What is Synthetix DeFi ?

Synthetix is one of the most hyped DeFi projects in the Crypto universe right now, with a market cap exploding from just under 10 million dollars in mid twenty nineteen to around two hundred million dollars today. So what is all the fuss about? what Synthetix is, show you how to use the Synthetix exchange, explain what SSX tokens are used for, telling you the difference between Cynth tokens and SSX tokens and share some insights into the future of the project.

What is Synthetic (with “c” at the end)

OK, all set. All right, let’s slide into Synthetix. To explain what Synthetix is, I’m going to have to start off by explaining what a synthetic asset is that’s synthetic with a C at the end (synthetic). The first thing to know is that Synthetic assets are not just a Crypto thing. Indeed, almost every market in the world uses synthetic assets for trading. But what the heck are synthetic assets? Well, in short, a synthetic asset is a simulated representation of a real world asset.

Let me explain it with football analogy, and I’m going to do so here. Football players are multi million dollar assets who are often transferred from one club to another. Let’s take Neymar, for example, and his two hundred and twenty two million euro move from Barcelona to Paris Saint-Germain. The thing in football is that no two players are the same.

They have different levels of skill and attributes which determine their real world value. Now let’s take the computer game football manager. This game translates the skills and attributes of different players and creates a virtual representation of each player within the game.

In short, football manager is all about simulating real world players and allowing the game to flex their football managerial skills within a simulated environment.

Here’s the game developers simulation of Neymar in football manager. We can think about this version of the player as a synthetic Neymar in a nutshell, what the creators of football manager are aiming for is to tie the attributes and performance of real life football players with the stats and performance of the player within the game. By doing so, they’re creating a synthetic representation of the real player. Now, it may sound crazy, but football manager is so good at translating the attributes and skills of real world players into a synthetic version that real life football teams are actually using the game’s data to help them splash real money on players.

Now let’s take it back to Crypto, Neymar Ethereum would be like the real world version of Neymar. However, SEth on Synthetix is the simulated or synthetic version of Ethereum. This is like a synthetic version of Neymar in football manager. The thing to note is that Synthetix are a simulated representation of a real world asset. In football manager. This is represented in every game update.

So let’s say that for some reason Neymar plays poorly for a bit. This poor real life performance would then be reflected in the next database update by reduced attribute stats. In a nutshell, Synthetix assets track the performance of the real asset. The same is true of Crypto assets like Eth, SBTC, SEth and SBNB on Synthetix. These synthetix are not the real asset and simply track the real world performance of the real asset. So now that you know about Synthetix assets, I’ll move on to explaining what Synthetix with an “x” at the end is.

Synthetix trading platform and Synths token

In short, Synthetix is a trading platform for synthetic assets built on top of the Ethereum Blockchain. Another important thing to note is that the platform is currently only partially Decentralized. However, there are plans in the future to make synthetix truly Decentralized more on that later for chain link fans. So what synthetix assets can you trade on the platform? Well, there are a number of different asset categories to choose from.

These include fiat currencies like USD, the euro yen, Aussie dollar, British pound, Cryptocurrency like Bitcoin, Ethereum and BNB, commodities like gold and silver. And stocks are coming soon, which will allow users to trade synthetic versions of stocks like Tesla, Netflix, Amazon and Apple. Now, if we zoom into the different asset examples on the Synthetix website, you’ll notice that there is sBTC and iBTC. So what you need to know is that anything with an S before the ticker symbol mimics the price of the asset.

So if you bought BTC when Bitcoin was 10 K and the price went to 20 K, you would have doubled your money. Effectively, you’re going long on the asset. However, Synthetix has assets prefixed with an i. For example, i BTC this is an inverse synthetix asset, which means you can profit from an inverse moon by effectively shorting it. Both types of assets are known as synths. Oh yeah. Another cool thing about Synthetix is that anything with a price data feed can technically be traded on the Synthetix exchange.

Comparison With ETF

In theory, it’s possible to enable Decentralized synthetix trading for every single stock commodity and Cryptocurrency in the world. That’s the sort of potential we’re talking about here. However, it doesn’t stop there in traditional Finance there’s something known as an exchange traded fund or ETF. Yes, Bitcoin ETF hopefuls.

We are having to bring up these sorts of products again.

Now, put simply, many ETFs commonly hold a basket of different assets focused on a particular sector or region of the world and trade freely on the stock exchange. If you hop over to Hargreaves Lansdown, the biggest investment supermarket platform in the UK, you’ll see a huge range of different ETFs by sector.

