Launched in September 2017, the Synthetix protocol allows users to issue and trade derivative tokens called Synths. Recent integrations and upcoming releases have significantly strengthened the position of the Synthetix protocol.
- Recent integration with 1inch promotes protocol usage on ETH mainnet
- Some protocols integrated with Synthetix on Optimism are good L2 solutions for high volume/high speed trading and generate fees for the protocol
- These integrations will increase the fees paid to the protocol. SNX holders are entitled to receive a portion of it when staking in the protocol’s pool.
- We have major releases on our roadmap for the next 6 months that are likely to drive even higher usage
- Increased protocol revenues and increased SNX staking could drive SNX out of the market, creating buying pressure.
This price increase is supported by several events that have occurred in the last few months. ie:
- Recent releases
- Harnessing optimism
- SNX incentives (staking and commission rewards)
- Protocol roadmap
Here’s what these mean for protocols and crypto derivatives.
What is Synthetics?
synthetics A protocol that uses the token SNX as collateral to create synthetic tokens, providing a liquidity solution for virtually any asset, virtual or not. For example, like Tesla, it is possible to mint a stock from the US market and have a composite representation of it on the blockchain. This opens up the possibility of trading on decentralized exchanges and derivatives markets within the crypto space.
All SNX used to create different types of sTKNs are pooled in one pool. Each sTKN (Synthetic Token) issued represents a liability (or loan) taken from this liquidity pool. Therefore, having a larger pool of liquidity can help alleviate pressure on the sTKN peg (the price equivalence that must be maintained on the asset it represents).
The main innovation of the protocol is to allow users to exchange one synth for another in a simple way, like a common swap between two regular assets. Various protocols are currently leveraging this feature, using Synthetix as their base trading/swap layer.
Recent releases of Synthetix
1 inch integrated
The last two months have been full of SNX releases and integrations. The most relevant among them was the integration with the DEX aggregator 1inch.
A DEX typically has one pool for each trading pair it offers. One pool for ETH<>DAI and another pool for ETH<>USDC. The ratio between two assets determines the asset exchange rate between pairs. One pool is more expensive for a user to acquire another asset than he has one asset (this is called slippage).
1inch is a search engine that tries to find the best prices for swaps (transactions between two different assets). This is done by quoting various DEXs. One thing that affects the exchange rate of this swap is the size of the trade. The larger the size, the more likely the quoted exchange does not have enough liquidity in its pool for that trade (price slippage).
With the addition of Synthetix, 1inch is now able to find routes where users can trade ETH or BTC of great value without suffering the slippage of standard DEXs. This is made possible by his Synthetix’s unique ability to exchange one synthetic asset for another just by exchanging liabilities (for example, burning sUSD to create sETH).
The chart above shows a sharp increase in sUSD usage (mint & burn) over the past two months, reflecting the integration with 1inch. Integrations with Paraswap and Ox (other aggregators) are also on the roadmap.
Harnessing optimism
Synthetix was one of the first protocols present We plan to use Optimism L2 as a solution for more use cases. The list of protocols currently using Synths in Optimism is extensive. Quentaworks like a spot and derivatives exchange.
Synth selection in Kwenta – source: Kwenta website
Solutions using Synthetix tokens on Optimism (Kwenta, Lyra, Uniswap) have grown in popularity this year, increasing revenue for the protocol.
SNX Incentive
The main function of the SNX token is to act as collateral in debt pools that enable the issuance of synthetic assets. By staking SNX on the protocol, holders receive a share of the revenue collected by the protocol: sUSD commissions generated from traders (Kwenta futures, Lyra options, Kwenta spots, Curve cross-asset swaps, etc.) and SNX Inflation reward (incentive for staking). The image below shows the current yield of the token when staked on Synthetix.
The chart above confirms the increase in fees collected on the ETH mainnet by the protocol. This is a direct result of our integration with 1inch. The table below shows all fees collected by the protocol. If you check the “optimism perpetual futures” and “optimism” rows, you’ll see that a lot of it comes from derivatives trading done on Kwenta and other protocols in optimism.
Protocol roadmap
We have major releases on our roadmap for the next few months that will help make the experience of users/applications interacting with the protocol more seamless. The Synth Bridge for Optimism will enable the transfer of assets between ETH and L2 Optimism, reducing latency for Synth’s bridging, increasing volume on that chain, and allowing perpetual and spot trading markets to run more It is worth noting that liquidity is provided. For example, by Quenta.
Version 3 of the protocol makes several additions that increase the use cases while building additional incentives for staking SNX into the protocol. One of them is Vote Locking Tokennomics. This is a financial incentive for users to lock SNX to the protocol for a period of time (up to 4 years). They will be eligible for higher rewards and voting rights on future protocol proposals in exchange for vlSNX (Vote Locked SNX).
The Footprint Analytics community contributes to this work.
The Footprint Community is a place to help data and crypto enthusiasts around the world understand and gain insights about Web3, the Metaverse, DeFi, GameFi, or any other area of the emerging blockchain world. Here you’ll find vibrant and diverse voices who support each other and move the community forward.
