Robert Steinadler, 5 months ago

What is Synthetix, and how does it work?

Decentralized Finance is one of the biggest growth sectors in crypto, because it enables worldwide financial services as an application that is accessible by anybody with a computer. The last two years proved that this market is going to stay and despite many goofy use-cases there are also more mature ways to use this technology. What about decentralized energy markets or a decentralized stock market? That would be neat not only for speculation, but also to save costs, since a piece of software and a decentralized network could eliminate the need for a large overhead in companies offering these services.

Synthetix is a DeFi application that could possibly contribute to a lot of use-cases that are not typical for this sector and in this article, we are going to explore its features.

How does Synthetix work?

Synthetix allows tokenizing almost any asset through its protocol. Such an asset could be a crypto asset like Bitcoin or fiat money like the US-Dollar. This carries huge potential and offers basically unlimited possibilities, since there are thousands of assets that are traded and also those that could be tokenized without being part of an active market.

The approach faces two major problems that need to be solved:

  • How to ensure the value of the tokenized assets?
  • How to make sure that the price of each asset is correctly reflected by its token?

When creating an asset on Synthetix the creator has to buy and deposit a predefined amount of the native token of the protocol called SNX. In effect, each tokenized asset is backed by an overcollateralized amount of SNX tokens to maintain the value of the original asset. The second problem is solved by using oracles. Synthetix runs its own oracles, but in many cases relies heavily on Chainlink.

Chainlink is crypto’s biggest data provider when it comes down to tracking asset prices. It is not only possible to track prices and market data for crypto, but also for stocks or commodities. The more growth we see in gathering real-world data and making it available on the blockchain, the more options you would have with Synthetix.

An asset that is tokenized is called a Synth which points to the fact that it is a synthetic asset that is a token-backed derivative, which tracks the price of the underlying asset. Each Synth keeps its commonly used ticker only adding an “s” in front, e. g. sBTC, sUSD, or sXAU. These Synths can be traded for each other and open up a whole new world for traders.

Currently, the following assets classes are supported by Synthetix:

  • Commodity: Gold, Bitcoin, and even wood fall under this category.
  • Forex: All kinds of Forex currencies can be tokenized as a Synth.
  • Crypto: No matter if it’s a token or a cryptocurrency, it can be a Synth.
  • Index: The Nasdaq or the S&P 500 fall under this category.

The SNX token

The SNX token serves three purposes in the Synthetix ecosystem. The first one is backing Synths by demanding to overcollateralize them by buying and using SNX tokens as collateral.

The second is staking which is very different from other protocols, since stakers are not securing block production. Synthetix has its very own exchange that allows trading Synths for one another. Stakers receive a reward by providing liquidity to this market and to other protocols that are connected to the Synthetix ecosystem. The staking reward is generated through the trading fees and an inflation rate of the SNX token. Trading fees are paid out to stakers in sUSD and the inflation rate is paid out in SNX.

In 2020 Synthetix was organized in multiple decentralized autonomous organizations (DAO) and has a unique governance system that represents different interest groups through several bodies:

  • ProtocolDAO: Controls protocol upgrades and changes to the smart contracts involved, as well as funding of any upgrades.
  • GrantsDAO: The community can make proposals and this DAO controls the funding for their projects by handing out grants.
  • SynthetixDAO: Controls the overall funding and makes sure that all contributors are kept incentivized.
  • Spartan Council: Eight elected members that watch over the DAO ecosystem.
  • Ambassador DAO: Ambassadors are also elected and work on relationships with other protocols, teams, or businesses.

Synthetix started on the Ethereum blockchain, and therefore SNX is an ERC-20 token. Since the protocol spread through other blockchains, SNX is also available on Solana, Binance Chain, Fantom, Avalanche and layer-2 networks like Arbitrum and Optimism. On each blockchain, the SNX token is issued using the respective token standard.

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