Synthetix Network

What is Synthetix (SNX)?

Synthetix is a decentralized derivatives liquidity protocol deployed on the Ethereum blockchain. Billed as a new financial primitive, Synthetix allows users to create synthetic assets, trade in unique derivatives, and obtain exposure to real-world assets on the blockchain.

Synthetix takes a family of financial instruments—usually accessible only to institutional investors—and gives any user of Web3 the ability to access them.

This brings down barriers since all that’s required to use Synthetix is an unrestricted internet connection. Users would typically need a brokerage account with advanced controls to access the same products traditionally.

Notably, Synthetix does not collateralize or hedge using the real-world assets it synthesizes. Instead, the derivatives are backed by overcollateralization of their value using staked SNX tokens.

Derivatives are often criticized as no more than gambling based on asset price movement. They are, however, a highly in-demand product, and Synthetix offers access to them in a decentralized, permissionless manner.

When Was Synthetix Launched?

Synthetix was launched in September 2017, known at the time as Havven. The launch was followed by the fanfare of one of the biggest airdrops of the time. On this occasion, members of the network’s Telegram social media platform were given two million havven (HVN) tokens.

These two million havven tokens were promoted as being worth $1 million, referring to the hard cap of $30 million in place for the network’s 60 million HVN token sale.

Just before launching the full-feature platform known now as Synthetix, Havven decided that rebranding was in order, given the refinement of the project’s purpose. What was then referred to as “multicurrency nomins” is now called Synths, and the Synthetix brand shored up the project’s focus on on-chain synthetic assets.

The Synthetix rebrand was announced in November 2018, and the HAV token became the SNX or Synthetix Network Token.

Who are the Founders of Synthetix?

Synthetix was founded by crypto entrepreneur Kain Warwick. Warwick is a non-executive director at the Blueshyft retail network who also founded Pouncer, an Australian live auction platform.

Warwick’s co-founder at Pouncer, Justin J. Moses, is also involved with Synthetix. Moses, former director of engineering at MongoDB and deputy practice head of engineering at Lab49, serves as CTO of Synthetix.

The role of Synthetix’s CEO belongs to Peter McKean, a former ICL Fujitsu programmer with over twenty years of experience in software development. Jordan Momtazi—a business strategist, market analyst, and sales leader with significant blockchain and e-commerce experience—is the project’s COO.

Clinton Ennis is another core Synthetix team member with nearly two decades of software engineering experience who previously worked as Architect Lead at JPMorgan Chase.

How Does Synthetix Work?

The primary function of Synthetix is to allow users to mint crypto assets that track the prices of other assets. These other assets could be fiat currencies like the U.S. dollar or the Indian rupee, precious metals like gold and silver, or other cryptocurrencies like Ethereum and Bitcoin.

The creation of synthetic assets isn’t a revolutionary concept, but access to this sort of financial product is often restricted. It also requires trust in a financial institution.

Synthetix, however, creates synthetic assets using open-source code, which is all that users need to trust. These new assets, called Synths, are created when users lock SNX tokens in special smart contracts.

Synths then track the value of oracles—the assets they represent using special data feeds. Synthetix has a partnership with Chainlink—a decentralized, blockchain-based system of oracles—in this regard.

What are Smart Contracts?

Smart contracts are the reason why cryptocurrencies like Ethereum are referred to as “programmable money.”

They are pieces of code that carry out an action when a predefined condition is met. Since they are deployed on public blockchains, they are both open-source and immutable. This means that anyone can fully read the code, which allows an informed decision on whether to trust that the smart contract works. It can’t be changed or edited in any way.

These smart contracts can replace traditional third parties when executing a contract between two parties that don’t trust each other. These include banks, escrow accounts, lawyers, etc.

What Makes Synthetix Unique?

Synthetix is unique for its particular approach toward collateralization. Most platforms that attempt to provide a synthetic asset, such as stablecoins, tend to collateralize by holding the actual asset in reserve.

