use to get the SNX token and exchange it in the ‘real world’. In fact, it could be possible that stakers when trying to cash out on SNX need to burn more Synths(valued in SNX) than they initially locked in for.
Furthermore, as mentioned earlier in this ‘Synthetix explained’ story, at the moment this project isn’t fully decentralized. As a result, your funds on the Mintr platform aren’t completely censorship resistant what theoretically could result in a third party claiming your funds.
The entire Synthetix project is a bold move of the team trying to accomplish introducing traditional synthetic assets on the Ethereum network. All this, to modernize the trading of financial assets and leverage it with blockchain technology.
At this moment in time, the DeFi movement is witnessing gigantic growth and institutional investors are ready to enter some serious money into these very young market. As a result of this, the odds are in favor of the Synthetix team and they might have a bright future ahead.
With this exclusive guide, I have Synthetix explained as simple as possible, although this project is very complicated, and investing in it requires a steep learning curve for the common investor.
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