Synthetix: commodities, stocks and more on blockchain
Synthetix is a decentralized finance platform on the Ethereum blockchain with several functions that allow users to mint new crypto assets that mimic both real-world assets (like the USD) and crypto-assets (like Bitcoin).
First: It is a decentralized exchange or DEX. The benefit of a DEX is that users don't actually have to open an account with any institution to manage crypto assets they created. As everything is executed with smart contracts, all users have to do is to connect to the exchange with a compatible Ethereum wallet like MetaMask.
Secondly: Synthetix is also a synthetic asset issuer using a process called collateralization. To collateralize an asset on Synthetix, users must purchase its SNX cryptocurrency, which once locked in a special contract can be used to generate these new assets called Synths.
Synths are blockchain assets that are pegged to real-world assets like fiat currencies, cryptocurrencies, and commodities. The prices are tracked in real-time using Chainlink oracle data feeds, allowing investors to buy, sell and trade on these assets like the real thing, only without an institution. All Synths minted on the platform are denoted by an 's'. For example, Synth designed to mint the value of the USD is called sUSD. Another Synth that minted the Bitcoin price is called sBTC. Synths can be created for any asset, like commodity or fiat currency.
Synths like sAAPL give investors exposure to this real-world asset (Apple stock), but it won't give Synth investors the dividends that actual stockholders get. Users can choose to bet the other way and short prices with Synthetix assets known as Inverse Synths. So Inverse Synths like iBTC for example, rise in price when the actual price of BTC falls. Other Inverse Synths available on the Synthetix Exchange are iETH and iBNB.
Third: Synthetic also offers an incentive staking mechanism, which rewards users for staking SNX tokens to provide liquidity and stability to the ecosystem.
Synthetic coin (SNX) is the utility token of the Synthetix Ecosystem. Users purchase SNX tokens and lock them up as collateral to create Synths.
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 decentralized application for interacting with the Synthetix contracts. Synths are currently backed by a 750% collateralization 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 collateralization 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 incentivized 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 collateralization ratio does not fall below the target threshold.
Minting, burning, and the C-Ratio
The mechanisms above ensure SNX stakers are incentivized 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 fluctuates, 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.
SNX can be purchased in several big exchanges such as:
1 CoinBase is a platform to purchase SNX using a credit card or even your Bank Account. You only need to follow the steps and link your Bank Account or Credit Card for purchasing your first cryptocurrency. Use this link and you can get AUD 13.84 in free Bitcoin when you buy or sell AUD 138.41 or more.
2. Binance Exchange - you can purchase SNX on Binance using your mobile phone or desktop. You only need to follow the step as instructed. You can also receive a 25% discount on trading fees using Binance Coin (BNB) instead of cash. Use the link above for a bonus 10% discount.
3. Celsius is a platform that works and operates similar to a bank, where you can deposit and earn interest, or borrow against an asset to receive cash or coins. Interest rates may vary from 2% up to 10% or more, depending on how stable the coin is seen to be. As of when this article was written, interest paid on SNX by Celsius is 13.99% which is far more than a bank pays on your fiat cash. Join Celsius Network using the above link and earn $20 in BTC with your first deposit of $200 or more!
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