This is true for 21st-century share ownership, too, since most shareholders who keep shares with their brokers are defined as entitlement holders. Entitlement holders’ shares are registered to custodians and have different (often less protected) rights than directly registered shareholders.

Still, Synthetix does not interact with the underlying asset at all. Instead, users have to collateralize their Synths by locking up 350% of the value of the Synth in SNX tokens. This is a significant level of overcollateralization compared to similar systems such as the Maker Protocol.

However, SNX is a freely traded cryptocurrency, and price changes can impact users’ collateral. If the price of SNX rises, the system then releases a portion of locked SNX to users since the ratio can be maintained with less SNX being locked. The user could then opt to mint more of their chosen Synth.

Yet, when the SNX token’s value goes the other way, a staker gets flagged for liquidation once their collateralization ratio hits 150%. At this point, the staker has 12 hours to raise their ratio back to 350%.

If a flagged staker does not restore their ratio, they are liquidated and penalized for a percentage of their staked SNX.

Trading between Synths is done in a peer-to-contract manner. When a user initiates a trade between two Synths, the smart contract system destroys the first Synth. It also queries oracles for price data and then creates the correct amount of the second Synth for the user.

This system solves many of the liquidity issues that traditional equity market regulations need exceptions for. This includes the market maker exception to SEC Rule 203(b)1, colloquially known as “the Madoff Exception.”

How is the Synthetix Network Secured?

The Synthetix network is secured by staking, allowing users to lock SNX in the protocol and earn a share of trading fees in Synth dollars (sUSD). The central mechanism of the Synthetix protocol is that SNX stakers are the counterparty to trades made using the platform.

Synthetix uses Optimistic Ethereum for lower gas and latency. This means that transactions and account balances rely on Optimism and, ultimately, Ethereum for their accuracy and security.

The creation, redemption, and trading of Synths are all smart contract calls that are gas-intensive. Hence, the Synthetix platform was well served in choosing a layer 2 scaling solution.

What is the Use of SNX?

As mentioned above, the main use of the SNX tokens is staking. Staking SNX provides deep liquidity for Synths trading in Synthetix. It also supports various protocols that rely on Synthetix liquidity, such as Kwenta, Curve, Lyra, and dHEDGE.

SNX stakers also receive SNX inflationary rewards on top of the sUSD trading fees. These are generated from trades on Kwenta Futures, Lyra options, Kwenta Spot, and Curve cross-asset swaps.

Ultimately, the SNX token provides collateralization for all of the Synths that users mint, so locking it in the protocol is key. However, it also plays a fundamental part in protocol governance.

Who Controls Synthetix?

In its formative period, Synthetix was governed by a non-profit foundation, but it was replaced soon after in favor of an on-chain governance system.

SNX stakers vote on a wide variety of things, from Synthetix Improvement Proposals (SIPs) and Synthetix Configuration Change Proposals (SCCPs) to the key components of the governance structure. These include:

• Core Contributors Committee. Responsible for hiring and paying Core Contributors who signal priorities, implement SIPs, and work on the protocol.
• Treasury Council. Funds incentives, manages the treasury, provides budget and funding to other DAOs, and oversees strategy and dealmaking.
• Protocol DAO. Executes SIPs and SCCPs.
• Spartan Council. Votes on SIP/SCCP feasibility, conducts risk assessments, and inducts Protocol DAO members.
• Grants Council. Sponsors ecosystem events, creates initiatives, and reviews grant submissions from the SNX community.
• Risk Committee. Creates Risk Evaluation processes and reviews SIPs risk.

How Much Is SNX In Circulation?

SNX has a maximum supply of over 291 million SNX tokens, with close to 238 million currently in circulation.

Synthetix issued 100 million SNX (then called HAV) during its token sale and seed stages, with 60 million SNX sold to raise $30 million. 20% of the 100 million SNX tokens issued went to the team and advisors.

