Cryptocurrency derivatives are becoming one of the most dominant forces of the industry. In essence they are a blend of traditional finance with the upcoming cryptocurrency economy. Derivatives have been predominantly a tool in traditional markets, but are currently getting more traction also in the crypto space.

This is for instance thanks to Synthetix, which is a protocol that allows traders and users to earn on price movements of assets without actually having to own them. Are you curious to know how that is possible? Then keep on reading.

What is Synthetix (SNX)?

Synthetix (SNX) is an Ethereum mainnet and Optimism based protocol that issues its own synthetic assets, also known as “Synths.” Synths are synthetic assets akin to financial instruments in the form of ERC-20 smart contracts. They track and provide returns on any other pre-specified asset, yet, without the need to actually hold the asset.

Thus, it does not matter whether the Synths are tracking the price of gold, silver, Bitcoin, Ethereum, index or even an inverse of an asset, once the holder of the Synth is in profit, they make money without actually holding the asset. This is something that the traders, especially from retail, would not be able to do in the traditional world of finance. Especially when combined with almost no friction and low fees, the main benefits of Synths for retail traders start stacking up.

Synths can be also traded on different decentralized exchanges (DEXes), such as Kwenta, but we will get to that later. This, however, means that the opportunity to trade them is equal for everyone. No capital requirements, KYCs, ID checks or any other regulatory obstacle is usually used in decentralized exchanges, making it free and equal for anyone to use.

The platform tracks the underlying assets using smart contract price delivery protocols called oracles. Currently it uses Chainlink oracle system. Synthetix allows users to trade Synths seamlessly, without liquidity and slippage issues. It also eliminates the need for third-party facilitators as everything is run purely thanks to a code.

The system is currently used more and more by other decentralized finance (DeFi) protocols. These include for instance 1inch, Curve, Dhedge, Paraswap, Yearn of Aelin. It is also used by Lyra, which is the first completely decentralized options protocol and Thales, which is a market protocol for trading on price action, sports and events. Both of these are completely powered by Synthetix, as they are built on top of it.

List of some of the major DeFi projects currently using Synthetix. Source:synthetix.io

Team and history of Synthetix

Synthetix was founded in 2017 by Kain Warwick, a veteran in the blockchain industry. Initially, the project was known as Havven (HAV) and aimed to create a stablecoin that could rival Tether (USDT) and other centralized stablecoins. However, after facing regulatory hurdles, the team pivoted to focus on synthetic assets. In 2018, the project raised $30 million in an initial coin offering (ICO) and was renamed and rebranded to Synthetix.

Kain Warwick is one of the leads ever since the beginning of the project. He has a quite extensive resume which includes founding Pouncer, a live auction site exclusive to Australia or involvement with other cryptocurrency projects since 2011, such as Blueshyft, a cryptocurrency payment platform in Australia.

The CEO of the project is Peter McKean, who has about two decades of experience in software development. Previously he worked as a programmer at ICL Fujitsu. Justin Moses, the CTO of Synthetix, who has also been with the project ever since the beginning, used to work as a Director of Engineering at MongoDB. His speciality and knowledge are mostly based around large-scale systems, design and development. He was also one of the co-founders of Pouncer together with Warwick.

Clinton Ennis is probably the last notable major name in the project. His 18 years of experience in software engineering in combination with a background in traditional finance earned him a position of Synthetix’s Senior Architect. Previously he worked as an Architect Lead at JPMorgan Chase.

What is interesting about the setup of Synthetix is that originally, it was governed by not-for-profit Synthetix Foundation from Australia. That, however, changed, when in 2020 the governance shifted into three DAOs. The holders of the SNX tokens were in charge of this decision and split the duties in a following fashion:

• ProtocolDAO: in charge of the protocol’s upgrades and smart contract security as well as its funding
• GrantsDAO: in charge of funding the community proposals
• SynthetixDAO: in charge of funding individuals and organizations that collaborate or create partnerships with protocol and its development

The decentralized exchange – Kwenta  

We have already seen projects such as Lyra or Thales, which are built on top of Synthetix. However, one of the protocols that are built on this project really stands out. And that is Kwenta. Kwenta is the decentralized exchange (DEX) of Synthetix, which allows users to trade the Synths. It does not have an order book, rather the trades are done on a peer-to-peer basis with a smart contract. The prices are supplied by Chainlink oracles.

The users of this exchange can buy and trade about 13 different cryptocurrencies and their inverses. Kwenta however also allows for trading synthetic gold and silver or dollar and euro. It also has the option of trading whole indices, with sDeFi and sCEX being the two major ones following the prices of DeFi assets and centralized exchange tokens respectively.

The fees are usually between 0.3 – 1% on the trade. This goes directly to the reward pool for the stakers who submitted their tokens on the network and is one of the use cases of the SNX token.

Tokenomics of Synthetix Network Token (SNX)

The tokenomics of Synthetix Network Token (SNX) at the very beginning was as follows. During the ICO phase, 100 million tokens were issued, with 20% being allocated to the team, 3% to bounties and marketing incentives, 5% to partnerships and 12% to the foundations. The remaining 60 % was sold to investors to raise 30 million. Currently the total supply is about 350 million tokens, with the circulating supply being a bit over 252 million SNX.

The token is compatible with Ethereum as it is a traditional ERC-20 standard token. Since the whole protocol uses Proof-of-Stake (PoS) consensus mechanism, the SNX tokens can be earned via staking from the network fees that are charged on the transactions of Synths. But the most important function of SNX tokens is collateralization.

SNX tokens are used as collateral for the synthetic assets that are minted. This means that whenever Synths are issued, SNX tokens are locked up in a smart contract. That means that SNX tokens are used as a collateral against Synths and are thus pegging their value. Currently, there is about $669 million dollars’ worth of SNX tokens locked.

Total staked value of SNX token, Source: synthetix.io

Advantages and disadvantages of Synthetix

One of the main advantages of Synthetix is its ability to provide exposure to a wide range of assets, including stocks, commodities, and currencies, without requiring users to actually own the underlying asset. Additionally, the protocol is highly decentralized, with no single point of failure or control, which happened thanks to the governance voting of the community and split between three DAOs. This provides greater security and transparency for users.

On the other side of this spectrum is the overall complexity of Synthetix, which is its biggest disadvantage. The protocol can be difficult to understand for users who are new to DeFi, which may, at least initially, limit adoption. Additionally, the protocol is heavily reliant on the Ethereum blockchain, which can lead to high gas fees during periods of high network congestion.

Conclusion

Synthetix is a promising DeFi protocol that has the potential to disrupt traditional finance by providing users with exposure to a wide range of assets. While the protocol is still relatively new and faces some challenges, its unique approach to creating and trading synthetic assets has already attracted a significant user base and could continue to gain traction in the future. The infrastructure and the whole ecosystem that is being built around the protocol is without any doubt getting more exciting by day.

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