Synthetix Network (SNX) has gained attention recently after it made a huge move off the bottom and certified itself as one of the top crypto projects by fees collected. In June alone, the fees collected on Ethereum mainnet by Synthetix rose from $4,000 on June 1st of 2022 to a peak of about $630k. This led to the SNX token doubling in price, hitting a high of over $3 and trader’s questioning is it time to buy SNX?
Top crypto projects by fees generated
Fees generated by Synthetix on Ethereum Mainnet
What is Synthetix Network?
Synthetix Network is a decentralized synthetic asset issuance and exchange (DEX) protocol that was initially launched in September 2017. These synthetic assets or "synths'' allow users to gain exposure to the underlying asset while benefiting from all of the advantages of decentralization. All synths start with "s", so a USD synth would be displayed as sUSD. The Synthetix protocol also includes a DEX where these synths can be swapped without requiring a counterparty to hold the synth being swapped for. This is because the smart contract burns the input synth and mints the corresponding value of the output synth.
The SNX token is used as collateral to mint synths. Users can stake SNX in a smart contract and mint synths against it. The amount of synths that can be minted is dependent on the collateralization ratio (c-ratio), which currently sits at about 270%. Therefore, users must lock 2.7 times more value of SNX than the value of synths they mint. Whenever a new synth is minted, the staker creates a debt that changes with the exchange rate. Stakers must pay back this debt before they can withdraw their staked SNX. Stakers receive a percentage of the protocol's trading fees in sUSD along with SNX rewards from inflation.
Why Buy Synthetix Network?
The massive increase in trading volume and fees generated comes mostly from the DEX aggregator, 1inch, after the SIP-120 proposal was passed. SIP-120 implemented atomic swaps, which allows users to swap synths on Ethereum mainnet automatically without fee reclamation. Prior to this SIP, when users would make a trade there would be a 10 minute wait to give the oracles time to check if there was a lag in price updates. If a trade was affected, then the trader either owes Synths (reclamation) or is owed Synths (rebate), and must either pay or be paid these Synths. 1inch integrated atomic swaps, which served as a major catalyst for the increase in trading volume.
In March of 2022, Synthetix launched perpetual futures on their synths, which was integrated by the protocol, Kwenta, and also contributed to this surge in trading volumes. Remember, many crypto assets have similar capabilities, but this project is unique and may appeal to you more because of how your portfolio is constructed. As of November 2022, the token was hovering around $2.50.
DeFi Protocols, and SNX, Come With Risks
Every DeFi protocol has its risks and Synthetix is no different. Although Synthetix is currently overcollateralized, it can still implode if SNX crashes since staked SNX acts as collateral. The protocol relies on stakers to pay down their debt to maintain the network c-ratio while absorbing potential liquidations. That being said, Synthetix has been able to survive for four years and their overall health can be easily monitored. Despite falling over 90% from its highs, none of the top 20 wallets have been liquidated and the largest holder of SNX and debt, the community treasury, is dedicated to servicing its debt.
With the increase in trading volume, this helped increase staking yields from fee generation, which can be used to pay off debt and maintain confidence in the health of the protocol. If Synthetix can continue making moves to form additional partnerships that help increase fee generation, it will survive the bear market and appease their stakers. Given the current market conditions, SNX will fall if the overall market continues its bear market. However, by surviving this crash, Synthetix could solidify itself as one of the top DeFi protocols. Currently, the staking yield is over 80% APY and will continue to increase with greater fee generation. Once the market turns around, staking SNX could be one of the best investment opportunities in crypto.
Frequently Asked Questions
What is Synthetix Network?
Synthetix Network is a decentralized synthetic asset issuance and exchange (DEX) protocol that plans to offer a wide variety of functionalities.
How does staking Synthetix (SNX) generate protocol revenues?
Staking SNX provides collateral for the debt pool and earns weekly rewards that are a combination of protocol fees and inflationary supply.
What is a Synth?
Synths are assets that are voted on by the community and can be things like fiat currencies, other cryptocurrencies or anything else with a price.
What blockchain is SNX on?
SNX began on the Ethereum mainnet but can now be purchased on multiple blockchains like Binance Smart Chain, Optimism, Fantom and more.
A full-version of this article can be found here (https://blockstar.substack.com/p/synthetix-network-overview).
Blockstar Advisors is a full-service web3 consulting firm focused on blockchain education. To learn more about us and what we offer visit blockstaradvisors.com or check out our twitter @blockstar_adv.
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