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Recent Related Article

Crypto Staking: Considering the Risks and Opportunity Costs

Synthetix is a decentralized and permissionless derivatives liquidity protocol
built on the Ethereum blockchain, with a native token SNX which can be staked in
order to create synthetic assets called Synths. Users can speculate on any real
asset by creating synthetic assets that track their real-time prices.  Anyone
can gain exposure to stocks, bonds, real estate, currencies, and just about
anything with a price, all in a non-KYC system with no central authority. This
can be done by depositing SNX tokens on the platform.  The Synthetix project
includes a dApp called Kwenta that facilitates the exchange of Synths. Synthetix
is widely regarded as one of the most innovative and trailblazing crypto
projects, with perhaps one of the best examples of a DeFi project finding a
product market fit. Synthetix facilitates the decentralized exchange of
synthetic assets and includes a stablecoin (sUSD) in which exchange rewards are
denominated and issued. Synthetix combined staking, on-chain derivatives and
thoughtful token mechanics to become the original Ethereum-based derivatives
protocols and remains one of the most popular. As of the summer of 2021,
Synthetix began supporting Ethereum’s L2 scaling solution Optimism, since then,
the proportion of value locked on the Ethereum Mainnet has come closer to that
locked on Optimism (as of Q3 2022, Synthetix saw ~$160 million in TVL on
Optimism and ~$400 million on the Ethereum mainnet).

April 30, 2023 in Houston, TX.Written by: CryptoEQ Fundamentals Team, Zachary
Lorance. Analysts: CryptoEQ Fundamentals Team.

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SNX STRENGTHS

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SNX WEAKNESSES

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SNX LINKS

 * Whitepaper
 * Website
 * Github
 * Twitter
 * Telegram
 * Discord
 * Reddit
 * Blog
 * Dapp Radar


USE CASE



Synthetix, originally called Havven, is a decentralized synthetic asset issuance
protocol built on Ethereum. To understand the value of Synthetix, a user must
first understand derivatives and synthetics in the traditional, legacy financial
world. A derivative is a security that derives its value from an underlying
asset, like options, futures, and swaps. The actual derivative does not contain
the value, only exposure to things like stocks, bonds, and currencies that
contain the value. 

A synthetic is a financial instrument that is made up of one or more
derivatives. Therefore, one synthetic could contain a future, a swap, and an
option. It is an investment vehicle meant to imitate or track other investments.
Synthetix provides a way to trade the price exposure of real-world assets on a
blockchain.  Synthetix is also similar to MakerDAO in that a user must lock up
Synthetix Network Tokens (SNX) to create synthetic USD (sUSD), similar to how
Maker users must lock up MKR to mint DAI.

Generally speaking, synthetic assets are tokenized at a 1:1 ratio to assets like
USD or ETH. The synthetic assets from the blockchain are collateralized by SNX.
To mint synthetic assets, depositors must provide the protocol’s SNX token as
collateral. This protects the value of the synthetic assets. Additionally,
liquidity providers staking SNX receive trading fees and staking rewards as
compensation for providing protocol security.

Synthetic assets have been using over-collateralization as a means of providing
protocol security to their assets. Specifically, the Synthetix protocol requires
all synths to over overcollateralized at a rate of 400% for SNX and 150% for
ETH. So, if the price of the underlying asset increases, the collateralization
ratio can adjust to falling below its target. If the opposite occurs, more
collateral would be required. This results in the user being flagged. After
being flagged, synths are burned within 2 hours if sufficient collateral is not
deployed.


STAKING

Staking digital assets on Ethereum has captured the eye of traditional finance
institutions over the last year. Staking validates transactions on a Proof of
Stake (POS) blockchain. By holding SNX tokens, users can... Upgrade to Premium
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CHALLENGES TO ADOPTION

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TECHNOLOGY




OVERVIEW

Synthetix is a decentralized synthetic-derivatives protocol built on Ethereum
and instantiated on Optimism (as of July 2021). Like many DeFi projects,
Synthetix leverages smart contracts to support a non-custodial solution for
exchanging digital assets. Synthetix serves to facilitate the exchange of
synthetic digital assets at oracle-determined prices while mitigating
counterparty risk. Synthetix enables access to liquid markets for synthetic
derivatives of various asset classes, such as synthetic FOREX currencies,
digital assets that track the price of stocks, or derivatives of other
cryptocurrencies. Synthetix successfully adopted Chainlink oracles in Q3 of
2020, enabling the secure bridging to a reliable data source for real-world,
off-chain events. Synthetix is an open-source project with an active development
community and a well-adopted governance methodology centered around Synthetix
Improvement Proposals (SIPs), of course, borrowed from Python and earlier
cryptocurrency projects. 

