Synthetix DeFi project

synthetix-defi

Synthetix DeFi is a derivatives protocol backed by a native token SNX. In order to mint new derivatives – called Synths – users must stake at least 750% of the Synths value in SNX. Maintaining this ratio – referred to as a cRatio – allows users to earn native inflation along with a pro-rata portion of trading fees from the Synthetix Exchange.

The best place to interact with the Synthetix Network is Mintr, where you can mint and burn Synths, collect fees, and more.

Synthetix Abstract

Synthetix is a decentralised synthetic asset issuance protocol built on Ethereum. These synthetic assets are collateralized by the Synthetix Network Token (SNX token) which when locked in the contract enables the issuance of synthetic assets (Synths). This pooled collateral model enables users to perform conversions between Synths directly with the smart contract, avoiding the need for counterparties. This mechanism solves the liquidity and slippage issues experienced by DEX’s. Synthetix DeFi currently supports synthetic fiat currencies, cryptocurrencies (long and short) and commodities. SNX holders are incentivised to stake their tokens as they are paid a pro-rata portion of the fees generated through activity on Synthetix.Exchange, based on their contribution to the network. It is the right to participate in the network and capture fees generated from Synth exchanges, from which the value of the SNX token is derived. Trading on Synthetix.Exchange does not require the trader to hold SNX.

How SNX backs Synths

All Synths are backed by SNX tokens. Synths are minted when SNX holders stake their SNX as collateral using Mintr, a decentralised application for interacting with the Synthetix DeFi contracts. Synths are currently backed by a 750% collateralisation ratio, although this may be raised or lowered in the future through community governance mechanisms. SNX stakers incur debt when they mint Synths, and to exit the system (i.e. unlock their SNX) they must pay back this debt by burning Synths.

Synthetix is also currently trialling Ether as an alternative form of collateral. This means traders can borrow Synths against their ETH and begin trading immediately, rather than needing to sell their ETH. Staking ETH requires a collateralisation ratio of 150% and creates a debt denominated in ETH, so ETH stakers mint sETH rather than sUSD and do not participate in the ‘pooled debt’ aspect of the system. In this model, ETH stakers do not receive fees or rewards as they take no risk for the debt pool.

Why SNX holders stake

SNX token holders are incentivised to stake their tokens and mint Synths in several ways. Firstly, there are exchange rewards. These are generated whenever someone exchanges one Synth to another (i.e. on Synthetix.Exchange). Each trade generates an exchange fee that is sent to a fee pool, available for SNX stakers to claim their proportion each week. This fee is between 10-100 bps (0.1% – 1%, though typically 0.3%), and will be displayed during any trade on Synthetix.Exchange. The other incentive for SNX holders to stake/mint is SNX staking rewards, which comes from the protocol’s inflationary monetary policy. From March 2019 to August 2023, the total SNX supply will increase from 100,000,000 to 260,263,816, with a weekly decay rate of 1.25% (from December 2019). From September 2023, there will be an annual 2.5% terminal inflation for perpetuity. These SNX tokens are distributed to SNX stakers weekly on a pro-rata basis provided their collateralisation ratio does not fall below the target threshold.

Minting, burning, and the C-Ratio

The mechanisms above ensure SNX stakers are incentivised to maintain their Collateralisation Ratio (C-Ratio) at the optimal rate (currently 750%). This ensures Synths are backed by sufficient collateral to absorb large price shocks. If the value of SNX or Synths fluctuate, each staker’s C Ratio will fluctuate. If it falls below 750% (although there is a small buffer allowing for minor fluctuations), they will be unable to claim fees until they restore their ratio. They adjust their ratio by either minting Synths if their ratio is above 750%, or burning Synths if their ratio is below 750%.

Stakers, debt, and pooled counterparties

SNX token stakers incur a ‘debt’ when they mint Synths. This debt can increase or decrease independent of their original minted value, based on the exchange rates and supply of Synths within the network. For example, if 100% of the Synths in the system were synthetic Bitcoin (sBTC), which halved in price, the debt in the system would halve, and each staker’s debt would also halve. This means in another scenario, where only half the Synths across the system were sBTC, and BTC doubled in price, the system’s total debt—and each staker’s debt—would increase by one quarter. In this way, SNX stakers act as a pooled counterparty to all Synth exchanges; stakers take on the risk of the overall debt in the system. They have the option of hedging this risk by taking positions external to the system. By incurring this risk and enabling trading on Synthetix.Exchange stakers earn a right to fees generated by the system.

