Synthetix: Real World Assets, On the Blockchain
Synthetix at a Glance
Synthetix is a decentralized application (DApp) for the issuance of synthetic assets, referred to as synths on the Synthetix platform. Developed by Kain Warwick, Synthetix is a financial application with the aim of helping bridge the gap between traditional finance and decentralized finance (DeFi). The issuance of synths is like derivative products offered in the traditional finance markets. However, Synthetix operates on the Ethereum blockchain and is always accessible to any DeFi trader. Synths allow traders to gain exposure to other assets without having to hold any of the underlying assets.
Oracles are smart contracts that can be used to track the price of assets represented by synths. By leveraging the technology of decentralized oracles, Synthetix can offer a wide variety of synths to give traders more flexibility within their portfolios. Oracles can track many different types of assets, including real-world commodities, fiat-currencies, as well as cryptocurrencies and cryptocurrency indices. Using synths, traders can now participate in FOREX markets without having to hold any of the different fiat currencies.
The Token, SNX, and it’s Use as Collateral
By staking (depositing) SNX into smart contracts and locking the collateral, users have access to borrow against this collateral to create any synth offered on Synthetix. When borrowing against SNX as collateral, traders are incurring debt with the protocol and must maintain a collateralization ratio to prevent being liquidated. Governance proposals control the threshold for liquidation events on the protocol.
The initial sUSD (synthetic USD) value of the staked SNX is the total amount of collateral a user can borrow against. To unlock the SNX deposited into the Synthetix smart contract, a user must pay off their entire outstanding debt. Users are incentivized to stake SNX by receiving a pro-rata portion of the fees generated on the Synthetix protocol. By incentivizing users to stake their SNX tokens, this will lead to a deeper liquidity pool for the protocol.
Synthetix’s design is referred to as a pooled liquidity model, meaning all the SNX staked on Synthetix is concentrated into a single liquidity pool. By pooling all the assets in one central place, this allows traders to swap directly between synths and helps reduce slippage when swapping. Also, by allowing traders to directly interact with smart contracts, this eliminates the need for a counterparty to mediate the exchange between assets.
SNX is used as the main collateral and governance token for Synthetix. The Synthetix protocol is a community-governed protocol that separates itself into three different decentralized autonomous organizations (DAOs). The protocolDAO is responsible for protocol upgrades and the smart contracts for Synthetix. The grantDAO oversees funding governance proposals for SNX holders to vote on. Lastly, the SynthetixDAO helps provide funding to attract developers to help advance the Synthetix platform. Currently, Synthetix has over $1 billion in Total Value Locked (TVL) on its platform. Originally deploying its product on the Ethereum blockchain, it has expanded its reach to the layer 2 network, Optimism. By continuing to bring much needed financial innovation to the DeFi markets, Synthetix can continue to attract capital to its products.
DeFi 101: A Guide to Decentralized Finance
Decentralized Finance, or DeFi, has been rapidly gaining traction amongst the investment community. DeFi protocols, like Solana, Chainlink, or Uniswap, have real-world utility (and revenues) that are quickly displacing their traditional counterparts that require intermediaries to function.
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