What these financial products enable you to do is buy a basket of stocks or commodities. So, for example, the iShares PLC Core Footsie one hundred ETF allows me to buy exposure to the whole Footsie one hundred index, which means exposure to the one hundred biggest stock market listed companies registered in the U.K..

You’ll also notice here that the single ETF has a whopping 7,8 billion pounds in it.

The point is that ETFs are bloody popular due to the fact that with just a few clicks, I can get exposure to a big basket of different stocks like these, it makes being super easy for investors to diversify their holdings. The really exciting thing is that Synthetix could launch a Crypto top 10 Synthetix basket, holding the top 10 biggest Crypto currencies, which would mimic the performance of these assets. A pretty easy way to get exposure to the top Crypto.

Essentially, the platform could create baskets of synthetic assets for nearly anything and slice and dice them in an almost infinite number of ways. Given how much value is locked up in a traditional ETF, that could potentially be a massive market indeed. Now I quickly want to address the elephant in the room. Why would someone want to hold a synthetic asset and not the real thing? In short, it’s for trading purposes. Synthetic assets on the platform are likely for you if you want an easy way to get price exposure without dealing with any centralized entities.

How to Use Synthetix Exchange

So you’re interested in Synthetix, the next thing you’ll be wondering is how do I use the Synthetix exchange? The key thing to know here is that unlike other exchanges, you’re not trading with another person. We’ll explain this in a bit more detail in a minute. Once you’re on the Synthetix website and click the take me there button under the exchange header, you’ll then be told to connect your wallet to the exchange Dapp.

Supported wallets include Metamask, Trezor and Ledger. Once connected, you’ll then be prompted buy sUSD with Ethereum, which is a synthetix stable coin pegged to one dollar. The thing to know here is that to start trading on Synthetix, you’ll need to start with some s USD. Alternatively, you can buy Synthetix sUSD token from a exchange. Move it to Metamask, Trezor or Ledger wallet. And once you connect that wallet to the Synthetix exchange Dapp, you’ll be ready to trade.

You can then click the asset button to activate a dropdown showing you all the different assets on the exchange. So let’s pretend we have  sUSD and we say we want to trade one thousand dollars sUSD for s Eth (Synthetix Ethereum). What happens when you execute the trade is that your sUSD is burned and sEth is minted. So with the Synthetix exchange, you’re not trading with other people like in a regular exchange. Instead, the Synthetix exchange is essentially a synthetix token minting and burning system.

Now you’re probably wondering how the prices of synthetix assets are determined when trading. In short, it’s all determined by price data feeds, which are also known as Oracle’s. Earlier, I said that Synthetix was only partially Decentralized, and the reason why is because these price feeds are completely centralized and controlled by the Synthetix team. That being said, the project does have plans to Decentralized these in the future. You can see this price data feed in the bottom left hand corner of the trading screen.

All right, you’re probably sitting there and thinking that the Synthetix exchange sounds pretty cool. However, let’s be blunt about it. What on earth is the benefit of all this? Well, in a nutshell, there are three main benefits.

Three Benefits of Synthetix

One, it’s partly Decentralized, and that means there is no KYC and it’s non-custodial, meaning you control the keys to your Crypto assets.

Two Seeing that you’re not trading with other people and synthetix assets are bought and sold through the minting burning of synthetic tokens.

This means you don’t have to worry about liquidity. The reason why is that new tokens can always be minted.

Three,  tokens supply is not a problem either. In theory, an infinite number of synthetic tokens can be created. This being said, in reality there is a cap and that’s based on the amount of collateral that is backing up the Synthetix system. In short, collateral is just something that’s pledged as security for repayment of a loan.

Here, collateral simply refers to the Crypto that underpins the value of all issued synthetix assets. More on that later. Now, you’re probably wanting to get an idea of how big the Synthetix ecosystem actually is. You can pop on over to the Synthetix dashboard or check out DeFi pulse.com. You’ll then discover that the current synthetix ecosystem is the second largest in DeFi right now and has a whopping one hundred and fifty six million dollars worth of value locked up in it.

About SNX Token

Not too shabby at all. Let’s now move on to talking about the SNX token, you can see on the Synthetix dashboard that over 80 percent of all SNX tokens are locked as collateral and that the value of these tokens is around one hundred and sixty million dollars. The key thing here is that the total synth token supply is valued at only twenty two and a half million dollars. This means that the value of all the synthetix tokens issued is over collateralized by around seven hundred and seventy five percent.

Another interesting fact that I have to share with you is that the Synthetix project incentivizes SNX holders to hold a collateralization ratio of over seven hundred and fifty percent.

