Today, Decentralised Finance is a much more developed field than just a few years ago. While many entities are responsible for this innovation, one of the first was Synthetix. Many features implemented by Synthetix have become a staple of the entire DeFi industry today. By focusing on creating a new asset class in crypto, Synthetix has established itself as a key player in the future of the crypto industry.
How Does Synthetix Work?
Synthetix is a protocol that allows you to generate “synthetic” assets. Synthetic assets are like derivatives in financial markets. These assets – also known as “Synths” – enable you to receive returns from another asset without owning it.
Almost anything with a reliable trading history can be turned into a Synth. For example, crypto tokens like Bitcoin and Ethereum, fiat currencies like the USD and commodities like gold can all be in the form of synthetic assets.
A blockchain oracle is a service that grants blockchains access to data from the outside world. Smart contracts are typically unable to access data that is not on their network (Off-chain). Oracles bridge this gap and provide smart contracts with a way to access external information.
Synths use decentralised price oracles to access the data of underlying assets. With this, you can own and trade Synths the same way you would trade the tracked asset. This can let you trade in assets normally not available to crypto investors, such as gold and silver.
Smart contracts representing other assets must be backed – or collateralised – by something to have value. For example, stablecoins like USDT and USDC are backed by an equal reserve of US dollars. Being able to trade 1 USDT for 1 US Dollar is what gives the stablecoin its value.
Read more: Difference Between USDT and USDC
Unlike stablecoins, Synths are not backed by the underlying asset. Instead, they are collateralised by the Synthetix Network Token (SNX). This is the native token of the platform and must be staked to mint a synthetic asset.
The Synthetix protocol works on over-collateralisation. Any Synth created is backed by a fluctuating collateralisation ratio, determined through governance. This ratio is currently 400%. It must be managed by stakers by minting more Synths if it is too high or burning them if it is too low.
Kwenta is the Synthetix decentralised exchange. This is where you can trade your Synths with other investors. Unlike other exchanges, Kwenta does not have an order book. Trades are done on a peer-to-contract basis against a smart contract. A fee between 0.3-1% is levied on every trade. This is used as a reward pool for stakers on the network.
Kwenta provides several synthetic cryptos and inverse cryptos. Inverse cryptos track the reverse price of underlying assets. In addition, you can also trade synthetic fiat currencies like USD and Euros. Finally, Kwenta also includes two indexes, sDEFI which tracks a set of DeFi assets and sCEX, which tracks tokens issued by centralised exchanges.
How To Use Synthetix Network Token?
SNX tokens form the backbone of the Synthetix protocol. SNX is staked to mint new Synths. Therefore, SNX is used as collateral for any assets issued by the protocol. To do this, you must first hold the tokens in a compatible wallet. Once you connect this wallet to the Synthetix exchange, you can lock the tokens as collateral.
When you stake your tokens up to the required ratio, you are eligible for two sets of rewards. First, you can earn staking rewards in SNX. You can also earn exchange fees on every Synth trade, denominated in sUSD.
What Is Synthetix Staking?
Staking is necessary for participating in the Synthetix network. Once you stake your tokens, you can hold debt in the form of a synthetic asset. Unlike other platforms, staking in SNX must be managed to meet the collateralisation ratio.
If your collateralisation ratio is too low, you can burn Synths to match the target. Only when you match the target will you earn rewards. On the other hand, if your ratio is too high, you can mint new Synths.
As mentioned above, you can earn both staking rewards and exchange fees. Staking rewards are made available once every week.
Is SNX a Good Investment?
Since its beginning, Synthetix has been a pioneer in the DeFi space. It provides a unique avenue of investment through its Synths, enabling crypto investors to trade in assets like fiat currencies and gold.
However, investing in SNX is a complicated process that requires you to understand its staking rules. It also needs an understanding of the derivatives market. While it can be a great investment opportunity, you must ensure you are comfortable with its unique systems.