Why is the price of SNX soaring? An overview of the current ecosystem and V3 prospects of Synthetix
Why is SNX price surging? Overview of Synthetix's current ecosystem and V3 prospects
Written by: THOR HARTVIGSEN
Translated by: TechFlow
Synthetix has recently achieved significant growth. This article aims to analyze the current uniqueness of Synthetix, its recent performance, and why V3 is a major innovation in DeFi.
The Current Status of Synthetix
Synthetix was launched in 2017 by Kain Warwick and Justin Moses. The project was initially called Havven and provided a stablecoin (nUSD) collateralized by cryptographic assets. Since then, the protocol has made significant progress and now offers synthetic assets on the Ethereum mainnet and Optimism.
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Today, Synthetix acts as the liquidity layer for many DeFi protocols. On Synthetix, users stake the native token SNX to mint sUSD (Synthetic USD). Therefore, sUSD is the native stablecoin of Synthetix, overcollateralized by SNX and representing the user’s debt on the protocol.
As a result, the total available liquidity that protocols built on Synthetix can utilize depends on the amount of collateral (i.e., SNX) on the protocol. Why do users stake SNX to achieve this synthetic liquidity? Because stakers receive rewards in the form of native SNX tokens and also earn fees generated by this synthetic debt (currently at an annualized yield of 40%). If the staked SNX amount falls below a certain threshold, additional SNX issuance occurs to attract more users to stake SNX and increase liquidity.
Liquidity on Synthetix supports two types of assets: spot and futures. Spot synths track various assets such as cryptocurrencies, commodities, and forex. This allows users to gain exposure to underlying assets without actually holding them. Synthetic futures enable users to trade leveraged futures of various assets. The liquidity on Synthetix acts as the counterparty for these trades. Therefore, SNX stakers bear counterparty risk. This means that if traders utilizing the liquidity on Synthetix-powered trading protocols (e.g., Kwenta) make significant profits, the stakers’ debt increases, and vice versa. However, mechanisms are in place to mitigate this risk, including arbitrage opportunities (funding rates) provided to traders when there is a deviation in trading activity. This aims to achieve hedging neutrality for liquidity providers (SNX stakers), and V3 will introduce risk isolation.
Kwenta
As of now, Synthetix has a total locked value (TVL) of $375 million, meaning that $375 million worth of SNX has been staked. One example of a protocol built on Synthetix and utilizing its liquidity is Kwenta. Kwenta is a perpetual futures trading protocol on Optimism that does not have native liquidity but inherits it from Synthetix. All trading pairs on Kwenta are priced in sUSD, so users need to mint sUSD by staking SNX (or buying sUSD on the market) to trade these synthetic assets.
All transaction fees generated on Kwenta are paid to SNX stakers. On average, Kwenta accounts for approximately 60-70% of all fees generated by protocols utilizing Synthetix liquidity. There are other protocols/frontends built on top of Synthetix, including:
- Lyra;
- Thales;
- Kwenta;
- dHedge;
- Polynomial.
- Infinex
Infinex is an on-chain perpetual exchange designed to simulate the trading experience on centralized exchanges in a decentralized manner. As the user interface and experience are core to this protocol, “Simple” and “Advanced” modes will be provided to make it easier to attract new traders.
The protocol will not have a new native token and will be governed by SNX. Additionally, all revenue will be used to deepen liquidity on Synthetix through the purchase and staking of SNX. The larger the trading volume, the greater the purchasing pressure on SNX and the deeper the liquidity. This could create a virtuous cycle.
Synthetix V2 Metrics
Below are charts from Token Terminal showing the price of SNX and the trading volume utilizing Synthetix liquidity. As you can see, there is a significant divergence between recent on-chain activity and the current price of SNX.
Recently, Synthetix has launched several products, with the Perps V2 upgrade playing a significant role in increasing activity. This upgrade introduces various synthetic assets that can be used on protocols like Kwenta. It is worth mentioning that Synthetix has acquired a significant amount of OP tokens from Optimism, which are being used for protocols like Kwenta to incentivize users to use the product. Additionally, Kwenta also distributes KWENTA tokens as an additional incentive.
Below is a chart of TVL, which, in the case of Synthetix, is directly correlated with the price of SNX, as shown in the following image. This is because, as mentioned earlier, SNX is the only asset that can be staked on the protocol.
Synthetix is a core infrastructure in DeFi that is used by multiple protocols as mentioned above. Currently, the limitation of liquidity or TVL is that only SNX can be staked on Synthetix. This will change in V3.
Synthetix V3
Synthetix V3 includes a series of upgrades that will take Synthetix to a new level: providing cross-chain liquidity layer for DeFi. V3 is currently in the alpha stage, and different features will be rolled out gradually.
