Blockchain technology allows us to reimagine concepts like currencies, banking, and financial services in exciting new ways. This is the brave new world of Decentralized Finance – or DeFi for short. Synthetic Assets, or synths, are the DeFi version of derivatives from the world of traditional finance.
In traditional finance, investors use derivatives to track the value of an underlying asset for risk management, hedging, or speculation. With a derivative, you gain exposure to the underlying asset without ever actually owning the asset. Synthetic assets are the blockchain equivalent of traditional derivatives. They exist as virtual tokens that you can program to track the value of any asset or index out in the real world.
What Is Synthetix?
Synthetix is a popular synthetic assets protocol based on the Ethereum blockchain. Kain Warwick founded the platform in 2017 as Havven, a stablecoin. But in 2018, the project underwent an expansion in its scope and mission, leading to its eventual rebranding as Synthetix.
The Synthetix.io platform allows users to create synthetic assets based on a wide range of different commodities, stocks and more, both from the real world and digital world. For instance, you can create tokens that track the value of popular cryptos like Bitcoin, or fiat currencies like the US dollar, popular corporate stocks like Tesla, and any other commodity or index.
Anyone can create or “mint” a synth on the platform, as long as they have the collateral to back it up. This collateral system ensures that the entire platform is less vulnerable to volatility caused by extreme price swings. And this is where the SNX Token becomes essential.
The SNX Token
SNX is the native token of the Synthetix platform. You may think of it as the master token used to create other synthetic tokens. A user wishing to mint a new synthetic token must put up at least 750% of the total value of the synth as collateral.
Users then stake this collateral in the form of SNX tokens using Synthetix's smart contracts app called "Mintr." The Synthetix platform uses a system of decentralized price feeds or "oracles" to track the real-world value of the assets linked to a synth.
Apart from minting new synths, token holders can also use SNX to create a form of income through a process called "staking." In staking SNX, one provides collateral into liquidity pools on Synthetix. The SNX tokens are "locked-in" for a certain period. The SNX liquidity pools create the sUSD – a stablecoin that tracks the US dollar value.
However, "staking" SNX on the Synthetix platform is different from what is commonly understood by staking, which is locking cryptocurrencies to participate in a proof-of-stake (PoS) consensus mechanism.
When staking on Synthetix users also take on debt risk. This is because the sUSD created is the users’ debt position and all of the SNX stakers debt is pooled. This pool is also where the profits and losses of Synthetix Exchange traders is represented. That means the pooled debt can change over time based on traders’ profits and losses. This is the risk assumed when staking their SNX, and positions need to be actively managed in case of large price moves.
Synthetix is a project that fully showcases the massive potential hidden inside the DeFi ecosystem. As one of the early drivers of DeFi, Synthetix has earned its reputation as a reliable protocol for trading in derivatives, minting new synths, and generating income through staking. With over 50% of SNX holders participating in staked pools valued at over $760,000 million, the SNX token inspires much confidence.
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