A beginner's guide to Synthetix (SNX), the derivatives liquidity protocol allowing you to create and trade synthetic assets.
Synthetix, also known as SNX, is a decentralised finance (DeFi) protocol that allows you to create and trade synthetic assets.
These synthetic assets, also known as "synths," are digital tokens that track the price of real-world assets such as:
- Fiat currencies,
- Commodities
- Stocks
- Other cryptocurrencies
The Synthetix protocol operates on the Ethereum blockchain, benefiting from the network’s security and transparency.
While the protocol's native token, SNX, is used as collateral for creating synths as well as to govern the protocol through a decentralised governance system.
In essence, Synthetix allows you to gain exposure to a wide range of assets without actually owning them, making it a powerful tool for hedging and speculation.
Introduction to Synthetix
The Synthetix project was started in 2017 by Kain Warwick, who is also the founder of Blueshyft, an Australian payment gateway for digital assets.
Warwick, who has been involved in the blockchain industry since 2012, saw the potential for creating synthetic assets on the blockchain and wanted to create a platform that would make it easy for anyone to do so.
Synthetix was originally launched as "Havven" in 2018, but was later rebranded as Synthetix to better reflect its focus on synthetic assets.
The platform's goal is to enable anyone, anywhere to gain exposure to a wide range of assets, without the need for intermediaries.
One of the main motivations behind the creation of Synthetix was to address some of the limitations of traditional financial systems.
Limitations such as high fees, the general lack of transparency and limited access for those in certain parts of the world.
By taking advantage of blockchain/smart contract tech, Synthetix aims to create a more transparent and accessible financial system that is not controlled by any single central authority.
Put simply, Synthetix is a decentralised finance protocol that enables the creation and trading of synthetic assets on the Ethereum blockchain.
From here, our Synthetix guide will delve deeper into how the protocol works, its benefits and how you can use it to gain exposure to a wide range of assets without actually owning them.
What are synthetic assets in crypto?
Synthetic assets are a type of financial instrument that mimics the value and performance of real-world assets.
When we say real-world assets, think stocks, commodities and other cryptocurrencies, without actually owning them.
These assets are created through the use of smart contracts on the blockchain and are designed to provide you with exposure to a wide range of assets and markets.
As we’ve mentioned above, Synthetix itself is a decentralised platform that specialises in creating synthetic assets.
Using its unique platform, Synthetix enables you to trade a wide range of synthetic assets, such as synthetic gold (sXAU), synthetic Bitcoin (sBTC) and synthetic Tesla (sTSLA) among others.
Each synthetic asset on the Synthetix platform is created through the use of a collateralised debt position (CDP).
This means that you can stake SNX, the native governance token of the Synthetix platform, in order to mint synthetic assets.
The value of each synthetic asset is then determined by a blockchain oracle from Chainlink, which provides accurate pricing information for the underlying asset.
For example, let's say that you want to gain exposure to the price of gold without actually owning physical gold.
They can use the Synthetix platform to mint sXAU, which is a synthetic asset that tracks the value of gold.
You would stake SNX as collateral to mint sXAU, and the value of sXAU would be determined by the price of gold as provided by the price oracle.
How does Synthetix work?
Synthetix works on the Ethereum blockchain.
The protocol uses smart contracts, which are self-executing programs that automatically enforce the rules of the system, to create and manage the synths.
Synthetix uses a modified version of Proof of Stake called "Mintr" that is specific to the protocol.
Validators, who are required to hold SNX tokens as collateral, can stake their tokens to earn rewards and help secure the network.
On the DeFi side, Synthetix allows you to create and trade synthetic assets, or synths, which track the price of real-world assets.
To create a synth, you must first lock up a certain amount of SNX tokens as collateral.
The amount of collateral required depends on the type of synth being created and the current market conditions.
Once the collateral is locked up, you can then mint synths, which can be traded on various decentralised exchanges (DEXs) such as Uniswap (UNI) and Curve.
The value of the synths is derived from the value of the underlying asset they track and the supply of synths is determined by the amount of collateral locked up in the protocol.
You can also earn rewards by providing liquidity to the Synthetix protocol, either by staking your SNX tokens or by providing liquidity to the various synths on DEXs.
In exchange for providing liquidity, you earn a portion of the trading fees generated by the protocol.
What is SNX crypto used for?
SNX is the native token of the Synthetix protocol and has several use cases within the ecosystem.
Firstly, SNX is used as collateral to create and trade synthetic assets, or synths, on the platform.
You must hold a certain amount of SNX tokens as collateral in order to mint synths.
The amount of SNX required as collateral depends on the type of synth being created and the current market conditions.
Secondly, SNX is used for governance of the Synthetix protocol.
SNX holders have the ability to propose and vote on changes to the protocol, such as adding new synths, adjusting the collateralisation ratio and changing the incentive structure.