TLDR
- Multi-collateral, not just SNX;
- Permissionless liquidity layer;
- Developer-friendly ecosystem;
- Seamless cross-chain implementation.
Multi-Collateral Collateralization
Multi-collateral collateralization is one of the core principles of the Synthetix V3 vision. Currently, only SNX can be staked to provide liquidity for synthetic spot and perpetual markets. V3 introduces the design of insurance pools, each represented by a collateral (token). An insurance pool can be ETH, another SNX, and a third wBTC. The types of collateral that make up these insurance pools are added through governance. In addition, insurance pools can be added to pools for protocols that wish to utilize specific liquidity. For example, a pool can be composed of ETH and DAI insurance pools, which can then be used on on-chain derivative markets (such as Kwenta). Some benefits include:
- As a staker, you can choose which asset to provide as collateral and earn rewards, enjoying more freedom.
- As pools are associated with specific markets, stakers can avoid risks. Risk-averse investors may only provide liquidity to pools used by the BTC and ETH markets, without involving higher-risk assets.
- As pools are associated with specific markets, better hedging can be achieved, reducing counterparty risks.
Permissionless Liquidity Layer
With V3, developers can create new markets on Synthetix using liquidity pools in a permissionless manner. One important obstacle in DeFi is establishing liquidity in the early stages, often incentivized by issuing a large number of tokens.
In addition to being able to choose which liquidity pools the market should integrate, market creators can also choose the oracles to be used for their products and create custom reward structures for liquidity providers. The listing of new synthetic assets no longer requires governance and can be easily achieved. These assets can be anything from spot OPs to ETH options.
Synthetix will ultimately serve as a liquidity-as-a-service platform that can be easily integrated by new products.
Seamless Cross-Chain Implementation
The ultimate goal of Synthetix V3 is to be available on any EVM chain. Teleporters will allow liquidity provided on one chain to be used on other chains. For example, if a user provides liquidity to a pool on Optimism, markets on Arbitrum can utilize this liquidity to support their platform.
Below is an overview of the structure of the Synthetix V3 spot market: Users deposit their assets into insurance pools, which are added to specific pools. These pools can be used by protocols to create markets on top of the Synthetix liquidity pool. These markets are the objects with which users interact on dapps built on Synthetix, such as Kwenta.
The Path to V3
Below is a brief overview of the plans leading up to the full release of Synthetix V3:
- Stablecoin Migration – V3 introduces a new synthetic stablecoin to replace the current V2 sUSD. The name is yet to be determined, but one suggestion is to keep the new stablecoin as “sUSD” and rename the current V2 version as “oldUSD” or “legacyUSD”. Over time, as the new V3 stablecoin and synthetic assets gain liquidity and empowerment, users will need to migrate their assets from V2 to V3 (via Curve pools).
- Perps V3 – Perps V3 will introduce the aforementioned multi-collateral collateralization. For traders on protocols like Kwenta and Polynomial, the most important aspect is that all synthetic assets (not just sUSD) can be used as collateral for trading. The UI/UX will also be simplified and intuitive. Most of the core code has been completed and is nearing audit. The testnet may be launched in late July.
- Upgrade V2 SNX Stakers to V3 LPs – This feature allows current SNX stakers to migrate to V3 without having to repay debt and close positions (SIP-306).
- Teleporters – Teleporters are a key part of the cross-chain functionality of V3. To enable the use of cross-chain liquidity, they destroy sUSD on one chain and mint sUSD on another, eliminating the need for slippage and cross-chain bridges. Teleporters are currently under development and running on several testnets (SIP-311).
- Cross-Chain Pool Synthesis – This is another core aspect necessary to achieve the vision of full-chain liquidity. It allows markets and pools to be aware of the state of collateral on other chains. With this feature, new perpetual markets can be launched on one chain and leverage liquidity from another chain. It is currently being tested on the testnet (SIP-312).
Conclusion
The ultimate goal of Synthetix is extremely exciting, but the key lies in creating demand and attracting developers to build solutions that utilize Synthetix as a liquidity layer. The more protocols (such as Kwenta) that are built on Synthetix, the higher the returns for liquidity providers (staking on Synthetix). As returns increase, the provided liquidity will also increase, and deeper liquidity will attract more protocols to be built on Synthetix. This is a mutually beneficial cycle.
As mentioned earlier, 60-70% of the fees earned by SNX stakers come solely from traders on Kwenta. Trading on Kwenta is strongly incentivized by a significant emission of OP and KWENTA tokens, making it difficult to estimate the extent of recent user growth.
