The decentralized finance (DeFi) sector has advanced so quick over the previous yr that new methods of buying and selling and incomes from digital belongings have emerged at unprecedented charges.
What was as soon as simply restricted to collateral-backed lending and borrowing platforms is now a digital smorgasbord of different DeFi protocols providing derivatives, flash loans, dynamic stablecoins, and artificial belongings.
The Synthetix protocol launched with the intention to present access to these synthetic assets in tokenized kind through the use of a fancy system of algorithms and derivatives. Merchants holding synths on the protocol do not need the true asset of their possession, nonetheless, they will nonetheless acquire publicity to its value actions.
So far as DeFi protocols go, Synthetix is without doubt one of the hardest for inexperienced persons to understand however we’ll try to unravel a few of these complexities on this DeFi Deep Dive.
A Temporary historical past
The Synthetix platform began out as a stablecoin challenge referred to as Havven with its native cryptocurrency, the Havven Token – HAV. The platform had an ICO in February 2018 for the ERC-20 token which launched at a value of $0.67 on the time.
Its preliminary intention, according to the white paper, was to turn out to be a decentralized funds community that makes use of a twin token system to challenge stablecoins referred to as nUSD, with the HAV tokens as collateral.
Early buyers and HAV holders obtained a share of the charges generated from all nUSD transactions as a reward. This additionally helped to keep up its greenback peg.
The workforce rapidly came upon that stablecoins may do much more. In consequence, they introduced the foremost rebranding to Synthetix in late November 2018, with HAV tokens changing into SNX.
Australian entrepreneur Kain Warwick based Synthetix. He had beforehand established the OTC funds platform Blueshyft.
How does it work?
Synthetix in its present kind allows the creation of on-chain artificial belongings which use oracles to trace the worth motion of the identical belongings in the true world.
The Ethereum (ETH)-based DeFi platform permits buyers to get value publicity for just about any asset from shares to commodities, fiat currencies, and naturally crypto belongings. The protocol additionally has its personal stablecoin, sUSD. It offers staking, yield farming, and a wide range of derivatives buying and selling choices.
Artificial belongings are minted on the protocol utilizing the Synthetix Community Token (SNX) as collateral. This locks into a wise contract. In early 2020, the protocol enabled the usage of ETH as collateral along with SNX. Stakers can even earn a share of the 0.3% minting charges on the alternate by depositing SNX tokens as collateral to a payment pool.
The collateral ratio is 750% so if customers need to mint 100 British kilos right into a sGBP Synth they would want to stake 750 British kilos value of SNX. If the worth of SNX will increase, an equal portion of a staker’s SNX is robotically unlocked as collateral. The official documentation explains why the ratio is so excessive:
“This mechanism permits Synthetix to help instantaneous, near-frictionless conversion between completely different flavors of Synths with out the liquidity and slippage points skilled by different decentralized exchanges. The ensuing community of tokens helps an intensive set of use instances together with buying and selling, loans, funds, remittance, eCommerce, and lots of extra.”
SNX stakers incur money owed after they mint Synths. In an effort to exit the system and unlock their SNX, they need to pay again this debt by burning Synths.
The tokens inflationary economics will see the provision enhance from March 2019 to August 2023. The overall SNX provide will enhance from 100 million to round 250 million with a weekly decay price of 1.25% ranging from December 2019. On the time of writing, there have been 151 million SNX in circulation.
Every Synth is an ERC-20 token that tracks the worth of an exterior asset; for instance, sUSD tokens monitor the worth of the US greenback, and gold-based Synths will monitor the real-world value of the commodity via a Chainlink (LINK) oracle.
The platform additionally has iSynths which inversely monitor the worth of belongings by way of value feeds and oracles. These permit merchants to successfully take quick positions. They’re additionally accessible for cryptocurrency and index-based Synths. Inverse Synths have three essential factors: an entry level, an higher restrict, and a decrease restrict, the entry level being the worth at which it enters into the system.
