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Core Report Strengths
- Synthetix (SNX) has managed to continually attract users throughout Q3 2022 while also continuing to hold nearly $500 million in value locked on-chain. Synthetix also remains the largest protocol on layer-2 rollup Optimism, placing Synthetix in the best position possible to benefit from L2 adoption.
- SNX staking can offer very high APYs, ~49.7% at the time of writing, making the protocol attractive to yield-seeking DeFi users. Around 120 million SNX are being staked on the Synthetix protocol, this is out of a maximum supply of ~215 million, meaning ~50% of the SNX supply is currently being staked.
- While already proven to be a successful project, SNX has a clear roadmap, a growing team, and steady development progress to grow the project which could eventually unlock the global market of trading synthetics of any asset, currency, commodity, etc.
Core Report Weaknesses
- Synthetix is a complex trading platform that integrates various early-stage technologies like Ethereum, smart contracts, oracles, Mintr, and more which creates compounding risk for SNX holders.
- Synthetix is not fully decentralized, immutable, or censorship-resistant like other DeFi projects, i.e., Uniswap. In fact, Synthetix has a "pause" feature that the team used to stop trading after an exploit in June 2019.
- SNX staking requires ~400% over-collateralization, which is cost-prohibitive to most users and far more cost-intensive than other DeFi projects. This could dissuade some users from using Synthetix and instead seek alternative ways to trade/earn yield in DeFi.
- SNX staking is not as "passive" as other projects and requires some additional oversight. The learning curve associated with SNX staking (and the Synthetix ecosystem in general) is higher than other DeFi projects and may discourage some users.
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 1.25% weekly rewards decline beginning in December 2019. Additionally, the community also approved a 2.5% annual terminal inflation starting in September 2023. This monetary policy is illustrated in the charts below.
Source. SNX current token issuance schedule.
Initially, 100 million SNX were issued in March 2018 and distributed as follows:
- 60% were allocated to investors in the main ICO sale.
- 20% were allocated to the team.
- 12% were allocated to the Synthetix Foundation.
- 5% were reserved for Partnership Incentives.
- 3% were 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.
Synths are minted and backed by staked SNX as collateral using Mintr, a decentralized application for interacting with Synthetix contracts. Stakers increase their debt when they mint Synths, and to exit, or unlock, the platform they must pay back this debt by burning Synths. Community governance mechanisms will dictate the collateralization ratio in the future, but currently, the ratio remains at about 400%.
An additional monetary policy change can be found with SIP-256 in relation to scaling the Synthetix protocol’s native stablecoin, sUSD. Synth creation is inherently inefficient versus real market demand, namely due to inefficiencies with over-collateralization. The problem is that contingencies tend to introduce increased risk to the system. For example, lowering the collateralization ratio removes security with the sUSD stablecoin. The SIP-256 upgrade includes the possibility of introducing a contract that contains a delta neutral wrapped position that is long spot ETH and short perp ETH. This would be utilized to mint the sUSD stablecoin at a 1:1 ratio. The reason for this is it promotes a much higher degree of scalability and mitigates the limitations of over-collateralization on capital.
Initial Token Distribution
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.
Token and Protocol Metrics
As of Q3 2022, the SNX token maintains a market capitalization of ~$650 million and a total supply of 294,845,000 tokens. SNX reached an all-time high of $28.53 in February 2021, prior to the 2022 bear market. SNX remains in the top 100 cryptocurrencies by market capitalization.
Despite the volatility in market capitalization, token holders of SNX have actually grown. The number of active token holders grew exponentially from roughly May 2021 until it reached over 80,000 in November 2022. Since the market peak in November 2022, token holder growth has been relatively stable.
Source: Token Terminal
Protocol revenue for Synthetix has grown exponentially in the second half of 2022. Revenue has routinely surpassed $2 million over the course of June, July, and August 2022. Prior to roughly June 2022, protocol revenue was relatively steady, hovering around $300k. This has been in comparison to the falling fully diluted market cap of the Synthetix protocol through the 2022 bear market.
Fees on the Synthetix protocol generate revenue via synth trades. Every trade on the protocol comes with a fee charge between 0.1% and 0.6%, which is later distributed to SNX stakers. During the summer months of 2022, both trading volume and protocol revenue have skyrocketed, helping Synthetix to maintain one of the highest rates of revenue generation in the space. For specifics, Synthetix has logged over $10 billion in cumulative trading volume and over $240 million in cumulative protocol revenue.
Due to the heightened trading volumes and revenue generation, SNX holders accrue a hefty amount of value. Synthetix is rated within the top ten highest fee-generating protocols in the space as of 2022, only trailing Ethereum, Uniswap, GMX, Binance Smart Chain, and Aave. Seven day fees average approximately $200,000.