How does Synthetix work?

 

Synthetix is a decentralized protocol that enables the creation and trading of synthetic assets on the Ethereum blockchain. It was launched in 2018 and has since become one of the most popular DeFi (Decentralized Finance) protocols in the space. In this article, we'll take a closer look at what Synthetix is, how it works, and why it's important for the crypto industry.

What is Synthetix?

Synthetix is a decentralized protocol that allows users to create and trade synthetic assets on the Ethereum blockchain. These synthetic assets are ERC-20 tokens that track the price of an underlying asset, such as a stock, commodity, or cryptocurrency. For example, the synthetic asset sAAPL tracks the price of Apple's stock, and the synthetic asset sBTC tracks the price of Bitcoin.

Synthetix is powered by its native token, SNX, which is used to collateralize the creation of synthetic assets. In order to create a synthetic asset, a user must first stake SNX as collateral. The value of the staked SNX must be greater than the value of the synthetic asset being created. This ensures that the synthetic asset is fully collateralized and backed by SNX.

Once a synthetic asset has been created, it can be traded on the Synthetix exchange or used as collateral to create more synthetic assets. When a user trades a synthetic asset on the Synthetix exchange, they are actually trading a derivative contract that tracks the price of the underlying asset. The price of the synthetic asset is determined by an oracle that pulls data from various sources to ensure accuracy.

How does Synthetix work?

Synthetix is built on the Ethereum blockchain and uses smart contracts to automate the creation and trading of synthetic assets. The protocol is governed by a decentralized autonomous organization (DAO) that is controlled by SNX token holders. The DAO is responsible for making decisions about the protocol, such as adding new synthetic assets or adjusting collateralization ratios.

To create a synthetic asset, a user must first stake SNX as collateral. The amount of SNX that must be staked depends on the value of the synthetic asset being created and the collateralization ratio. For example, if a user wants to create $1,000 worth of sAAPL with a collateralization ratio of 800%, they would need to stake $8,000 worth of SNX.

Once the SNX has been staked, the user can mint the synthetic asset by sending a transaction to the Synthetix smart contract. The smart contract then mints the synthetic asset and credits it to the user's wallet. The user can then trade the synthetic asset on the Synthetix exchange or use it as collateral to create more synthetic assets.

When a user trades a synthetic asset on the Synthetix exchange, they are actually trading a derivative contract that tracks the price of the underlying asset. The price of the synthetic asset is determined by an oracle that pulls data from various sources to ensure accuracy. If the price of the underlying asset goes up, the price of the synthetic asset will also go up, and vice versa.

Why is Synthetix important for the crypto industry?

Synthetix is important for the crypto industry because it enables the creation and trading of synthetic assets on the Ethereum blockchain. This allows users to gain exposure to a wide range of assets without actually owning them. For example, a user can gain exposure to the price of Apple's stock without actually owning any Apple stock.

Synthetix also has the potential to disrupt traditional finance by enabling the creation of synthetic assets that track the price of traditional assets, such as stocks, commodities, and currencies. This allows users to gain exposure to these assets without having to go through traditional financial.