The year 2019 has been widely recognized as the year of DeFi within the cryptocurrency asset industry. Data from DefiPulse shows that the total value of assets locked in various DeFi applications has nearly tripled over the past year, growing from $275 million to $686 million.
What’s particularly noteworthy is that not only has the total locked value changed, but the rankings of DeFi applications by locked value have also shifted. The former "Big Three of DeFi"—MakerDAO, Dharma, and Compound—have seen changes. Synthetix, a decentralized synthetic asset issuance protocol built on Ethereum, has innovated its token economic model and captured $170 million in locked value. Within just a year, it surpassed Dharma and Compound, securing the second position in DeFi, right behind MakerDAO. This rapid ascent has led many to看好 the potential of the synthetic asset market.
The native token of Synthetix, SNX, was launched in February 2018. Its price has increased over 30-fold since the beginning of the year. The trading volume of SNX also grew from less than $1 million in August to nearly $10 million by December. The protocol has also introduced a new stablecoin, Synthetix USD (sUSD), positioned as a competitor to Dai.
So, what mechanisms underpin this impressive growth of over 30 times for SNX? What are its use cases and profit opportunities? Why has this relatively complex protocol managed to rise so quickly? We will break it down.
What is Synthetix?
At its core, Synthetix is a protocol for issuing synthetic assets, built on the Ethereum blockchain.
Synthetic assets are designed to simulate other financial instruments. In essence, the risk or return profile of any financial tool can be replicated using a combination of other financial instruments. These assets are composed of one or more financial derivatives, with their value derived from underlying assets. This category includes forward commitments like futures, forwards, and swaps, as well as contingent claims such as options, credit derivatives (e.g., credit default swaps - CDS), and asset-backed securities.
Ethereum's stablecoin, Dai, is itself a synthetic asset, and the Maker protocol can be considered a synthetic asset issuance platform. Maker generates Dai by over-collateralizing ETH. Since Dai is pegged to the US dollar, it effectively acts as a synthetic representation of the dollar.
Synthetix operates in a manner similar to MakerDAO. It also involves over-collateralizing a volatile token to generate another token or asset. The key difference is that, currently, the only collateral accepted by the Synthetix protocol is its own native ERC-20 token, SNX.
You can think of Synthetix as a converter. It serves as a token circulation conversion pool, especially relevant while cross-chain technology is still maturing. For instance, if you want to hold BTC, ETH, and EOS simultaneously, you would typically need to operate across three separate blockchains. However, through Synthetix, you can gain exposure to all three assets within its ecosystem.
As of now, Synthetix supports 10 synthetic assets with 77 corresponding trading pairs. Its synthetic assets are currently categorized into four main types: fiat currencies, commodities, cryptocurrencies, and inverse cryptocurrencies.
- Fiat Currency Synths: Include sUSD, sEUR, sJPY, and others.
- Commodity Synths: Include sXAU (synthetic gold) and sXAG (synthetic silver).
- Cryptocurrency Synths: Include sBTC, sETH, sBNB, and others.
- Inverse Cryptocurrency Synths: Include iBTC, iETH, iBNB, etc. These track the inverse price movement of the corresponding cryptocurrency; for example, when the price of BTC decreases, the price of iBTC increases.
The Synthetix Team: From Stablecoin Beginnings
Synthetix originated from a project called Havven, founded in 2017. Havven was initially conceived as a distributed payment network with its own stablecoin.
Initially, Havven utilized a dual-token system to mitigate price volatility. One token was the stablecoin Nomin, denominated in fiat currency to maintain price stability (pegged to the US dollar) and intended as a medium of exchange. The other token, Havven, served as a reserve collateral token for the system. Its supply was fixed, and its market capitalization reflected the total value of the system.
By the end of 2018, the Havven team was working on launching multi-currency stablecoins (e.g., for the Euro, British Pound). It was during this effort that the team realized the Havven system had the potential to support a wide array of assets, including synthetic cryptocurrencies (long and short), indices, and derivative assets like stocks. Consequently, the project rebranded to Synthetix and pivoted from being solely a stablecoin project to a comprehensive synthetic asset issuance protocol.
Before the official rebranding to Synthetix, Havven had disclosed two funding rounds:
- In September 2017, Havven announced a $250,000 seed funding round.
- In March 2018, Havven raised a total of $30 million through private and public token sales.
Neither round disclosed the names of the investors.
On October 28th, the Synthetix Foundation announced that Framework Ventures had purchased 5 million SNX tokens (worth approximately $6.3 million) from the foundation's treasury. Synthetix further indicated that several other institutions had also purchased "significant" amounts of SNX but did not disclose their names.
The Synthetix team is based in Australia. The founder and CEO is Kain Warwick, who previously served as the CEO of Blueshyft, a crypto digital payment provider. Blueshyft operates a network of 1,250 points of presence across Australia, providing digital payment solutions for online businesses via an iOS platform. It has become the largest cryptocurrency payment channel in the country, processing tens of millions of dollars in transactions daily.
In a recent interview, Kain expressed his belief that decentralized on-chain derivative trading holds immense potential for future growth, stating that Synthetix's goal is to become the next BitMEX.
