What is Synthetix? (SNX)
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One of an emerging number of decentralized finance (DeFi) cryptocurrencies, Synthetix enables this service through code alone, without the need for a financial intermediary. Rather, Synthetix is simply a collection of smart contracts running on the Ethereum blockchain.
This means Synthetix users do not need to trust a particular institution or person to manage the crypto assets they create. They need only trust that its code will execute as written.
Synthetix is able to generate these new assets using a process called collateralization.
To collateralize an asset on Synthetix, users must purchase its SNX cryptocurrency, which once locked in a special contract can be used to generate these new assets (called synths).
For example, one synth designed to mimic the value of the U.S. dollar is called sUSD. Another synth, which mimics the Bitcoin price, is called sBTC. Still, synths can be created for any asset, be it a commodity like gold or silver, or a fiat currency like the euro or Korean won.
Synths are then able to track the value of other assets using special data feeds, called oracles, which enable users to gain exposure to gains or losses in those markets.
As of August 2020, Synthetix is among the DeFi projects with the most value locked in its contracts, with over $800 million locked in its contracts according to available data.
Who created Synthetix?
Havven’s goal was to create cryptocurrencies that mimicked the performance of fiat currencies like the U.S. dollar or the euro on multiple blockchains, including Ethereum and EOS.
At the end of 2018, Havven rebranded to Synthetix, at the time expanding its goals to include the creation of synthetic assets for cryptocurrencies and commodities. In 2019, Synthetix raised $3.9 million by selling SNX tokens to Framework Ventures.
Synthetix was initially governed by a non-profit foundation, but it was dissolved in June 2020 and replaced by three decentralized autonomous organizations or DAOs.
These DAOs are the mechanisms by which holders of the SNX cryptocurrency can now vote on changes to the protocol and make decisions about its future.
How does Synthetix work?
Synthetix uses two cryptocurrencies to offer its synthetic asset minting service. The first is its native cryptocurrency, SNX. The second are synths, which can mimic any asset.
To generate synths: A user must acquire SNX and deposit it on the Synthetix platform. In return, Synthetix creates a new synth token of the user’s choice. The value of SNX locked would then need to remain at or above 750% of the value of the synth created, according to software rules.
Say a user wanted to mint a synthetic U.S. dollar. If the user deposited $1,000 worth of SNX cryptocurrency, then they receive $133 worth of sUSD.
Since SNX is a cryptocurrency, its value is determined by the open market. As a result, the amount of synths that can be in circulation may change as the price of SNX moves up or down.
For example, if the price of SNX rises, the system will release SNX tokens that aren’t needed to guarantee synths that were created earlier. These SNX tokens can be locked up again on the platform to create new synths.
For instance, suppose the price of SNX doubled. This means half of the original $1,000 of SNX locked up could be released. The user could use that SNX to create $500 more in sUSD synths.
This means that the higher the price of SNX, the more synths that can be created.
Another interesting feature of Synthetix is how it prices synths using price feeds called oracles.
When an exchange between synths occurs, the first synth, let’s say sUSD from our earlier example, is first “burned” or destroyed.
The synth that it’s being exchanged for, sBTC, is then calculated based on a price feed from an oracle. The Synthetix platform would then create the correct amount of sBTC for the user.
The Synthetix team argues that an advantage of this system is that it doesn’t require large amounts of orders, or a central exchange, to convert between currencies.
Users can trade any time they wish, at the stated price, without waiting to be matched.
Why does SNX have value?
SNX has value because it is needed to generate new synths on the Synthetix platform.
In addition, when a user locks SNX, they also become eligible to receive fees that occur across the entire platform when any synth is traded. Fees are typically 0.3% of an exchange.
In the example above, suppose $1,000 of sUSD was exchanged for sBTC.
Assuming the exchange fee was 0.3%, $3 worth would go to users with SNX locked in the system. These fees are distributed weekly. As of August 2020, some $9.3 million worth of exchange fees have been paid out since the system was launched in 2018.
Users who lock SNX are also eligible to receive “staking rewards,” additional SNX tokens that the system distributes to users who lock up their tokens to create synths.
The amount of additional tokens that can be distributed through staking is determined by the software rules – the total amount of SNX is designed to rise from 100 million units in 2019 to about 260 million units by 2023.
These staking rewards mean that users who lock SNX tokens will receive more tokens, giving them an incentive to support the network.
Kraken's Crypto Guides
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- What is EOSIO? (EOS)
- What is Stellar? (XLM)
- What is Cardano? (ADA)
- What is Monero? (XMR)
- What is Tron? (TRX)
- What is Dash? (DASH)
- What is Ethereum Classic? (ETC)
- What is Zcash? (ZEC)
- What is Basic Attention Token? (BAT)
- What is Algorand? (ALGO)
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- What is Gnosis? (GNO)
- What is Melon? (MLN)
- What is Nano? (NANO)
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- What is Tether? (USDT)
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- What is Lisk? (LSK)
- What is Tezos? (XTZ)
- What is Cosmos? (ATOM)
- What is Augur? (REP)
Why Should I use SNX?
You may want to use SNX if you believe that synthetic assets and decentralized exchanges will gain further adoption in cryptocurrency.
Further, by buying and staking SNX, you gain additional benefits, such as earning a percentage of network trading fees and newly minted SNX.
The range of synths available may also make the platform attractive to traders. Therefore, the SNX token is useful if you believe crypto asset traders will continue to use Synthetix as a tool.
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