Summary

Synthetix is ​​a DeFi protocol for synthetic cryptocurrency assets. It was born from the ashes of the 2018 bear market along with Maker, Compound, Uniswap and several other companies, laying the foundation for decentralized finance to become an important part of the cryptocurrency space.


Introduction

Synthetix was originally a stablecoin project called "Havven", and made a major transformation during the cryptocurrency bear market to become a synthetic asset protocol. The community behind Synthetix pioneered many mechanisms that have now become recognized standards in the DeFi field.

Synthetix has always been a core component of Ethereum DeFi and is about to launch a Layer 2 expansion solution. In the foreseeable future, Synthetix will continue to play an important role in the DeFi field.


What is Synthetix?

Synthetix is ​​a synthetic asset protocol that allows the issuance of synthetic assets in Ethereum. You can think of synthetic assets as a derivative product. It provides a way to gain exposure without owning the asset.

What are synthetic assets (or "Synths")? In fact, it includes almost any asset with a reliable price source, such as cryptocurrencies such as Bitcoin or Ethereum, commodities such as gold and silver, and fiat currencies such as the US dollar. There are even reverse Synths that track the underlying assets inversely, allowing traders to gain short exposure or hedge current holdings and liquidity mining positions.

The core idea is that by using Synthetix, traders can get exposure to certain assets that do not exist on the chain. Synthetix also supports the creation of various indices, such as the DeFi Index, which tracks a portfolio of DeFi assets.


How does Synthetix work?

Synth uses a decentralized price oracle to track the price of the underlying asset. It is important to note that Synth is different from cryptocurrencies (such as stablecoins) that are backed by reserves. Compared to traditional reserves, the value of Synth comes from a variety of complex on-chain mechanisms and smart contracts.

For example, BUSD is a stablecoin, and each BUSD represents a reserve of $1. Similarly, Paxos' "PAX Gold" (PAXG) is also backed by physical gold bars. In a sense, owning PAXG is equivalent to owning an equivalent amount of gold reserves. In other words, PAXG is a token that embodies gold ownership.

Synths are different, they track asset prices through a complex smart contract mechanism. Owning sXAU does not mean owning any underlying gold, it only represents gaining exposure to the gold price.

So what’s the point of holding such an asset? As mentioned above, it provides a great way to gain price exposure without actually owning the asset. Another advantage of Synths is that they are ERC-20 tokens in Ethereum and can be easily integrated by other DeFi protocols. Synths can be deposited in platforms such as Uniswap, Sushi or Curve, and you can provide liquidity and earn transaction fees just like with other ERC-20 tokens.


Synthetix Network Token (SNX)

Since there is no underlying asset to back it, what are these tokens collateralized with? Mainly the token launched by the platform - SNX. Recently, Synthetix also added Ethereum as collateral to provide support.

Synthetix adopts an over-collateralization model, that is, the collateral value of all synthetic assets exceeds their own value.

Synth is created by users pledging collateral (SNX) and minting synthetic assets for it. In other words, the essence of Synth is a debt secured by posted collateral.

Debt positions must maintain a certain collateralization ratio, the specific value of which is determined by governance. This is designed to ensure that Synth has sufficient collateral to eliminate deficits in the system and survive extreme periods such as large-scale market crashes.

Stakers must artificially manage the above ratio by minting and burning Synths (debt) or adding more collateral in order to continue to receive staking rewards.


Unlimited liquidity and zero slippage

Synthetix does not have an order book or slippage in the traditional sense. Its market positioning is to provide a trading platform with "unlimited liquidity". Its pricing method is determined by an algorithmic mechanism, which is closer to the working principle of an automated market maker (AMM) rather than a central limit order book (CLOB).

Essentially, the trading counterparties in Synthetix are not individuals or market makers. Traders need to repay part of the debt in the debt pool and borrow an equal amount of debt from another Synth.

It’s a complex mechanism with many nuances, but what we must understand is that trading in Synthetix is ​​not the same as trading in a Binance order book or a Uniswap liquidity pool.


Synthetix and Optimism

Why didn’t Nasdaq migrate to the Synthetix trading platform as a whole? In fact, the fees and execution guarantees in the Ethereum mainnet are not entirely suitable for most traders and trading styles. For this reason, the Synthetix contract chose to be deployed on a Layer 2 solution called Optimistic Rollup, which is an implementation plan launched by Optimism.

Rollups are a great way to scale blockchains. They derive their security from the Ethereum blockchain, as opposed to other scaling solutions like sidechains which “self-secure” using a unique set of validators. This is a key difference. Rollups can create the same scaling benefits as sidechains (such as increased transaction throughput and lower transaction fees) but without the severe impact on security.

However, Synthetix contracts are currently more complex smart contracts, and migrating them to such cutting-edge technology in the most secure way is no easy task. Optimism has been running in conjunction with Synthetix in the background for some time, and deployment in the mainnet is expected to take place in the summer of 2021.


Summarize

Synthetix is ​​a synthetic asset protocol in Ethereum. Synth tracks the price of the underlying asset, but users do not have to be the actual owner of the asset. Synthetix is ​​the earliest DeFi project to go online, and has set up a decentralized governance structure through SynthetixDAO. Although the principle is difficult to understand, as Synthetix is ​​deployed to the rollup implementation plan launched by Optimism, its popularity may continue to increase.