Synthetix

  • Cryptoasset Report
  • December 10, 2019

Synthetix is a decentralized synthetic asset issuance protocol consisting of an Ethereum-based smart contract, an exchange, and a decentralized application (dApp) to facilitate smart contract interaction.

Overview

Synthetix is a decentralized synthetic asset issuance protocol consisting of an Ethereum-based smart contract, an exchange, and a dApp to facilitate smart contract interaction. The protocol facilitates the issuance of synthetic digital assets, pegged to real-world currencies, commodities, cryptoassets and market indices, to those who stake the project’s main, non-synthetic token, SNX, in Synthetix smart contracts. Such tokens seek to provide exposure to certain assets without the need to hold the asset itself; something which is particularly attractive to both retail and institutional-level participants in decentralized finance, as synthetic assets may provide enhanced liquidity and market access relative to their underlying assets. While these ‘Synths’ resemble synthetic assets used by many exchanges, the manners in which they are minted, burned and traded seeks to eliminate the slippage and liquidity issues often associated with such assets. The team behind Synthetix is based in Australia and led by Kain Warwick, founder of blueshyft, the largest cryptocurrency payment system in Australia.

Protocol Details

Architecturally, three core components comprise the Synthetix ecosystem: Synthetix smart contracts running on Ethereum, the Mintr dApp facilitating interactions with this smart contract, and Synthetix.Exchange, where users may exchange Synths for other Synths and/or digital assets. Further, there exist two classes of tokens in the Synthetix ecosystem. The first, ‘Synths,’ are a series of synthetic digital assets pegged to real-world assets, such as crypto and fiat currencies and commodities. The second, SNX tokens, are non-synthetic, ERC-20 tokens used to facilitate the issuance of Synths.

By staking SNX to a Synthetix smart contract via the Mintr dApp, an interface for interacting with the Synthetix smart contract, ‘stakers’ catalyze Synth issuance. Upon receipt of SNX, the smart contract mints new Synths and holds the SNX as collateral at a 750% ratio, though this figure is subject to change by future community governance mechanisms. As a result, the staker is effectively taking on debt, which is recorded in the system’s Debt Registry and denominated in Synthetix Drawing Rights (XDR), Synthetix’s chosen unit of account. Debt levels are dynamically assessed according to price feeds, causing the number of Synths owed by the staker to fluctuate with changing rates.

As the total SNX in the smart contracts must sufficiently collateralize all circulating Synths, the protocol employs two mechanisms to incentivize stakers to maintain a 750% collateralization ratio. First, stakers who maintain this ratio receive a portion of the 0.3% transaction fees taken from Synth-to-Synth transactions on Synthetix.Exchange on a weekly, pro-rata basis. Second, the protocol distributes to stakers SNX newly minted, as part of its inflationary monetary policy.

Likewise, as Synths trade on the open market, the protocol requires contingencies for maintaining the assets’ pegs; to do so, it incentivizes arbitrage. First, should a Synth’s price fall below that of its peg, arbitrage may increase demand and raise its price. That is, because users may send Synths back to the smart contract to regain their SNX at a fixed rate, it is profitable to purchase Synths on the open market and send them back to the contract, thus realizing a profit while driving the Synth’s price back up. Creating a Synth/ETH liquidity pool, from which users can exchange tokens at a fixed rate, allows for a second form of arbitrage. At present, rates are determined and published on-chain through decentralized Chainlink oracles.

Synthetix.Exchange is a decentralized exchange platform designed for the trading of SNX and Synths without the order books employed by most DEXs. That is, rather than a peer-to-peer system, Synthetix.Exchange allows users to trade directly against a contract that maintains constant adequate liquidity, thus theoretically reducing risks of slippage or lack of liquidity. Finally, when a user wishes to exit the Synthetix ecosystem, they simply burn the number of Synths equivalent to their current debt, algorithmically-determined by the protocol; staked SNX are then released back to the user, at which point they may be sold as any other ERC-20 token may be.

Synthetix spawned from the development of the now-defunct Havven, a stablecoin platform with a single asset, nUSD. The transition occurred in November of 2018, eight months after Havven’s token issuance and one month after Mintr was launched; open minting via the Synthetix smart contracts and trading on Synthetix.Exchange began the following month. Further, developers are exploring the possibility of staking ETH, rather than solely SNX, to collateralize Synths. Other proposed upgrades include Synth positions and lending protocols, as well as the addition of new Synths pegged to various assets.

In June of 2019, a malfunction in Synthetix’s oracle reporting protocol allowed a bot to earn $1B in nominal Synth profit in under an hour. In exchange for a comparatively meager bug bounty, the owner consented to a rollback and the funds were ultimately returned; however, the ease with which the action was reversed highlights that Synthetix is currently centralized in some respects and the inherent risk of such smart contracts.

Asset Details

SNX are ERC-20 tokens, fungible and freely tradeable across multiple exchanges. The staking of SNX powers the Synthetix ecosystem, as this is the only means of creating Synths. Thus, SNX represent an entry and exit point for the entire network. Further, SNX serves to reward stakers and incentivize adequate collateralization. The initial supply of SNX was 100,000,000, and inflation will eventually cause total supply to reach 245,312,500 in March of 2024. In February of 2018, Synthetix raised $30M through a public sale of SNX; in October, Synthetix sold 5 million SNX from its treasury to Framework Venture Partners, raising an additional $3.8M.

Synths are synthetic assets, which provide exposure to a given asset without the need to hold the asset itself, intended for use in cryptoasset trading and remittance purposes. While Synths are initially generated through staking, existing Synths are freely-tradable within the Synthetix ecosystem and may be purchased with Ether. These tokens are each pegged to a real-world asset which, in the Synthetix ecosystem, may be categorized as either cryptocurrencies, fiat currencies, commodities or inverse tokens. Inverse Synth tokens have prices negatively correlated with their underlying assets, allowing holders to ‘short’ the asset. The Synths currently available for minting and trading can be found on Synthetix.Exchange.