Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.
Trading on exchanges has been traditionally dominated by major financial centres and exchanges, such as the London or New York stock exchanges. It has been hard to trade without going through these large, centralized exchanges. Synthetix is intended as an alternative, enabling trading of synthetic assets through the Ethereum-based ERC20 tokens, instead of assets on stock or commodity exchanges.
ERC20 tokens are tokens based on the Ethereum blockchain. Ethereum is a platform for developing blockchain-based apps and is used by a wide range of different projects. It has its own cryptocurrency called Ether, which is used to pay for fees on the network. Many DeFi (decentralized finance) apps are based on the Ethereum blockchain. Synthetix, today’s topic, is one such DeFi app.
It’s part of an ongoing financial movement that blew up in 2020. DeFi takes one of the most common uses of blockchain—decentralized currency—and expands it to other financial instruments. These uses include borrowing and lending, insurance, and in the case of Synthetix, synthetic asset and derivatives trading. By decentralizing these services, DeFi apps replace traditional intermediaries such as banks and insurers, instead relying on the blockchain to uphold agreements.Buy and sell Bitcoin and Ethereum instantly with Wealthsimple. Sign up to trade here.
What is Synthetix?
Synthetix was originally a stablecoin, which means it tracked the value of a stable asset. Stablecoins usually track the value of the US Dollar. However, Synthetix pivoted from this into asset trading. Now, it produces different tokens which track the value of a stock, currency or commodity. These tokens are called synths. Synths can even extend into mimicking other cryptocurrencies.
The synths will track the price of the real world asset, meaning trading can be done without the need to interact with an exchange. However, these synths aren’t the same as an actual asset. A synthetic gold bar is just that, synthetic. You won’t get any real world gold through synths and you can’t redeem it. And some cryptocurrencies, such as MKR, come with voting rights on their network. But if you hold MKR through a synth, you will not have access to the voting or staking ability.
Synthetix uses smart contracts to carry out trades. Smart contracts are effectively self-fulfilling contracts that remove the need for a third party. They are a crucial part of many DeFi projects. In a traditional contract, two parties come to an agreement, each side with its own obligations to fulfil. If one party reneges on the contract, intermediaries, such as a law court, come in to resolve the dispute. This is not necessary with smart contracts. Once one party has fulfilled its side of the deal, this is kept in storage on the blockchain until the other party has fulfilled their side. If they don’t, then the first party is refunded, without needing to resort to a lengthy and expensive legal battle. This is why one aspect of DeFi and blockchain is trustlessness, as there is no need to trust that someone else will keep their end of a bargain.
Synthetix also has its own cryptocurrency called the Synthetix Network Token (SNX). This complements the range of synths—tokens that track various assets. SNX can be locked up to create sUSD (synthetic US Dollars), or any other synthetic asset. The system is similar to a loan, where the sUSD represents debt whereas the SNX is collateral used to maintain and justify the price of the asset. A user needs to hold SNX to be able to create a new asset.
Synthetix is reliant on price information, whether that be the latest price of coffee beans, the British pound or Amazon stock. At first, Synthetix relied on centralized price feeds. These price feeds would provide updates on prices fairly quickly, but were susceptible to manipulation, as they were housed on a single server. This system has now been replaced as Synthetix has partnered with Chainlink, a so-called decentralized oracle network. With Chainlink, Synthetix grabs decentralized price feeds that avoid the reliance on any single party to provide pricing information.
When two synths are exchanged, the first synth is destroyed (called burning). The synth it is exchanged for is calculated using the Chainlink oracle. Once this amount is calculated, the Synthetix platform produces the new synth and gives it to the user. This means there is no need for a central exchange to swap fiat currencies; it can be done through synths very quickly. It also means traders can trade without needing an individual counterparty to trade with; the trade is executed through the platform.
Synthetix has a particular incentive model for users of the network who hold SNX. By staking SNX, a user will receive fees from users of the network. This isn’t where the incentives stop, though. A synth is created when 750% of its value in SNX is staked. This locks up a lot of SNX, cutting it off from circulation, thereby reducing supply. In fact, the 750% rule means that for $1,000 worth of SNX, only $133 worth of an asset can be produced.
In theory, all of this drives up the price of SNX; the token becomes rarer and its fundamental value increases because locking it up adds a new synthetic token to circulation. A further reward to stakers is the minting of new SNX tokens. In February 2019, there were 164 Million in circulation, but this has since fallen to around 114 million, as the amount of SNX minted has been lower than the amount destroyed.
Synthetix has methods to maintain or control the price of SNX. If SNX price rises, the system releases SNX tokens that weren’t tied up guaranteeing synths. These tokens are then sold on the open market. Doing this increases the supply, driving the price of SNX down. It also means some SNX can be released from their smart contracts. If the price of SNX doubled, then half the SNX in a smart contract could be released from guaranteeing an asset, as the remaining half is sufficient to cover the value of the asset.
Assets on the Synthetix exchange can both be bought and shorted. Buying is fairly simple, but shorting can be confusing. It is effectively the opposite of buying, as a user is betting that a synthetic asset will decrease in value. When shorting, a user borrows an asset and sells it at the current price, with the obligation to buy it back at a later date. While buying has limited losses (a trader can only lose what they buy), the potential loss for a short is theoretically unlimited. This is because asset prices can rise infinitely, whereas they bottom out at zero.
How is Synthetix different from Bitcoin?
Synthetix has two types of cryptocurrencies on its network, each of them considerably different from Bitcoin. Bitcoin was created as a peer-to-peer payment network. This means that it is meant to act as a form of money or as a store of value akin to gold. Mining a new Bitcoin requires a lot of computational power and a lot of energy; both cost money, and the charge is shunted to the purchaser, providing Bitcoin with what some consider fundamental value.
SNX, on the other, is a cryptocurrency with a purpose entirely different than Bitcoin. SNX is used to maintain the Synthetix network by minting new synths. The supply adjusts in response to the price of the cryptocurrency, whereas the supply of Bitcoin increases at a similar rate apart from when it undergoes a halving, an event where the amount of Bitcoin minted as a reward is halved.
In addition, the synths created on the Synthetix network have little to do with Bitcoin. While a synth could be created to track the value of Bitcoin, which would mean it has the same value as a Bitcoin, it would not be the same as holding the real thing. In addition, many of the other synths created track real world assets, such as gold. Bitcoin’s value is not tied to any other asset (even though it does correlate with the stock market)—another fundamental difference.
Synths are also created in a different way than Bitcoin. Synths are created when a user stakes their SNX at a rate of 750% higher than the value of the asset they are creating. New Bitcoins, on the other hand, are minted when miners use their computers to solve difficult mathematical puzzles.
How to buy Synthetix
SNX is tradable on popular cryptocurrency exchanges, such as Binance or Coinbase. These exchanges allow a user to trade SNX against other cryptocurrencies such as Bitcoin or the US Dollar through a stablecoin, such as Tether (USDT) or USDC. The cryptocurrency can also be moved off these exchanges in a wallet if a user wants to hold SNX, whether that be on a hardware or a software wallet. However, SNX is perhaps best used when put to work on the Synthetix platform and used to trade assets. SNX can also be bought on the platform’s website, ready for staking and asset trading.
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