Derivatives are a very, very big market. After all, practically every single type of investment asset that you've ever heard of, like stocks, currencies, bonds, commodities, equities, and so on, are technically derivatives. It's so big of a market, in fact, that experts sometimes still struggle to value it properly. Some say it's over a $1-quadrillion, while others put it somewhere between $12- and $640-trillion. As we try to examine in our Synthetix review, imagine if all of that was exposed to crypto.
Isn't that the goal of blockchains, especially decentralized finance – or DeFi – in the first place; to disrupt and create a new model for the “legacy” financial system? With Synthetix, the humungous scale of derivatives could move onto decentralized chains, with unlimited numbers of real-world assets that could be synthesized and traded with cryptocurrencies. Could Synthetix make its mark on the derivatives market, far beyond DeFi? Well, read along our Synthetix review to find out more.
What Is Synthetix?
Built and powered by the Ethereum blockchain, Synthetix is a decentralized finance (DeFi) liquidity protocol made for derivatives, where real-world assets can be synthesized and traded natively with cryptocurrencies. Essentially, it allows DeFi users to gain on-chain exposure to existing asset classes such as stocks, currencies, commodities, or so on by tracking their underlying performance in real-time but done across a wholly decentralized network and without any meddling intermediaries.
As with many other decentralized exchanges and trading platforms, Synthetix is completely trust-less and non-custodial. By providing on-chain exposure with non-blockchain-based assets such as derivatives, Synthetic has essentially enabled anyone to have easier access to trading these assets and investments, which are normally reserved to a select few. There are no limitations on liquidity, and users are able to trade peer-to-contract (P2C) within the Synthetix protocol.
How Does Synthetix Work?
The key asset that you need to know for our Synthetix review is Synths. Each Synth is an ERC-20 token that tracks the price of an external asset and is labeled as ‘sXXX.' For example, an sUSD Synth will follow the price of the US Dollar, an sBTC will track the price of the Bitcoin, while sTSLA will mirror the value of Tesla stock. Through the efficient use of smart contracts, Synthetix's derivatives trading is based around a distributed ‘pooled collateral mechanism.'
This pooled collateralization allows for synthetic assets – or Synths like the aforementioned sUSD, sBTC, or sTSLA – to be converted directly to one another without facing immense price slippages that can happen with illiquid assets.
Moreover, Synthetix allows its users to have exposure to these assets without having to trust an intermediary like a broker or have to actually hold the underlying asset as collateral themselves. So, how does this ‘pooled collateralization' model work?
Well, it actually functions similarly to a decentralized exchange's AMM, or ‘automated market maker.' Within Synthetix, there is little fear regarding liquidity as users can provide collateral in the form of SNX tokens to a pool of Synths and thus become collateral providers.
This is similar to how we have liquidity providers (LPs) on DEXes. In return for sharing their collateral, collateral providers can then earn a portion of the trading fees paid by users who trade between these synths.
What Can You Do With Synthetix?
Currently, Synthetix has a moderate basket of Synths that include synthetized cryptocurrencies, fiat currencies, equities markets, and commodities, all of which have a basic trading fee of either 0.3% or 1.0%. As of writing this Synthetix review, they are one of the largest DeFi protocols, with roughly $2.3-billion in total value locked. Thanks to how the pooled collateralization works on Synthetix, there is theoretically an infinite number of derivatives assets that can be created synthetically.
On that note, it's worth bearing in mind that practically anyone can issue (or mint) their own Synths, so long as there is a clear price feed that can be plugged into Synthetix. All you need is to deposit SNX tokens into the Synthetix smart contract to turn it into collateral.
Overall, this helps to open up the market for non-blockchain assets to gain exposure in DeFi and allow users who value decentralization to trade these Synths with better accessibility, ease, and cost-effectiveness in mind.
How Can You Trade With Synths Powered by Synthetix?
