Decentralized finance has become a much more developed field in recent years. Many entities have contributed to the development of this field, but Synthetix was one of the first. Many features of Synthetix have become the norm of the entire Defi industry today. Synthetix has established itself as a vital player in the crypto industry by focusing on creating a new asset class in crypto.
How does Synthetix work?
Users can generate synthetic assets by using Synthetix. You can imagine synthetic assets as derivatives in financial markets. These assets allow users to receive returns from another asset without being the owner. These are known as Synths.
Any asset with a reliable trading history can be converted into a Synth. For example, fiat currencies such as the USD, crypto assets like Bitcoin and Ethereum, and commodities like gold can be in the form of synthetic assets.
Price oracles
A service that allows blockchain access to data from the outside world is known as a blockchain oracle. For example, smart contracts are unable to access data from a different network (off-chain). Blockchain oracles present a solution to bridge this gap and allow smart contracts to access external data.
Synthetic assets use decentralised price oracles to access the information of the underlying assets. Using this method, users can trade and own synths the same way they own any tracked asset. Using synths can help users trade assets that are not available to crypto traders, such as silver and gold.
Collateralization
Smart contracts representing other assets must be collateralized or backed by another asset of value. For example, stablecoins like USDC and USDT are collateralized by an equal reserve of USD. Stablecoins can retain their value as one USDT/USDC can be traded for one US Dollar.
Synths are not collateralized by the underlying asset. Synthetix Network Token(SNX) backs Synths and is the native token of the platform. SNX is staked to mint synthetic assets.
Overcollateralization is used in the Synthetix protocol. Every Synth asset created is backed by a fluctuating collateralization ratio, which is determined through governance. Currently, this collateralization ratio is at 400%. This ratio is managed by stakers by burning more Synths if it is too low or minting more if it is too high.
Kwenta Synthetix
The Synthetix decentralized exchange is known as Kwenta. Using this exchange, users can trade Synths with other traders. Kwenta does not possess an order book. Trades are executed using a peer-to-contract system against a smart contract. A 0.3% to 1% fee is levied on every trade. This fee is then used in a reward pool for stakers on the network.
The Kwenta platform has several inverse and synthetic cryptos. Inverse cryptos are used to track the underlying assets’ reverse prices. Additionally, users can also trade synthetic fiat currencies like Euros and USD. Lastly, Kwenta has two indexes: sCEX to track tokens issued by centralized exchanges and sDEFI to track a set of Defi assets.
How to use the Synthetix Network token?
The backbone of the Synthetix protocol is SNX tokens. SNX tokens are staked to mint new Synth assets. Hence, SNX is used as collateral for any Synths issued by the protocol. To do this, users must first hold tokens in a compatible wallet. Users can lock tokens as collateral once they have connected this wallet to the Synthetix exchange.
Users are eligible for two sets of rewards once they have staked their tokens up to the required ratio. The first stake rewards are in the form of SNX tokens. Users can also earn exchange fees on every trade, which are denominated in sUSD.
What is Synthetix Staking?
Staking is required to participate in the Synthetix network. Users can hold debt in the form of a synthetic asset after they stake their tokens. In contrast to other platforms, staking in SNX tokens must be controlled to meet the collateralization ratio.
If the collateralization ratio is too low, users can burn synths to match it. Users receive rewards only when their ratio matches the target. Furthermore, users can mint new Synths if the collateralization ratio is too high.
As mentioned earlier, users can earn both exchange fees and staking rewards. These rewards are available once every week.
Is SNX a good investment?
Synthetix has been a pioneer in the Defi field since its inception. Synthetix provides a unique method of investment through its Synths. Synthetix allows crypto traders to trade in assets like gold and fiat currencies.
Nevertheless, users need to understand the SNX staking rules as investing in SNX is complicated. Crypto investors also need to understand the derivatives market before investing in SNX. SNX could be a great investment opportunity, but investors should be comfortable with its unique systems.
You can now buy Synthetix (SNX) on ZebPay. Visit ZebPay blogs to stay informed about crypto.
