For investors, blockchain technology has opened up an entire world of new asset classes. At the same time, this opening up has happened globally – a stark contrast to traditional stock markets that restrict users based on where they live.
One of the biggest shortcomings with investing using blockchain tech is that investments have previously been relegated to digital currencies and tokens only.
Synthetix is changing that. By using a complex system of synthetic derivatives, Synthetix will eventually allow any blockchain investor to get exposure to almost any asset type imaginable – gold, crude oil, soybeans, fiat currencies and more.
A Simplified Introduction To Synthetix
When it comes to the latest wave of DeFi platforms and assets, Synthetix is easily one of the most complex, abstract and difficult to understand for beginners. It’s especially difficult to those new to derivatives and synthetic assets.
Because of this we’re going to be taking a very high level approach to explaining Synthetix. When you’re ready to dig into all the technical details, we recommend you read through the official white paper (PDF).
Synthetix is an Ethereum-based DeFi platform that will allow investors to get price exposure to any type of asset that has price tracking. For example, in the future you could invest in Starbucks stock, SBUX, by purchasing a synthetic SBUX stock token – sSBUX, which can be bought, sold and minted through the Synthetix platform.
The price of the token will track the price of the real SBUX stock. But owning synthetic SBUX as a token doesn’t mean you actually own a share of the stock. As such, you won’t be able to earn dividends if a stock offers them normally.
According to Synthetix, this idea can extend beyond stocks to commodities futures like corn or steel, other cryptocurrencies, fiat currencies (not just stable coins based on them), precious metals and more.
Currently, only fiat currencies, certain cryptocurrencies, and gold and silver are supported. The group behind Synthetix plans to eventually support any asset that has a price ticker. Also currently on offer are index assets that cover a combined basket of different cryptocurrencies.
In addition to trading synthetic derivatives (called “synths”), advanced users can also participate more directly in Synthetix by minting synths and staking their SNX tokens.
Minting and Staking With Synthetix
Synthetix runs on its own native Ethereum token, SNX. It has seen a massive upswing in price in the last few months. It is currently sitting at around $25 to $26 at publishing time.
If you hold SNX tokens, you can earn trading fees from the platform in proportion to the number of tokens you are staking. However, staking SNX is vastly different than other staking systems and comes with some substantial risks. In fact, staking SNX is a lot more like placing bets as opposed to just sitting back and collecting interest.
Here’s how it works. First, you’ll need to get some SNX tokens. They are available on most major exchanges. Next, you’ll need to mint them into a synthetic asset. Basically, it means you will use your SNX to create a synth that you believe will go up in value (or down in value if you are creating a short position via an inverse synth like iBTC).
To mint, you will need to have 750% of the value of what you want to mint in SNX tokens. For example, if you want to mint $100 Canadian Dollars into the synth sCAD, you would need the market equivalent of $750 CAD worth of SNX.
If your chosen asset’s price goes in the right direction, you’ll not only profit from the price change but you will also collect your portion of the platform’s trading fees. In addition to trading fees, the platform is currently under an inflationary policy. That means new tokens are being created and distributed to SNX holders that are minting. This rate of new token release will slow down in September of 2023.
Understanding Synthetix “Debt”
Now what happens if prices don’t move in your desired direction? This is where things get truly complicated. First we need to understand how Synthetix treats “debt”. When you mint and stake, you are taking on a portion of the platform’s total debt. If your assets do well, you will end up collecting money from people that bet on assets that didn’t do well. If you are on the losing end of this arrangement, you will end up owing money to the platform – kind of.
To make things more complicated, if you hold an asset that doesn’t move much, you could still end up owing to the platform pool. Let’s say you hold a stablecoin or a fiat currency, and most others on the platform are holding sBTC. If Bitcoin has a huge upward swing, you could be penalized for this and end up owing money. Conversely, if your asset doesn’t move but everyone else’s assets generally drop, you stand to gain a profit.
As mentioned above, the platform wants all of it’s synthetic assets to be over-collateralized to 750%. If your mint or stake falls below this ratio, you will no longer collect trading fees. In order to continue collecting fees again, you’ll need to either burn a portion of your minted tokens or add more SNX to your stake.
The official litepaper describes it this way:
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.”
If you’re ready to start minting and staking, head over to the official minting app Mintr at mintr.synthetix.io. All you need to get started is a compatible Ethereum wallet like Meta Mask, some ETH, and some SNX.
Who is Synthetix For?
Due to its high learning curve and abstract nature, Synthetix is definitely not for everyone. However, there is definitely a large group of people that could benefit from participating in Synthetix and in owning synth assets.
Currently if you want to open a short position and bet against a crypto like Bitcoin going up, it’s not easy. It usually requires accounts, contracts, brokers and more. But with a shorting synth asset like inverse Bitcoin – iBTC – shorting the coin becomes trivial. Just buy it and hold it.
Another group that may be interest in Synthetix is those wanting to get exposure to world stock markets or futures markets that may be locked out of them due to regional restrictions. For example, if you are based in China and want to get price exposure to Apple stock, buying some sAAPL when stock support launches on Synthetix could be exactly what you need.
As for who Synthetix isn’t for, that would include beginners, those looking for a simple staking experience, and those averse to a lot of risk. There are many other DeFi platforms and proof-of-stake cryptocurrencies that offer simple, reliable returns with far less risk than staking with Synthetix. But if you have a taste for risk or like making bets, staking on Synthetix could be a great choice.
Is staking with Synthetix too complicated, too risky, or just right? Let us know in the comments below.