Trading the Synths that we mentioned earlier in our Synthetix review is no different than trading cryptocurrencies in a conventional DEX, as in there's no need to worry about order books or having to risk massive volatility spikes owing to low liquidity. If you'd like to trade Synths powered by the Synthetix protocol, there are a number of dApps (decentralized applications) that you can use, such as the namesake Synthetix Exchange or Kwenta derivatives DEXes.
Either long or short, you can buy up available trading pairs of Synths. Kwenta is even planning to build synthetized perpetual futures contracts for these real-world derivatives and release them in the near future. If you'd prefer a less hectic investment plan, then you could use dHedge to organize and manage your Synths together in a portfolio like a hedge fund. Other platforms such as ParaSwap, and 1inch are also offering services that let you trade with Synths.
What Are Synthetix's SNX Cryptocurrency Tokens?
We've hinted before at how Synthetix's native cryptocurrencies, the SNX tokens, function. They are used for collateral, and staking a set amount of SNX is required to mint (i.e., create) new Synths or synthetic assets. These collateral providers (or stakers) are then rewarded and incentivized with a portion of the trading fees generated by Synths they've either created or taken part in. Therefore, the value of SNX tokens is directly proportional to Synthetix's wider network activity.
As for its tokenomics, Synthetix originally adopted a deflationary supply curve that capped its token supply but a new monetary plan was adopted in 2019, which introduced an inflationary model to reward active stakers. At the time of writing this Synthetix review, there is a total supply of 215,258,834 SNX. However, this will increase until 2024 all the way up to 245,312,500 SNX, as the inflation rate will gradually decrease every year until then, starting at 75,000,000 SNX in 2020.
From mid-2020 until now, the price of Synthetix's SNX has seen some enormous growth. As of this Synthetix review, one SNX token is valued at $18.14, which marks a parabolic 55,000+% gain from its all-time lows in early 2019. With a market capitalization of $2,082,941,563, this makes Synthetix's SNX the 55th-most valuable cryptocurrency on the market.
What Do Synthetix's Future Roadmap Updates Look Like?
Despite an already solid protocol as of our Synthetix review, they have a very extensive 2021 roadmap update planned, including significant network overhauls in the form of Synthetix V3. This will see them redesigning their entire smart contracts structure for the first time since 2018, where we'll get to experience a new staking mechanism, tokenized debt, continuous staking rewards, vesting, open interest caps, order matching, price thresholds, and so much more.
Nonetheless, Synthetix V3 is mostly in its testing phase right now, while other key improvements have taken priority. This includes the move to the Optimism layer 2 scaling solution for Ethereum to better prepare Synthetic for future scalability, upgrades to the decentralized on-chain governance of Synthetix, changes to the dApp interface to improve usability, introducing new derivatives assets, launching the aforementioned synthetics futures contracts and a lot more to come.
Synthetix Review – Conclusion
While summarising our Synthetix review, going through its project has made us incredibly excited over what might be over the horizon for Synthetix, along with the idea of derivatives trading on the blockchain. Allowing that on-chain exposure to otherwise old-school and non-blockchain native derivatives that trade in their trillions each day is incredibly empowering, as it continues to show us the power of how decentralized finance can ultimately transform the financial system today.
The only significant downside that we can find right now anyway is the somewhat limited number of synthetic derivatives or assets that you can trade, given the fact that there's so much more out there. On top of that, being built on the Ethereum network means that all Synths trading has to go through the oft volatile gas fees on its network. That said, a very solid platform and firm commitments towards improving on excellence show us that Synthetix has a very bright future.
Ease of Use
Long Term Sustainability
- Allows a (theoretically) infinite number of derivatives that could be synthesized at once.
- Supports any type of derivative so long as there is a price feed, varying from stocks, commodities, equities, bonds, currencies, etc.
- The use of pooled collateralization ensures low price slippage and liquidity issues, thus providing traders with competitive prices.
- Stakers (or collateral providers) can earn a portion of the trading fees from Synths.
- A large variety of dApps that natively support Synths, such as decentralized exchanges and asset management platforms.
- Strong commitment to improvements and future updates.
- A somewhat limited number of synthetic derivatives and assets can be traded.