The core of the decentralized finance (DeFi) movement aims to restructure traditional financial products and concepts on the chain through blockchain technology. In order to achieve this ambitious goal, the DeFi community has created many mechanisms and formulated various standards. These innovations include but are not limited to smart contracts, decentralized exchanges, lending protocols, liquidity mining, and synthetic assets, etc., injecting new vitality into the financial ecosystem. This movement aims to realize the openness, transparency and intermediary-free nature of financial services and promote a more democratic and inclusive financial system. The development of the DeFi movement also continues to promote the innovation and evolution of blockchain technology in the financial field.
The concept of synthetic assets
One of the key concepts is synthetic assets. Synthetic assets are an asset class that enable investors to indirectly acquire assets on the blockchain that are not directly accessible. Synthetix is an innovative protocol that promotes different assets into the cryptocurrency space, providing investors with a wider range of investment options through the issuance of synthetic assets or derivatives.
This article will take an in-depth look at the Synthetix protocol, the technology behind it, and the native token SNX. With our SNX price forecast for 2023-2030, we will evaluate its potential as an investment.
What is Synthetix (SNX)?
Synthetix (SNX) is a protocol for issuing synthetic assets (Synths) on the Ethereum blockchain. Simply put, synthetic assets simulate the prices of other assets, allowing people to trade directly on the blockchain. In the traditional asset trading market, we can buy and sell stocks, real estate, precious metals or commodities. However, at the current stage of the DeFi field, we have yet to find a way to directly trade traditional assets such as stocks, precious metals, commodities, etc.
In this case, some projects have proposed the concept of synthetic assets: similar to derivatives in traditional financial markets, can these trading objects be anchored to create a virtual asset that directly represents these traditional trading markets on the blockchain? , thereby copying their prices and realizing on-chain transactions? This is where synthetic assets come in.
Synthetic assets are simulations of target assets, such as sUSD representing the US dollar price, sGold representing the gold price, sSP500 representing the S&P 500 stock index, and even sBTC representing BTC and sETH representing ETH. Synthetix supports synthetic commodities including gold, silver, synthetic cryptocurrencies, inverse synthetic cryptocurrencies, cryptocurrency indices, and fiat currencies. This allows Synthetix to introduce non-blockchain asset exposure into the crypto ecosystem, creating a more mature financial market.
The Origin and Development of Synthetix
Synthetix originally originated as a platform called Havven, founded by Kain Warwick in 2017 to issue collateral-backed stablecoins. However, Havven’s development team decided to change course in 2018, renaming the company Synthetix to better reflect that the protocol supported not just USD stablecoins, but other synthetic assets as well. Following this decision, Synthetix successfully raised $30 million through an ICO. Since then, the Synthetix protocol has become one of the high-profile projects in the DeFi community.
How does Synthetix work? Synthetix leverages two cryptocurrencies to offer its synthetic asset minting services, its native cryptocurrency SNX and Synths, which can mimic any asset. In order to generate Synths, users need to obtain SNX and store it on the Synthetix platform. In return, Synthetix will create new Synths tokens of the consumer's choice. According to software rules, the locked SNX value needs to remain at or above 750% or higher of the created Synths value.
For example, if a user wishes to mint synthetic USD and deposits $1,000 worth of SNX cryptocurrency, they will receive $133 worth of sUSD. Given that SNX is a cryptocurrency whose value is determined by the open market, the number of Synths available for circulation may change as the price of SNX fluctuates. If the price of SNX increases, the system will release unnecessary SNX tokens to secure previously created Synths. These additional SNX tokens can again be locked on the platform and used to create new Synths.
Take the doubling of SNX price as an example
Half of the initial $1,000 SNX locked will be available for release. Users can use this portion of SNX to create another $500 in sUSD Synths. Therefore, the higher the SNX price, the more Synths are created.
Another interesting feature of Synthetix is how it uses price feeds called oracles to price Synths.
When an exchange occurs between Synths, the first Synths, such as sUSD in our previous example, is "burned" first. It then calculates the Synths it is exchanging, such as sBTC, based on the price feedback from the oracle. The Synthetix platform will then create the correct amount of sBTC for the user.
The Synthetix team believes that one of the advantages of the system is that it does not require a large order book or a central exchange to convert between currencies. Users can trade at the stated price any time they wish without waiting for a match.
Synthetix’s two tokens
SNX users mine Synths by staking a corresponding amount of SNX. When trading Synth to Synth on the Synthetix exchange, users can stake and receive rewards from the network. To encourage staking and minting of Synths, fees generated from trading on the Synthetix exchange will be sent to a pool where SNX holders can claim a percentage of the fees they collect.
All Synths are powered by SNX tokens. SNX will be issued or minted when SNX holders lock SNX in the Synthetix smart contract protocol. Since the value of SNX can fluctuate rapidly in either direction, a large collateral ratio of 500% is required to minimize liquidation risk. Users can burn Synths if the rate is lower than the mortgage rate, and toss more Synths if the rate is higher.
It allows us to convert fiat currency into cryptocurrency with a local fiat currency value and then use it to purchase goods and services on a decentralized platform.
Synths
Synths are ERC-20 tokens used to analogize and track the value of real-world assets. It can create Synths for different asset classes such as cryptocurrencies, fiat currencies, commodities, stock indices and stocks. Asset prices are tracked using Chainlink, a decentralized oracle that collects price data feeds from multiple sources.
Why is SNX valuable? SNX has value because it requires generating new Synths on the Synthetix platform. When users lock SNX, they are also eligible to receive fees incurred across the platform when trading any Synths. Fees are typically 0.3% of the exchange.
If $1,000 of sUSD is exchanged for sBTC. Assuming an exchange fee of 0.3%, a value of $3 will accrue to users of the system who have locked up SNX. These fees are allocated weekly.
Users who lock SNX are also eligible for “staking rewards,” which are additional SNX tokens distributed by the system to users who lock their tokens to create Synths. The number of additional tokens that can be distributed through staking is determined by software rules. These staking rewards mean that users who lock up SNX tokens will receive more tokens, incentivizing them to support the network.
Synthetix Ecosystem
Many platforms have taken advantage of SNX’s deep liquidity and composability to provide trading experiences with lower slippage, hedging, and other unique use cases.
In a consensus service proof-of-concept use case, SNX is used to provide decentralized consensus on the validity and order of blockchain transactions to a custom Hyper Ledger Fabric network without the need to configure a RAFT1 or Kafka2 ordering service. Other use cases include, but are not limited to, financial markets, matching engines (similar to those used in Uber or AirBnb), or supply chain negotiations.
Synthetix V3 update: As of November 2022, Synthetix team member Noah Litvin published an article stating that Synthetix will be updated to the V3 version to further improve its functionality and user experience. These updates will include a more efficient contract architecture, more flexible asset support, and more powerful oracle capabilities.
To summarize: Synthetix and its native token SNX play a vital role in the DeFi field. Through innovative synthetic asset concepts and powerful technical support, Synthetix provides investors with more diversified investment options and a more efficient trading experience. As blockchain technology and the DeFi movement continue to develop, Synthetix is expected to continue to lead the trend in the future and become one of the strongest blue-chip coins in the DeFi field.