Synthetix was launched in 2017 by Kain Warwick and Justin Moses. The project was originally called Havven and provided a stablecoin (nUSD) that was overcollateralized by crypto assets. Since then, the protocol has grown significantly and now offers synthetic forms of assets on the Ethereum mainnet and Optimism.
Synthetix has experienced significant growth recently. This article aims to break down what makes Synthetix unique right now, its recent performance and why V3 is a major innovation for DeFi.
The Current State of Synthetix
Synthetix was launched in 2017 by Kain Warwick and Justin Moses. The project was originally called Havven and provided a stablecoin (nUSD) that was overcollateralized by crypto assets. Since then, the protocol has grown significantly and now offers synthetic forms of assets on the Ethereum mainnet and Optimism.
Today, Synthetix acts as a liquidity layer for many DeFi protocols. On Synthetix, users stake the native token SNX, which is used to mint sUSD (synthetic US dollars). Therefore, sUSD is the native stablecoin of Synthetix, which is overcollateralized by SNX and represents the user's debt on the protocol.
Therefore, the total available liquidity that protocols built on top of Synthetix can use depends on the amount of collateral (i.e. SNX) on the protocol. Why do users stake SNX to achieve this synthetic liquidity? Because stakers are rewarded in native SNX tokens and also receive fees generated by leveraging this synthetic debt (currently 40% annualized). If the amount of staked SNX falls below a certain threshold, the issuance of SNX will increase, thereby attracting more users to stake SNX and increasing liquidity.
Liquidity on Synthetix supports two different types of assets: spot and futures. Spot synthetics track various assets such as cryptocurrencies, commodities, forex, etc. This is a way for users to gain exposure to their underlying asset without actually holding that asset. Synthetic futures allow users to trade leveraged futures on various assets. Liquidity on Synthetix acts as the counterparty to these trades. As a result, SNX stakers bear counterparty risk. This means that if traders on trading protocols that leverage Synthetix liquidity (such as Kwenta) make huge profits, the debt of stakers will increase, and vice versa. However, there are mechanisms to reduce this risk, including arbitrage opportunities (funding rates) for traders when trading activity deviates. This is designed to make liquidity providers (SNX stakers) hedge neutral, while V3 will introduce isolation risks.
Account
As of now, Synthetix has a total locked value (TVL) of $375 million, which means that $375 million worth of SNX has been staked. An example of a protocol built on top of Synthetix and leveraging the protocol's liquidity is Kwenta. Kwenta is a perpetual futures trading protocol on Optimism that has no native liquidity but inherits liquidity from Synthetix. All trading pairs on Kwenta are denominated in sUSD, so in order to trade these synthetic assets, users need to mint sUSD by staking SNX (or buying sUSD on the market).
All transaction fees generated on Kwenta are paid to SNX stakers. On average, Kwenta captures approximately 60-70% of all fees generated by protocols utilizing Synthetix liquidity. There are other protocols/frontends built on top of Synthetix, including:
Lyra;
Thales;
Account;
dHedge;
Polynomial
Infinex
Infinex is an on-chain perpetual exchange that aims to simulate the trading experience on a centralized exchange on-chain in a decentralized manner. Since the user interface and experience are at the core of the protocol, "simple" and "professional" modes will be provided to make it easier to attract new traders.
The protocol will not have a new native token, but will be governed by SNX. In addition, all revenue will be used to deepen liquidity on Synthetix by purchasing and staking SNX. The greater the trading volume, the greater the buying pressure on SNX, and the deeper the liquidity. This may form a virtuous circle.
Synthetix V2 Indicators
Below is a chart from Token Terminal showing the price of SNX and the volume of transactions utilizing Synthetix liquidity. As shown in the chart, there is a large divergence between recent on-chain activity and the current price of SNX.
Synthetix has launched many products recently, among which the Perps V2 upgrade has played a major role in increasing activity. The upgrade introduced various synthetic assets that can be used on protocols such as Kwenta. It is worth mentioning that Synthetix has obtained a large number of OP tokens from Optimism, which are used in protocols like Kwenta to incentivize users to use the product. In addition, Kwenta also issues additional KWENTA tokens to provide higher incentives.
Below is a chart of TVL, and in the case of Synthetix, it is directly correlated to the price of SNX as shown in the chart below. This is because as mentioned earlier, SNX is the only asset that can be staked on the protocol.
Synthetix is a core infrastructure in DeFi and its liquidity is used by multiple protocols as mentioned above. Currently, the limitation in liquidity or TVL is that only SNX can be staked on Synthetix. This will change in V3.
