Abstract

“Synthetix is the backbone for derivatives trading in DeFi, allowing anyone, anywhere to gain on-chain exposure to a vast range of assets.” This is the first definition of Synthetix a user will see when first going to the crypto website. The first sentences of the Synthetix litepaper reads as follows: “Synthetix 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).” from the litepaper. To understand these definitions, we need to define and understand the key terms that make up these definitions.

Key Synthetix Definitions

DeFi

DeFi (decentralized finance) is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains, the most common being Ethereum.

SNX

SNX is the primary form of collateral backing the synthetic assets available in the Synthetix protocol. Its stakers are entitled to fees generated by Synth trades on Synthetix.Exchange; this is where the value from SNX token is derived from.

Synthetic assets (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. There are many types of synths, including forex, commodity, crypto, index, and inverse. Each synthetic asset is an ERC20 token which tracks the price of an external asset.

Forex

Forex Synths track the price of forex currencies via price feeds supplied by Chainlink’s oracle network of distributed node operators.

Commodity

Commodity Synths track the price of commodities via price feeds supplied by Chainlink’s oracle network of distributed node operators.

Crypto

Crypto Synths track the price of cryptocurrencies via price feeds currently supplied by a Synthetix oracle. Crypto Synths will soon be transitioned to use Chainlink’s oracle network.

Index

Index Synths track the price of indices via price feeds supplied by Chainlink’s oracle network of distributed node operators. These indices can either be available in off-chain finance, such as sNIKKEI, or they can be custom designed by the Synthetix community, such as sDEFI.

Inverse

iSynths inversely track the price of assets via price feeds supplied by either Synthetix’s oracle or Chainlink’s oracle network of distributed node operators. They allow traders to effectively take a short position, and are currently available for Crypto Synths and Index Synths. Each iSynth has three important points: an entry point, an upper limit, and a lower limit. Its entry point is the price at which it is entered into the system.

Background

Synthetix is a decentralized exchange (DEX) and a platform for synthetic assets. The protocol is designed in a way that exposes users to the underlying assets via synths, without having to hold the underlying asset. The platform allows users to autonomously trade and exchange synths. It also has a staking pool where holders can stake their SNX tokens and are rewarded with a share of the transaction fees on the Synthetix Exchange. The platform tracks the underlying assets using smart contract price delivery protocols called oracles.  . It also eliminates the need for third-party facilitators. SNX tokens are used as collateral for the synthetic assets that are minted. This means that whenever synths are issued, SNX tokens are locked up in a smart contract. Since launch, the protocol has transitioned to the Optimistic Ethereum mainnet to help reduce the gas fees on the network and lower oracle latency.

Figure 1: Example of how debt works in the Synthetix system

Classification

In the following lines, we classify Synthetix based on several aspects.

Substance

The substance of Synthetix is protocol, meaning the currency has fixed rules that are programmed and independent of the deliberation of people. The protocol of Synthetix is explained in more detail throughout the document.

Monetary Authority

SNX stakers create debt by minting Synths.

Carrier

The carrier is the SNX token, because this is what all synthetic assets are backed by. Without the SNX tokens holding value and being the projection of currency, the synthetic assets they are backing would have no real value.

Value (of Synthetix and SNX token)

Synthetix pooled collateral mechanism solves the liquidity and slippage issues experienced by DEX’s and is where the value of the Synthetix ecosystem is derived. The value of SNX token is derived from the right to participate in the network and capture fees generated from Synth exchanges.

Monetary Unit

There are different kinds of tokens used in the Synthetix ecosystem. SNX is the primary form of collateral backing the synthetic assets available in the Synthetix protocol. Its stakers are entitled to fees generated by Synth trades on Synthetix.Exchange. 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.

