According to the Synthetix.io Homepage: "Synthetix is the backbone for derivatives trading in DeFi, allowing anyone, anywhere to gain on-chain exposure to a vast range of assets." Merely a bunch of words that tell me, the average and very ordinary investor, nothing. So, I turn to the Publish0x.com informational blurb for clarity. Quoting directly from the text at https://www.publish0x.com/tag/synthetix-network-token: "The Synthetix protocol is one of the latest protocols in the decentralized finance(DeFi) ecosystem and offers DeFi users a multi-tier issuance platform, collateral type, and decentralized exchange. The protocol permits users to mint synthetic assets such as cryptocurrencies, fiat currencies, or derivatives and they can be swapped in a decentralized manner through the Synthetix Exchange platform." Damn, now I'm really confused.
So, when I'm confused or don't understand the basics of something, I am relentless in my quest to gain understanding. Therefore, some research on my part is warranted and accordingly I share the results in this article. Please understand, this is not intended to be a Graduate course review of Synthetix, but a hopefully simplistic view of the basics surrounding this investment vehicle for the average investor out there.
What is Synthetics (101 Version)? It is an Ethereum based software providing a protocol for issuing synthetic assets. Synthetic assets are akin to derivative contracts in traditional finance. Once issued, these synthetic assets are in fact ERC-20 smart contracts (named appropriately 'Synths') which follow and provide the returns of some other asset absent the ownership of the underlying asset. The Synths that are issued use discovery protocols whose purpose is to track the price of the asset the Synth represents. Therefore, Synths may be held or traded as if the underlying asset was actually owned. Examples of assets that can be 'Synthed' include but are not limited to cryptocurrencies such as Bitcoin, Physical Gold and Silver, US Dollars and Euros, and even a mixed batch of DeFi assets. The native token to the network, SNX, is utilized as collateral for the 'Synths' created in the system.
So, what do you gain by staking SNX? When you stake the SNX token not only are you minting sUSD, you are also obtaining debt in an amount equal to the number of sUSD that have to be burned when you choose to unstake your SNX. (It should be noted here that this debt involves additional risk, With the continuing issuance of 'Synths", the debt pool in the system is constantly changing. Therefore, when you choose to unstake, you may be required to burn more sUSD than were issued when the original staking took place) Once staked, you are eligible to receive both staking rewards in the form of SNX tokens as well as exchange rewards in the form of sUSD (which are based on the amount of debt the staker has issued). All rewards are based on Synthetix's collateralization ratio of 600% which provides insurance that the issued 'Synths" are backed by adequate collateral. Debt distribution within the system is beyond the scope of this article (but may prove to be an interesting topic in the future), but suffice it to say this mode of distribution insures liquidity within the system as well as reduces slippage.
In my opinion, this is not an investment for the new investor. The process requires knowledge developed over time and varied experiences in investing. But if you are researching Cryptocurrencies and land upon Synthetix I hope this article provides a simplified basic explanation of SNX, what it is and how it works.
I am merely an ordinary small investor who likes to share what I've learned through research into the Crypto World. I am not in any way a financial advisor and as such, do your own research before investing. If you enjoyed this article please like it, comment and/or tip. Feedback is always welcome here.