The Ethereum and Optimistic Ethereum, Synthetix is a distributed asset issuance technology and decentralized finance (DeFi) initiative. Synthetix allows creation and exchange of a variety of synthetic, decentralized assets. This comprises a mixture of commodities, fiat currencies, and cryptocurrencies. Synthetix seeks to open up a decentralized, permissionless, and international crypto market.
To automate the creation, exchange, and management of synths, Synthetix uses smart contracts. Using the platform, users will be able to access a variety of assets directly without the use of middlemen in a decentralized and trustless manner.
The Synthetix Protocol
This is a series of smart contracts that, with the help of Synthetix Governance, provide liquidity to facilitate different financial derivative products.
Developed on Ethereum and Optimistic Ethereum, Synthetix is a decentralized liquidity provisioning system (a layer-two scaling solution built on Ethereum). Synthetix Network Token (SNX), which, when locked in a staking contract, facilitates the generation of synthetic assets, is used by stakers to collateralize synthetic assets and related products (synths). Users can execute conversions between synths directly through the smart contract using this pooled collateral paradigm, jettisoning the necessity for counterparties. This is aimed at solving the liquidity and slippage problems plaguing decentralized exchanges.
This pooled collateral concept currently allows Synthetix to support a wide range of products. Perpetual Futures and Spot Synths are some of these items. For integrators creating new financial derivatives, these instruments provide the foundational layer of liquidity. Traders don’t need to have the Synthetix token to transact within the Synthetix network.
Offerings
Spot Synths
Without possessing the underlying resource, synthetic assets give access to an asset. Several benefits result from this, including the expansion of the accessibility of some assets and censorship resistance. It also reduces friction when transferring between various assets.
Synthetix Futures
Synthetix Perps is a decentralized perpetual futures market with high liquidity and low trading costs that makes use of liquidity from the Synthetix loan pool.
Without possessing the underlying asset, users can trade perps to obtain exposure to a variety of assets. Users can prevent exposure to volatility in the value of their margin and simplify PnL and liquidation calculations by using sUSD as the denominator for each position’s margin, which can be minted and burned as necessary.
The SNX debt pool bears the risk of any market distortion as the counterparty to all orders. To encourage a neutral balance, a constant financing rate is paid from the heavier to the lighter side of the market. By allowing leveraged long and short exposure, perps enable a significantly expanded and capital-efficient trading experience.
Synths’ Architecture
Minting Synths
Via the Synthetix smart contract, SNX owners can create sUSD by locking their SNX as collateral. An SNX owner mints by following these steps:
The Synthetix contract verifies that the SNX staker can mint Synths against their SNX, hence their Collateralization Ratio must be less than the desired c-ratio.
To track the staker’s issued debt amount when issuing or burning USD, debt shares are granted to the staker.
The Synthetix contract directs the sUSD contract to issue the revised amount when the debt has been assigned to the staker. It adds it to the supply as a whole and places the freshly created sUSD in the user’s wallet.
Exchange
The processes that smart contracts take to conduct a Synth exchange (in this example, from sUSD to sBTC) are listed below:
Burn the source Coin (sUSD), which requires decreasing the sUSD balance at that wallet address and adjusting the sUSD supply.
Determine the conversion rate (i.e. the exchange rate, based on the price of each currency).
Charge an exchange fee and transmit the money to the fee pool in sUSD so that SNX stakeholders can collect it.
The destination Synth (sBTC) contract issues the remaining (after the fee), and the balance of the purse address is updated.
A new total supply of sBTC is available.
Claiming Fee
A fee is deducted and transferred to the fee pool for SNX stakers to claim whenever Synthetix liquidity is utilized to swap through the Synthetix contract. The staker’s SNX staking rewards, which provide them extra SNX for staking the SNX they already have, are claimed together with their fees. After a stakeholder asks to claim their fees, the smart contracts follow the following procedure:
The fee pool determines if fees are now available and whether the staker is qualified to earn payments.
The staker’s wallet address receives the fee payment in sUSD, and the fee pool’s balance is updated.
In addition, a pro-rata portion of the escrowed (inflationary)SNX from the SNX staking rewards contract is assigned to the wallet address.
Oracle
Oracles that push price feeds on-chain decide the value of all synthetic assets in the Synthetix system. An aggregate value is created for each asset using an algorithm and several sources.
The Synthetix Staking Interface
This is the online interface that makes it simple to use Synthetix Staking and other Synthetix products.
