Synthetix — Research Report

Synthetix — Research Report



Synthetix, one the leading decentralized synthetic asset platform providing a powerful engine to trade currencies, commodities, stocks, crypto, and indicies. Their native token, SNX, is valued at $2.62(1/22) with a market cap of  ~$650,000,00(1/22).


Figure 1 -- Synthetix Network Token key metrics: Circulating Supply, Max Supply, and Total Supply

The protocol was initially founded under the name Haaven through an ICO in 2018 raising $30m from the likes of Coinbase Ventures, Paradigm, and Parafi. Synthetix


Figure 1 -- Token Distribution from Intial 100m SNX tokens


The Synthetix protocol is a decentralized platform built on the Ethereum blockchain that allows users to create and trade synthetic assets, also known as Synths. These Synths are digital assets that are backed by collateral of Ether (ETH) or Synthetix Network Tokens and currencies.

The platform uses a system of smart contracts to govern the creation and trading of Synths. Users can deposit ETH/SNX as collateral and receive Synths in return, which can then be traded on the Synthetix exchange. The value of the Synths is determined by the value of the underlying assets and the amount of collateral held in the system. The synths given to the depositors are considered debt required to have a 400% collateralization ratio.

The Synthetix protocol also uses a decentralized autonomous organization (DAO) to govern the platform and make decisions about its development. The DAO comprises token holders who can vote on proposals to change the platform's rules and parameters.

Overall, the Synthetix protocol aims to provide a decentralized and transparent way for users to create, trade, and access a wide range of synthetic assets.

Token Economics


The Synthetix protocol utilizes the SNX token, which is an ERC-20 token that is used as collateral to mint synthetic assets, or "synths." Synths are digital assets that track the value of real-world assets such as commodities, currencies, and stocks. To mint a synth, users must deposit SNX into the Synthetix protocol's collateral pool, and in return, they receive a corresponding amount of the synth they wish to mint. The value of the SNX in the collateral pool is then locked up and can only be unlocked by burning the corresponding synth.

The Synthetix protocol also utilizes a debt pool, which provides liquidity for the trading of synths. The issuance of sUSD funds the debt pool, a synthetic stablecoin pegged to the US dollar's value. Users must borrow sUSD from the debt pool to trade a synth. The amount of sUSD borrowed is locked up as debt and can only be unlocked by paying back the borrowed sUSD and a fee in SNX. The fees generated from the debt pool are then distributed to SNX holders as a form of inflationary reward.

In summary, SNX tokens are used as collateral to mint synths, and the debt pool is used to provide liquidity for the trading of synths. The fees generated from the debt pool are distributed to SNX holders as a form of reward, incentivizing holders to stake their SNX and participate in the protocol.

System Architecture


Figure 2 -- SNX flow diagram -- how SNX stakers hold onto PnL

Minting Snyths

  • SNX holder will mind sUSD by locking their collateral(SNX) in a smart control and that will continue to require a collateralisation Ratio to be below 400%
  • Debt shares are issues to stakers to track the amount of debt issued when minting and then burning their sUSD
  • If the price os SNX increase the proportionate amount of SNX will be unlocked

Exchange Process

  • Step 1: burn the source Synth(sUSD), which will involve updating the wallet balance and the total balance of sUSD
  • step 2: establish conversion rate
  • Step 3: exchange free
  • Step 4: the remaining sUSD is issued to sBTC to the destination Synth contract and the wallet is then updated
  • Step 5: the sBTC total supply is updated

Exiting the System

  • When Synths are exchanged through the contract the fee is extracted and sent to the pool to be claimed by SNX stakers
  • Fees are allocated pro-rata based on the amount of debt issued to them
  • When they want to decrease their debt or exit the system they must burn their sUSD and unlocks their SNX
  • It can be complicated if the value of their debt changes over time
  • Major risk is if the debt pool increases, therefore the debt that you know have also increases

Figure 3 -- Token Terminal Weekly Gainers(1/24)

Token Specifics

Value Accrual to SNX:

Synthetix maintains one of the clearest value accruals to the token itself out of all defi protocols. During the month of Jan, Synthetix was the protocol that had the largest weekly and daily fees to holders in all Defi. Newly introduced fee-burning through the last update, Synthetix is poised to provide more cross-chain liquidity because debt can be assigned via an oracle with no asset movement.

The general understanding is simple: a more liquid system with more transactions will provide a flywheel effect in which people are trading more often.