How to Generate Returns on Synthetix
After understanding the project's background, let's explore the practical process of engaging with the Synthetix ecosystem.
Synthetix is not only a protocol for issuing synthetic assets but also a trading platform for them. Users can trade synthetic assets on Exchange.synthetix.io. The system involves not just collateralization but also derivative trading for long and short positions, allowing users to gain from price movements of various assets. The operational flow is as follows:
1. Acquire SNX for Collateral
The primary channels for purchasing SNX are decentralized exchanges like Uniswap and Kyber, as well as the centralized exchange KuCoin. Data from CoinGecko indicates that the highest trading volume occurs on the SNX/ETH pair on Uniswap, with KuCoin accounting for less than 20% of the流通量 (circulating volume). Most participants choose to exchange ETH for SNX on Uniswap.
2. Mint Synthetic Asset sUSD
Once a user holds SNX, they can use Mintr to lock their SNX tokens as collateral and generate the synthetic asset sUSD. Think of sUSD as your entry chip for the Exchange.synthetix.io platform. You can obtain sUSD either by minting it through collateralizing SNX or by purchasing it directly on Uniswap.
Due to SNX's potentially high volatility, Synthetix mandates a 750% over-collateralization ratio to generate the stablecoin sUSD. This means users must maintain this target threshold to qualify for rewards from transaction fees and new SNX token issuance.
This ultra-high collateralization incentive is designed to ensure the backing抵押资产 (collateral assets) can withstand significant price fluctuations. It encourages抵押者 (stakers/minters) to increase their collateral ratio by depositing more SNX or by burning synthetic assets.
The SNX issuance rewards are similar to staking rewards. According to StakingRewards.com, the current抵押率 (staking rate) for Synthetix is around 85.16%, with a reward rate of approximately 54.92%, which is considered relatively high.
Transaction fee distribution involves a 0.3% fee on every trade executed on Exchange.synthetix.io. These fees are pooled and distributed to users who have抵押代币 (staked their tokens).
During the minting process, the user incurs a debt equivalent to the value of the newly created synthetic asset. This debt is tracked in XDR (Synthetix Drawing Rights). XDR uses a basket of currencies to stabilize the value of the debt, similar to the IMF's Special Drawing Right (SDR). The value of these synthetic assets fluctuates based on prices from an oracle, meaning the debt itself is variable.
After debt is allocated to the staker, the Synthetix smart contract issues new synthetic assets, adds them to the total supply, and allocates them to the user's wallet. Because synthetic assets are over-collateralized by SNX, they have a target ratio of 750%. If the value of SNX increases, previously locked SNX can be unlocked, or more synthetic assets can be minted.
3. Trade Synthetic Assets
This step is performed on Exchange.synthetix.io. Users can exchange sUSD for any other asset available on the platform, enabling them to trade (go long or short) on cryptocurrencies, commodities, fiat currencies, and more.
For example, if you are bullish on BTC, you can buy sBTC (conversely, if bearish, you buy iBTC). When the price of BTC rises, the value of your sBTC increases. You can then sell your sBTC directly on the Exchange.synthetix.io market.
A unique aspect is that trading synthetic assets primarily involves interacting with a smart contract. There is no order book nor a direct counterparty for each trade. The risk of holding an inverse asset like iBTC is not borne by an individual but by the entire "debt pool." This pool comprises the total value of all synthetic assets and fluctuates with their prices.
An asset trade within the system simply converts debt from one type of synthetic asset to another. This process occurs without order books or matching, alleviating user concerns about liquidity.
However, the risk is that all participants share the value fluctuations of the entire debt pool. Therefore, even if you hold sUSD, you could potentially experience losses if the value of the debt pool changes unfavorably.
Since the prices of the tokens are obtained off-chain via an oracle—currently operated by the Synthetix team—this presents a centralization risk for users.
4. Burning Debt
When an SNX staker wants to reduce their debt or exit the system, they must first burn synthetic assets.
For instance, if a user minted 1000 sUSD by collateralizing SNX, they must burn 1000 sUSD to unlock their collateral. However, if the debt pool has changed during the staking period (which affects individual debt proportionally), the user might need to burn more or less than 1000 sUSD to settle their debt.
The burning process is also executed through a smart contract. The contract determines the user's sUSD debt balance, removes it from the "debt ledger," burns the corresponding sUSD, and updates the user's wallet balance and the total sUSD supply. Subsequently, the SNX collateral is unlocked.
Understanding the profit mechanism, rewards are distributed weekly every Wednesday. For example, a major SNX holder who staked 33,000 SNX tokens reportedly receives weekly trading fee rewards of 115.48 SNX and weekly SNX issuance rewards of 328.94 SNX. This totals a significant weekly income, highlighting that the more SNX you stake (and the higher your debt share), the greater your weekly SNX rewards.
While many investors acquire SNX on Uniswap, network latency and congestion can sometimes hinder smooth transactions.
👉 Explore advanced staking strategies
Risks Facing Synthetix
While Synthetix's model is ingeniously designed, combining stablecoin minting with Staking and attracting users through issuance rewards and fee sharing, it faces significant risks that cannot be ignored.