If an iBTC Synth entered at a value of $50,000 that might be its entry level so if the worth of the sBTC Synth (which tracks bitcoin’s (BTC) precise value) drops to $49,000 then iBTC could be at $51,000 and vice versa. The higher and decrease limits are the place the Synth is frozen for leverage functions.
Index Synths monitor numerous indexes such because the Nikkei or Nasdaq and even crypto and DeFi associated indexes that exist. Likewise, forex-related Synths monitor the worth of foreign exchange fiat currencies by way of value feeds.
Synthetix has a little bit of a steep studying curve. Its summary nature signifies that it’s not for everybody. These wanting entry to world inventory market actions however can’t as a consequence of geographical restrictions would profit from utilizing the platform.
Moreover, merchants trying to quick crypto non-accredited belongings for futures platforms can even profit. Rookies which might be on the lookout for easy DeFi yield farming ought to in all probability search user-friendlier platforms.
Synthetix protocol and token efficiency
Synthetix has been one of many fastest-growing DeFi protocols in a sector that has expanded itself by 250% for the reason that starting of 2021.
Complete Worth Locked (TVL) on Synthetix is round $2.38 billion on the time of writing in keeping with the alternate itself. Information suppliers akin to DeFiPulse and DappRadar are reporting between $2.23 and $2.39. So the figures are fairly shut. The previous has ranked Synthetix at eighth place simply behind Instadapp.
Because the starting of 2021, Synthetix TVL has increased round 90% so it’s a little behind the expansion price of the business as an entire by way of TVL. This can be because of the complexity related to utilizing the platform examine to easy token swapping interfaces akin to Uniswap.
Token efficiency, nonetheless, has undoubtedly not been lagging. As reported by BeInCrypto, SNX was one of many better performing DeFi tokens in 2020, notching up a acquire of over 500% for the yr.
That determine has been dwarfed by what it has executed thus far in 2021, surging from $7.20 on January 1 to an all-time excessive of simply over $27 by mid-February. On the time of writing, SNX is buying and selling at $20.60 representing a acquire of 170% thus far this yr.
Layer 2 Integration
Being primarily based on Ethereum, there was some urgency from Synthetix to combine Layer 2 scaling options.
The protocol started testing Layer 2 scaling with Optimistic Ethereum in September 2020. That is an impartial L2 expertise supplier providing airdropped SNX tokens as incentives for these collaborating on the testnet.
In mid-January 2021, it introduced the launch of the L2 platform referred to as Castor although extra testing was required.
In early April, the protocol introduced that Optimistic Ethereum has been built-in into staking enabling liquidity suppliers to earn yields on Layer 2 and keep away from these painful gasoline charges.
The launch is being phased in as performance is added progressively. The ultimate section slated for later this yr will depreciate Layer 1 staking and disable any Synths on the community.
The 2021 roadmap specified by a weblog publish penned by founder Kain Warwick in January 2021. In it, he likened it to the title of a sci-fi film depicting a “future the place everybody on this planet is related to at least one one other by handheld gadgets that permit them to carry, commerce and switch each conceivable asset.”
The migration to a full Layer 2 alternate and the depreciation of belongings on Layer 1 is the workforce’s precedence for this yr. The transfer turns into extra of a necessity each time Ethereum transaction charges break their earlier excessive.
Synthetix v3 was talked about, representing an entire re-architecture of the smart contracts for the primary time since late 2018, nonetheless, no timeframe was given.
It’s going to present a brand new staking mechanism, tokenized debt, value thresholds, and order matching. There will likely be a lot of governance enhancements, asset growth into equities, leveraged futures, binary choices, and acquisitions on the playing cards.
Synthetix will get lots deeper than it’s already by way of complexity, which is music to the ears of superior merchants on the lookout for higher flexibility and choices within the burgeoning fledgling monetary sector that’s DeFi.