CORE Rating: Bronze
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Overview
Synthetix is an Ethereum-based DeFi project that serves as a decentralized exchange (DEX) and issuer of synthetic assets in an open, decentralized, and trust-minimized way. It accomplishes this through a staking-based incentive system, while also using smart contracts and oracles.\
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.
SNX Strengths
- Synthetix (SNX) is a top 10 DeFi token with nearly $2.5B in value locked while showing continued growth since inception.
- SNX staking provides ultra-competitive ROI at nearly ~30% making it attractive to DeFi users seeking yield. SNX also demonstrates an active user base as ~60% of the SNX supply is currently being staked.
- While already proven to be a successful project, SNX has a clear roadmap, 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.
SNX 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 ~750% overcollateralization 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.
Important Links
Use Case
Synthetix, originally called Havven, is a decentralized synthetic asset issuance protocol built on Ethereum. A synthetic is a financial instrument that is made up of one or more derivatives. 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.
The synthetic assets from the blockchain are collateralized by the Synthetix Network Token (SNX). Synthetix is 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. Once SNX is locked in a contract, Synthetix allows issuance of the synthetic assets, Synths, in the form of an ERC-20 token. By using the staking pool collateral model, communication between Synths interacts directly with smart contracts to avoid the need for human counterparty risk. This model also solves the liquidity and slippage (the difference between the expected price of a trade and the price of the executed trade) problems of decentralized exchanges while incentivizing holders to stake their tokens.
SNX is mainly used as a debt security to leverage other assets, speculation, and staking. As of Q2 2021, there are only a few types of assets users can collateralize, but the Synthetix Foundation is working diligently to offer more assets to benefit user adoption and the network's growth.
By holding SNX tokens, users can earn trading fees from the platform in proportion to the number of tokens staked. However, staking SNX is vastly different from other staking systems where interest is collected passively. SNX staking adds a layer of complexity in which, in addition to staking on the network, a user must place a directional bet on an asset (up or down) when staking. This increases the risk and may not be for the average user.
Technology
Synthetix’s code is an open-sourced dApp protocol on Ethereum. Synthetix removes custodial risk by using smart contracts and price oracles. As of September 2020, Synthetix uses Chainlink oracles rather than their own in order to bridge the real-world price data with its platform. This removes some of the centralized dependency on the Synthetix team and highlights another step towards transitioning the project to decentralized governance.
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 eight times (~750%) 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. Synthetix does not have a liquidation mechanism to protect users from insolvency issues.
For example, if a user mints 1 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.
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.
Figure 1. SNX staking flowchart.
In a practical example, if a staker mints 1,000 sUSD by locking up 8,000 SNX, to eventually retrieve their original 8,000 SNX, they must burn their 1,000 sUSD. However, the original debt will fluctuate with the price of SNX while it was locked up. So, the user may need to burn more or less than the original 1,000 sUSD worth of debt depending on token performance. When the full debt is burned, the Debt Register resets to zero and the staker is no longer part of the debt pool.
The overall benefit of this process and Synthetix, in general, is that the entire process is peer-to-contract. Conversions between Synths occur with smart contracts and not a centralized company. There are no third parties, counterparty risk, nor KYC.
Beginning in Q1 2021, Synthetix began integrating its new staking mechanism, in a phased approach, on an Ethereum layer 2 (L2) called Optimistic Ethereum. On this L2, anyone holding the token can validate transactions and earn staking rewards by locking their tokens in the network. However, in its current phase, there is currently no utility for sUSD on this L2.
Economics
SNX is the utility token of the Synthetix ecosystem and is necessary to create “Synths”. Synths, the synthetic version of an asset created on the Synthetix platform, can collateralize fiat currencies, commodities, cryptocurrencies, cryptocurrency indexes, and more. Once SNX is staked, new Synths can be minted.
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.
Synthetix's original monetary policy featured a fixed supply; however, a new monetary policy was introduced in 2019. This new inflationary monetary policy was heavily front-loaded so that ~50% of all the additional supply would be distributed in the first year and then halving 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 also 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. The current monetary policy is illustrated in the charts below.
Figure 2. SNX current token issuance schedule.
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 750%.
SNX holders are incentivized to stake in many different ways. One way includes exchange rewards generated when someone exchanges one Synth to another Synth within the platform. The exchange fee charges both maker and taker fees of 0.30% to reward the stakers for providing liquidity on the platform.
Another incentive is an inflationary bonus. SNX supply will increase 40% from May 2020 to August 2023 because of its 2.5% annual inflation rate. Every eligible SNX staker will claim rewards from the exchange if they do not fall below the 750% collateral ratio.
SNX’s next use case is that SNX is required to maintain a user’s Collateralization Ratio at the appropriate rate. Synths are backed by collateral to absorb price shocks so if the SNX or Synths shifts, so will every staker’s collateralization ratio. If the ratio gets above 750%, they will be unable to claim fees until they correct their ratio. A staker can adjust their ratio by minting or burning Synths toward a 750% ratio.
In Kwenta, Synth’s decentralized exchange (DEX), users can buy and trade 13 cryptocurrencies and inverse cryptocurrencies, synthetic gold and silver, synthetic USD, synthetic Australian dollars, and synthetic Euros.
