What is the Synthetix Network?

By raven | Investment | 20 Nov 2019


In my first post about the best weekly performers, one of the coins that performed well in weeks when the market was doing badly was the Synthetix Network Token (SNX). Here is a quick summary that I've given there:

Synthetix is a rebranding of Havven, which was one of the first crypto backed stablecoins. They work over the Ethereum network, and offer two types of tokens: the SNX token, and the so-called "synthetic assets" or "Synths", which represent gold, dollars, bitcoin, Tesla or Apple shares, and so on. Basically, users that possess SNX can use these tokens as collateral to "mint" Synths. All the trade of Synths on the Synthetix Exchange generate fees which are paid to SNX holders. Synthetix was founded in 2017 by Kain Warwick, co-founder and CEO of Blueshyft, a very large payment network that processed tens of millions of dollars in crypto transaction volume. It seems an interesting and solid project, worth looking at -- specially after the fact that it grew 30% in a week when the market was going south. Now, why did it go up so much in that week specifically? We don't need to find out why: it has been going up consistently for months!

That last sentence is still true. SNX has been growing steadily ever since: it's up 254% since the time I wrote that post. I should have taken the "It seems an interesting and solid project, worth looking at" a bit more seriously... But okay, so SNX is up 50% this week, when all the market is not really looking good. I decided to really take a look on Synthetix and find out why all this amazing growth. Here are some highlights.

First, I recommend taking a look at this interview with the founder of Synthetix, Kain Warwick:

As mentioned above, Warwick has lots of relevant experience and we can see that in the interview. So, first impressions: great!

What is the Project?

The Synthetix Network operates on the Ethereum network (as everything these days... that's why I'm bullish on ETH as well). It works in a similar way to one of its main competitors: Maker DAO. As explained before, it allows users to lock up SNX tokens and mint Synths, which are synthetic assets (or derivatives) that track the price of some other asset. For example, you can mind sUSD, which is a stablecoin tracking the value of the USD. The collateral in the Synthetix Network is of 750%, which means that if you want to mint 100 sUSD, you need to stake $750 worth of SNX. Once you minted this sUSD, you can do whatever you want with it: sell it, keep it in your wallet, etc. It can be traded currently in Kucoin, Uniswap or in the Synthetix Exchange. Also, when you mint tokens you make a debt with the Synthetix smart contract, and you can only take back your staked SNX when you repay this debt. The system is quite complex and interesting, and I strongly recommend anyone interested to read their "litepaper".

What is the point of synthetic assets?

Synths available today include some fiat currencies (sUSD, sEUR, etc.), crypto assets, gold (sXAU) and silver (sXAG), but they plan to add other types of synthetic assets tracking the price of indexes (e.g. S&P500) or stocks (AAPL, TSLA, etc.). But what is the point of having these synthetic assets?

First, it brings the possibility of exposure to a lot of types of assets for people within the Ethereum network. It reduces friction. Now, as long as you have an Ethereum wallet you can hold assets tracking the price of all those "real" assets. Sure, you don't have real gold or a real stock of Apple, but you have a token that will have the same price as them, so you can trade/invest using them. This is the idea known as "tokenization" -- other projects that come to mind are Ravencoin and Tezos, but I don't know exactly how they work.

You might ask, how does Synthetix guarantee that my sXAU will be pegged to the price of gold? Without going into much detail (which you can find in the litepaper), it is based on the fact that the contract holds a collateral of 750%. Users who mint Synths create a debt in the system, and they can only unlock their staked SNX if they repay this debt. The debt fluctuates according to price changes of the newly minted Synths. So if sXAU price goes up, the debt in the system raises, but it is guaranteed by the large overcollateralization. Another important point to notice is that the smart contract needs to get this price information for assets from somewhere (off-chain). That's called the oracle problem. Synthetix currently uses a centralized oracle solution, but they already integrated with Chainlink in the testnet, and it might be available soon. In summary, as long as an asset has a price that can be reliably tracked, with price data widely available such as for Gold, Bitcoin, S&P500 shares, etc. it can eventually be tokenized by the Synthetix Network.

Another advantage is the so-called "infinite liquidity" provided by the peer-to-contract trade. In Synthetix.Exchange you trade directly with the contract: there's no order book, so no delays and no price slippage. That is one of the main advantages of Synthetix compared to other derivatives or "wrapped" crypto assets.

Short and Long Crypto Synths

This is another very interesting possibility that comes from Synthetix. There are long (regular) crypto Synths, such as sBTC or sETH, but there are also shorts, called iBTC, iETH, etc. (i from inverse). These inverse Synths track the price of the asset inversely: if BTC gains $100, iBTC loses $100, and vice-versa. This means that you can now make money trading even if you are bearish on some asset. You are totally sure that BTC will drop? Just buy some iBTC.

The SNX Token and Staking

People staking SNX tokens get three benefits. First, you can mint Synths. Second, you get staking rewards in SNX, which are locked for 1 year -- which is good, as it rewards holders but at the same time helps to keep SNX scarce. The third benefit comes from fees from the Synthetix.Exchange. The trading fees on the exchange are of 0.3%, which go to a fee pool, and then are divided among SNX stakers in proportion to their debt in the contract -- a good way to incentivize the minting of Synths. Note also that in order to claim these rewards (weekly) you need to keep your collateral at 750%. This is a way to incentivize stakers to keep the collateralization ratio, which safeguards the network in case of sharp price fluctuations.

Currently, 75% of SNX is locked. This reduces the already small supply of 87 million SNX, which explains in part why the growth in demand has driven the price to the moon.

Final Thoughts

The community around Synthetix seems to be really engaged. They have one of the most active reddits that I have seen for a crypto out of the top 15. The volume locked and traded on Synthetix is growing at a staggering pace, and it is already number two on Defipulse. And 2020 will be the year of DeFi.

I think the SNX token has a good growth potential. The staking mechanism is very beneficial for holders. The structure of incentives is cleverly elaborated to bring value to SNX and stability and liquidity to the network. Despite being the second in the DeFi space, SNX marketcap is still much smaller than Maker's. The team is very competent and is expanding the horizons of the Ethereum ecosystem. The fact that the system is a bit complex means that there will be some time until people realize how it works, and as that happens adoption will grow. Also, SNX is still not traded in many platforms (you can buy using Uniswap with Metamask, for example), which means that the bulk of buyers is still to come, when big exchanges like Binance and Coinbase decide to list it. It's not a coincidence that the value of SNX skyrocketed from 3 cents to $1,27 since the beginning of this year, and there's still room for growth, as SNX stands now at a meager $110M market cap.

351665157-56a53694cbe3a38de27beaf86675f7b42778c0e39302ed11d4bfe052ec6ffea6.png

SNX/USD price chart (1 year)

As always, don't take this as financial advice: take it as a starting point for your research.

Disclaimer: I do hold some SNX at the time of writing.

How do you rate this article?


1

0

raven
raven

I've heard of bitcoin a long time ago, but only recently I became interested in investment in general, which brought me to the world of cryptocurrencies. I am also interested in learning to develop blockchain applications.


Investment
Investment

In this blog I will talk mainly about cryptocurrencies and other forms of investment. The intention is to share and discuss ideas, so do not take any of this as investment advice.

Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.