Synthetic Biology

Synthetix project - OG yield farming

By fblauer | Yield Hacking with Defi | 1 Dec 2019


Intro

This project continues to be interesting and relevant, with a lot of different facets to it. It took me a while to get the hang of it, but now I am really starting to see the vast potential. It is a whole ecosystem, and far more than just a dapp. Here is the litepaper for considerably more detail.

Background

The project borrows some ideas (and maybe even code) from the pioneering Maker Dao project , which uses a smart contract to mint a stable coin called Dai, which is pegged to the USD dollar. It is secured by collateral, (initially Eth, but now also other ERC20 tokens). It also has a borrowing rate, (called stability fee) which can be used to maintain the USD peg. If the value of the Dai stable coin is too high in relation to USD, then they will lower the rate, encouraging more people to take more loans and inflate the value, which will have the effect of decreasing the price of the stable coin. If they raise the rate, there will be more incentive for borrowers to pay off the Dai loans, and the repayments are burned, decreasing the supply of Dai, and raising the value back to 1 USD. If your collateralization ratio falls below 150%, then your  collateral could get liquidated, and so the backing on an aggregate level is maintained. If you dont' know how Maker works, you should because many other Defi projects are based on the original idea.  

How it works (synthetix)

A similar technique is used for Synthetix, but can be applied to producing any synthetic asset with a price feed (called a synth), not just USD. It uses a similar process (to Maker) for maintaining the peg, in a decentralised way. There are many synthetic assets (called synths) that have been created for things like Fiat Currencies, Commodities, other Crypto assets, tokenized conventional stocks/equities, or stock indices. So, for example sXAU is pegged to the price of gold, or sCEX is pegged to an index of Centralised exchange tokens. You can have synthetic stocks like apple or google, or any real world assets that has a reliable price feed. There are also inverse synths for short positions, (if you want to bet against the synthetic digital asset). You don't have to physically own the underlying asset, only the synthetic representation. One of the advantages of this alternative, is unlimited liquidity, and the lack of slippage when trading one asset for another. The assets which represent the synths don't have to be bought or traded. They just have to be backed up by a sufficient value of collateral. 

The process is decentralised, so that you don't have to trust, and rely on a central authority to maintain the collateral backing the assets. But you do have to rely on the smart contracts, which are opensource, verified by auditors (you can see the report), and tested. They have implemented all changes recommended by the auditors. There are also bug bounties, so that there is an incentive to report any that may be found.  

You can either mint your own synthetic assets, by staking SNX, or you can trade for them on a decentralised exchange like Uniswap. There is also an internal sUSD based exchange where you can trade one synthetic asset for another, with sUSD as a trading pair for all the assets. The exchange is similar to Uniswap or Bancor, but the assets for trading are all synthetic. 

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Here is a good article which talks about the rise of Susd as a stable coin, and suggests why it could rival Dai. The SNX token is used for collateral (above) and also for governance (below), and has been increasing in demand and value. 

Rewards

You can claim rewards each week for staking, and minting sUSD, which creates a loan which that has to be paid back eventually, but there is no stability fee so you can take as long as you want. But, you have to keep the collateral at 750% of your borrowed sUSD, or you don't get the rewards until you top it up. There is also no liquidation if your loan falls below 750%. You just have to top it off, if you want to get your rewards. So, its a different incentive than Makerdao, and the collateralization ratio is much higher. You don't have to worry about liquidation for now, but that may change in the future. The worst that could happen is that you don't get your rewards if you don't keep your collateral above the ratio for more than 2 weeks. If the value of SNX goes up, you can mint more sUSD (see MINTR graphic above). If it goes down, you can either pay back some Susd, or get more SNX to stake. 

You are entitled to a share of exchange fees that people pay when converting assets from one to another. If that wasn't enough, you can also participate in some of the yield farming opportunities, as explained below, in more detail. 

Governance

The team is very knowledgeable, and there is a very good discussion forum on discord. The governance is quite transparent and democratic, and votes are held for all major decisions. Anyone can participate, but only SNX token holders can vote. Price oracles have been migrated over to Chainlink, which is quite reliable and secure. 

Plans for the future

The project is currently running on Ethereum, but is designed in a way that it could running on multiple chains if the need arose in the future. For example, they have formed a partnership with Thorchain, which is a cross chain liquidity network. 

They also have plans to add Ether as collateral, in addition to SNX. (see litepaper), and also plans to be able to lend sUSD natively on the platform for interest. 

Yield farming with SNX

They were one of the OG projects for yield farming. They were doing liquidity mining before it was fashionable, and became a thing. Here are some of the current opportunities:

  • SNX (synthetix) integration with Curve.fi and Ren
    • Convert eth to sBTC, RenBTC or WBTC on 1inch.exchange, or Uniswap
    • Deposit on curve.fi/sbtc. Earn transaction fees and also accrual in value (if BTC goes up)
    • Stake directly on curve, or on Synthetix/Mintr. Get additional rewards from Synthetix by claiming them periodically on Mintr/LP tab. Be mindful of the Eth network fees

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    • Synthetix also has a similar process for Susd on Curve with the curve/susd pool
    • They also have a bonus/reward process on Balancer for the Weth / Seth pool. Here is a good article from the Zerion blog which explains in more detail how to use the Synthetix/balancer incentives
    • You could also use Zapper.fi to contribute to the SNX/USDC liquidity pool on Balancer to collect liquidity fees and BAL tokens. You can stake for the SNX rewards from the same interface. Here is an explainer video.

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  • Synthetix and Idle - Mint sUSD and deposit on Idle.finance to earn interest. Soon you will also be able to earn BAL, and CRV by posting sUSD on Idle finance

Yieldfarming.info - This is the best tool for ROI on yieldfarming investments. Don't be put off by the spartan text based UI. It is the most important tool, if you are using doing Defi/yield farming. All of the key pools are hyperlinked. If you click on any of the 9 pools listed, it will show you the full APR calculation, your pool amount and share, and rewards. The first 3 are Synthetix based. Credit to Weeb McGee for developing (you can follow him on twitter)

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Conclusion

It all sounds pretty complicated when you first read about it, since there are many integrated partnerships/platforms involved.

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But it isn't really complex when you get familiar with the process, and it makes more sense when you start to use it. So, I suggest you just try it out. The rewards are substantial, at least for now. The yield farming opportunities discussed above are a bonus for the short term.

But I believe that the project has very good long term prospects as well, and will continue to improve and evolve. So, I am staking and holding the SNX tokens. I get staking rewards, (which are locked for 12 months), and a small share of the transaction fees on their exchange to trade any of the synthetic assets. I am also looking forward to investing in some of the synthetic assets such as an Index of Defi coins, or shorting the S&P 500 index for example on synthetix.exchange. The icing on the cake is the yield farming incentives. 

As usual, Let me know what you think, and if  you agree. 

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fblauer
fblauer

Self styled crypto enthusiast. Unbank yourself


Yield Hacking with Defi
Yield Hacking with Defi

This is a blog about the intersection between crypto currency and finance. I have been testing and evaluating various defi (decentralised finance) and opfi (open finance) projects. This includes lending and borrowing markets, decentralised exchanges, automated market making, smart contract wallets, and tools for measuring and monitoring return on investment. All enabled by blockchain technology, with decentralised, opensource and audited smart contracts. These systems are interoperable and composable.

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