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. 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, which 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.
In November 2020, the Spartan Council was created via the election of seven community members to make up the governing body. The Spartan Council is responsible for approving Synthetix Improvement Proposals (SIPs) and signaling whether or not the protocolDAO should implement future SIP proposals.
A central forum for the submission, discussion, and acceptance of SIPs is provided in order to document the rationale behind the protocol design decisions. The SIPs describe protocol standards, propose updates, and are formatted in a similar manner to Ethereum Improvement Proposals.
Community governance calls are venues for the Synthetix team to consult with the community. The calls take place on a semiannual basis and have a predetermined agenda of issues to be discussed and resolved.
Vulnerabilities
Synthetix has experienced several exploits in its short history but has worked to resolve these and community conflicts relatively successfully. 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.
It is important to know as a user that Synthetix implemented a pause mechanism to prevent traders from being able to benefit when there is an expected price spike during a market closure. This pause functionality means the Synthetix protocol is not as immutable or unstoppable as some DEXs like Uniswap.
An exploit of Synthetix coins recently caused the Cream protocol token to drop dramatically in price on February 12, 2021. Analyst, Igor Igamberdiev states that an attacker made two transactions (via flash loans) that secured 1.8 million USDC from the Aave v2 platform then swapped it with Synthetix. This attack did not affect the Synthetix platform’s value, but it is clear that the token was manipulated in order to cause damage to other networks.
At the time of writing, the biggest security threat to impact the Synthetix network occurred when a trading bot breached and stole over $1 billion from the platform. After 37 million Synthetix Ether was lost on June 24, 2019, the foundation stopped all trading on its platform. Traders lost access for 24 hours and the crypto community blamed the oracle as the weakness for the breach. In this case, all the ETH were recovered and the situation was resolved. However, while this instance saved people money, it also illustrated the centralization behind the project in the early days.
The most recent (Jan. 11, 2021) vulnerability discovered was a bug in multi-collateral loans that resulted in some loans being flagged for complete liquidation when only partial liquidation was required. The problem was discovered by the Marqet Exchange and Synthetix claimed that they awarded Marqet with a bug bounty for its discovery and disclosure.
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. Other metrics, like Google trends, show an all-time peak of Synthetix searches during early February 2021.
Figure 3. SNX social media momentum peaked prior to the price peak in February 2021.
In late June 2020, Synthetix announced that Framework Ventures, ParaFi Capital, DTC Capital, Hashed, Three Arrows, Defiance Capital, and IOSG had joined the protocol and will add strategic value to the ecosystem. Other notable investor organizations include Synapse Capital and SVK Crypto.
On November 29, 2019, Synthetix and THORChain, a cross-chain liquidity protocol, announced the launch of a new partnership. This partnership will allow SNX holders to be able to stake SNX and access pairings to all supported assets on each of their chains.
Synthetix also officially announced a partnership with Chainlink on November 18, 2020, in order to use Chainlink’s oracle to mimic the price movement of oil. sOIL and iOIL will deliver on-chain exposure to Defi users to short and long the oil markets.
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. CoinGecko records recent monthly pageviews adding up to approximately 17,472 people within the month of February 2021.
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.
A user can purchase Synthetix tokens from various mainstream platforms. Synthetix is an ERC20 token and can be stored with most cold or warm wallets that store ERC20 tokens. Popular on-chain wallets include MetaMask, Exodus, and MyEtherWallet. Trezor, Ledger, and Ellipal remain the most popular hardware wallets that store Synthetix. Some of the most notable desktop and online wallets to house Synthetix are BitPanda, BitGo, and Coinbase.
The staking platform, located in the Synthetix web address, is also simple in its navigation and maintenance. Most exchanges offer leveraged trading for the Synthetix asset and see significant volume from its synthetic brother pairs (sUSD used mostly). The Synthetix network is very attractive to traders seeking high yields, but the largest threat to user experience is high volatility that fluctuates due to exchange rate shifts.
Synthetix posts most of their upcoming events on their blog. Some blockchain metric websites like Etherscan, Blockchair, and Dapp Radar are useful for analyzing the network’s value, supply, and demand.
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
Synthetic V3 will be the first complete re-architecture of the Synthetix contracts since late 2018. Synthetix uses an upgradeable proxy pattern to allow upgrades that do not require token holders to migrate. Synthetix V3 requires each token holder to migrate from the old contract to the new one, allowing Synthetix to forgo backward compatibility and redesign everything from scratch.
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. 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.
Currently, the debt pool is undifferentiated, but Synthetix plans on splitting the debt pools into asset classes so stakers can choose in which pool to participate. Each pool will have different risks and yields leading to more options for end-users.
Synthetix is attempting to and must expand the range of crypto assets and commodities that it offers. This expansion will have many challenges like market closures, dividends, and regulatory oversight.
In 2021, Synthetix plans to improve governance to the election process for the Spartan Council to reduce the power of the protocolDAO and continue decentralization of the synthetixDAO. The protocol governance changes would use community delegation governance tokens from other protocols such as Curve and Uniswap in an incentivized way to ensure mutual participation in ecosystems outside of Synthetix.
