Understand Synthetix in one article
Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.
Editor's Note: This article comes from
Blue Fox Notes (ID: lanhubiji)Why DeFi is the second breakthrough in the history of encryption?, reprinted by Odaily with authorization.
Blue Fox Notes began to pay attention to Synthetix in May 2019. At that time, it was not very well-known, but its data developed rapidly.
Why DeFi is the second breakthrough in the history of encryption?
") One of them is Synthetix, which is viewed from the total value of its locked assets. At the time of writing, the total value of its locked assets reached 167 million US dollars, second only to MakerDao's 338 million US dollars, and surpassed Compound.
As one of the three small giants, Synthetix is one of the most interesting projects in the current DeFi project, and it is also one of the most complicated projects. So, what exactly is Synthetix? Many readers of Blue Fox Notes have been reporting that Synthetix is difficult to understand, why did it come from behind?
Today, Blue Fox Notes briefly interprets Synthetix. Synthetix is essentially an issuance protocol for synthetic assets (Synths), built on Ethereum. To understand Synthetix, you must first understand what a synthetic asset is.
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Synthetic assets are primarily a simulation of an asset. In our life, there are many simulated behaviors. This is very common in games. For example, in football simulation games, we can combine our favorite players. You can form a team including Messi, Mane, De Bruyne, Van Dijk, Sun Xingmin, Hazard A team of players like you. The data of all players comes from the actual performance, according to these data to determine the final score of your dream team.
A more intuitive example of synthetic assets is the simulation of some priced assets. For example, the simulation of Tesla stock. You can simulate Tesla's stock to build synthetic assets, and even synthesize all the assets of the entire Nasdaq and NYSE.
Why are synthetic assets in demand? The demand for synthetic assets is mainly derived from transactions, by simulating a certain asset to obtain the risk exposure of the asset, so as to obtain possible opportunities to earn income. For example, Apple's stock is not available to people from all countries. However, if synthetic assets are used, users can benefit from the rise of Apple stock by purchasing synthetic assets of Apple stock, and of course they will also bear the risk of decline.
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Sythetix is an issuance protocol for synthetic assets
Synthetix is an Ethereum-based synthetic asset issuance protocol. The synthetic assets currently supported by Synthetix include fiat currencies, cryptocurrencies, and commodities. Among them, the legal currencies mainly include the US dollar (sUSD), the euro (sEUR), and the Japanese yen (sJPY), but at present, sUSD is basically the main currency. In terms of cryptocurrencies, there are Bitcoin (sBTC) and Ethereum (sETH), etc. In addition, there are reverse encrypted assets, such as iBTC. When the price of BTC falls, the price of iBTC rises, thereby making a profit. Commodities are currently dominated by gold (sXAU) and silver (sXAG).
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Synthetix is not only an agreement to issue synthetic assets, but also a trading platform for synthetic assets. The main purpose people use it for is to trade. For example, assuming that a user expects a certain encrypted asset (such as BTC) to rise, he can obtain the opportunity to earn income by purchasing the synthetic asset (sBTC) of the asset, whose price is the same as the actual asset price, which means Once the user purchases, he also accepts the possibility of the ups and downs of the asset.
Can't these needs be met directly through the exchange? Why should it be done on Synthetix? Here are a few user needs: transactions on Synthetix are carried out in a decentralized mode, and there is no need for counterparties, and there is no need to worry about liquidity and slippage. Transactions on its exchanges are executed through smart contracts and are transactions against smart contracts, not order book transactions. Each of these has its own unique trading experience and some advantages. The exchange rates for synthetic assets come from oracles.
In addition, through synthetic asset transactions, it is possible to realize the transaction of the asset without actually holding the asset, such as without holding BTC or Apple stock. This kind of transaction can reduce the friction of asset exchange, and can quickly exchange between different types of assets, such as fast exchange between different assets such as Tesla stocks, gold, soybeans, Bitcoin, etc., so synthetic assets can help investors Reach out to a wider range of assets.