Transmission System

The steps involved for the smart contracts to process a Synth exchange (from sUSD to sBTC in this example) are below:

  1. Burn the source Synth (sUSD), which involves reducing that wallet address’s sUSD balance and updating the total supply of sUSD.
  2. Establish the conversion amount (i.e. the exchange rate, based on the price of each currency).
  3. Charge an exchange fee, which is currently 0.3% of the converted amount, and send the fee as sUSD to the fee pool, where it can be claimed by SNX stakers.
  4. The remaining 99.7% is issued by the destination Synth (sBTC) contract and the wallet address balance is updated
  5. The sBTC total supply is updated.

No counterparty is required to exchange, as the system converts the debt from one Synth to another. Hence no order books or order matching is required, resulting in infinite liquidity between Synths. No debt change is required to be recorded against the debt pool either, as the same value is burned from the source Synth and minted from the destination Synth.

Institutions

SNX holders are the fundamental regulators and are needed to maintain the system. An SNX holder can mint any synth in the system (take sUSD for example) by locking their SNX as collateral via the Synthetix smart contract. The steps involved when an SNX holder mints are:

  1. The Synthetix contract checks that the SNX staker can mint Synths against their SNX, which requires their Collateralization Ratio to be below 750%.
  2. Their debt is added to the Debt Register. The debt is the amount of the new value minted, and is stored in sUSD
  3. With the debt assigned to the staker, the Synthetix contract instructs the sUSD contract to issue the new amount. It adds it to its total supply and assigns the newly minted sUSD to the user’s wallet.

ETH stakers also play a role in maining the system. It is also possible to mint Synths by staking ETH. However, ETH stakers’ debt is denominated in ETH rather than sUSD. It does not get added to the system’s pooled debt, and thus does not fluctuate depending on traders’ outcomes.

Traders are another subject that plays an important role, without needing to hold or stake SNX. Traders on Synthetix.Exchange can take advantage of the system enabled by SNX stakers, namely trading a wide variety of assets with infinite liquidity and no slippage.

Finally, arbitrageurs play a role in the system as well, but are less important in maintaining the system. The primary opportunity for arbitrage in Synthetix is taking advantage of underpriced assets on the secondary market. If sETH or sUSD are ever trading below the price of ETH or USD respectively, then stakers can profit by purchasing them cheaply and using them within the Synthetix system, where their values do not take the market rate into consideration.

Collateral

Synthetix’s pooled collateral model enables users to perform conversions between Synths directly with the smart contract, avoiding the need for counterparties.

Creation

The maximum supply of SNX is 212,424,133 tokens. Currently there are 114,841,533.01 SNX in circulation, as of writing. Through their Initial Coin Offering (ICO), Synthetix sold over 60 million tokens. The SNX tokens are pre-minted, and according to Binance Research, the total supply of SNX will be distributed as follows: 0.87% Pre-Sale, 19.20% Private Sale, 3.05% Public Sale, 18.49% Team, 0.77% Advisors, 4.62% Foundation, 1.93% Partnership Incentives, 1.16% Bounties/Airdrops, and 49.92% Staking.

Termination

When an SNX staker wants to exit the system or reduce their debt and unlock staked SNX, they must pay back their debt. At its simplest: a staker mints 10 sUSD by locking SNX as collateral, and must burn 10 sUSD to unlock it. But if the debt pool fluctuates (and therefore their individual debt fluctuates) while they are staked, they may need to burn more or less debt than they minted. The process for reducing debt to zero is as follows:

  • The Synthetix contract determines their debt balance and removes them from the Debt Register.
  • The required amount of sUSD is burned, and total supply of sUSD is updated along with the sUSD balance in the user’s wallet.
  • Their SNX balance becomes transferrable.

Communication

There are many forms of communication outlined in the beginning of the project’s whitepaper website. The first is Discord discussions. All Synthetix governance discussions begin in the Synthetix community Discord in the #governance channel. There are also research forums, where more formalized opinions regarding governance and improvements to Synthetix are stored in the Synthetix Research Forum. There is also a SIP website, which is used to review or create Synthetix Improvement Proposals (SIPs). You can also get technical support from the Synthetix Discord in the #tech-support channel and find additional support resources, explanations, and links in the community-built Synthetix Resources page.

