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Why has the price of SNX surged: DeFi innovation behind Synthetix.

2023-07-17 14:55

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Original author: THOR HARTVIGSEN

Translated by: Deep Tide TechFlow

Synthetix has recently achieved significant growth. This article aims to analyze the current uniqueness of Synthetix, its recent performance, and why V3 is a major innovation in DeFi.

The Current State of Synthetix

Synthetix was launched in 2017 by Kain Warwick and Justin Moses. The project was initially known as Havven and provided a stablecoin (nUSD) backed by over-collateralized crypto assets. Since then, the protocol has made significant progress and now offers synthetic assets on the Ethereum mainnet and Optimism.

Nowadays, Synthetix serves as the liquidity layer for many DeFi protocols. On Synthetix, users stake the native token SNX to mint sUSD (Synthetic USD). Therefore, sUSD is the native stablecoin of Synthetix, over-collateralized by SNX and representing the user's debt on the protocol.

Therefore, the total available liquidity that can be used by protocols built on top of Synthetix depends on the amount of collateral (i.e. SNX) on the protocol. Why do users need to collateralize SNX to achieve this synthetic liquidity? Because collateralizers will receive rewards in native SNX tokens and will also receive fees generated by using this synthetic debt (currently at an annualized yield of 40%). If the amount of SNX collateralized is below a certain threshold, the issuance of SNX will increase, thereby attracting more users to collateralize SNX and increase liquidity.

The liquidity on Synthetix supports two different types of assets: spot and futures. Spot synthetics track various assets such as cryptocurrencies, commodities, and forex. This is a way for users to gain exposure to the underlying asset without actually holding it. Synthetic futures allow users to trade leveraged futures on various assets. The liquidity on Synthetix acts as the counterparty to these trades. As a result, SNX stakers take on counterparty risk. This means that if traders utilizing the Synthetix liquidity on the trading protocol (such as Kwenta) make huge profits, the stakers' debt will increase, and vice versa. However, there are mechanisms in place to mitigate this risk, including arbitrage opportunities (funding rates) provided to traders when trading activity deviates. This is designed to make liquidity providers (SNX stakers) market-neutral, and V3 will introduce isolated risk.

Kwenta

As of now, the total locked value (TVL) of Synthetix is $375 million, which means that $375 million worth of SNX has been staked. An example of a platform built on Synthetix and utilizing its protocol for liquidity is Kwenta. Kwenta is a perpetual futures trading protocol on Optimism that does not have native liquidity, but instead inherits liquidity from Synthetix. All trading pairs on Kwenta are priced in sUSD, so in order to trade these synthetic assets, users need to mint sUSD by staking SNX (or buying sUSD on the market).

All transaction fees generated on Kwenta are paid to SNX collateral holders. On average, Kwenta accounts for approximately 60-70% of all fees generated by protocols utilizing Synthetix liquidity. There are other protocols/front-ends built on top of Synthetix, including:

Lyra;

Thales;

Kwenta;

dHedge;

Polynomial.

Infinex

Infinex is an on-chain perpetual exchange that aims to simulate the trading experience on centralized exchanges in a decentralized manner. As the user interface and experience are at the core of this protocol, "Simple" and "Professional" modes will be provided to make it easier to attract new traders.

This agreement will not have new native tokens, but will be governed by SNX. In addition, all revenue will be used to deepen liquidity on Synthetix by purchasing and mortgaging SNX. The larger the trading volume, the greater the purchasing pressure on SNX, and the deeper the liquidity. This may form a virtuous cycle.

Synthetix V2 Metrics

Below is a chart from Token Terminal showing the price of SNX and the trading volume using Synthetix liquidity. As shown in the chart, there is a significant discrepancy between recent on-chain activity and the current price of SNX.

Recently, Synthetix has launched many products, among which the Perps V2 upgrade has played an important role in increasing activity. This upgrade introduces various synthetic assets that can be used on protocols such as Kwenta. It is worth mentioning that Synthetix has obtained a large amount of OP tokens from Optimism, which are used for protocols like Kwenta to incentivize users to use the product. In addition, Kwenta also provides additional KWENTA tokens to provide higher incentives.

Below is the chart for TVL. In the case of Synthetix, it is directly related to the price of SNX, as shown in the following figure. This is because, as mentioned earlier, SNX is the only asset that can be staked on the protocol.

Synthetix is the core infrastructure of DeFi, and its liquidity is used by multiple protocols, as mentioned above. Currently, the limitation of liquidity or TVL is that only SNX can be staked on Synthetix. This will change in V3.

Synthetix V3

Synthetix V3 includes a series of upgrades that elevate Synthetix to a new level: providing cross-chain liquidity layer for DeFi. V3 is currently in the alpha stage, and different features will be gradually rolled out.