Synthetix V3
Synthetix V3 includes a series of upgrades that take Synthetix to the next level: providing a cross-chain liquidity layer for DeFi. V3 is currently in alpha and different features will be rolled out gradually.
TLDR
Multiple collateral, not just SNX;
A permissionless liquidity layer;
A developer-friendly ecosystem;
Seamless cross-chain implementation.
Multi-collateral pledge
Multi-collateral collateralization is one of the core tenets of the Synthetix V3 vision. Currently, only SNX can be staked to provide liquidity used by synthetic spot and perpetual markets. V3 introduces a vault design where each vault is represented by a type of collateral (token). One vault could be ETH, another SNX, and a third wBTC. The types of collateral that make up these vaults are added through governance. Additionally, vaults can be added to pools for use by protocols that want to tap into specific liquidity. For example, a pool could be composed of an ETH vault and a DAI vault, which could then be used on on-chain derivatives markets like Kwenta. Some of the benefits include:
As a staker, you have more freedom to choose which assets to provide as collateral and receive returns.
Since pools are tied to specific markets, stakers can avoid risk. Risk-averse investors may only provide liquidity to pools used by BTC and ETH markets, and not riskier assets.
Because the pool is tied to a specific market, it allows for better hedging, reducing counterparty risk.
Permissionless Liquidity Layer
With V3, developers can create new markets on Synthetix that leverage liquidity pools in a permissionless manner. A significant hurdle in DeFi is building liquidity early on, which is often incentivized through large issuance of tokens.
In addition to being able to choose which liquidity pools the market should integrate, market creators can also choose the oracles used for their products and create custom reward structures for liquidity providers. The listing of new synthetic assets is no longer done through governance and can be easily achieved. These assets can be anything from spot OP to ETH options.
Synthetix will ultimately act as a liquidity-as-a-service platform that can be easily integrated by new products.
Seamless cross-chain implementation
The ultimate goal of Synthetix V3 is to be available on any EVM chain. So-called Teleporters will make liquidity provided on one chain available on other chains. For example, if a user provides liquidity to a pool on Optimism, markets on Arbitrum can use that liquidity to support their platform.
Here is an overview of the structure of the Synthetix V3 spot market: Users deposit their assets into vaults, which are added to specific pools. These pools can be used by the protocol to create markets on top of Synthetix liquidity pools. These markets are what users interact with on dapps built on Synthetix, such as Kwenta.
Towards V3
Here is a brief overview of the plans leading up to the full release of Synthetix V3:
Stablecoin Migration - V3 introduces a new synthetic stablecoin to replace the current V2 sUSD. The name has not yet been determined, but one suggestion is to keep the new stablecoin as "sUSD" and then rename the current V2 version to "oldUSD" or "legacyUSD". Over time, as new V3 stablecoins and synthetic assets gain liquidity and empowerment, users will need to migrate their assets from V2 to V3 (via Curve pools).
Perps V3 — Perps V3 will introduce the multi-collateral mentioned earlier. Most importantly for traders on protocols like Kwenta, Polynomial, all synthetic assets (not just sUSD) can be used as collateral for trading. The UI/UX will also be more streamlined and intuitive. Most of the core code is complete and close to audit. Testnet will likely be live in late July.
Upgrading V2 SNX stakers to V3 LPs — This feature allows current SNX stakers to migrate to V3 without having to pay off debt and close positions. (SIP-306) .
Teleporters — Teleporters are a key part of V3’s cross-chain functionality. To enable cross-chain liquidity usage, they burn sUSD on one chain and mint sUSD on another, eliminating slippage and the need for cross-chain bridges. Teleporters are currently in development and live on several testnets. ( SIP-311 ) .
Cross-chain pool synthesis — This is another core aspect required to achieve the vision of full-chain liquidity. It enables markets and pools to understand the state of collateral on other chains. With this feature, new perpetual markets can be launched on one chain and utilize liquidity on another chain. Currently underway in testnet (SIP-312).
Conclusion
The ultimate goal of Synthetix is very exciting, but the key is to create demand and attract developers to build solutions that utilize Synthetix as a liquidity layer. The more protocols (like Kwenta) build on Synthetix, the higher the yields will be for liquidity providers (stakers on Synthetix). As yields increase, so will the liquidity provided, and deeper liquidity will attract more protocols to build on top of Synthetix. It's a virtuous cycle that reinforces each other.
As mentioned before, 60-70% of the fees earned by SNX stakers come from traders on Kwenta alone. Trading on Kwenta is heavily incentivized by large OP and KWENTA token emissions, so it is difficult to estimate the extent of recent user growth.
