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- 1 Synthetix allows crypto traders to interact with real-world assets such as stocks and commodities in a decentralized environment.
- 2 Synthetic assets on the platform are called Synths and are minted by staking SNX tokens.
Synthetix is a protocol running on the Ethereum blockchain that allows users to mint and trade synthetic assets on Ethereum and Optimism blockchain. Synthetic assets derive value from an underlying asset. They allow traders to take advantage of the price action of the underlying asset without actually holding them. The synthetic assets on Synthetix are called Synths. If a trader mints ALGO as a synthetic asset, it would be denoted as sALGO on the Synthetix platform. The trader can make profit from the ALGO price movement but cannot use the asset (sALGO) to participate in governance on the Algorand network.
How does Synthetix work
Synths are minted by staking the Synthetic network token (SNX). Staking takes place on Optimism, a layer-2 protocol on the Ethereum blockchain. The SNX token serves as collateral while the synth minted is considered as a debt. After trading, the SNX token can be unlocked by burning the synth.
The Synthetix platform works in an over-collateral nature. The SNX tokens that are staked to mint Synth must be of a higher value than the Synth that is minted. This helps the synth to edge over the price volatility of SNX tokens.
The Synths minted are traded on decentralized exchanges on the Synthetix protocol (Kwenta) or other exchanges (Uniswap). To ensure the stability of the network, stakers are required to maintain a target collateral ratio.
A Collateral ratio is the difference between the SNX tokens staked by a user and their active debt. A staker’s active debt is influenced by traders. If a debt is in sBTC and traders are profitable (making more sBTC) the total amount of sBTC on the platform (called debt pool) increases. If the user minted 10% of the network’s sBTC debt pool and the total debt increases to 3000, the staker’s active debt is 300.
A target collateral ratio is set for every staking account. If the account falls below the target ratio, the user will be unable to claim staking rewards. To resolve this, the staker has to burn the synth. This reduces their debt and adjusts the target ratio. Stakers are also rewarded with trading fees.
The Synthetix network uses price oracle to get an updated price list of synthetic assets. The Chainlink Oracle connects the on-chain synths to off-chain price data.
How does trading work on Synthetix
There are two types of synthetic assets users can mint on the platform: spot synths which include synths of crypto assets (like Bitcoin, Ethereum), fiat currencies ( USD, GBP), or commodities (gold or silver). Derivative synths include perpetual futures. This allows traders to take a position on the underlying asset without expiry.
Kwenta is a decentralized trading platform built on Synthetix that allows traders to access the perpetual futures on the platform. It uses Chainlink price oracle and liquidity provided by SNX token stakers.
Synthetix is governed by three decentralized autonomous organizations whose members are elected by the SNX token stakers. The Protocol DAO is made up of 8 signers, 4 of which are required to agree on updates to smart contracts.
The Synthetix DAO manages the network’s treasury and funds growth. 6% of SNX tokens are assigned to this DAO.
The Grant DAO is made up of 5 signers, 4 of which are needed to review funding for proposals.
Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.
