The application of Decentralised Finance (DeFi) has continued to pave the way for extended possibilities that overcome the limitations posed by traditional financial systems. This achievement invariably led to unprecedented growth in the range of DeFi protocols available on the DeFi market with each offering a unique solution and building on its own defining quality.
Synthetix is a unique DeFi protocol by which users can mint a class of assets known as synthetic assets, which is based on the Ethereum blockchain. Thus, the Synthetix smart contracts make it possible for users to gain exposure to certain assets including those existing outside the blockchain without actually having to hold those assets.
In a way, understanding derivatives can offer an insight into the peculiarities of synthetic assets. This article further explores the basic idea behind the Synthetix protocol, including its history and practical use case.
Brief history of Synthetix
The history of Synthetix is one that is marked by crucial transformations which ultimately redefined its objectives. The project now known as Synthetix actually started out as Havven, a stable coin project founded by the Australian-Native, Kain Warwick.
The Synthetix founder and Blueshyft C.E.O initially introduced Havven with the objective of creating cryptocurrencies based on the Ethereum blockchain that copies the performance of the U.S. Dollar and other fiat money.
Havven was launched through an initial coin offering (ICO) back in 2018 during which sixty (60) million Hav tokens were sold to realise about $30 millions. Towards the end of the same year, Havven was later rebranded to Synthetix as we have it now, and this comprises a more expanded objective of creating synthetic assets that copies the price of real-world assets like stocks, golds, fiat currencies, etc.
Synthetix is touted to be one of the biggest projects on the DeFi market after its native token, SNX worth at least $180million was locked up in the protocol towards the end of 2019.
The founder of Synthetix is now looking to further expand its objective to include synthetic assets for major U.S. stocks like Tesla and Apple.
What is Synthetix?
Consider Synthetix as a collection of smart contracts or a protocol based on the Ethereum blockchain that allows you to create synthetic assets which track and mimic the performance of another asset. Thus, you don’t have to hold assets like gold, silver, stocks, fiat currencies, etc. to gain exposure to their market performance.
How does Synthetix work?
The Synthetix project is centred around the use of the Synthetix Network Token- SNX, which is the native cryptocurrency utilised on the platform. SNX is locked up to create synthetic assets or ‘Synths’ (like sUSD) which copy the performance of other assets.
Although very similar, this should not be confused with stable coins as Synths have features that distinguish it from the former. Instead, Synthetix is based on a collateralised system where SNX is locked up as collateral for a wide range of synthetic assets (the ‘debt’ in this case) to be created.
Synths have the attributes of ERC20 tokens. Hence, a user can therefore deposit them on platforms like Uniswap or other DEXes based on Ethereum.
Getting started with synth and SNX token; You can get started by exchanging your Ethereum for Synths on Kwenta- an exchange powered by the Synthetix platform. SNX token obtained from exchanges like Uniswap is another option. These tokens can be staked using the Mintr Dapp to create your desired Synths
Users can receive more tokens in the form of rewards by locking up their SNX tokens as explained below.
SNX can be staked and rewards can be earned by users who have their SNX tokens locked up in the protocol. This incentive associated with staking SNX is said to be the probable reason a substantial amount of the total SNX supply still remains locked up in the protocol. The system distributes staking rewards to eligible users automatically. Recall that users also have the chance of creating their desired Synths upon staking SNX.
Before its dissolution in June 2020, the Synthetix foundation- an Australian-based non-profit- governed Synthetix. After it was dissolved, three Decentralised Autonomous Organisations (DAOs) assumed governance of the Synthetix project. These DAOs guarantees SNX token holders to vote, as well as decide the operations and future of the protocol.
Upgrade of the Synthetix protocol and smart contracts is governed by the protocolDAO. On the other hand, the funding of contributors to the network’s development and funding of proposals for public goods is governed by synthetixDAO and grantsDAO respectively.
Lastly, while trading stocks, commodities, precious metals, and other assets using traditional methods may have limitations, crypto enthusiasts can now take advantage of the inherent possibilities that DeFi provides by using the Synthetix platform to trade cryptocurrencies and gain exposure to the performance of those assets.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.