Abstract

Synthetix is a DeFi protocol for synthetic cryptocurrency assets. It was born out of the ashes of the 2018 bear market, along with Maker, Compound, Uniswap, and several others, laying the groundwork for decentralized finance to become an important part of the cryptocurrency space.

Introduction

Synthetix was originally a stablecoin project called "Havven". Made a major transformation during the bear market and became a synthetic asset protocol. The community behind Synthetix pioneered many mechanisms that are now recognized standards in the DeFi space.

Synthetix has always been a core component of Ethereum DeFi and will soon launch Layer 2 scaling solutions. In the foreseeable future, Synthetix will still play an important role in the DeFi field.

What is Synthetix?

Synthetix is a synthetic asset protocol that allows the issuance of synthetic assets in Ethereum. You can think of synthetic assets as a type of derivative. It provides a way to gain exposure without owning the asset.

What do synthetic assets (or "Synth") include? In fact, it includes almost all assets with reliable price sources, such as cryptocurrencies such as Bitcoin or Ethereum, commodities such as gold and silver, and fiat currencies such as the US dollar. There are even inverse Synths that track the underlying asset in reverse, making it easier for traders to gain short exposure or hedge current holdings and liquidity mining positions.

The core idea is that by using Synthetix, traders can gain exposure to certain assets that do not exist on the chain. Synthetix also supports the creation of various indices, such as the DeFi Index that tracks a portfolio of DeFi assets.

How does Synthetix work?

Synth uses a decentralized price oracle to track the price of underlying assets. It is important to note that Synth is different from cryptocurrencies that are backed by reserves (such as stablecoins). Compared with traditional reserves, the value of Synth comes from various complex on-chain mechanisms and smart contracts.

For example, BUSD is a stable currency, and each BUSD represents a reserve of US$1. In the same way, Paxos' "PAX Gold" (PAXG) is also backed by physical gold bars. In a sense, owning PAXG is equivalent to owning gold reserves of equivalent value. In other words, PAXG is a token that embodies gold ownership.

Synth is different. They track asset prices through a complex smart contract mechanism. Owning sXAU does not mean owning any underlying gold, it only represents gaining exposure to the gold price.

So, what’s the point of holding such assets? As mentioned earlier, it provides a great way to gain price exposure without actually owning the asset. Another advantage of Synths is that they are ERC-20 tokens in Ethereum that can be easily integrated by other DeFi protocols. Synth can be deposited into platforms like Uniswap, Sushi or Curve, where you can provide liquidity and earn trading fees just like you would with other ERC-20 tokens.

Synthetix Network Token (SNX)

Since there is no underlying asset to back it up, what is the collateral for such a token? Mainly the token launched by the platform - SNX. Recently, Synthetix also added Ethereum as supporting collateral.

Synthetix adopts the over-collateralization model, that is, the mortgage value of all synthetic assets exceeds their own value.

Synth is created by users staking collateral (SNX) and minting synthetic assets for it. In other words, the essence of Synth is debt secured by posted collateral.

Debt positions must maintain a certain collateral ratio, and the specific value is determined by governance. This move is intended to ensure that Synth receives enough collateral to eliminate deficits in the system and survive extreme periods such as large-scale market crashes.

Stakers must artificially manage the above ratio by minting and burning Synth (debt) or adding more collateral in order to continue to receive staking rewards.

Unlimited liquidity and zero sliding spread

Synthetix does not have an order book or sliding spread in the traditional sense, and its market positioning is to provide A trading platform with "unlimited liquidity". Its pricing method is determined by an algorithmic mechanism, which is closer to the working principle of an automated market maker (AMM) than a central limit order book (CLOB).

Essentially, the trading objects in Synthetix are not individuals or market makers. Traders need to repay part of the debt in the debt pool and borrow an equal amount of debt from another Synth.

This is a complex mechanism with many nuances. However, what we must understand is that trading in Synthetix is not the same as trading in the Binance order book or the Uniswap liquidity pool.

Synthetix and Optimism

Why did Nasdaq not migrate to the Synthetix trading platform as a whole? In fact, the fees and execution guarantees in the Ethereum mainnet are not completely suitable for most traders and trading styles. For this reason, the Synthetix contract chooses to be deployed on a Layer 2 solution called Optimistic Rollup - an implementation plan launched by Optimism.

Aggregation is an excellent way to scale your blockchain. It derives its security from the Ethereum blockchain, which is completely different from other scaling solutions such as sidechains that use a unique set of validators to "self-protect". This is a key difference. Rollups can create the same scaling benefits as sidechains (such as increased transaction throughput and lower transaction fees), but without the severe impact on security.

However, Synthetix contracts are currently relatively complex smart contracts, and it is not easy to migrate them to such cutting-edge technology in the safest way. Optimism has been running in conjunction with Synthetix in the background for some time, and deployment on the mainnet is expected to take place in the summer of 2021.

Summary

Synthetix is a synthetic asset protocol in Ethereum. Synth tracks the price of the underlying asset, but users do not have to be the actual owner of the asset. Synthetix is the earliest DeFi project to be launched, and has set up a decentralized governance structure through SynthetixDAO. Although the principle is difficult to understand, its popularity is likely to continue to increase as Synthetix is deployed to the roll-up implementation launched by Optimism.