What Is Synthetix (SNX)?
A Synthetix asset is a synthetic crypto asset that runs on the DeFi protocol. The reason for the rise of decentralized finance has been the birth of platforms like Maker, Compound, Uniswap, and others, which have grown from the ashes of the bear market of 2018, paving the way for decentralized finance to become a major sphere in the cryptocurrency world.
Introduction
In the early days of Synthetix, they were a stablecoin project called Havven, but after the bear market in crypto-currency, they made a significant pivot into a protocol for synthetic assets. Several of the mechanism behind Synthetix were pioneered by the community behind Synthetix, and they now constitute a standard in the DeFi landscape.
With an impending release of a layer 2 scaling solution, Synthetix will probably remain one of the core building blocks of Ethereum's DeFi project for a long time to come. This is because DeFi continues to be one of the core building blocks of Ethereum's DeFi project.
What is Synthetix?
In order to issue synthetic assets on Ethereum, Synthetix is a protocol that permits the issuance of such assets. An asset described as a synthetic asset can be thought of as a type of derivative product. An advantage of it is it gives you the opportunity to gain exposure without owning an asset.
What exactly is a synthetic asset, or Synth? Well, that could just about be anything that is able to provide a reliable price feed. Cryptocurrencies like BTC or ETH are some examples, as are commodities like gold and silver, or fiat currencies like USD. Inverse Synthesizers can also be used to track the inverse of the underlying asset, which can be a very good way for traders to take advantage of shorting an asset. In addition, hedging existing holdings and yield farming positions is also very easy with inverse Synths.
By using Synthetix, traders can gain exposure to some assets which do not exist on the blockchain, by using a product called Synthetix. As part of Synthetix, you may also create indexes such as the DeFi index, which generates a price based on a basket of multiple DeFi assets.
How does Synthetix work?
Synths follow the underlying assets' prices using decentralized price oracles, which enable them to track their performance. Synths differ from traditional cryptocurrencies that are backed by reserves, such as stablecoins, which are owned by a central authority. Synth value is derived not from the more conventional reserve, but from the many on-chain mechanisms, smart contracts, and other on-chain elements.
As an example, BUSD, which is also known as a stablecoin, represents one US dollar in reserve per BUSD. Similarly, Paxos offers physical gold bars as security for its product Pax Gold (PAXG). By acquiring PAXG, to an extent, you are also acquiring an equivalent amount of the underlying gold reserve. PAXG, or Paxos Gold Token, is, in other words, a token that represents ownership of gold.
Synths are unique. These tracking mechanisms are based on a complex system of smart contracts, which enables them to track the prices of assets. You do not own any gold underlying sXAU, and therefore, you cannot own any value of gold underlying sXAU. Instead, it simply means that you have a stake in the gold price.
Wouldn't you like to hold an asset like this? So, why would you want to do so? It is a good way to get exposure to the price of a particular asset without having to own it, as we have mentioned before. Furthermore, the Synths are also useful in that they are ERC-20 tokens on Ethereum, so they can easily be integrated with other DeFi protocols that are already in place. There are places like Uniswap, Sushi, or Curve where you can deposit Synths, and like with other ERC-20 tokens you can provide liquidity and earn trading fees just like with other tokens.
Synthetix Network Token (SNX)
When it comes to collateralizing those debts that aren't backed by the underlying asset, what do you use? The platform's token - SNX - is primarily what users can use to transact. However, Synthetix, recently, added Ethereum to its list of supported collaterals.
Synthetix utilizes overcollateralization - each synthetic asset is backed by more collateral than it represents in terms of value.
The creation of synthetic assets is done by users staking collateral (SNX) and minting a new asset against the collateral they staking. Moreover, each Synth is essentially a debt that is being posted against a collateral that has been posted by the borrower.
A certain collateralization ratio must be maintained for each debt position. It is the governance issue that determines this ratio. Synths will be adequately collateralized and there will be no shortages in the system in the event of an outlier event, such as a crash of the market.
For stakers to continue earning rewards, the amount of Synths (collateral) they hold must be managed manually. Stakers must burn synthetics (debt) or add more collateral as needed to maintain this ratio.
Infinite liquidity and no slippage
According to Synthetix, the exchange has "infinite liquidity" since there isn't an order book or slippage as would be expected as a traditional exchange. It is highly probable that a central limit order book (CLOB) may be used simply because an algorithmic price is determined, similar to what is used by an automated market maker (AMM) than what is used by a central limit order book (AMM).
The main difference between trading on Synthetix and dealing with a market maker or individual is that you are not trading against them. Rather than paying down some of your debt from the debt pool, you instead borrow a portion of your debt from another Synth.
Synthetix & Optimism
What is the reason why the entire NASDAQ is not already listed on Synthetix exchange? However, to be completely fair, the Ethereum mainnet does come with some fees and execution guarantees that may not be suitable for many traders and trading styles. The Synthetix contracts have been developed on an optimistic rollup which is a layer 2 solution led by the company Optimism and will be deployed on an optimistic rollup.
A rollup is one of the most effective ways to scale a blockchain. As opposed to other scaling solutions such as sidechains, which have their own security mechanisms based on their own validater set, rollups have their security provided by the Ethereum blockchain itself. Definitely, it is a key distinction. The benefits of rolling up can be similar to those of sidechains in terms of scaling (e.g., increased transaction throughput, reduced fees), without compromising much on security.
Although they are among the more complex smart contracts available today, Synthetix's contracts are one of the most impressive ones. It is not an easy task to move them to the most advanced technology and secure them in the most effective manner possible. Synthetix and Optimism have been working on this project in the background for some time and the deployment is expected to take place in the summer of 2021 on mainnet.