Partnerships

SNX tokens can be purchased at top exchanges, such as Binance, OKEx, Coinbase Pro, and Uniswap (V2). Synthetix also announced a partnership with Chainlink, a provider of decentralised oracle solutions. This partnership is key because it allows Synthetix access to other assets and gives DeFi users access to exposure of these assets. For example, Synthetix was able to create the asset sOIL, which is their synthetic oil asset. According to AltcoinBuzz, Synthetix utilizes a Chainlink decentralized oracle network to mirror the price movement of oil. The creation of sOIL gives DeFi users on-chain exposure to oil, which happens to be one of the most important commodities in the world as the world’s economy relies upon oil.

Team Experience

The network was launched in September 2017 by Kain Warwick under the name Havven (HAV). About a year later the company rebranded to Synthetix. Kain Warwick is the founder of Synthetix and a non-executive director at the blueshyft retail network. Prior to founding Synthetix, Warwick has worked on several other cryptocurrency projects. He also founded Pouncer, a live auction site exclusive to Australia.

Peter McKean, the project’s CEO, has over two decades of experience in software development. He previously worked as a programmer at ICL Fujitsu. Jordan Momtazi, the COO of Synthetix, is a business strategist, market analyst and sales leader with several years of experience in blockchain, cryptocurrency, digital payments and e-commerce systems. Justin J. Moses, the CTO, was the former director of engineering at MongoDB and deputy practice head of engineering at Lab49. He also co-founded Pouncer.

Current Funding

Since its conception in 2017, Synthetic has had five (5) announced fundings from seven (7) different investors for a total of $46.1M USD. Investors include Coinbase Ventures, Paradigm, IOSG Ventures, SOSV, Framework Ventures, George Burke, and Infinite Capital.

Current Risks

There are several risks in the current architecture, as Synthetix is still an experimental system and complex systems require both empirical observations and theoretical analysis. Empirical observation and theoretical analysis ensure the mechanism design aligns incentives for all players.

One risk involves the debt SNX holders issue when they stake their SNX and mint Synths. As previously explained, this debt can fluctuate due to exchange rate shifts within the system. This means that to exit the system and unlock their staked SNX, they may need to burn more Synths than they originally minted.

Most people in the cryptocurrency space are aware of this risk, but the prices of most cryptoassets are highly correlated to Bitcoin and/or Ethereum. This means it’s possible for major price fluctuations in the SNX token to occur for reasons that have little to do with SNX or the Synthetix system.

Finally, there are a number of aspects of the system that are currently centralised. This decision has been made to ensure efficient implementation of the project. One example of centralisation is the use of proxy contracts across much of the architecture. This is to ensure the system can be upgraded easily but confers a level of control to the engineering team which requires trust from users. While these aspects will be phased out over time, it is important to understand the risks inherent in the current system architecture.

Risk Mitigation Strategies

As a decentralised protocol, the Synthetix team is committed to decentralisation and censorship resistance — this will be a gradual process as the system matures. This includes crucial areas such as price feeds. They have previously announced a partnership with Chainlink, a provider of decentralised oracle solutions.

Another important area is governance, they have recently initiated regular community governance calls to ensure the project’s goals are aligned with the community. Another aspect of this process is a move to a formal change management process; they have introduced SIP’s (Synthetix Improvement Proposals) to allow the community to introduce change requests and to ensure that any changes to the system are well understood and considered by all stakeholders.

Conclusion

We at Altlift see Synthetix as one of the leading platforms of the DeFi movement. The system offers synthetic assets to users across the world, providing access to specialized trading strategies. When taking into consideration the size of traditional financial markets, it has the potential to truly create a massive tokenized market of digitized real-world assets on the Ethereum Blockchain. The Altlift team sees Synthetix’s collaboration with Chainlink to be especially exciting, because it allows SNX holders access to be exposed to an even wider range of assets. Inverse Synths (iSynths) also bring another interesting element to the system because it allows users to take short positions on synthetic assets