The Optimism network is an Ethereum Layer 2 scaling solution leveraging
optimistic rollups to increase transaction throughput by taking computation
off-chain. This technology is particularly important for Synthetix in that it
enables cheaper transaction fees. This, in turn, make on-chain oracle updates
cheaper and, therefore, more frequently affordable for the same price point.
This helps improve the quality of data from oracles and mitigate the impact of
front-running on trades on Synthetix. L2 scaling solutions support transacting
on Ethereum by making it cheaper and more commercially viable for a wide range
of use cases. The Optimism bridge also now includes transfer functionality in
the SNX staking UI, whereas users previously had to interact directly with the
relevant smart contracts in order to send assets to the L2.


SNX COLLATERALIZATION AND STAKING

 Synthetic assets on Synthetix are collateralized with SNX. Staking SNX allows
for the creation of Synths (synthetic assets). SNX staking rewards are designed
to incentivize SNX holders to participate in the platform, specifically by
minting Synths. Trading fees on Synthetix are used to compensate SNX stakers.
SNX stakers are basically responsible for managing their debt and their
collateralization ratio, where the collateralization ratio describes the value
of collateral relative to the value of issued (loaned) synths. 

Source

Synthetix has a debt pool on the basis of which all synths are issued; if the
market value of the collateral increases, the... Upgrade to Premium to access
this section and the entire 50+ page report!

Mintr, the exchange where users can mint Synths, is a decentralized application
(dApp) that traders can use to stake their SNX as collateral to mint Synths.
After staking SNX as collateral in Mintr, users can mint sUSD, which is pegged
to the US dollar. Every sUSD minted must be backed by almost five times (~400%)
the value of SNX staked on Mintr, ensuring that all collateral is backed by
Synths and that stakers incur collateralized debt when creating sUSD. When users
mint and stake, they are taking on a portion of the platform’s total debt. 

For example, if a user mints one sUSD into a debt pool of 100 sUSD, then the
debt ratio owed to the network is 1%. The total debt equals the sUSD value of
all Synths. If the sUSD value of the debt pool increases more than the minter’s
Synth portion, then a loss will be incurred (the opposite is also true). If a
staker’s minted Synth account is equal to the relative debt pool, then no losses
or gains accrue. One user’s profit equals another user’s loss. Synthetix can
create a positive or negative feedback loop from person to person based on
market volatility. 

The system tracks the debt pool by updating the Cumulative Debt Delta Ratio.
Each time an SNX holder mints or burns Synths, the system’s ratio is updated.
Also, this system uses this data to determine... Upgrade to Premium to access
this section and the entire 50+ page report!


KWENTA

A perpetual futures product launched in beta in March of 2022; since the
Synthetix protocol was not originally designed to easily facilitate leveraged
positions, they are being offered through Kwenta. In Kwenta, a dApp and
decentralized exchange (DEX) for Synthetix, users can buy and trade 13
cryptocurrencies and inverse cryptocurrencies, synthetic gold and silver,
synthetic USD, synthetic Australian dollars, and synthetic Euros. In April 2021,
Kwenta launched synthetic stocks like Facebook, Apple, Netflix, Google, Tesla,
and more. This enables traders to swap cryptocurrencies like sETH, sLINK, sUNI,
and more directly for the stocks without interacting with traditional finance.
In July 2021, Synthetix (SNX) began trading on the Ethereum (ETH) layer two
scaling platform Optimism, allowing the exchange to deliver faster transaction
speeds and a ~50X reduction in gas fees. Kwenta has become the dominant source
of trading volume on Synthetix, accounting for >70% of all volume. The Synthetix
team announced that Kwenta will branch off as its own separate project. 

Source: Blockworks


ATOMIC SWAP UPGRADE

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ECONOMICS



With synthetics in the traditional market, collateralized debt obligations
(CDOs) are types of asset-backed securities. These securities are used as
vehicles for refinancing mortgage-backed securities and are IOUs to pay
investors based on the cash flow that is collected from the pool of bonds or
other assets it owns. In just a few years since its inception, the CDO market
grew to hundreds of billions of dollars. In a similar way, synthetics can act as
a CDO product. “Synths”, the synthetic version of an asset created on the
Synthetix platform, can collateralize fiat currencies, commodities,
cryptocurrencies, cryptocurrency indexes, and more.

