Synthetix has reached the $1 billion in value locked milestone, following other DeFi protocols like Compound and Aave. Synthetix (SNX) has been one of the many DeFi tokens that has made substantial gains in 2020, having hit its all-time high of $7.32 on August 15 and rallied more than 400% year-to-date.
SNX/USDT daily chart. Source: TradingView
Most of the hype around the 2020 altcoin season has been focused around lending, liquidity, and yield farming within crypto. However, Synthetix has been able to make strides in the DeFi sector by offering crypto investors an inlet to the world of traditional finance. Synthetix is also the fourth biggest DeFi protocol by total value locked according to data from DappRadar.
What makes Synthetix tick?
Synthetix is a decentralized exchange (DEX) built on the Ethereum blockchain through a series of smart contracts. However, Synthetix does not offer trading between crypto assets (typically ERC-20 tokens) like tokens and stablecoins, but rather between synthetic assets or “Synths.”
Synths are tokenized representations of other assets. They track the price of other tokens that are traditional assets investors know well. Commodities and stocks can be traded directly on the Synthetix exchange. Examples include fiat currencies (sUSD,sEUR), cryptocurrencies (sETH, sBTC) and commodities like gold (sXAU).
Another unique feature of Synthetix is the ability to create and trade Synth tokens that track the price of assets inversely (iUSD, iETH, iXAU, etc). This makes Synths one of the only ways to short an asset in a purely decentralized manner.
With DeFi, it takes money to make money
These Synth tokens are created by using another asset as collateral. However, instead of using the underlying asset (like USDT or wBTC) or relying on an established asset like Ether (MakerDAO’s DAI), the protocol’s native SNX token is used.
This means that in order to create new Synths, users must stake SNX tokens at a 750% collateralization ratio through the platform’s Mintr smart contract.
While locking up $750 to access $100 of sUSD may seem counter-productive, users can also acquire Synths through another decentralized exchange or by borrowing it. Those staking SNX are incentivized to do so through the staking rewards which come from new tokens issued in the protocol’s inflationary monetary policy.
Not only do users receive staking rewards, SNX stakers receive Synth exchange rewards generated by the exchange’s fees. As such, members of the community are incentivised to provide liquidity to Synths and to lock their SNX tokens.
This creates scarcity and may be a major factor in the rapidly growing market cap as well as the growing value locked figure.
DeFi connects investors to crypto and traditional assets
While the Decentralized Finance sector has taken crypto by storm in 2020, there are a few key projects that are taking the lead and pushing the space forward.
Notably, lending and credit platforms along with yield farming have been in the spotlight, especially following the release of the Compound protocol and token.
However, this new subset of DeFi is becoming more popular with projects like UniSwap and its upcoming fork, SushiSwap, which allow for decentralized trading of ERC-20 tokens and rewards liquidity providers. There’s also dYdX, a fully decentralized platform which allows users to trade assets with margin.
As DeFi continues to make its parth to mainstream appeal, the need for solid infrastructure and interoperability between protocols and traditional finance becomes paramount. The growing allure of DeFi is not just in the interest to be earned from staking assets but also from the sector’s potential to provide investors with decentralized access to crypto and legacy assets.