Thirdly, SNX is used to incentivise you to participate in the Synthetix ecosystem.
Users who stake their SNX tokens to help secure the network or provide liquidity to the various synths on DEXs are rewarded with SNX tokens.
These rewards are funded by the inflation of the SNX token supply.
Finally, SNX is also used for trading on various cryptocurrency exchanges.
As the Synthetix protocol gains more adoption and usage, the speculative demand for SNX may increase, which could potentially lead to an increase in its value.
As you can see, SNX is a key component of the Synthetix ecosystem and plays an important role in enabling the creation and trading of synthetic assets on the Ethereum blockchain.
Synthetix pros and cons
Synthetix has its fair share of advantages and disadvantages.
Let’s now take a look at some of the pros and cons.
Pros of Synthetix
- Access to a wide range of assets: Synthetix allows you to gain exposure to a wide range of assets, including stocks, commodities, and cryptocurrencies, without actually owning them.
- Decentralised: Synthetix is a decentralised platform, which means it is not controlled by any central authority or organisation. This can help ensure the security and transparency of the platform.
- Efficient trading: Trading on Synthetix is fast and efficient, with low fees and no slippage, thanks to the use of smart contracts and decentralised exchanges.
- Incentives for participation: Users who participate in the Synthetix ecosystem by staking their SNX tokens or providing liquidity can earn rewards, which can help incentivize participation and strengthen the network.
- Governance by community: Synthetix is governed by its community of SNX holders, which means that decisions about the protocol are made democratically and with the best interests of the community in mind.
Cons of Synthetix
- Technical complexity: Synthetix can be complex to use, especially for those who are new to the cryptocurrency and DeFi space.
- Volatility: The value of synths can be highly volatile, which means that you may experience significant gains or losses depending on market conditions.
- Limited liquidity: Synthetix is still a relatively new platform, which means that there may be limited liquidity for certain synths, especially those that are less popular.
- Regulatory uncertainty: The regulatory landscape around DeFi and cryptocurrencies is still uncertain in many jurisdictions, which could potentially impact the viability of the Synthetix platform.
- Reliance on Ethereum: Synthetix is built on the Ethereum blockchain, which means that it is subject to the limitations and scalability issues of the Ethereum network.
In summary, Synthetix has several attractive features.
But whether the pros outweigh the cons ultimately depends on your risk tolerance and investment goals.
Synthetix (SNX) vs Mirror Protocol (MIR)
Synthetix and Mirror Protocol are two leading decentralised finance (DeFi) projects that offer synthetic asset trading on the Ethereum blockchain.
While both projects share similarities in terms of their core features and functions, there are also several key differences between them.
One key attribute that both Synthetix and Mirror Protocol share is that they allow you to trade a wide range of synthetic assets on a decentralised platform.
This enables you to gain exposure to various real-world assets, such as stocks, commodities and cryptocurrencies, without actually owning them.
Both platforms also have their own governance tokens (SNX for Synthetix and MIR for Mirror Protocol), that can be staked to earn rewards and participate in the decision-making process.
Another similarity between Synthetix and Mirror Protocol is that they both utilise a unique consensus mechanism to maintain the integrity of their platform.
Synthetix uses a system called "staking" to ensure that all transactions on the platform are legitimate and secure, while Mirror Protocol uses a "price oracle" system to provide accurate pricing information for synthetic assets.
However, there are also several key differences between Synthetix and Mirror Protocol.
For example, Synthetix has a larger community and user base, and it offers a wider range of synthetic assets to trade.
Mirror Protocol, on the other hand, has a simpler user interface and is more accessible for beginners.
In terms of governance, Synthetix has a more complex governance structure, with multiple layers of decision-making and a larger community of stakeholders.
Mirror Protocol, on the other hand, has a more streamlined governance process, with a smaller community of stakeholders and more centralised decision-making.
In making a final comparison, both Synthetix and Mirror Protocol are innovative DeFi projects that offer unique features and benefits.
While there are similarities between the two platforms, they also have their own distinct strengths and weaknesses.
We’d encourage you to carefully consider your options before choosing which platform to use for synthetic asset trading.
Should I buy Synthetix (SNX) crypto in 2023?
As you have read in this guide, Synthetix is a unique DeFi protocol that allows you to trade a wide range of synthetic assets on the Ethereum blockchain.
Its decentralised structure, efficient trading, and incentives for participation make it an attractive platform for both traders and investors.
Furthermore, Synthetix has been gaining traction in the cryptocurrency and DeFi space, with an increasing number of users and partnerships with other platforms and projects.
The team behind Synthetix is also constantly working to improve and expand the platform, which could potentially lead to further growth and adoption in the future.
Our opinion is that Synthetix has a bright future ahead.
Its innovative approach to synthetic asset trading on the Ethereum blockchain could potentially make it a game-changer in the DeFi space.
If you are interested in investing in Synthetix, now may be a good time to do so.
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