The Synthetix protocol offers 15 different synths available directly on the
Ethereum mainnet and 10 different synths on the layer-2 protocol Optimism. Of
these synths, 7 of them track the prices of fiat currencies directly. Those
currencies are the following:

 * sUSD
 * sEUR
 * sJYP
 * sAUD
 * sGBP
 * sCHF
 * sSRW

Lastly, Synthetix offers a very unique option in the creation of... Upgrade to
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MONETARY POLICY

Synthetix's inflationary monetary policy was heavily front-loaded so that ~50%
of all the additional supply would be distributed in the first year and with
halving occurring each year after that. For five years after the start of the
policy in 2019, the total issuance will be halved, starting at 75M SNX for the
first year. The total supply will eventually reach 245,312,500 SNX by 2024. This
front-loaded design helped bootstrap the network by incentivizing stakers with
early high issuance/staking rewards.

However, this monetary policy did not last. In November 2019, the SNX community
voted and approved a... Upgrade to Premium to access this section and the entire
50+ page report!

Initial Token Distribution

Initially, 100 million SNX were issued in March 2018 and distributed as follows:

 * 60% was allocated to investors in the main ICO sale.
 * 20% was allocated to the team.
 * 12% was allocated to the Synthetix Foundation.
 * 5% was reserved for Partnership Incentives.
 * 3% was reserved for marketing.

As of 2022, Synthetic has yet another monetary policy change in store. SIP 276
is proposing that Synethix place a cap on its SNX supply equal to 300 million.
Thus, this would eliminate inflationary rewards and add positive pressure on the
price of SNX. The expectation is that Synthetix becomes increasingly revenue
generation-oriented with plans to share revenue with stakers. 

Synethix launched its SNX token with an initial supply of 100 million tokens
back in March 2018. In this token launch, 60% of tokens were allocated to
investors, with the remaining 40% of tokens going to the protocol, Synthetix
Foundation, or core team and advisors. All tokens after the genesis tokens sold
in 2018 are given back to SNX token holders in the form of staking rewards. The
longevity of the staking rewards program is dependent on the status of SIP 276
and whether the SNX supply is capped at 300 million tokens.

Source


TOKEN AND PROTOCOL METRICS

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DEBT POOL

The Synthetix debt pool and corresponding collateral ratio are extremely
important to the protocol’s overall health, performance, and security. Due to
the volatile nature that synth assets can demonstrate, the collateral ratio, and
by extension, the debt, can also fluctuate. For SNX, collateral must be at
>400%. When a staker falls below their collateral ratio, they must provide new
collateral to the debt pool, or they will miss out on staking rewards. 

In the event that a staker’s collateral ratio is not met, the staker’s synth
assets are at risk of being burned. When a user’s collateral ratio falls below
400%, there are three possibilities:

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GOVERNANCE



Ownership of tokens within the Synthetix platform is determined by a public
network of Ethereum smart contracts; however, protocol designs, incentives, and
system developments were originally governed by the Synthetix Foundation but are
now under a more community-driven governance. Synthetix claims that the
foundation traded centralization and speed of development for decentralization
of key decision-making processes within the network. 

In July 2020, Synthetix announced that it had started the process of
decommissioning the Synthetix Foundation. Originally, the Synthetix Foundation
was a not-for-profit entity that governed and coordinated the development of the
Synthetix protocol. With the Synthetix Foundation decommissioned, the project’s
governance transitioned to being governed by several decentralized autonomous
organizations (DAOs). The DAOs include the protocolDAO, grantsDAO, and
synthetixDAO. These changes gave SNX holders more direct control over Synthetix.


SYNTHETIX IMPROVEMENT PROPOSALS (SIPS)

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GOVERNANCE REVIEW

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VULNERABILITIES



Synthetix is an open-source, relatively transparent, and decentralized platform.
The network has had relatively few bugs and has resolved community conflicts
with the protocol inconsistencies pretty seamlessly. The grant and bug bounty
programs assisted Synthetix as it grew in value and staker attention into a less
volatile decentralized platform. The success of this project somewhat relies on
Ethereum’s protocol to protect itself from smart contract bugs, high gas fees,
and general developer interoperability. 

Since Synthetix is built solely on Ethereum, any critical bug in Ethereum could
have downstream effects on SNX. The layer 2 solution of rollups also comes with
its own complexities as well as competition risk. Another implementation of
rollups, dubbed zk-rollups, is currently being adopted and considered by other
Ethereum dApps. If zk-rollups become the preferred scaling solution, that could
leave Synthetix (a bit) fragmented from the rest of the blossoming Ethereum DeFi
space. However, this remains a long-tail risk, and it is too early to tell. 


