Synthetix: The #1 Decentralized Deep Liquidity Provider for Synthetic Assets


For anyone not familiar, what is Synthetix?

Synthetix is a decentralized finance protocol that provides deep liquidity for synthetic assets on the Ethereum blockchain. This enables other protocols to build fully decentralized and composable financial dapps for price exposure to spot and perps cryptocurrencies, commodities like gold and silver, forex, and eventually a wide range of exotic financials. From this, Synthetix powers an extensive ecosystem of protocols built on top of it including:

  • Kwenta: Perpetual futures
  • Lyra: Options AMM
  • Thales: Parimutuel options
  • Overtime Markets: Sports betting
  • Polynomial Finance: Structured product vaults
  • dHedge: Decentralized hedge funds
  • 1inch and other aggregators: Atomic Swaps

If you want to learn more about Kain, the founder, who is one of the most influential voices in crypto and defi then check this out.

What is the use case for the SNX token?

The SNX token provides collateral for the Synthetix platform, enabling users to mint sUSD to use within the ecosystem and on other DeFi protocols like Aave, Curve, etc. By staking SNX users earn a proportion of weekly fees generated by the exchange and any inflationary rewards. Stakers also have the ability to vote in quarterly elections for various councils that comprise the Synthetix DAO.

How much can SNX stakers earn?

Stakers receive two kinds of rewards for staking SNX: sUSD fees generated from traders interacting with Synthetix ecosystem protocols (Kwenta Futures, Lyra options, Curve cross-asset swaps, etc) and SNX inflationary rewards (for now).

Currently, the annual percentage yield for stakers from SNX rewards and sUSD fees is around 67%, with an average APY of ~10% coming directly from fees. Synthetix is one of the only DeFi protocols where 100% fees go directly to stakers.

What is SNX v3?

Synthetix V3 aims to accomplish what Synthetix set out to do many years ago – transforming the protocol into a permissionless derivatives platform. Below is the high level long-term vision for V3:

  1. V3 aims to solve one of DeFi’s biggest problems for new protocols: The cold start liquidity problem. New protocols can’t attract liquidity to gain users, and users don’t have enough liquidity to use the protocol. Protocols resort to giving out large amounts of tokens to grow liquidity.
    1. These incentives don’t work in the long term, which is where Synthetix comes in.
    2. Protocols will use Synthetix to grow liquidity. Spin up whatever derivative your protocol is building, then lobby for stakers to direct capital to it.
  1. Synthetix V3 is a complete rebuild of the protocol from the ground up. Many DeFi architecture standards weren’t standards when Synthetix was built. This rebuild will set Synthetix up with a much more efficient architecture to develop novel DeFi applications on top of. Synthetix will become a protocol for protocols. Anyone will be able to build on top of Synthetix and put its deep liquidity to use for any sort of derivative they’re trying to build.
  1. Why will builders love V3:
    1. Create a pool to support (nearly) any financial derivative you want to build
    2. From traditional financial markets to more exotic markets such as no-loss lotteries or even wholly separate protocols
    3. Current (perceived) competitors could source and route liquidity through Synthetix to increase markets
    4. Solves the Cold Start liquidity problem – simplifying the provisioning of liquidity for early markets
    5. Integrating will take days, not weeks

Synthetix V3 builds on years of research and development and will transform the protocol into a permissionless derivatives platform. Granted, Synthetix V3 hasn’t been approved by governance yet. It continues to evolve based on governance and community input. The Synthetix Improvement Proposals (SIPs) that define V3 can be found here.

It was recently proposed to cap SNX emissions, what was the logic behind that?

SNX reward inflation was initially intended to bootstrap the network. However Kain, Synthetix’ founder who submitted the SIP for the change, believes it’s no longer necessary as Synthetix can generate sustainable fee yields from atomic swaps while maintaining a healthy level of staked SNX to backstop the liquidity of sUSD.

A rise in fee revenue has been a result of a combination of more users of our perps product through as well as DeFi protocols 1inch and Curve starting to use the Synthetix platform for atomic swaps. These two catalysts have vaulted Synthetix into the top fee generating protocols as tracked by

What are the pros and cons of synthetic assets?