Of the remaining 20%, 12 million SNX went to the foundation, 5% was allocated to partnership incentives, and 3% went to bounties. The foundation, which carried out early governance of the protocol, was dissolved in June 2020.

One of the largest investors in the project is Synapse Capital. Framework Ventures also invested in Synthetix, allowing the project to raise a further $3.9 million in 2019.

The SNX token is inflationary, but its inflation rate was the highest in the two years following the inflationary mechanism’s introduction in March 2019. The issuance rate will hit a fixed 2.5% in August 2023.

How Do You Buy SNX?

SNX is a token that has received considerable interest from the community, so you can buy it from all of the top exchange platforms.

Many platforms use stablecoins like USDT for SNX trading, but fiat U.S. dollar pairs are also extremely common with SNX. If you prefer to use crypto, you’ll find SNX most commonly paired with Bitcoin, although ETH is also common.

Since SNX is an ERC-20 token, it can also be exchanged freely on decentralized exchanges like Uniswap. You can trade SNX on Uniswap V2, as well as sidechain-based Uniswap V3 against a variety of other ERC-20s.

Is It Possible to Buy Synthetix Instantly?

The speed at which you’ll receive your SNX when you buy it depends on how you’re buying it.

Using a decentralized exchange atop main layer ETH, like Uniswap V2, might be relatively slow depending on network congestion. We’re talking minutes rather than seconds. Gas fees are often a consideration with Ethereum, as well.

However, Uniswap V3 embraced layer 2 networks like Optimism and Polygon for a reason. Optimism is a common choice, given that it’s closely related to Synthetix. Using it makes transactions practically instant.

Buying SNX on a centralized exchange is fast, too, but CEX accounts use custodial storage. This means that the SNX you bought aren’t actually yours, and you can’t connect to Synthetix or DeFi and use the tokens to mint any Synths.

To do that, you’ll need a wallet, but watch out for delays when sending SNX from a CEX to a private wallet.

How Do You Store SNX?

As mentioned, you could keep your SNX on an exchange or use a private, non-custodial wallet instead. Since SNX is an Ethereum-based ERC-20 token, any Web3 wallet compatible with Ethereum will do the job.

Hot wallets connect to the internet and are especially popular when using dApps and DeFi platforms like Synthetix. All you need to do, especially if it’s a browser extension wallet, is visit the Synthetix platform using your browser. Then you need to click a button to log in and connect your wallet.

You could also use a cold wallet to store your SNX, keeping it off the internet and eliminating the risk of hacks or connecting to the wrong site. However, it’s not quite as convenient to use a platform like Synthetix via a cold wallet.

Synthetix Energy Consumption

Synthetix is deployed on the Ethereum blockchain. In fact, it leverages the Optimism sidechain for scale and the reduction of fees.

In September 2022, Ethereum switched from proof-of-work consensus to proof-of-stake. Since this happened, a lot of criticism when it comes to energy consumption simply isn’t valid anymore.

Ethereum is no longer secured by entire warehouses full of GPUs, which causes its energy consumption to reduce by more than 99.5%.

Is SNX a Good Investment?

Synthetix is an extremely exciting project for finance enthusiasts or traders with a serious appetite for derivatives. Breaking down the entry barrier, it provides a pathway for many who wouldn’t normally have access to a very particular suite of financial products.

Synths are currently created via voting. The next evolution of Synthetix, called Synthetix V3, aims to take derivatives to the next level by enabling truly permissionless asset creation. This will allow any financial derivative to be built atop Synthetix V3.

Derivatives are sometimes referred to as the tail that wags the dog. This means that derivatives markets often dictate what happens to the actual asset rather than the other way around. Synths do not involve the underlying asset at all, for good or for ill, and only provide exposure to the value and fluctuation of the asset.

SNX is, therefore, an alluring prospect and an entry ticket to an often gated world of options, futures, leverage, and liquidity that would turn the heads of most savvy investors.