Résumé

Synthetix is ​​a DeFi protocol for synthetic crypto assets. Born from the ashes of the 2018 bear market with Maker, Compound, Uniswap and a few others, it paved the way for decentralized finance to become a major sector in the cryptocurrency space.


Introduction

Synthetix started as a stablecoin project called Havven, before making a major pivot during the bear market to become a protocol for synthetic assets. The community behind Synthetix has been behind many mechanisms that are considered a standard in the DeFi landscape today.

Continuing to be one of the main building blocks of DeFi on Ethereum, and with an imminent launch of a Tier 2 scaling solution, Synthetix will likely remain a key building block of DeFi for the foreseeable future.


What is Synthetix?

Synthetix is ​​a synthetic asset protocol that enables the issuance of synthetic assets on Ethereum. We can consider a synthetic asset as a kind of derivative product. It allows you to gain exposure to an asset without having to own it.

But what can a synthetic asset, or “Synth” be? Well, almost anything that has a reliable source of pricing. Examples of this include cryptocurrencies like BTC or ETH, commodities like gold and silver, and fiat currencies like USD. There are even inverse Synths that track the inverse of the underlying asset, providing traders with an easy way to gain short exposure or cover existing positions or yield farming positions.

The idea is that by using Synthetix, traders can gain exposure to certain assets that do not exist on blockchain. Synthetix also enables the creation of indices like the DeFi Index, which tracks the price of a basket of multiple DeFi assets.


How does Synthetix work?

Synths use decentralized price oracles to track the prices of underlying assets. It is important to note that a Synth is different from a reserve-backed cryptocurrency, such as a stablecoin. Instead of a more conventional pool, what gives value to a Synth are various complex on-chain mechanisms and smart contracts.

For example, BUSD is a stablecoin where each BUSD represents 1 USD in reserve. Similarly, Paxos Pax Gold (PAXG) is backed by physical gold bars. In a way, if you own PAXG, you own an equivalent amount in the underlying gold reserve. In other words, PAXG is a token that represents ownership of gold.

Synths are different. They track the price of assets through a complex mechanism of smart contracts. Owning sXAU does not mean you own the underlying gold. This simply means that you are exposed to the price of gold.

So why want to hold such an asset? As we've already mentioned, this is a good way to gain exposure to the price of an asset without having to own it. What also makes Synths useful is that because they are ERC-20 tokens on Ethereum, other DeFi protocols can easily integrate them. Synths can be deposited into platforms like Uniswap, Sushi or Curve, and you can provide liquidity and earn trading fees like with other ERC-20 tokens.


Synthetix Network Token (SNX)

So if they're not backed by the underlying asset, what are they backed by? Mainly, through the platform token, SNX. More recently, Synthetix also added ETH as a supported collateral.

Synthetix works with overcollateralization, meaning that each synthetic asset is collateralized by more value than it represents.

Synths are created by users who put up collateral (SNX) and create a synthetic asset using these funds. In other words, each synth is essentially a debt against the collateral posted.

Each debt position must maintain a certain collateral ratio. This ratio is determined by governance. It aims to ensure that Synths are sufficiently collateralized and that there is no deficit in the system, even during statistical aberrations such as a large market crash.

Stakers must manually manage this ratio by creating and burning synths (redemption) or adding more collateral to ensure they can continue to earn staking rewards.


Infinite liquidity and no slippage

Synthetix sells itself as an exchange with “infinite liquidity” because there is no order book or slippage in the traditional sense. Prices are determined by an algorithmic mechanism, more similar to the operation of an automated market maker (AMM) than a central limit order book (CLOB).

In essence, when you trade on Synthetix, you are not trading against any individual or market maker. Instead, you pay off part of your debt from the debt pool and borrow the same amount of debt from another Synth.

This is a complex mechanism with many nuances, but it is important to understand that trading on Synthetix is ​​not the same as trading on the Binance order book or Uniswap liquidity pools.


Synthetix et Optimism

So why hasn't all of NASDAQ already started using Synthetix? Well, the fees and execution guarantees on Ethereum mainnet aren't exactly suitable for most traders and trading styles. This is why Synthetix contracts will be deployed on a second layer solution called optimistic rollup, more precisely, an implementation of it by the company Optimism.

Rollups are a great way to scale blockchains. Unlike other scaling solutions like parallel chains, which are responsible for their own security using a separate set of validators, rollups benefit from the security of the Ethereum blockchain. This is an essential difference. Rollups can achieve the same scaling benefits as parallel chains (e.g., increased transaction throughput and reduced transaction fees), without compromising on security.

Synthetix contracts, however, are one of the most complex smart contracts in existence. It is not easy to port them to cutting-edge technology in the safest way possible. Optimism has been working with Synthetix for some time behind the scenes, and deployment is expected to happen on mainnet sometime in summer 2021.


To conclude

Synthetix is ​​a synthetic asset protocol. Synths track the price of an underlying asset without users having to actually own the asset itself. Synthetix is ​​one of the oldest DeFi projects that has a decentralized governance structure through the SynthetixDAO. While not the easiest project to understand, Synthetix may see increased adoption when deployed on the Optimism implementation.