Inflationary schedule:


Figure 4 -- weekly inflation of SNX -- L1/ L2/Overall

SNX has a rough 2.5% annual inflation during September of 2023; before this date, they are decreasing SNX emissions by 1.5% each week. The community voted to decrease the chances of random dumping and dilution. SNX stakers receive the weekly emissions as an added benefit alongside .3% fees. They maintain the staking ratio to 85% plus or minus 10%. The staking ratio will be measured as the percentage of SNX collateral in staked addresses divided by the total SNX collateral.


Governance Structure

The Synthetix protocol utilizes a decentralized governance structure that is made up of several vital councils and DAOs. These councils are elected by Synthetix Stakers and are responsible for making decisions regarding the direction and development of the protocol.

The first council is the Spartan Council which is responsible for reviewing, testing, and implementing protocol upgrades. The second council is the Treasury Council which is responsible for managing the protocol's treasury and making decisions about how funds are allocated. The third council is the Ambassador Council, which is responsible for promoting the protocol and building relationships with other projects and organizations. Lastly, the Grants Council is responsible for managing the protocol's grants program and allocating funds to support the development of projects that align with the protocol's goals. These councils are elected by Synthetix Stakers, who are incentivized to participate in the governance process and ensure that the protocol is being developed in the community's best interest.


Figure 5 -- Governance Structure: Councils, Comimittees, Core COntributors, and a DAO


Atomic Swaps

  • Synthetix on mainnet creates a waiting period of 10 minutes to decrease the risk of front running to be able to check the difference in the price when the transaction was initiated to when the transaction is finalized
  • Althought fee reclamation is helpful, the amount of time that it takes to use the platform makes the trading experience much worse
  • Optimism allows trading without fee reclamation since block speed is much quicker
  • Synthetix is able to ditch fee reclamation because new pricing architecture via Uniswap V3 and chainlink.

Figure 6 -- 1inch integrated with Synthetix for Atomic Swaps


  • Perps V2 have exploded on Synthetix during Januaray, all futures contracts need an oracle for price feeds, Synthetix now uses pyth off chain oracles to enable fees and decrease front-running and sandwich attacks, while using ChainLink as a backstop.
    • Decreases perps trading fees from 5-10 bps
  • The settlement is also altered so that sUSD is only backed by dcentralized collateral and isnt at risk of harm by frozen centrralized assets and isn’t secured by Tether or Circle.
  • SNX has unique governance properties that allow collection of revenue by the protocol alongside voting rights.
  • Integration through Kwenta, Decentrex, and Polynomial increases market-depth and usage from whales.


  • Allows protocols to use synthetix as a vehicle of liquidity
  • Anyone will have the ability to create liquidity pools and be able to build on top of Synthetix with updated architecture standards
  • Simplified Staking
  • Differentiated Debt Pool
    • Supplies collateral and receive fees from specific asset pools without having to be exposed every asset within the debt pool

Figure 7 -- Synthetix Roadmap that includes 2022 and 2023

Investment Thesis

Competitive Advantage

First Entrant:

The Synthetix protocol offers several competitive advantages that make it stand out in the growing field of decentralized finance (DeFi) and synthetic assets. One of its main advantages is that it was one of the first protocols to enter the derivative space in the crypto industry. This means that it has a significant head start and a proven track record in creating and trading synthetic assets, which gives it a strong reputation and user base. Synthetix was one of the first protocols to be launched and built on Optimism, where almost all trades have taken place because of lower fees and increased oracle updates.

Synthetic Asset Benefits through contracts:

Another major advantage of the Synthetix protocol is its zero slippage feature. Slippage refers to the difference between the expected price of a trade and the actual executed price. It can be a significant problem in highly liquid markets, but the Synthetix protocol's unique design allows for trades to be executed at the exact price that is quoted, which eliminates the problem of slippage. This means that users can trade with confidence, knowing that their trades will be executed at the price they expect. This has to do with the fact that instead of p2p trading, it is peer to contract trading where all transactions are executed against the contracts of Syntehtix; this allows increased access to liquidity, decreased slippage, and no traditional order book.

Real World Assets:

The Synthetix protocol also offers users access to a wide variety of synthetic assets. This includes traditional assets such as stocks, commodities, and currencies, as well as more exotic assets such as weather derivatives and real estate. This diversity of assets provides users with many more investment options and allows them to diversify their portfolio, which can be a significant advantage over other platforms that offer a more limited selection of assets.

Finally, the Synthetix protocol is governed by a decentralized autonomous organization (DAO) which allows token holders to vote on proposals to change the platform's rules and parameters, this provides a more transparent and democratic way of decision making.


There are two scenarios for Synthetix in the perpetual market, it is likely that Synthetix will thrive in either for a myriad of different reasons.

