Synthetix (SNX) is one of the numerous DeFi tokens that has rallied considerably this year to reach a historical high of $7.32 in mid-August, reflecting gains of over 400% so far this year.
A major portion of the hoopla around altcoin this year was based on liquidity, lending and yield farming. Nevertheless, Synthetix has successfully entered the DeFi domain with the promise of facilitating crypto investors a pathway into conventional funding.
As per data provided by DappRadar, Synthetix is the fourth largest DeFi covenant in terms of TVL.
Synthetix, a decentralized exchange (DEX) created on the Ethereum blockchain via a series of smart contracts. Nevertheless, Synthetix does not facilitate trading between crypto assets (usually ERC-20 tokens) such as tokens and stablecoins, but instead among synthetic assets or “Synths.”
Synths basically portray assets in tokenized form. They basically monitor value of conventional assets. Synthetic exchange facilitates trading of commodities and stocks.
This includes fiat currencies (sEUR, sUSD), cryptos (sBTC, sETH) and commodities such as gold (sXAU).
Another distinct characteristic of Synthetix is the capability to develop and trade Synth tokens that monitor the asset price in an inverse manner (iUSD, iXAU, iETH).
Currently a short position can be taken in a clear decentralized way using Synths only. Creation of Synth tokens is accomplished by using another asset as collateral.
Nevertheless, rather than utilizing the underlying asset such as wBTC or USDT or depending on a proven asset such as Ether (MakerDAO’s DAI), the covenant’s in-house SNX token is utilized.
This implies that to achieve the creation of fresh Synths, there is a necessity for users to stake SNX tokens at a 750% collateralization ratio via the platform’s Mintr smart contract.
While freezing as much as $750 to gain access to $100 worth sUSD will not yield desired outcome, users will be able to purchase Synths via another decentralized cryptoexchange or simply lend it.
Stakers of SNX are incentivized through new tokens distributed on the basis of the covenant’s inflationary monetary guidelines.
Users not only receive staking rewards but also Synth exchange rewards generated in the form of exchange fees. Per se, community members are incentivized to offer liquidity to Synths and to stake their SNX tokens.
This results in shortfall and may be a key element in the fast rising market cap and also the increase in TVL. As the DeFi sector has grown in leaps and bounds in 2020, there are some major ventures that are gaining pace and pushing the crypto sector forward.
Interestingly, lending platforms and yield farming have garnered market’s attention, particularly after the launch of Compound covenant and token.
Nevertheless, this latest subset of DeFi is turning out to be popular with ventures such as UniSwap and its forthcoming fork, SushiSwap, which permit decentralized trading of ERC-20 tokens and compensates liquidity providers. Notably, dYdX, a completely decentralized platform facilitates trading of assets with margin.
As DeFi makes inroads into mainstream finance sector, there is an urgent need for robust framework and interoperability between covenants and conventional finance.
The rising attraction of DeFi is not because of interest earned by staking of assets but from the sector’s capability to offer investors with decentralized access to conventional assets and cryptocurrencies.