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Synthetix beginner’s guide
Learn how to trade synthetic assets with the Synthetix DeFi protocol.
Synthetix is an Ethereum-based DeFi platform that enables the trading of tokenised assets, such as stocks, forex, commodities and cryptocurrencies.
On Synthetix these tokenised assets are known as Synths, which essentially allow users to trade derivatives of assets that would otherwise only be available through traditional platforms like a stock exchange or broker. As such, Synthetix expands the range of assets that are available to cryptocurrency traders. By leveraging blockchain technology, Synthetix is also able to ensure infinite liquidity, zero slippage and provide traders with novel features not found elsewhere.
This guide will explain how to use Synthetix, how to create and trade Synths, as well as show you how to stake SNX and ETH in return for rewards, all while highlighting the risks involved.
What is Synthetix
Founded in 2018, Synthetix began its days as 'Havven'. Havven's vision was to build a synthetic US dollar (sUSD) to enable payments and transactions. However, after the launch of multiple USD stablecoins throughout 2018, Havven decided to pivot and expand.
A rebranding in late 2018 led to Synthetix, an Ethereum-based synthetic asset issuance and trading platform focused on allowing traders to mint synthetic versions of currencies, cryptocurrencies, stock, commodities and indexes.
More commonly referred to as 'Synths', the synthetic assets are a form of cryptocurrency token and can be traded on the Synthetix exchange. The synthetically created versions are pegged to the value of the real-world asset.
The system is reliant on the Synthetic Network Token (SNX). To mint synthetic assets and begin trading, traders must stake SNX as a form of collateral via Synthetix, which can then be traded on the companion exchange Kwenta. Note that as of May 2021, Synthetix is trialling the use of ETH as a secondary form of collateral.
Once a user holds synthetic assets they can begin trading them for any other synthetic asset on the Synthetix exchange, Kwenta, or use them in other DeFi protocols.
The creation and utilisation of Synths provide traders with a vast array of possibilities for trading, hedging and managing portfolios that expand beyond the standard cryptocurrency sector. The unique operability has seen Synthetix grow from strength to strength in the DeFi ecosystem.
Traditional derivatives trading
In the financial world, derivatives, which are contracts based on an underlying asset, are traded through centralised exchanges. Derivatives are used by traders to speculate on the future price of an asset without having to physically hold it. However, this process requires users to set up an account, provide KYC information and relinquish control of their capital. The Synthetix platform aims to remove the need for a centralised entity whilst allowing traders to speculate on the future price of commonly traded assets.
Decentralised oracle datalink
Synth values are pegged 1:1 with the underlying asset. To keep prices updated, real-world exchange data is passed to the Synthetix exchange via the data oracle, Chainlink. Synth prices constantly track the performance of the real-world asset and therefore can be traded like on a traditional trading platform.
On the Synthetix exchange users do not trade with other people or real-world liquidity.
While CeFi exchanges work by matching buyers with sellers, and decentralised exchanges (DEXs) like Uniswap work by utilising liquidity pools, the Synthetix exchange works by the process of minting and burning synthetic tokens.
If a trader comes to the exchange and wants to trade sUSD for sETH, the sUSD will be burned and the sETH will be minted. This will be completed using the exchange rate at the time. The minting and burning process can always be completed so unlike other exchanges there is no reliance upon a real-world asset. This offers users infinite liquidity to complete transactions.
Cross-exchange of Synths
Any Synth on the Synthetic exchange can be traded for another Synth, leaving a unique list of possibilities for traders. Synthetic Apple shares could be traded for synthetic gold. Anything with a live data feed of price can theoretically be added to the platform.
Any Synth can also be used to un-stake SNX from the platform as long as the value of the Synths matches the required collateral.
To remain as decentralised and trustless as possible, the platform requires no KYC data and is non-custodial, meaning that private keys are always kept with the user.
Originally governed by the Synthetix Foundation in Australia, in 2020 the platform moved towards a more decentralised governing protocol defined by three separate decentralised autonomous organisations (DAOs). These 3 DAOs are ProtocolDAO, GrantsDAO and SythentixDAO.A DAO is essentially a blockchain-based organisation where members make governance decisions by voting with tokens.
What are Synths?
Synths are the synthetic versions of real-world assets. Synths are created when users stake SNX or ETH as collateral. For example, users can stake SNX to mint sUSD.
Synths that are designated with a prefix of 's' (sUSD, sXAU, sBTC) increase in value when the price of the associated real-world asset increases in value.
The Synthetix DAOs are responsible for deciding which assets can be synthesised on the platform.
The Synthetix platform also allows traders to take short positions in a synthetic asset. This is achieved through the application of Inverse Synths.
Synths that are designated with a prefix of 'i' (iUSD, iXAU, iBTC) increase in value when the price of the associated real-world asset decreases in value.
For example, a trader holds iBTC and the current value of BTC is $30,000. If the price of BTC dropped to $29,000, the value of the iBTC token would increase proportionally to $31,000.
How to use Synthetix and Synths
To begin using Synthetix, a user must first hold Synths within their web 3.0 digital wallet, such as Metamask or Formatic. There are two prominent options to acquire Synths.A)
- Purchase native SNX tokens via a cryptocurrency exchange.