Scenario 1: Combative

In a scenario in which it is Synthetix vs. GMX, Synthetix will likely gain mroe volume more quickly because of its architecture. Perps V2 changes things as it has lower fees, 0 slippage, and uses decentralized on-demand oracles. This along with a variety of protocol integrations that includes names like 1inch and curve means that Synthetix has 9-figures more in liquidity that it wouldnt have otherwise. Synthetix is aiming to be a protocols for protocols in which they are the engine for deep liquidity and provide a variety of synthetix assets.

Scenario 2: Complementary

After V3 of the protocol, it will let anyone design their protocol around the debt-pool of synthetix and use it as backing and branding. In the future, GMX could be considered the most accessible for perps using the Synthetix V3 market and could have a world in which SNX is stake for GLP. GLP would have further decreased risk and volatility because it has access to assets outside of Arbitrum and would vastly increase fee production. Multi-chain debt-pool that will be able to support on many different chains will provide a backbone for protocols to come.

Protocol Integrations:


The Kwenta partnership has brought a large percentage of volume, especially with V2 including perps trading. Kwenta uses the Synthetix debt pool and the oracle engine and creates incentives to balance the debt-pool based on market conditions. Kwenta has support for both Ethereum and Optimism where the lion’s share of trading happens. They also have another front-end through Decentrex as well.


Figure 8 -- Kwenta Trading Dashboard

Overall, the Synthetix protocol's combination of being an early entrant, zero slippage and a variety of synthetic assets, and its decentralized autonomous organization governance, provide a strong competitive advantage and a wide moat for the protocol in the decentralized finance space.


Along with Kwenta, Synthetix has integrated with 1inch/Curve through the integration of Atomic Swaps which has created a boom in transaction volume along with fee production. Although much of the volume was because of the potential bounties along with the optimism quests, much of the transaction volume has continued through Jan.

Synthetix Ecosystem

Current Synthetix Ecosystem:

  • Kwenta: Spot and Perpetual
  • Decentrex: Perpetual
  • PolynomialFi: Options Vault
  • Lyra: Options
  • Thales: Parimutuel Markets

Evaluation and Concluding Remarks

An investment in Synthetix presents a compelling opportunity for those bullish on the future of decentralized finance and the growth potential of synthetic assets. As a decentralized platform for the creation and trading of synthetic assets, Synthetix allows users to gain exposure to a wide range of real-world assets such as commodities, currencies, and stocks, all while leveraging the benefits of blockchain technology.

With a traditional derivatives market valued at an staggering 1 quadrillion dollars, the potential for decentralized platforms like Synthetix to capture a portion of this market is significant. Furthermore, the recent launch of Synthetix V3, and the leadership of the company's founder and CEO Kain Warwick, positions the platform for continued growth and innovation.

In summary, investing in Synthetix offers the potential to tap into the massive derivatives market and benefit from the unique capabilities of decentralized finance. The platform's strong leadership team, and the recent launch of V3, further solidify the opportunity for growth in the coming years.

Trading Ideas

Debt Hedging

We want to generate revenue (SNX) from staking while reducing exposure to the fluctuations and variance of the debt pool, which would be pure yield. Therefore, we must hedge our debt so that it mirrors the movements of the overall pool and our outstanding debt is near 0 (value of our synths presently minus proportional debt obligation of the global pool). We argue that we can capture most of the variance of the debt pool without needing to fully replicate it by purchasing the assets whose returns most closely model the pools returns. For example, since most assets are correlated to BTC and ETH, performing a regression analysis of the returns of BTC and ETH against the global debt pool provides the necessary proportions of each to hedge the debt. Our r^2 is the proportion of the variance we capture from this hedge. This proportion should be update fairly frequently to account for changes in the composition of the debt pool.

We can be resistant to fluctuations in the debt pool by owning BTC and ETH since both of those assets are heavily correlated to everything else in the debt pool. Therefore, any fluctuations up or down in the debt pool will be accounted because our proportion of the debt would go up and down roughly the same. This means that we can extract pure yield off of SNX.

Math: Synthetix


Figure 9 -- Synthetic Staking API

Long SNX over ETH

If we are fundamentally long on SNX over the broader crypto market we can just by SNX as a purley speculative asset and don’t stake it therefore we don’t have exposure to fluctuations in the debt pool. While we own SNX, we can short less or the proportionate amount of ETH. If we fundamentally predict that even if the market goes down, SNX will decrease less than ETH, we would still be making money. In a world in which the conviction is not high enough to short 100% the amount of ETH relative to SNX, you can always short a different amount.

Long SNX -- Options Hedge

If we believe that SNX and ETH are highly correlated and we are fundamentally high on SNX, we could place a put on ETH way out of the money, we are not obligated to the option, but it is protecting against tail risk.