Staking is the sole method of generating liquidity for Synthetix products. Staking is a crucial component of the system that supports all of the Synthetix protocol’s products by locking collateral and maintaining a target c-ratio.
Users that stake SNX and mint sUSD incur debt equal to the amount of sUSD that must be burned to unstake their SNX. This debt, which makes up a fraction of all the debt on Synthetix, is expressed in sUSD and fluctuates in line with the availability of Synths and the value of their currencies. For instance, if half of Synthetix’s Synths were synthetic ether (sETH) and ether’s price doubled, both the total debt and each stakeholder’s debt would increase by one quarter.
Benefits of staking
In exchange for staking, stakers receive weekly incentives. There are two ways to receive these benefits. One comes from trading fees that are levied against traders. The other is inflationary rewards, which are recently created SNX coins kept in escrow for a year. During this escrow, escrow-locked SNX tokens are stakeable and offer additional benefits to stakers.
Because anybody can participate in Synthetix staking and contribute collateral, it differs significantly from existing DeFi protocols. Staked SNX makes it possible for protocols built on Synthetix to leverage its many benefits, including deep liquidity, minimal slippage, and extremely low trading fees.
Minting, burning and the C-ratio
These procedures guarantee that SNX stakeholders are incentivized to keep their Collateralization Ratio (C-Ratio) at the desired level. By doing so, it is made sure that the Synthetix protocol has enough collateral backing it to withstand significant price fluctuations. Every staker’s C Ratio will change based on the value of SNX. They won’t be able to claim fees until their goal c-ratio is restored if it drops below that level (with a tiny buffer to account for minor swings).
Synthetix Governance
Synthetix is governed by a representative council system. The Spartan, Treasury, Ambassador, and Grants Council are the four stakeholder-elected councils.
To support the decentralized nature of the Synthetix Protocol, several governing bodies and “artifacts” coexist. The Spartan Council, Treasury Council, Ambassador Council, and Grants Council are the major decentralised councils and DAOs. Synthetix Stakers elect each council.
The Synthetix Improvement Proposals (SIPs) and Synthetix Configuration Change Proposals (SCCPs), which effectively define proposed changes to the Synthetix Protocol, are two key documents used in the governance process. Synthetix Core Contributors, under the direction of the Core Contributor Committee, implement these improvements.
Synthetix Partners & Integrators
These are the protocols that have merged with Synthetix products and liquidity to create user-focused protocols for various use cases.
No user-focused front-ends that enable trading are run using the Synthetix Protocol. As a backend liquidity provisioning tool, it supports DeFi user-focused apps. There are more and more protocols that make use of this cash and pay stakers trading fees.
Some of these protocols are 1inch/Curve- Atomic Swap, Lyra-Options, Kwenta- Spot and Preps, Decentrex-Perps, and Polynomial- Option Vaults.
The Greater Synthetix Ecosystem
Other protocols have been developed independently of Synthetix or in close partnership with it. These protocols are strongly related to Synthetix even though they don’t directly integrate with its liquidity.
Synthetix Token (SNX)
The SNX token, which is used by the Synthetix Network, promotes cooperation and expansion. Staking and governance are SNX’s two main purposes.
Staking
SNX For collateralizing the network, stakers receive weekly payouts. There are two ways to receive these benefits. One comes from trading fees that are levied against traders. The other is inflationary rewards, which are recently created SNX coins kept in escrow for a year. During this escrow, escrow-locked SNX tokens are stakeable and offer additional benefits to stakers.
Governance
According to the amount of SNX that they have staked, Synthetix Stakers are given a certain percentage of debt ownership. Then, for all parties except the Treasury Council, their vote weight is divided by four. The Synthetix Governance Module, which is entirely on-chain, is used for voting.
Synthetix V3
The goal of Synthetix V3 is to complete the task that Synthetix began several years ago: converting the protocol into a permissionless derivatives platform.
The protocol has been entirely overhauled from scratch in Synthetix V3. When Synthetix was created, several DeFi architecture standards weren’t yet in existence. This rebuild will provide Synthetix with a significantly more effective architecture to create cutting-edge DeFi apps.
To be integrated into Synthetix V3 are permissionless asset creation, better control of credit for stakers (ability to choose what they and to use as collateral and “Liquidity as a Service ” – a liquidity service to build on to increase liquidity rapidly.