Foremost is the risk associated with the oracle price feed, which has been discussed by various media and research institutions. In June 2019, Synthetix suffered a loss of over 37 million sETH due to an oracle attack.
The Synthetix system maintains a 750% collateralization ratio for SNX to support its synthetic assets, mitigating the volatility of both SNX and XDR. The system tracks the debt of synthetic assets through the following mechanism.
The total debt in the Synthetix system's debt pool is the sum of the value of all different synthetic assets multiplied by their current exchange rates. Currently, the prices of all synthetic assets in the Synthetix system are determined by a single oracle that feeds price information on-chain.
Whenever an SNX staker mints or burns synthetic assets, the system tracks the debt pool and each staker's debt. This is achieved by updating the "Cumulative Debt Delta Ratio." The oracle uses an algorithm with multiple sources to form an aggregate value for each asset, but it is currently operated by the Synthetix team.
The Synthetix team has acknowledged this issue. Kain stated in an interview that as an early-stage project, many risks remain, and they are actively researching oracles for decentralized on-chain price feeds. On December 20th, Synthetix announced a partnership with the decentralized oracle provider Chainlink, officially integrating its price feeds on Ethereum to provide users with accurate, decentralized price data.
However, some investors质疑 (question) whether Chainlink is truly decentralized, suggesting it relies on a limited number of nodes. Furthermore, as Vitalik Buterin has noted, if the market capitalization of an oracle is lower than the market capitalization of the DApps that depend on it, there is a risk of nodes colluding to manipulate data.
Secondly, Synthetix relies solely on SNX issuance incentives and transaction fees to ensure the solvency of its synthetic assets, lacking a formal liquidation mechanism to protect investor interests. In contrast, MakerDAO triggers liquidation when the collateralization ratio of a Collateralized Debt Position (CDP) falls below 150%, helping to mitigate losses for investors during extreme ETH price volatility.
If the market capitalization of SNX experiences a significant decline or the value of synthetic assets rises sharply, incentives alone may not guarantee that stakers promptly adjust their collateral ratios to maintain the appropriate level. MakerDAO, by not setting an upper limit on the collateralization ratio and only defining a minimum, incorporates a liquidation mechanism that penalizes under-collateralized positions. This清算机制 (liquidation mechanism) can better protect investor interests during sharp price declines.
Compared to MakerDAO, Synthetix holds an advantage in synthetic asset trading, offering easier access to a wider variety of asset classes and enabling transactions with lower friction. However, the current limitation of only accepting its native SNX token as collateral, unlike MakerDAO's use of ETH, presents a risk. A significant drop in the price of SNX could lead to a sharp decrease in the value of the抵押资产 (collateral assets), potentially causing systemic issues.
Ultimately, DeFi remains a niche and early-stage market. It's premature to talk about one protocol replacing another. The focus is still on refining mechanisms, improving user experience, and attracting new participants.
Investors should be aware that SNX tokens currently exhibit relatively low liquidity, have experienced significant price appreciation, and face potential selling pressure from unlocking events. Always conduct thorough research, rationally assess the market, and avoid盲目追高 (blindly chasing high prices).
Frequently Asked Questions
What is the main purpose of the Synthetix protocol?
Synthetix is a decentralized protocol built on Ethereum that enables the creation and trading of synthetic assets (synths). These synths track the value of real-world assets like fiat currencies, commodities, and cryptocurrencies, allowing users to gain exposure to these assets without directly holding them.
How do users earn rewards on the Synthetix network?
Users can earn rewards in two primary ways by staking SNX tokens. First, they receive inflationary rewards from new SNX tokens issued by the protocol. Second, they earn a proportional share of the trading fees generated from all transactions on the Synthetix Exchange. These rewards are distributed weekly to stakers.
What is the key difference between Synthetix and MakerDAO?
The key difference lies in the collateral and risk model. MakerDAO uses ETH (and other approved assets) as collateral to generate the DAI stablecoin and has a liquidation mechanism for under-collateralized loans. Synthetix uses only its native SNX token as collateral to generate various synthetic assets (including sUSD) and relies on a shared debt pool among stakers rather than individual liquidations.
What are the main risks associated with using Synthetix?
The primary risks include oracle reliance (price feeds, though improving, have been a historical point of centralization), the high volatility of the SNX collateral asset, the complexity of the shared debt pool model which can lead to unpredictable debt fluctuations for stakers, and the absence of a traditional liquidation mechanism found in other lending protocols.
Can you trade synthetic assets on Synthetix without staking SNX?
Yes, you can trade synthetic assets on the Synthetix Exchange without staking SNX. You can acquire sUSD (the base currency for trading) directly on decentralized exchanges like Uniswap. However, to participate in minting new synths and earning staking rewards, you must stake SNX as collateral.
What are inverse synthetic assets (e.g., iBTC) on Synthetix?
Inverse synthetic assets are designed to profit when the price of the underlying asset decreases. For example, iBTC's value increases when the price of Bitcoin decreases. This allows traders to take short positions on assets directly within the Synthetix ecosystem.