TLDR

Multiple collateral, not just SNX;

Permissionless liquidity layer;

Developer-friendly ecosystem;

Seamless cross-chain implementation.

Multi-collateral Pledge

Multi-collateral pledging is one of the core principles of Synthetix V3's vision. Currently, only SNX can be pledged to provide liquidity for synthetic spot and perpetual markets. V3 introduces the design of insurance pools, each represented by a collateral (token). An insurance pool can be ETH, another can be SNX, and a third can be wBTC. The types of collateral that make up these insurance pools are added through governance. In addition, insurance pools can be added to a pool for protocols that wish to use specific liquidity. For example, a pool can consist of ETH insurance pools and DAI insurance pools, which can then be used on-chain derivative markets (such as Kwenta). Some of the benefits include:

As a pledger, you can choose which assets to provide as collateral, and earn profits, enjoying more freedom.

Due to the association of pools with specific markets, pledgers can avoid risks. Risk-averse investors may only provide liquidity to pools used in the BTC and ETH markets, without involving higher-risk assets.

Due to the association of the pool with specific markets, it can better hedge and reduce counterparty risk in trading.

Permissionless Liquidity Layer

Through V3, developers can create new markets on Synthetix that utilize liquidity pools without requiring permission. One important obstacle in DeFi is establishing liquidity in the early stages, which is often incentivized through large token issuances.

除了能够选择市场应该整合哪些流动性池外，市场创建者还可以选择用于其产品的预言机，并为流动性提供者创建自定义的奖励结构。新的合成资产的上市也不再通过治理进行，而可以轻松实现。这些资产可以是从现货 OP 到 ETH 期权的任何东西。

Translation: In addition to being able to choose which liquidity pools the market should integrate, market creators can also choose an oracle for their product and create custom reward structures for liquidity providers. The listing of new synthetic assets no longer requires governance and can be easily achieved. These assets can be anything from spot OP to ETH options.

Synthetix will ultimately serve as a liquidity-as-a-service platform that can be easily integrated into new products.

Seamless Cross-Chain Implementation

The ultimate goal of Synthetix V3 is to be available on any EVM chain. The so-called Teleporters will allow liquidity provided on one chain to be used on other chains. For example, if a user provides liquidity to a pool on Optimism, a market on Arbitrum can use that liquidity to support their platform.

Below is an overview of the structure of the Synthetix V3 spot market: Users deposit their assets into insurance vaults, which are added to specific pools. These pools can be used by the protocol to create markets on top of the Synthetix liquidity pool. These markets are the objects that users interact with on dapps built on Synthetix, such as Kwenta.

Path to V3

Here is a brief introduction to the plan before the release of the complete version of Synthetix V3:

Stablecoin Migration - V3 introduces a new synthetic stablecoin to replace the current V2 sUSD. The name has not yet been determined, but there is a suggestion to keep the new stablecoin as "sUSD" and rename the current V2 version as "oldUSD" or "legacyUSD". As time goes on and the new V3 stablecoin and synthetic assets gain liquidity and empowerment, users will need to migrate their assets from V2 to V3 (via the Curve pool).

Perps V3 - Perps V3 will introduce the aforementioned multi-collateral. For traders on protocols such as Kwenta and Polynomial, the most important thing is that all synthetic assets (not just sUSD) can be used as collateral for trading. The UI/UX will also be simplified and intuitive. Most of the core code has been completed and is nearing audit. The testnet may go live in late July.

Upgrade V2 SNX stakers to V3 LP - This feature allows current SNX stakers to migrate to V3 without repaying debt or closing positions. (SIP-306).

Teleporters - Teleporters are a key component of the V3 cross-chain functionality. In order to facilitate cross-chain liquidity, they destroy sUSD on one chain and mint sUSD on another chain, eliminating the need for slippage and cross-chain bridges. Teleporters are currently under development and running on several testnets. (SIP-311).

Cross-chain pool synthesis - this is another core aspect required to achieve the vision of full chain liquidity. It allows the market and pool to understand the status of collateral on other chains. With this feature, new perpetual markets can be launched on one chain and leverage liquidity on another chain. Currently being tested on the testnet (SIP-312).

Conclusion

The ultimate goal of Synthetix is very exciting, but the key is to create demand and attract developers to build solutions that use Synthetix as a liquidity layer. The more protocols (such as Kwenta) built on Synthetix, the higher the returns for liquidity providers (stakers on Synthetix). As returns increase, liquidity provided will also increase, and deeper liquidity will attract more protocols to build on top of Synthetix. This is a mutually beneficial cycle.

As mentioned earlier, 60-70% of the fees earned by SNX stakers come solely from traders on Kwenta. Trading on Kwenta is strongly incentivized by a large amount of OP and KWENTA token emissions, making it difficult to estimate the recent level of user growth.