Beginner’s Guide to DeFi Protocol Synthetix Network Using ERC-20 Token (SNX) | Derivatives Trading on Ethereum Blockchain

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In this guide, we provide a detailed analysis of how Synthetix became one of the most in-demand token exchanges globally.

SNX, or Synthetix Network Token, offers users the opportunity to trade a host of financial assets, including stocks, bonds, currencies, crypto, and other assets, in a single unit of exchange called an ERC-20 token.

Key Takeaways

  • Synthetix Token allows users to trade currencies on Ethereum
  • It helps users buy stocks and bonds with digital currencies rather than with real currency;
  • In the past, Synthetix was a fixed-price cryptocurrency i.e. a stablecoin but now mainly acts as a DeFi.

Wall Street, London, and Hong Kong dominate the financial industry because of the cash flow they generate from buying stocks and commodities, however Synthetix is attempting to change the natural order by creating a decentralized market with lesser regulations that uses digital currencies to buy equities and assets, at any time of the day.

What is Synthetix?

Synthetix is a network protocol that uses ERC20 tokens as its unit for trading securities like stocks, bonds, and debentures. Synthetix assets otherwise known as “Synths” usually evaluate current prices of securities in the financial market and put them up in the equivalent value of an ERC20 token on an Ethereum blockchain.

However, buying up Synths doesn’t hold as much value as holding real assets. While users can get a Synthetix TUSD token for the same market value of a “real” TUSD token it however doesn’t give equal voting power to its holders as real token holders get more power in this scenario.

Who Invented Synthetix?

Synthetix, formerly known as Haven, originally served as a stable coin but its advancements under founder and current CEO Kain Warwick generated Synthetix token worth $180 million, making it one of the largest investment funds sealed with a Defi protocol as of December 2019.

It originally started as a form of stablecoin but has since branched out into decentralized finance. Stablecoins are a form of computerized assets, used to imitate major forms of currency like pounds and dollars. Unlike other forms of cryptocurrencies, they maintain stability in price values across trades.

DeFi – a short form for decentralized finance is currently the most popular segment of cryptocurrency today built on an arrangement of the blockchain networks. It is aimed at creating an open, trusted, and transparent financial service that can be used by everybody, completely separate from government and regular centralized systems.

A16z is one of the major holders of Synthetix tokens and the capitalist fund group owns over 370,000 MakerDAO tokens which was never publicized by the venture fund since their acquisition in September 2018. One synth is currently valued at around $7, recording a 20% loss in value over the last month.

What’s So Special About SNX?

Synthetix allows a lot of transactional operations all of which allow for price inflation, barter, and indemnity and are done on a token-based system. The multi-token platform implements two different tokens for its operations namely; synthetic assets and primary Synthetix Network Token (SNX).

Its mechanism is synonymous with MakerDAO’s where DAI is developed by sealing up ETH. The main Synthetix is rendered inactive to develop USD (synthetic USD). The sUSD and SNX both work synonymously in a debt-collateral system.

What separates Synthetix from Maker DAO is that SNX works as collateral for any asset exchange. For a Synthetix system to function, it must be able to obtain real-time information and global news such as the price of Apple stocks or the current price at which the Great Britain Pound is sold.

Synthetix previously employed the services of centralized exchanges to provide them with such data which may sometimes be unreliable but are now in alliance with ChainLink who provides accurate and real-time data to the blockchain while working as a decentralized exchange.

The service enables users to mint and burn synths without making use of a third-party system. You can also trade synths for other forms of currencies via the online exchange with extreme ease.

What Else is Different?

Synthetix’s incredible performance in the financial market mainly originates from its token-based system. Synthetix allows its members to stake their tokens in exchange for currency and other securities or gain incentives in alignment with their inflationary monetary policy. It also allows people to trade Synths through smart contracts, eliminating the need for an external party.

New Synths are formed when Synths with an accumulated value of 750% of a single one are bet as SNX. When this process is going on, SNX is limited for purchase in the market, and the value of tokens increases thereafter. This is confirmed by evaluating the price of tokens which are expected to increase. The year 2019 saw values of token rise from over $0.02 to over $1.20 at the end of the year.

In the system, there has been an inflation of recent, with the currency having up to a hundred million tokens in circulation; with some already being distributed to issuers and the rest being minted, and the number available is predicted to triple in number over the next few years. This is due to the realization by the online system that the brand needed to do more to create greater sensitivity of the general public to the token.

The system is debt-driven, with their 750% collateral kept aside as collateral. The synths given to act as debt can be used in several trading activities and must repay the said debt by trading in some synths to equal the value of synths they were given. This debt is contained in a pool for all traders using the platform. Every user’s debt is a fraction of the overall, and it fluctuates concerning the market value of the received synths.

They are however not mandated to pay back with the form of currency they got, allowing them the liberty to bay back in other forms of tokens, as long as the value remains equivalent to the debt; granting the system unlimited liquidity and still maintaining a balance within the system.

How are SNX Tokens Produced?

Tokens, just like shares, are increased when capital is raised in preparation for a company to go public. Synthetix launched an initial coin offering with over 100 million tokens back when it used to be referred to as Havven and that sequence generated over $30 million in revenue for the company. The number of SNX tokens which are currently over 160 million is projected to increase by a hundred million in about 5 years with extra incentives given to regular users of the platform.

How to Buy Synthetix Network Tokens (SNX)?

SNX tokens are readily available on decentralized platforms like Bisq and Bancor provided you have a cryptocurrency in your Ethereum wallet for trading. There is also room for generating new Synths by staking SNX on the Mintr dApp.

Before purchasing SNX tokens, here are a couple of things to know and put into consideration:

  • As stated on the platform, the service is relatively new and despite the several measures being taken to prevent losses, there is no assurance that it will continue to progress with no hitches.
  • More often than not, users have to trade in more tokens than they got in order to pay back the debt incurred.
  • There is a lot of competition in the world of crypto assets and tokens.
  • The service is heavily dependent on Ethereum – meaning that if it succeeds, the service succeeds, but if it fails, the service fails.
  • SNX tokens synthetic assets rely on price feeds. They cannot be produced without a way to monitor the progress of other steady asset’s values.
  • The tokens are limited to major cryptocurrencies like bitcoin, strong currencies, and other precious materials like diamonds and gold.

What You Can Accomplish with Synthetix Platform

The Synthetix platform is basically set up for trading. Its platform allows users to hold long positions on security, predict a higher market value for an asset in the coming days or weeks, or buy quickly and sell to get a small profit. Staking SNX provides a lot of incentives for users such as gaining profit and freebies, this is the main reason a major share of SNX tokens are sealed to prevent large creation of synths.

The Future

Synthetix topped the 2019 Defi dApp charts due to their incredible growth through the year and this resulted in a motive to operate a decentralized government system from the coming year. Like most cryptocurrencies, it entails high-risk with no guarantee of its value in the coming years and its performance in the stock market subject to external activities.

Employing the use of this service in its initial stages is only for those with high-risk tolerance and money to spare.

Although, with the past and current trend its token has been following, the service has been predicted to continue to flourish and will soon become a powerhouse in the world of Decentralized Finance.

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Chris Munch

Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.