What is Synthetix and why have ordinary crypto investors become so entranced with trading derivatives? Let’s upgrade our knowledge on crypto synths by learning about the biggest synth platform of them all: Synthetix.
Synthetix is a revolutionary decentralized finance exchange specializing in minting and trading crypto synthetic assets. Today, $SNX (Synthetix token) is trading near all-time highs with an overall market capitalization north of $3 billion.
You might be wondering what it is about Synthetix that makes it a highly valued DeFi project for investors. Well, because Synthetix is going after the $12 trillion+ derivatives market with a platform for issuing synthetic assets, the sky is truly the limit in terms of valuation.
Besides $SNX being an exciting token to trade, it has several platform-native functions which give it massive utility beyond pure speculation.
Synthetix is a decentralized derivatives exchange protocol for issuing and trading any asset imaginable using synthetic assets — crypto assets that track the value of real underlying assets.
Quick Synthetix overview
Before diving into the details below, here are the main takeaways you should know about the Synthetix exchange and liquidity protocol.
Synthetix creates a pool of liquidity by allowing users to stake SNX, thus minting (and backing) other assets, called synths.
Traders using the Synthetix exchange trade against the SNX-backed liquidity pool rather than counterparty matching, enabling zero slippage and deep liquidity.
Any asset can be traded on Synthetix, including crypto, forex, futures, stocks, indices, commodities, and unique markets.
Currently, just under 60% of the circulating $SNX supply is staked, showing widespread confidence in the platform.
What is Synthetix? Explaining synthetic assets
Synthetix calls itself a derivatives liquidity protocol — which, despite sounding complicated, isn't hard to understand.
Let's unpack what Synthetix exchange really is, along with how to easily understand synthetic crypto assets.
Using the Synthetix exchange protocol, anyone can create synthetic assets that are tradable on not only Synthetix itself but any exchange supporting Synthetix assets.
A synthetic asset is a cryptocurrency asset, or token, that tracks an underlying asset’s price. The underlying asset can be anything — Tesla stocks, index funds, or even entire markets.
The flexibility of what synthetic assets can replicate opens up a seemingly unlimited global liquidity pool, which goes some way in explaining why Synthetix ($SNX) is highly regarded by investors.
Derivatives liquidity protocol
Synthetic assets make it possible to track and trade any asset imaginable. Because synthetic assets derive their value from the underlying asset or market, they're technically known as derivatives.
That's why Synthetix calls itself a derivatives liquidity protocol — it exists to provide a framework for decentralized minting and trading synthetic assets between.
Why doesn't Synthetix just call itself a decentralized exchange? Because functioning as an exchange is only a small part of the picture. Synthetix-issued tokens, such as sTSLA and sETH, are likely the future standard for synthetic assets across multiple exchanges.
As such, issuing synthetic assets is just as, if not more, important to the Synthetix vision as is exchanging them.
When studying Synthetix, you will run into the word synths quite often. Synth is short for synthetic asset, but that's not the whole story.
To issue a synth on Synthetix, you have to back it with collateral first. This is done by staking SNX tokens using the Mintr app to over-collateralize the issued synth.
So, synths track an underlying asset’s price, but synths themselves have value collateralized by user-staked SNX.
In short, Synthetix is a decentralized exchange for doing two things:
It allows anyone to collateralize and issue synthetic assets,
...And provides a zero slippage peer-to-contract exchange for trading them.
Want to know more about how Synthetix works? Read on below.
How the Synthetix exchange protocol works using SNX as collateral
Central to the way Synthetix works is the usage of SNX tokens as collateral.
Sure, you can stake SNX tokens for governance purposes (more on that later), but the most important use case for SNX involves minting synths.
To put it simply, SNX tokens back synths.
The beginning of the Synthetix exchange flow cycle is Mintr, the app for interacting with Synthetix smart contracts.
Buy SNX tokens on Coinbase, Uniswap, Binance, Gemini, or your favorite exchange.
Once inside Mintr, it's time to create some synths!
To create a synth using Mintr, you over-collateralize the value of the synthetic asset you're issuing by 750%. In other words, the value of your collateral must be 750% higher than the value of the synth being issued.
Why? To protect both you and the protocol from price swing volatility. If the collateral limit were lower, the odds being liquidated (losing your collateral partially/entirely) would rise.