PAUSING AND TRACKING TRADING PROFIT

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NETWORK EFFECT



Before its launch in September 2017, Synthetix acquired a private seed funding
of $513,000 and raised over $30 million in its ICO in February 2018. In December
2020, Synthetix, along with Aave and Qtum, had the most activity for several
weeks, according to Omenics. Other metrics, like Google trends, show an all-time
peak of Synthetix searches during early February 2021. 

Figure. SNX social media momentum peaked prior to the price peak in February
2021.

One of Synthetix’s greatest network advantages is... Upgrade to Premium to
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Source

Most mainstream cryptocurrency exchanges, like Coinbase, Binance, and Gemini,
offer Synthetix as an asset to trade. The most prominent pairings by daily
volume are SEUR/SUSD, SETH/SUSD, and SBTC/SUSD. 


ADOPTION METRICS

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TEAM



Synthetix has over 25 employees working at the original Synthetix Foundation and
nearly 12 regular contributors to the Synthetix Github. The headquarters is in
Sydney, New South Wales, and was founded in 2017. Key team members include Kain
Warwick (Founder), Justin Moses (CTO), and Jordan Momtazi (COO). Kain has
spearheaded the organization since December 2016 but has previous experience as
a Non-Exec Director for Blueshyft, a software platform that adds physical retail
presence to digital businesses. Justin Moses, another Blueshyft team member,
worked as a Tech Advisor at Synthetix originally but soon moved to CTO. Before
Justin’s time at Blueshyft. He spent several years working for MongoDB and Lab49
managing Cloud SaaS and financial software as a principal engineer. Jordan
Momtazi, another addition to the team transferring from Blueshyft, has been with
the foundation since August 2017, originally as VP of Business Development and
then as COO. Jordan is also a Co-Founder in a crypto payment network at
RelayPay, a delayed crypto payment application.


USER EXPERIENCE



 Due to the complex nature of derivatives and day trading, Synthetix is not a
product for everyone in the crypto space. However, for those with some
finance/trading backgrounds and a stomach for volatility, Synthetix allows for a
trust-minimized way to gain price and trading exposure to otherwise inaccessible
products. It also allows users to create long and short positions, which many
other platforms do not yet provide. Shorting usually requires accounts,
contracts, brokers, and more, but with a shorting synth asset like inverse
Bitcoin (iBTC), shorting the coin becomes easy. 

Synthetix implemented Optimistic Rollups, which allow for higher throughput and
a better trading experience. Stop-loss, limit, and other order types were also
implemented to provide exchange features to the Synthetix platform. For a fee,
less confident users can now rely on a dedicated staking manager. Minters can
also create an ERC-20 IOU token for escrowed SNX.


USING SYNTHETIX 101

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REGULATION



Synthetix may be represented as a debt security in the future, similar to a
collateralized debt obligation seen within traditional markets. Securities are
fungible and tradable financial instruments used to raise capital in markets.
Debt securities require repayments to be made with respect to the size of the
loan, interest rate, and maturity of the asset. US regulations state that every
security offering is required to be registered with the SEC by filing a
registration statement that includes issuer history, business competition, and
material risks according to the Securities Act of 1933. The clarity of this
asset’s security status may depend on the recent XRP lawsuit undergone by the
SEC. 

No obvious regulations or events unique to SNX have appeared since its fairly
recent inception. No regulatory body has mentioned this asset as adhering or
conflicting with any law or governing rules specifically, but this asset
resembles and may be identified as a security. The SEC generally has authority
over the issuance or resale of any token or other digital assets that constitute
a security. A security may also include investment contracts which are defined
by the U.S. Supreme Court as an investment in a common enterprise with
reasonable expectations of profits from entrepreneurial or industrial efforts. 

Many digital assets lack clear utility and thus have no purpose other than for
retail investors to speculate on price (e.g. invest). However, SNX has a
clear-cut utility case on the platform in the form of collateral, governance,
and rebalancing the debt ratio within the network.


ROAD MAP




OPTIMISTIC ETHEREUM

Synthetix will transition to Optimistic Ethereum, a layer 2 scaling solution, in
2021. The two main advantages of Optimistic Ethereum are lower gas fees and
higher throughput. Lower gas fees are great for users and can make the system
more efficient. Higher throughput will allow the Chainlink partnership to reduce
oracle latency for leverage via Synthetix Futures along with future protocol
improvements. The transition will be rolled out in a staged multi-phased plan.

Source


SYNTHETIX V3

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NEW SNX STAKING MECHANISMS AND TOKENIZED DEBT ON V3

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Table of Contents

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Use Case
Technology
Economics
Governance
Vulnerabilities
Network Effect
Team
User Experience
Regulation
Road Map