Synthetix.io allows the creation of on-chain synthetic assets or “synths” that track the value of real world assets. A “synth” simulates the value of another asset, so investors can make trades off of its price movements. Users are able to “mint” tokens on mintr which represent the value of assets like currencies, precious metals, stocks, and indicies. They can then trade these minted synths on the exchange.
Synthetix offers peer-to-contract trading, instead of peer-to-peer. This means that users don’t need a counterparty in order to make a trade. This allows for unlimited liquidity. The pool of SNX stakers act as the counterparty which will act as the clearing house to clear the trades. The debt that is incurred in the instance that a user makes a gain, is absorbed by the pool of SNX stakers.
What is a synthetic asset?
A synthetic asset is an asset which has a value that corresponds to another underlying asset. It allows a user to be exposed to the price movements of an asset, without actually holding it. Users can tokenize assets by minting with Mintr on the Ethereum blockchain. Stablecoins are also considered “synths”, as they have the ability to track the value of another asset, i.e. fiat.
Synthetic assets are “minted” on the Synthetix exchange using the SNX token as collateral. Synths must be backed by collateral of SNX tokens at a ratio of 500%. If a users maintains this collateralisation ratio, they will be allowed the full percentage of the staking payout. They must maintain this ratio by burning and minting synths. When a synth appreciates in value, it creates debt which is distributed between all staked SNX holders.
What are the benefits of using a synthetic asset instead of holding the actual asset?
One of the benefits of synthetic assets is that they allow for more liquidity, letting more traders can easily enter or leave the market. This improves accessibility, as well as reducing trading costs for the participants. One of the main problems in cryptomarkets is the lack of liquidity. It also allows users to not have to deal with holding the asset.
Synthetics allow users to easily hedge their positions, reducing their risks, and protecting profits. Use cases include users creating cryptoassets that track the value of their local currency, then using that coin to make payments for goods and services.
Synthetic crypto assets also allow for the creation of more complex financial products like programmable derivatives.
What is the SNX token used for?
The SNX token serves as the collateral for all synthetic assets which are minted on the exchange. Token holders also receive a percentage of all of the transaction fees on the network if they maintain a collateralisation ratio of above 500%. Due to this model SNX has one of the highest staking rates out of any token in the ecosystem.
What future features will be included in the Synthetix Network?
Soon the exchange will be able to host synthetic positions. Users will be allowed open up short positions on all assets, with leveraged trading. Synths open up opportunities to trade financial products which have never before existed, like programmable derivatives!
The network will also begin to use Chainlink to provide price oracles, so the community can create new synthetic assets with these accurate price feeds. This will open up an even larger variety of financial products.
Users will also soon be allowed to use Ethereum to mint synthetic assets, instead of just the SNX token. This will bring a group of users that want to trade synthetic assets, but dont want to hold the SNX token.