Synthetic assets, and the basis on which Synthetix is built allows for the creation of almost any financial tool or market on-chain. All you need is a reliable price feed. This enables immediate, deep liquidity with minimal slippage when trading, without having to build up liquidity in each new market over time.  

The drawback of this system is that latency from price feeds opens up a vector of attack from HFTs that will attempt to arbitrage the price update from the oracle, resulting in higher fees passed onto traders for some markets.

What backs the Synthetic assets?

Synthetix has an overcollateralized system with each synthetic asset collateralized by more value than it represents to help ensure a robust, stable protocol. Synths are created by users staking SNX as collateral, taking loans against ETH, or wrapping ETH or LUSD, and minting a sUSD against it. At a given time roughly 30% of the network debt is backed by ETH and LUSD. Each Synth is effectively debt against the posted collateral. Each staker’s debt position needs to be maintained at a certain collateralization ratio, which is determined by Synthetix governance (currently 400%). This helps make sure Synths are sufficiently collateralized and there is no deficit in the system, protecting both the system and stakers even during volatile bear market conditions. Stakers need to manually manage their ratio by minting and burning each week to ensure they can continue to earn staking rewards.

Who are some of your biggest partners and how do they contribute to your success?

  1. Kwenta is a decentralized derivatives trading platform on Optimism, offering real-world and on-chain synthetic assets using the power of Synthetix. It was initially before being spun out into its own independent protocol. Despite being in beta, Kwenta perps have generated $3.85 billion USD in trading volume through organic use with no trading incentives. Synthetix Stakers have received over $13.5 million in trading fees from Kwenta this year.
  1. Lyra is an options automated market maker (AMM) that allows traders to buy and sell options on cryptocurrencies (currently $ETH and $BTC) against a pool of liquidity. Synthetix stakers receive sUSD fees generated from traders interacting with Lyra, and Lyra utilises Synthetix in three different ways:
    1. As a settlement currency (All options are quoted, paid for, and settled with Synthetic USD or sUSD).
    2. As collateral for calls (The AMM collateralizes the calls it sells with the relevant synth. For example, when the AMM sells an sETH call it will purchase 1 sETH from Synthetix. On expiry (or when the option is sold) the AMM will sell the sETH for sUSD and allow the option holder to settle).
    3. For delta hedging (The protocol aims to keep the exposure of liquidity providers close to delta-neutral. It does this either by longing or short selling the underlying asset on Synthetix. For example, if the AMM is long 500 sETH deltas, it may short sell 500 sETH using Synthetix’s short-selling functionality).
  1. Curve: Curve’s synth pools enable deep liquidity for like-asset trades and provide the foundation for atomic swaps, enabling traders to efficiently move in and out of synths through ETH/sETH and USDC/sUSD pairs. From this, aggregators like 1inch, Paraswap and 0x can tap into synth exchanges to allow for low-slippage trades between stables and ETH by routing users through Synthetix and Curve pools. For example, a user looking to make a large trade from USDC to ETH might face significant slippage. But by using atomic swaps they will be routed like so: USDC > sUSD > sETH > ETH.
  1. Chainlink: Accurate and secure price feeds are critical for the DeFi ecosystem. Chainlink is the most trusted Oracle network in Defi, which is why Synthetix has relied on them to provide this critical infrastructure since 2019. With their launch of CCIP later in the year, Chainlink will enable the next phase of Synthetix as a cross-chain protocol.

What comes next for Synthetix?

Perpetual futures V2: Users can look forward to improvements to the underlying architecture, a more efficient funding rate algorithm, off-chain signing mechanism for price updates and a modified price function.

Staking V2: New designs, UI components and tooling to make the staking experience simpler and more streamlined – expecting to go live in a few weeks

V3: The completely re-architected system described earlier that, we believe, will lead to a massive increase in protocols tapping into the network for liquidity. V3 will be built for cross-chain natively. Focused on ETH mainnet and Optimism to start.

V3GM: The new Synthetix governance module. V3GM is a flexible architecture that allows for both on-chain governance as well as elections without requiring direct token voting or poorly conceived vote delegation systems. 

If you want to learn more about Synthetix follow us on Twitter or join our Discord.

Synthetix: The #1 Decentralized Deep Liquidity Provider for Synthetic Assets - - 2024

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