How to trade on Kwenta, the Synthetix DEX
There's been plenty of talk about synthetic assets so far, or synths as they're called on Synthetix.
But, which synths can you actually trade on Synthetix exchange today? And how can you trade them? The answer to the latter isKwenta, the decentralized exchange built by Synthetix.
Using Kwenta, you can trade a vast selection of cryptocurrencies, forex assets, commodities like gold and oil, and even inverse assets (which allow you to trade short positions).
Once you load up the Kwenta app, you'll notice it looks a bit like a combination of Uniswap and Binance (albeit with a dark theme).
However, there are some key differences between those exchanges and Kwenta, the first of which is the central importance of sUSD.
To trade synths using Kwenta, you must begin with sUSD. What is sUSD, you ask? It's simply synthetic USD. Anytime you see a little s before an asset ticker you recognize, it just means that asset is a synthetic version.
So, sAUD (synthetic AUD), sETH (synthetic ETH), sBTC (synthetic BTC) — are all just synthetic SNX-backed assets tracking the prices of the real assets via a Chainlink oracle price feed.
How to trade on Kwenta in a few steps
Get sUSD: You need sUSD to start trading on Kwenta. Buy sUSD with other stablecoins, such as USDT, using Uniswap, 1inch, Binance, or Curve Finance.
Select synth: Now that your wallet has an sUSD balance, Kwenta will recognize it and allow you to trade. Select the synth you're buying from the menu.
Confirm trade: Conduct the trade on any sUSD/sXYZ pair of your choosing. You won't encounter liquidity or slippage issues commonly on other exchanges.
One last pro-tip for using Kwenta — make sure to have ETH in the same wallet you've connected to the exchange. Trading using Synthetix requires network fees (called gwei) paid in ETH. To figure out how much ETH you need, head over to ETH Gas Station.
SNX is the native Synthetix token that plays a fundamental role in the protocol's operation. In fact, you'd be hard-pressed to find another token with as much utility as SNX.
But, we digress. SNX performs several crucial tasks:
Creates deep liquidity for synths trading on Synthetix exchange
Mints synths & can be used as collateral for sUSD
Staked SNX earns staking rewards for token holders
As you can see, staked SNX tokens back the entire multi-billion dollar liquidity pool upon which Synthetix traders trade. Any synth created requires an SNX stake, creating demand for SNX tokens as synth trading grows along with new synth listings and markets.
Unlike other protocols where staking is mostly passive, SNX staking requires a bit of maintenance. The reason is when you stake SNX, you're minting sUSD and must maintain your collateralization ratio.
In return for maintaining your collateralization ratio and keeping your minted sUSD in good standing, you earn staking rewards. Currently, staked SNX rewards are hovering around 35% APY.
To stake SNX, mint sUSD, or burn sUSD (to unlock & claim SNX), head over toMintr, the Synthetix staking app. Once there, connect your SNX wallet, decide how much SNX to stake, then collateralize it in the mintr.
Later, you can go to Synthetix Earn to claim your staking rewards. Currently, $2.5 billion worth of SNX is staked, collateralizing sUSD to earn rewards.
Because Synthetix is currently migrating to a layer 2 solution (to reduce gas fees), you can stake onSynthetix Mintr L2. Despite not being fully functional, Mintr L2 allows for stakers to deposit and earn rewards, but you can't withdraw until Synthetix upgrades from Phase 0 to Phase 1.
Synthetix Exchanges — the future of trading
It's tempting to call any X the future of Y.
However, in Synthetix's case, doing so might actually be warranted. Cryptocurrency synthetic assets settle trades instantly, whereas traditional platforms take two or more days to settle.
Considering the speed and frequency of trading, especially amongst professional traders, traditional systems for exchanging assets are clearly outdated.
Synthetix has built a solution to slippage, liquidity, and settlement issues that plague other exchanges in both TradFi and DeFi. Additionally, one needn't wonder whether the protocol will be adopted — it already has $3 billion+ in total value locked.
About the only thing holding Synthetix back at this point is Ethereum congestion, but with the proliferation of L2 scaling solutions and ETH 2.0 on the horizon, the time for accumulating, adopting, and using SNX is now.
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