Synthetix, along with Maker, Compound, Uniswap, and other platforms, emerged in the aftermath of the 2018 bear market as a DeFi protocol specializing in synthetic crypto assets. It played a significant role in the growth of decentralized finance, establishing it as a prominent sector within the cryptocurrency industry.
Synthetix, originally known as Havven, transitioned from being a stablecoin project to becoming a protocol for synthetic assets during the crypto bear market. The Synthetix community pioneered important mechanisms in the decentralized finance (DeFi) landscape. It remains a vital component of DeFi on Ethereum and is poised for continued significance. Additionally, Synthetix is preparing for a launch on a layer 2 scaling solution, expanding its reach in the DeFi space.
What is Synthetix?
Synthetix is an Ethereum-based protocol that allows the creation of synthetic assets. These assets act as derivative products, providing exposure to various assets without owning them. Synths can represent cryptocurrencies, commodities, fiat currencies, and even inverse assets for short exposure or hedging. Synthetix expands the range of available assets on-chain and supports the creation of indexes like the DeFi index, which tracks multiple DeFi asset prices.
How Does It Work?
Synths are a type of asset that utilizes decentralized price oracles to track the prices of underlying assets. Unlike traditional reserve-backed cryptocurrencies, Synths derive their value through on-chain mechanisms and smart contracts. While stablecoins like USDT are backed by reserves and represent a specific value, Synths provide exposure to the price movements of various assets without actual ownership.
The benefit of holding Synths lies in gaining price exposure to assets without the need to possess them. Furthermore, Synths, being ERC-20 tokens on the Ethereum network, can be easily integrated into different DeFi protocols. This allows users to deposit Synths into platforms such as Uniswap, Sushi, or Curve, where liquidity can be provided and trading fees earned similar to other ERC-20 tokens.
What Is SNX Token?
Synths, the synthetic assets within the Synthetix protocol, are not backed by the underlying assets themselves. Instead, they are collateralized primarily by the platform's token, SNX, with the recent addition of ETH as supported collateral. The protocol adopts overcollateralization, where the value of the collateral exceeds the value of the synthetic asset it represents. Users stake SNX as collateral and generate Synths, which essentially represent a debt against the provided collateral.
To maintain stability, each debt position must adhere to a specific collateralization ratio determined by governance. This ratio ensures sufficient collateralization, even during outlier events like significant market crashes. Stakers play a vital role in managing this ratio. They can mint or burn Synths (debt) and add more collateral as needed. This active management enables stakers to continue earning staking rewards while maintaining the required collateralization ratio.
Synthetix offers a unique trading experience with "infinite liquidity." Unlike traditional exchanges, it doesn't rely on order books or slippage. Instead, an algorithmic mechanism like automated market makers (AMMs) determines pricing. When trading on Synthetix, you repay part of your debt from the pool and simultaneously borrow an equivalent amount of debt in another Synth. It's a distinct approach that sets Synthetix apart from platforms like Binance or Uniswap.
Synthetix & Optimism
The reason why the entire NASDAQ is not already onboarded to the Synthetix exchange is due to the limitations of fees and execution guarantees on the Ethereum mainnet. The Synthetix contracts have been deployed on a layer 2 solution called an optimistic rollup, specifically implemented by Optimism.
Optimistic rollups offer a scalable solution for blockchains. Unlike other scaling methods like sidechains, which rely on their own security through separate validator sets, rollups derive security from the Ethereum blockchain itself. This distinction allows rollups to achieve the same scaling benefits as sidechains, such as increased transaction throughput and lower fees while maintaining a high level of security.
Synthetix is an Ethereum-based protocol for synthetic assets. Synths allow users to track the price of an asset without owning it. It is one of the pioneering projects in the DeFi space and operates with a decentralized governance structure through the SynthetixDAO. As Synthetix deploys on Optimism's rollup implementation, it may see greater adoption despite its initial complexity.