What Is Synthetix (SNX) and How Does the Synthetic Asset Protocol Work

What is Synthetix (SNX)?

Synthetix (SNX) is a decentralized protocol for issuing synthetic assets and a crypto exchange built on the Ethereum blockchain. These synthetic assets are backed by the Synthetix Network Token (SNX), which, when locked in smart contracts, enables the issuance of synthetic assets known as Synths.

Synthetix currently supports synthetic fiat currencies, cryptocurrencies, both long and short positions, as well as commodities. SNX holders are incentivized to stake their tokens because they are paid a share of the fees generated by activity on Synthetix. The right to participate in the network and receive a share of the fees generated by Synth exchanges is how the Synthetix Network Token demonstrates its value.

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The History of Synthetix

The Synthetix Exchange and Network Token platforms began under the name Havven, a project conceived by Cain Warwick. The product of this project was a stablecoin, nUSD, which launched on June 11, 2018, and was at that time the first example of a synthesizer. However, in December 2018, the project was renamed Synthetix, and it began creating a platform capable of representing more than 20 synthetic assets, such as fiat currencies, commodities, and crypto assets.

Now, in 2022, the Synthetix Network Token and Synthetix Exchange have become some of the top assets in the decentralized finance sector, with more than $2.2 billion locked in the protocol.

What Does Synthetix Do?

Synthetix is a decentralized protocol for issuing and trading synthetic assets on Ethereum. Each synthetic asset (or Synth) is an ERC20 token that tracks the price of an external asset. For example, each sUSD token tracks the price of the US dollar. In principle, the system can support any asset with a clear price and provide on-chain exposure to an unlimited range of real-world assets. SNX is used to govern and incentivize network users through rewards in the form of a proportional share of the fees generated by decentralized exchange activity.

Is Synthetix Similar to Uniswap?

Both Synthetix and Uniswap are decentralized applications built on Ethereum and are liquidity protocols where users can provide liquidity and receive fees. However, they are not interchangeable projects; each has its own mechanisms, advantages, and disadvantages, depending on your goals and intentions with each platform.

How Does Synthetix Staking Work?

Synth tokens are minted when SNX holders stake their SNX as collateral using Mintr, a decentralized application for interacting with Synthetix contracts. Synths are currently backed by a 750% collateralization ratio.

When you stake SNX, it automatically mints sUSD at that ratio. SNX participants incur debt when they mint sUSD (or any Synth), and to exit the system (unlock SNX/claim rewards), users must repay this debt by burning Synths.

The debt amount is based on the change in the price of SNX relative to the minted Synth, which means that if you stake SNX to mint sUSD and the price of SNX rises, an equivalent portion of your SNX is automatically unlocked as collateral. For example, if a user locks $100 worth of SNX as collateral and the value of SNX doubles, half of their SNX (total value: $200) remains locked, while the other half is unlocked. That additional unlocked SNX can then be staked to mint more sUSD.

Why Is the Synthetix Staking Rate So High?

Stakers receive a share of the trading fees generated by the exchange protocol. When Synths are exchanged through the Synthetix contract, a 0.3% fee is extracted and sent to the fee pool to be claimed by SNX participants.

Fees are allocated to participants according to each participant’s proportion of issued debt. For example, if a staker has issued 1,000 sUSD in debt, the debt pool is 10,000 sUSD, and 100 in fees are generated during a fee period, that staker is entitled to 10 sUSD because their debt represents 10% of the debt pool. The greater the exchange pool’s volume, the greater the reward the user receives.

Does Synthetix Offer dApps?

Yes, Synthetix offers dApps, and there are currently dApps created specifically for this blockchain. Synthetix Exchange itself is a decentralized exchange application. Mintr is also a decentralized application for interacting with Synthetix contracts, allowing you to stake SNX and mint synthetic USD (sUSD). Last but not least, Kwenta.io is a crypto derivatives trading protocol built on the Synthetix protocol that does not require account creation or custodial transfer of funds.

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