Finally, arbitrage can also be achieved. sUDS is pegged to USD, but sUSD is traded in the open market and may be lower than 1 USD. SNX mortgagers generate synthetic assets by mortgaging SNX, and also create debts. After selling synthetic assets, they repurchase them when sUSD is lower than 1USD and use them to burn and reduce debts, thereby arbitrage.
The operating mechanism of Synthetix
Synthetix, like other asset issuance protocols, also requires asset mortgages to issue. For example, the MakerDAO protocol needs to mortgage ETH to generate dai. Synthetix is similar, but it collateralizes its native token SNX. Users can issue synthetic assets as long as they lock a certain amount of SNX in their smart contracts. Among them, its pledge rate is very high, which is 750% of its issued assets. Only when it reaches the target threshold of 750%, will it have the opportunity to obtain transaction fees and SNX new token rewards.
Similar to MakerDAO, when SNX stakers create synthetic assets, “debt” is incurred. And this "debt" is variable.
For example, if 100% of the system is sBTC, assuming that the price of sBTC is halved, the total debt in the system will also be halved, and the debt of each mortgager will also be halved. Conversely, if the price of sBTC doubles, the total debt in the system doubles, and the debt of each staker also doubles. If sBTC accounts for half, and if the relative price of sBTC increases by 50%, then in the end, everyone’s debt will increase by 25%. Since sBTC synthetic assets increase by 50%, then, relative to the increase in debt, there is still a 25% gain. The other half of the synthetic assets increased their debt by 25%, but their prices did not increase, which resulted in a 25% loss. That is, this mechanism causes SNX stakers to become counterparties to all synthetic asset exchanges. Stakers need to bear the entire debt risk in the system.
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(The picture comes from the Synthetix white paper)
The Synthetix system is essentially a system for the generation, transaction and destruction of synthetic assets. For the operation of the system, the most important participant is the staker who mortgages SNX assets to issue synthetic assets. It is different from MakerDAO in that users who issue synthetic assets not only do not need to pay stability fees, but also get transaction fees from the Synthetix exchange. As a result of this mechanism, SNX holders are encouraged to lock SNX and synthesize assets. This also means that SNX can capture transaction fees on its synthetic assets.
The main purpose of users using synthetic assets is trading. To synthesize assets, you must first mortgage assets.
1. Issuing synthetic assets
In order to issue synthetic assets, the premise is to mortgage enough original assets SNX (currently a 750% mortgage rate is required to obtain rewards). After users hold SNX, they can use Mintr to mortgage their SNX tokens to generate synthetic assets.
After the mortgage, the mortgage rate and debt records are generated, and the corresponding proportion of rewards can be obtained according to the contribution. This ultra-high mortgage rate incentive mechanism is mainly to ensure that the mortgage assets supporting synthetic assets can cope with large price fluctuations.
In order to encourage mortgagers to maintain a sufficiently high mortgage rate, it is also mentioned above that currently Synthetix stipulates that in order to receive transaction fee rewards, its mortgage assets must be 750% of the issued assets. Below this threshold, stakers are not rewarded with transaction fees. This incentivizes stakers to increase their collateralization ratio, deposit more SNX, or burn synthetic assets.
The collateral debt is the amount of synthetic assets generated. They are stored in Synthetix Drawing Rights (XDR), and the prices of these synthetic assets fluctuate according to the price of the oracle, that is, their liabilities are variable.
When the debt is distributed to the stakers, the Synthetix smart contract issues new synthetic assets and adds them to the total supply, and the new synthetic assets are also distributed to users' wallets. Since the synthetic asset is over-collateralized with SNX, it has a target threshold of 750%. If the value of SNX increases, SNX can be unlocked accordingly, and of course more synthetic assets can be issued.
