Trading in stocks, currencies, commodities and other assets continues to dominate Wall Street, London, Tokyo and other traditional financial centers. How would you feel if all the trading took place in the decentralised, global and 24-hour world of crypro through a DeFi application?
This is exactly what the Synthetix protocol, a platform for traders operating on the Ethereum network, aims to achieve.
How; Allowing users to trade securities through synthetic elements, the so-called “Synths”, based on Ethereum’s ERC20. Synths copy the value of an item to the “real world” and bring it to the Ethereum blockchain. In other words, they provide through their platform exposure to investment data which are available in token format.
Synthetic assets are simulated representations of real assets. Having a Synth is not the same as holding a “real” Apple stock, for example. You can buy and sell at the same price, but you do not have the voting rights that a real shareholder would have. The trading platform allows users to bet on the price of an item, taking long or short positions just as easily, without holding the actual item.
The operating mechanism
Synthetix uses an infrastructure based on a grid of guarantees, staking, currency offering and fees. The system uses two types of token. The main Synthetix Network Token (SNX) and synthetics or Synths. It is similar to MakerDAO, where the more Ethereum (ETH) bound the more DAI can be created.
The SNX Token is the fuel for the entire Synthetix ecosystem, as it commits to creating sUSD (synthetic USD), which has a locked exchange rate with the US dollar. SUSD acts as debt while SNX acts as collateral. The main difference between Synthetix and MakerDAO is that SNX serves as a guarantee for any copy of the asset – not just stablecoin.
An important part of Synthetix’s success can be attributed to the innovative incentive model. SNX holders freeze their coins to earn rewards (staking rewards). They receive fees from the exchange and fees from the inflationary monetary policy. To create new Synths, more than 750% of the Synth value must be reserved as SNX. The more SNXs pledged as collateral the less they are available in the market. So they become more valuable.
One of the basic requirements of the Synthetix ecosystem is the ability to provide reliable information from the “outside world”. In order to obtain price information, it used to use central price flows or oracles. Oracles act as intermediaries, providing and translating data from an external platform to the blockchain (sensors, sites, etc.). It is a kind of smart agent that provides the necessary data to activate smart contracts to execute orders when they meet the criteria.
The problem was that the incoming data was vulnerable to manipulation or falsification. With the cooperation of ChainLink, they have managed to be supplied with reliable information, without having to trust a single operator. It is now completely DeFi.