SNX - What is Synthetix and How Does it Work?

Introduction

The derivatives market is one of the largest markets in the traditional financial world, moving trillions of dollars per year in terms of notional value.

This article explores Synthetix, a decentralized finance (DeFi) protocol that introduces liquidity and a framework for establishing an on-chain derivatives market. Additionally, Synthetix facilitates the integration of tangible real-world assets into the blockchain.

What is Synthetix?

Synthetix operates as a DeFi protocol built on the Ethereum network, empowering individuals to generate synthetic assets, commonly referred to as "synths." These synths serve as a bridge connecting tangible real-world assets with their digital counterparts. The protocol ingeniously enables users to partake in the value of traditional assets, even those existing predominantly beyond the blockchain sphere, all without the need for direct acquisition.

With Synthetix, participants gain the ability to invest in a diverse array of synthetic assets. Imagine being exposed to synthetic gold and silver, mirroring the precious metals' performance without the necessity of physical ownership. Likewise, synthetic indices and fiat currencies become accessible avenues for investment, allowing users to engage with the broader financial landscape in a uniquely decentralized manner.

Furthermore, Synthetix introduces the concept of crypto synths, thereby ushering the crypto industry into the derivatives market. For example, investors can be exposed to an inverse Bitcoin token that rises when Bitcoin declines, all without the complexity of engaging in short positions through lending platforms.

How does Synthetix work?

Understanding how Synthetix operates is fairly straightforward. Let's break it down. When you want to create a certain synthetic asset, you provide 500 percent of that asset's value using SNX tokens. In other words, if you want to mint $100 worth of sUSD (Synthetix's synthetic USD), you need to lock up $500 worth of SNX tokens on the platform. This might seem like a lot, but it's designed this way to protect the platform from big price swings in the real-world assets you're investing in. When you're ready to close your investment, you can simply "burn" the synthetic assets you created, and you'll get back your locked-up SNX tokens.

Synthetix relies on Chainlink's oracle network, which acts like a bridge to fetch real-world prices for different synthetic assets quickly. This setup ensures that you can be exposed to various real-world assets without worrying about significant price changes suddenly affecting your investments.

In addition to this, Synthetix has its own decentralized exchange platform called Kwenta. This platform lets you access something called perpetual contracts with up to 50X leverage. This may sound a bit complex, but it's like having the ability to invest in assets that are worth much more than what you actually have. For instance, even if you only have $100 in your wallet, you can use Kwenta to invest as if you had $5000. It's a way to potentially amplify your investment gains, but it also comes with increased risk. 

Tokenomics

The SNX token is the utility token of the Synthetix protocol. It is used to govern the platform and stake tokens as a way to earn rewards in the form of protocol fees and token inflation.

The distribution of SNX is the following:

Final Thoughts

Synthetix emerges as a highly promising project that finds its footing in two prominent sub-sectors of DeFi: Derivatives trading and Real-world assets.

For those interested in the platform's growth potential, the token has been Whitelisted here on Kassandra Finance. This means you have the opportunity to explore one of our tokenized crypto portfolios featuring $SNX like Defi Blue Chips or even create your own and add the SNX token to it!