2. Trading Synthetic Assets
The process of trading synthetic assets is essentially a process of destroying the original synthetic assets and generating new synthetic assets. Assuming that sUSD is exchanged for sBTC, first the corresponding amount of sUSD in the user’s wallet address is destroyed, and the total supply of sUSD is updated; then, after the exchange rate is determined according to the price of the oracle machine, part of the transaction amount (such as 0.3%) is used as the transaction fee and sent to To the fee pool (claimed by all SNX stakers in proportion), and the remaining part is issued by the smart contract of the target synthetic asset sBTC, and the user’s wallet balance is updated at the same time, and the total supply of sBTC is updated.
3. Debt Destruction
When SNX asset mortgagers want to reduce their debts or exit the system, they need to destroy the synthetic assets first. For example, a staker generates 1,000 sUSD by staking SNX. In order to unlock the staked SNX, the user needs to destroy 1,000 sUSD first. If the debt pool changes during the staking period (and so does the personal debt), then this results in a user who may need to burn more or less sUSD to burn their debt. The operation process is completed through a smart contract. The Synthetix smart contract will determine the user's sUSD debt balance, then delete it from the "debt register", destroy the corresponding sUSD at the same time, and update the sUSD balance of the user's wallet and the total supply of sUSD. After that, SNX was unlocked successfully.
4. Synthetix’s Debt Pool
In general, there will always be synthetic assets generated or destroyed by SNX holders, which means that the debt pool of the system will change. The system will determine the debt of each SNX staker at any point in the future based on the generation and destruction of synthetic assets, and it is not necessary to actually record the debt changes of each staker. Because it updates the "Cumulative Debt Incremental Ratio" on the "Debt Register", which keeps track of each staker's percentage of debt. Every time a synthetic asset is minted or destroyed, the system multiplies the number of tokens in all synthetic asset smart contracts by the current exchange rate, and the total issued debt can be calculated.
Value Capture of SNX
First of all, SNX is the only collateral asset currently issuing synthetic assets. SNX is equivalent to a working token that enters the Synthetix system.
Second, capture transaction fees. For transactions on Synthetix, for example, a user exchanges sBTC for sETH, a transaction fee of 0.3% will be generated, and the fee will be deposited into the fee pool as XDR. SNX mortgagors can claim fees in the fee pool every week according to the corresponding proportion of their own staking (allocated according to the proportion of each mortgagor’s issued debt). A total of $3.2 million was incurred between December 2018 and the time of writing. If a staker issues 10,000 sUSD of debt, assuming the total debt is 20,000,000 sUSD, then the debt ratio is 1/2000, assuming the total fee for this cycle is 3,200,000 USD, then the staker can get a fee reward of 1,600 USD.
Finally, SNX’s newly added token rewards. SNX is an inflation token whose total supply will increase from 100,000,000 tokens in March 2019 to 245,312,500 tokens in March 2024. The newly added tokens will be rewarded proportionally to SNX stakers whose stake rate is not lower than the target threshold (currently 750%, which may change later).
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Synthetix uses native tokens as collateral instead of using ETH as collateral like MakerDao. If the price of SNX drops sharply, the value of the mortgaged assets will plummet, which may cause problems in the system. Since Synthetix still lacks a corresponding mechanism (for the time being, there is no global liquidation mechanism similar to MakerDAO) to protect the interests of synthetic asset holders, there may be extreme situations where synthetic assets cannot be repaid. In order to deal with the problem of excessive fluctuations in the price of SNX, it adopts an ultra-high mortgage rate, exceeding 750% to be rewarded. This also limits its scalability.
epilogue
The oracle is also a key issue. Currently, a partially centralized model is adopted. In the future, there are plans to integrate a decentralized oracle such as chainlink.
The current collateral of Synthetix is only SNX, no ETH or others. For most people, there are some barriers to buying and staking SNX. Synthetix needs to be expanded and needs more people to participate. If users are allowed to exchange Dai with sUSD, it will be easier for users to enter and the liquidity of the system will also be expanded. In addition, synthetic assets themselves can also introduce lending, derivatives transactions, etc., and there will be more explorations. Finally, the interface, transaction types, and speed of the current Synthetix exchange need to be improved.