This is done through a pretty clever mechanism where SNX token holders can only earn staking rewards if the collateralization ratio is over this number. The staking rewards are basically a distribution of the fees generated on the Synthetix exchange. Now you’re probably thinking that a seven hundred and fifty percent collateralization ratio is bloody high and it is. So why the insane number? Well, in short, it’s this high due to the system being untested and the fact that Synthetix is a volatile asset.

If you’ve been listening to all this and been thinking that it all sounds very similar to make it and die, then you’re absolutely correct. However, the difference is that Synthetix currently has no liquidation mechanism. That’s why Synthetix has been so conservative when it comes to the collateral ization of synth and why the collateralization ratio is so high. So now you should have a pretty good grasp of the Synthetix project. But what does the future look like for the project straight up?

The Future of Synthetix

I have to say that the current version of the Synthetix exchange is just a prototype. It’s by no means a finished product and is certainly a work in progress. However, the ultimate goal of Synthetix is to become a massive Decentralized trading platform where users can trade synthetic assets for anything on the planet. Shout out to the DeFiant on substack who highlights four key things in the pipeline for Synthetix. The first is the introduction of non SNX collateral options. That would be a big deal as SNX tokens are currently the only form of collateral.

If assets like Bitcoin could be used as collateral, this would certainly make the whole ecosystem much more stable. The second thing in the pipeline is the creation of a liquidation mechanism to stabilize under collateralized positions. Third, Synthetix acknowledges that its price feeds, also known as oracles, are centralized and that this opens up the exchange to a single point of failure. However, the project is solving that problem via integration with chainlink. Yes, another thing for chain link fans to get excited about this would mean that centralized price feeds would be converted into Decentralized ones.

The really cool thing is that the work has already begun here and the first version of the Synthetix chainlink integration is already complete for Ethereum providing accurate and Decentralized price feeds for this asset. Oh, and by the way, Kane Warick, founder of Synthetix, went on the record to say that the partnership is one of the most significant milestones in the project’s history so far.

He also goes on to say. Given our reliance on regular price feeds for our derivatives trading mechanism, finding a robust Decentralized Oracle solution has always been at the top of our priority list. Chain Link delivers the solution deployed by an excellent team and supported by an invaluable community. Even better, Synthetix is forex and commodity price feeds have also been chosen for the initial deployment, this covered fiat currency pair trading and US dollar gold and silver trading pairs. Finally, the Synthetix exchange desperately needs better trading tools, things that we take for granted on Crypto exchanges like leverage trading and stop losses simply do not exist in the current synthetix exchange.

These will almost certainly be needed if the project is going to successfully eat into the market share of the likes of Bitmex and buybit. Congratulations on hanging on in there to the end. I know I’ve gone through a lot, and the truth is that Synthetix is a very complicated project. So if you now feel like you get it, then you can give yourself a pat on the back. However, I’d like to finally share my closing thoughts on the project with you, I’ve been super excited about the potential of Synthetix since researching the project for my recent DeFi overview video.

It’s possible to enable trading for pretty much anything that has a tradable price and being able to access price exposure to these assets with Crypto. I also think that being able to buy inverse synthetic assets and being able to benefit from downward price movements. What I’m exceptionally interested in is the ability to buy a basket of assets in just a few clicks.

Imagine how much simpler it would be to buy a DeFi index rather than having to head over to numerous exchanges and process a dozen or so trades. Also, I’m aware that literally trillions of dollars in assets are parked in similar products in the traditional Finance markets. If Synthetix could gain even a few percent of that market.

I have no doubt that would mean huge things for both Synthetix and DeFi in general. However, one of the main concerns with Synthetix is that it’s only really accessible to Crypto veterans. After all, how many newcomers to the space know how to set up a hardware wallet or are able to use metamask. Access to Synthetix is of course possible. But it does have quite a high knowledge barrier and I sometimes wonder if many people truly see the value of non-custodial Finance.

For example, there are millions of people who use investment supermarkets like Hargreaves Lansdown and appear happy to trust that they actually own the assets reported in their account breakdown. It must also be stressed that the current version of Synthetix is only a prototype. There are limited tradable assets available right now and the exchange is missing many features we take for granted in the centralized exchange world. The team certainly has a lot of work to do to make the platform, the Decentralized investment supermarket that they envision.

However, with all that said, I’m still incredibly optimistic about the future of the project and particularly excited about the planned integration with Chainlink, which aims to make the whole exchange truly Decentralized. I’m certainly going to be monitoring Synthetix progress very closely over the coming months.

.

Leave a Reply

Your email address will not be published. Required fields are marked *