- Transfer them to a web 3.0 like Metamask and stake them on Synthetix to mint sUSD.
- Connect to Kwenta to trade your sUSD for Synths.
- Purchase ETH via a cryptocurrency exchange.
- Take the ETH directly to Kwenta or another DEX and exchange ETH for sUSD.
- Begin trading sUSD for other Synths on Kwenta.
Placing a trade
To place a trade on the Synthetix exchange platform Kwenta, you need to hold sUSD within your web 3.0 digital wallet, such as MetaMask or Formatic.
- Choose a pair. Select a pair from the assets panel in the Kwenta.io exchange.
- Order size. Enter the order size that you wish to exchange.
- Transaction speed. Select a speed for the transaction.
- Complete the transaction. Confirm the transaction via your digital wallet.
0.3% of the transaction value is charged as a trading fee.
What is SNX?
SNX is the native token to the Synthetix exchange and is required as collateral for traders who wish to mint synthetic assets. The process of staking SNX provides liquidity for the network.
When a user stakes SNX and mints Synths they incur debt. To redeem their SNX and exit the system the user must repay the debt by returning (burning) their Synths.
The staked SNX sits in a collective debt pool shared amongst all liquidity providers. It is referred to as a 'debt' pool because it represents all of the Synths that would need to be repaid for the SNX to be released.
Note: The amount of debt for each user is not constant. As the price of Synths fluctuate the collective debt will increase and decrease. If traders using the Synthetix platform are profitable those profits will be added to the debt pool. The opposite will be true for losses.
As the user's percentage share of the debt does not change, the user may end up with a larger or smaller debt to pay back.
To offset that risk, those that stake SNX are rewarded via:
- Transaction fees associated with the exchange of Synths on the Synthetix exchange, paid as sUSD.
- Staking rewards from the platform's inflationary monetary policy. The total supply of SNX is increasing to 260 million by 2023. These extra SNX tokens are distributed to those staking weekly on a pro-rata basis.
- Governance of the Synthetix platform.
As Synth creation requires SNX staking, the demand for SNX tokens grows as Synth trading grows.
How to buy SNX
SNX can be bought on a range of cryptocurrency exchanges and then transferred to your web 3.0 wallet to use on Synthetix or other DeFi apps. Use the table below to compare exchanges that sell SNX.
How to stake SNX
Users can stake the native SNX token in exchange for staking rewards in the form of SNX and a share of the exchange fees. To stake, users must hold SNX in a compatible web 3.0 digital wallet such as Metamask or Formatic.
- Visit the staking website on Synthetix
- Mint. Select the mint option from the menu.
- Determine maximum Synth creation. Click 'max' to determine the maximum amount of sUSD you will be able to mint depending on your SNX holdings.
- Adjust. Now lower the amount to a suitable figure for your strategy.
- Confirm. Click 'mint' and confirm the transaction via your web 3.0 digital wallet.
Synthetix requires 750% collateral for every Synth created. This is referred to as a collateralisation ratio. If a trader wants to mint 100 sUSD they will require collateral worth $750. This high collateral is one of the ways Synthetix manages any large price fluctuations.
Staking SNX requires maintenance of your collaterisation ratio (C-ratio). The C-ratio must be maintained at an optimum level to continue receiving staking rewards.
If a user's C-ratio is above the optimum the user must mint more Synths, thus lowering the ratio. If a user's C-ratio is lower than the optimum the user must burn some of their Synths, thus increasing the ratio.
Both SNX and Synth price fluctuations can affect each staker's C-ratio. Find more information regarding staking strategies here.
Risks of using Synthetix
Trading any class of derivative comes with the risk of trading with leverage, which refers to amplifying gains or losses. Synths carry that same risk and therefore should be assessed accordingly.
The Synthetix platform heavily relies on the SNX native token. Up to now, there has not been a known orchestrated attack targeting SNX; however, any future attack on the cryptocurrency token could cripple the platform and the collateral within it.
Similar to many other protocols in the DeFi space, the interconnectivity of the protocol is one of its greatest strengths but also one of its greatest weaknesses. An attack on one system could render the whole platform inoperable.
Our verdict: Should you use Synthetix?
Synthetix is a truly unique protocol in the DeFi sector. The flexibility of Synth exchange allows for a whole new world of potential trading strategies. Comparing the platform to the traditional financial markets, the potential for growth is extremely exciting.
However, the use of the platform is not without clear risk at this time and any user should only trade or stake that which they are willing to lose.
Pros and cons
- Trading capability. The platform opens the exchange options currently offered within the DeFi sector.
- Infinite liquidity. An exchange can always take place through the minting and burning of Synths. This provides no slippage in prices.
- No censorship. Access to traditional financial assets requires account creation and KYC, which is not required with Synthetix.
- SNX reliance. The protocol hangs on the SNX token. Large fluctuations or a targeted attack that may affect price could heavily affect the Synthetix platform and those staking on it.
- ETH congestion. The use of the Ethereum blockchain has led to congestion issues on the Synthetix network in the past.
Disclosure: The author owns a range of cryptocurrencies at the time of writing
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