Synths DeFi are tokens that provide exposure to assets such as gold, Bitcoin, U.S. Dollars, TESLA (coming soon), and AAPL (coming soon) within the Ethereum blockchain.

Synthetix DeFi is a decentralised synthetic asset issuance protocol built on Ethereum. These synthetic assets are collateralized by the Synthetix Network Token (SNX) which when locked in the contract enables the issuance of synthetic assets (Synths). This pooled collateral model enables users to perform conversions between Synths directly with the smart contract, avoiding the need for counterparties. This mechanism solves the liquidity and slippage issues experienced by DEX’s. Synthetix currently supports synthetic fiat currencies, cryptocurrencies (long and short) and commodities. SNX holders are incentivised to stake their tokens as they are paid a pro-rata portion of the fees generated through activity on Synthetix.Exchange, based on their contribution to the network. It is the right to participate in the network and capture fees generated from Synth exchanges, from which the value of the SNX token is derived. Trading on Synthetix.Exchange does not require the trader to hold SNX.

SNX as collateral. How SNX backs Synths

All Synths are backed by SNX tokens. Synths are minted when SNX holders stake their SNX as collateral using Mintr, a decentralised application for interacting with the Synthetix contracts. Synths are currently backed by a 750% collateralisation ratio, although this may be raised or lowered in the future through community governance mechanisms. SNX stakers incur debt when they mint Synths, and to exit the system (i.e. unlock their SNX) they must pay back this debt by burning Synths.

Synthetix is also currently trialling Ether as an alternative form of collateral. This means traders can borrow Synths against their ETH and begin trading immediately, rather than needing to sell their ETH. Staking ETH requires a collateralisation ratio of 150% and creates a debt denominated in ETH, so ETH stakers mint sETH rather than sUSD and do not participate in the ‘pooled debt’ aspect of the system. In this model, ETH stakers do not receive fees or rewards as they take no risk for the debt pool.

Why SNX holders stake

SNX holders are incentivised to stake their tokens and mint Synths in several ways. Firstly, there are exchange rewards. These are generated whenever someone exchanges one Synth to another (i.e. on Synthetix.Exchange). Each trade generates an exchange fee that is sent to a fee pool, available for SNX stakers to claim their proportion each week. This fee is between 10-100 bps (0.1% – 1%, though typically 0.3%), and will be displayed during any trade on Synthetix.Exchange. The other incentive for SNX holders to stake/mint is SNX staking rewards, which comes from the protocol’s inflationary monetary policy. From March 2019 to August 2023, the total SNX supply will increase from 100,000,000 to 260,263,816, with a weekly decay rate of 1.25% (from December 2019). From September 2023, there will be an annual 2.5% terminal inflation for perpetuity. These SNX tokens are distributed to SNX stakers weekly on a pro-rata basis provided their collateralisation ratio does not fall below the target threshold.

Minting, burning, and the C-Ratio

The mechanisms above ensure SNX stakers are incentivised to maintain their Collateralisation Ratio (C-Ratio) at the optimal rate (currently 750%). This ensures Synths are backed by sufficient collateral to absorb large price shocks. If the value of SNX or Synths fluctuate, each staker’s C Ratio will fluctuate. If it falls below 750% (although there is a small buffer allowing for minor fluctuations), they will be unable to claim fees until they restore their ratio. They adjust their ratio by either minting Synths if their ratio is above 750%, or burning Synths if their ratio is below 750%.

Stakers, debt, and pooled counterparties

SNX stakers incur a ‘debt’ when they mint Synths. This debt can increase or decrease independent of their original minted value, based on the exchange rates and supply of Synths within the network. For example, if 100% of the Synths in the system were synthetic Bitcoin (sBTC), which halved in price, the debt in the system would halve, and each staker’s debt would also halve. This means in another scenario, where only half the Synths across the system were sBTC, and BTC doubled in price, the system’s total debt—and each staker’s debt—would increase by one quarter. In this way, SNX stakers act as a pooled counterparty to all Synth exchanges; stakers take on the risk of the overall debt in the system. They have the option of hedging this risk by taking positions external to the system. By incurring this risk and enabling trading on Synthetix.Exchange stakers earn a right to fees generated by the system.

 

 

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