What is Synthetix (SNX)?
Synthetix is software that allows users to coin new cryptoactives that mimic real assets (like the US dollar) and cryptocurrencies (like Bitcoin).
One of an emerging number of decentralized finance cryptocurrencies (DeFi), Synthetix allows this service by code only, without the need for a financial intermediary.
Rather, Synthetix is simply a collection of smart contracts running on the Ethereum blockchain.
This means Synthetix users do not need to trust a particular institution or person to manage the cryptoactives they create. They just need to trust that their code will run as written.
Synthetix is able to generate these new assets using a process called collateralization.
To secure an asset in Synthetix, users must purchase their SNX cryptocurrency, which once entered into a special contract can be used to generate these new assets (called synthesizers).
For example, a synthesizer designed to mimic the value of the US dollar is called sUSD. Another synthesizer, which mimics the Bitcoin price, is called sBTC.
Still, synthesizers can be created for any asset, whether it's a commodity like gold or silver, or a fiat currency like the euro or Korean won.
Synthesizers are then able to track the value of other assets using special data feeds, called oracles, which allow users to gain exposure to profit or loss in those markets.
As of August 2020, Synthetix was among the DeFi projects with the highest value locked into its contracts, with more than $800 million locked into its contracts according to available data.
Who Created Synthetix?
Founded by Kain Warwick, Synthetix started out as a protocol called Havven, which raised about $30 million by selling 60 million HAV tokens in 2018.
Havven's goal was to create cryptocurrencies that mimic the performance of fiat currencies like the US dollar or the euro on various blockchains, including Ethereum and EOS.
In late 2018, Havven rebranded to Synthetix, at the time expanding its goals to include creating synthetic assets for cryptocurrencies and commodities. In 2019, Synthetix raised $3,9 million from the sale of SNX tokens to Framework Ventures.
Synthetix was initially managed by a non-profit foundation, but was dissolved in June 2020 and replaced by three autonomous decentralized organizations or DAOs.
These DAOs are the mechanisms by which holders of the SNX cryptocurrency can now vote on protocol changes and make decisions about its future.
Why Does Synthetix (SNX) Have Value?
SNX is valuable because it is needed to generate new synthesizers on the Synthetix platform.
In addition, when a user blocks SNX, he also becomes eligible to receive platform-wide fees when any synthesizer is traded. Fees are typically 0,3% of an exchange.
In the example above, assume that $1.000 of sUSD was exchanged for sBTC.
Assuming the exchange rate was 0,3%, $3 would apply to users with SNX blocked on the system. These fees are distributed weekly. As of August 2020, approximately $9,3 million in exchange rates have been paid since the system's launch in 2018.
Synthetix Price (SNX)
Synthetix (SNX) Staking
Users who block SNX are also eligible to receive “stake rewards”, additional SNX tokens that the system distributes to users who block their tokens to create synthesizers.
The amount of additional tokens that can be distributed via staking is determined by the rules of the software — the total amount of SNX is projected to increase from 100 million units in 2019 to about 260 million units by 2023.
These stake rewards mean that users who block SNX tokens will receive more tokens, giving them an incentive to support the network.
How Does Synthetix Work?
Synthetix uses two cryptocurrencies to offer its synthetic asset minting service. The first is its native cryptocurrency, SNX. The seconds are synthesizers, which can mimic any asset.
To generate synthesizers: a user must purchase SNX and deposit it on the Synthetix platform. In exchange, Synthetix creates a new synth token of the user's choice.
The value of SNX locked would then need to remain at or above 750% of the value of the synthesizer created, as per the rules of the software.
Let's say a user wants to mint a synthetic US dollar. If the user deposits $1.000 in SNX cryptocurrency, he will receive $133 in sUSD.
As SNX is a cryptocurrency, its value is determined by the open market. As a result, the amount of synthesizers that may be in circulation can change as the price of SNX goes up or down.
For example, if the SNX price increases, the system will release SNX tokens that are not needed to guarantee synths that were created previously. These SNX tokens can be locked back into the platform to create new synthesizers.
For example, suppose the price of SNX has doubled. This means that half of the original $1.000 of the locked SNX could be released. User can use this SNX to create $500 more sUSD synthesizers.
This means that the higher the price of SNX, the more synths you can create.
Another interesting feature of Synthetix is how it prices synths using price feeds called oracles.
When a switch occurs between synths, the first synth, say sUSD from our previous example, is first “burned out” or destroyed.
The synthesizer being traded for, sBTC, is calculated based on a price feed of an oracle. The Synthetix platform would then create the correct amount of sBTC for the user.
The Synthetix team argues that an advantage of this system is that it does not require large order quantities, or a central exchange, to convert between currencies.
Users can trade anytime they wish, at the stated price, without waiting for correspondence.
Why Should I Use Synthetix (SNX)?
You might want to use SNX if you believe that synthetic assets and decentralized exchanges will have greater adoption in cryptocurrency.
Also, when you buy and stake SNX, you gain additional benefits like earning a percentage of the newly created SNX and network trading fees.
The variety of synthesizers available can also make the platform attractive to investors. Therefore, the SNX token is useful if you believe that cryptographic asset investors will continue to use Synthetix as a tool.
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