Synthetix (SNX) Has Changed A Lot Under the Hood! Should You Pay Attention?

By Michael @ CryptoEQ | CryptoEQ | 23 Aug 2022


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*Below is an excerpt from the free, complete report on Synthetix (SNX). See the whole report here.*


Synthetix 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.

In Q3 2020, Synthetix successfully adopted Chainlink oracles, 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.

Exchanging synths involves sourcing prices from oracles. Since oracle updates take time and are on-chain, there is the possibility of front-running attacks. Fee reclamation has proved a key part of the strategy for mitigating the impacts of front running and essentially involves increasing the settlement time of trades on Synthetix. The protocol takes a Time Weighted Average Price (TWAP) across various oracles, which makes it harder to manipulate price fees and issues a fairer price. The transaction fee is also generated on the basis of a TWAP. 

SNX collateralization & 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. 

Synthetix has a debt pool on the basis of which all synths are issued; if the market value of the collateral increases, then more synths can be minted. If more synths are minted, all other things being equal, more transaction fees will be generated, which will be paid back to SNX holders, making SNX more valuable. This represents something of a positive feedback loop. However, a converse pattern also occurs in the event of the collateral becoming less valuable. 

There is also a target collateralization ratio of 400%, though this is configurable via governance votes on SIPs. SNX staking aims to facilitate monetary rewards for anyone who stakes SNX, not just those who get selected for block production, such as in Proof of Stake networks. Staked SNX is a collective collateral pool, and exchanging Synths involves burning and minting synthetic debt tokens at the price provided by an oracle. When synths are exchanged with one another, the underlying debt pool doesn’t change because the same value is burned as is minted (between the exchanged synths). This mechanism ensures liquidity proportional to the size of the debt pool and its constituent assets.  

SNX participants

Figure. Explanation of SNX staker’s role and incentives.

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 Synths back all collateral 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 their 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 and 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 the individual debt of each staker at any time without having to measure the changing debt of each staker. The staker’s final mint or burn transaction is recorded on the Debt Register with their insurance data and the relative index number.

SNX staking

Figure. SNX staking flowchart.

Liquidation Mechanism (SIP-148)

Synthetix had a major overhaul of its Staking mechanism in May of 2022 when the protocol shifted from a design aiming to incentivize users to maintain specified collateralization ratios (by making transaction fee accrual proportional to tiered collateralization ratios) to the current model. The current model involves a more decisive collateral floor. Once a position falls below its floor collateralization ratio, anybody holding sUSD can liquidate it. The liquidator is required to pay the debt associated with the funds they are liquidating. This debt must be paid in sUSD before the sUSD is burned. Liquidated SNX is moved to a global pool and distributed to SNX stakers with a year-long lock-up period. If one’s collateralization ratio falls below 150%, then as much as a 30% penalty on their staked SNX can be enacted. 


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. 


SNX kwenta volume july 2022

Source: Blockworks

SNX kwenta fees july 2022

Source: Blockworks

Atomic swap upgrade

Atomic swaps have been a significant upgrade for Synthetix as of Q3 of 2022. An atomic swap is one in which the assets expected to be exchanged are done so entirely or not at all, meaning there is no opportunity for a partial exchange or slippage. Atomic swaps are low latency and do not involve the same 10-minute wait period as many trades on Synthetix since they do not involve fee reclamation. Instead, atomic swaps on Synthetix (only available on the Ethereum mainnet) were originally designed to utilize a combination of Chainlink price feeds and Uniswap V3 DEX oracles. The aim here is to minimize slippage and transaction fees by taking a price that is hard to game or front-run. SIPs since, such as SIP-198, have since enabled users to trade atomic swaps of some synths on the basis of the chainlink oracle (and not also including DEX oracles). This same upgrade also removed the requirement that sUSD be used in each atomic swap, which further removed barriers to integrations and provided more trading volume, thereby generating more revenue for SNX holders. Atomic swaps have enabled mainnet integrations with aggregators (such as 1inch) and the associated following increase in volume. Similarly, Curve has been integrated to facilitate exchange with other stablecoins and open up even more liquidity to the Synthetix ecosystem. In addition to smoothing out UX features for existing integrations, such as enabling complex routed transactions on 1inch in one single transaction (as opposed to 2, such as USDC to sUSD to sETH followed by sETH to ETH), there are various other aggregators and DEXs which Synthetix can integrate with moving forward. 

SNX atomic swap diagram


Looking Forward

Synthetix is seeing similar initiatives to Kwenta being built atop it, such as Lyra, a decentralized exchange for cryptocurrency options, which is also built on Optimism and has ~$20 million in TVL as of Q3 2022. Lyra utilizes sUSD as the default collateral for LPs on the AMM. All of the fees generated on Lyra are routed back to SNX stakers. Projects such as Polynomial and Brahma are building atop Lyra further still, as various permutations on income generating vaults. Further, Thales, a peer-to-peer betting market built on Optimism, uses sUSD. Aelin, a fundraising platform on Optimism, also uses sUSD, as do sports betting services (Overtime) and Exotic.

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


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