– Sigil Research

Author: Fiskantes

Synthetix is a decentralized exchange on Ethereum for the creation of Synths: on-chain synthetic assets that track the value of the real-world assets. Born as stablecoin project Havven, Synthetix rebranded, pivoted and expanded its scope prior to launching on mainnet in February 2019. As of May 2019, the Synthetix platform supports over 20 Synths representing fiat currencies, commodities (e.g. gold), and crypto assets. Stocks, indices, and other derivatives are expected to be added soon.

Synthetix has a native token called SNX. Holders can lock SNX as collateral to mint Synths, which are freely tradeable ERC20 tokens. Transaction fees from Synths exchanged on Synthetix’s non-custodial DEX (Synthetix.Exchange) go to SNX holders/Synth minters, incentivizing Synth creation and giving value to the underlying collateral (i.e. the SNX token).

Project Overview

Synthetix project is decentralized derivatives platform and decentralized exchange. Mainnet was launched in July 2019 and currently has daily volume of around 2M USD. The platform is a pivot from the Havven stable coin project, as outlined in new Litepaper. Havven raised 30M USD in an ICO in February 2018.

Volume is still low, but rapidly growing. Activity on various assets is evenly distributed so far. Exchange has flat trading fees of 0.3% per trade, which are distributed among SNX stakers. There is no order book, since trades are settling between SNX token holders who are minting various synths, using SNX token as collateral.

Peer to Contract trading: Synthetic exchange has unique trading engine. There is no order book, because traders do not trade against themselves, but against the shared liquidity pool of all minted synths, which are in the smart contract. This means high liquidity (the size of all minted synths) and no risk of order book (memepool) front running, which is otherwise common problem for decentralized exchanges.

SNX holders stake SNX and mint Synths (native derivatives on the platform) via Mintr dapp. SNX is used as a highly over-collateralized collateral (currently 750%), backing the value of Synths.

Derivatives – called “synths” (for example synthetic bitcoin sBTC, synthetic dollar sUSD or even synthetic stocks and indices) are then traded on Synthetix native decentralized exchange. Inverse synths with symbol “i” are used for shorting (for example iBTC means bitcoin short position), with some restrictions.

There are many synths in the pipeline, such as stocks and indices. For example, recently added synth sCEX and iCEX let’s traders participate on price moves of basket of crypto exchange tokens.

Rewards generated from staking can’t be withdrawn from the ecosystem sooner than in 12 months. This mechanism, while restricting stakers, prevents massive sell-offs in early bootstrapping phase during initial high inflation stage.

In case the underlying assets of minted Synths rise in value, or SNX token price decreases, SNX stakers are required to add more SNX tokens to collateral pool or to burn some of the synths they minted. Failing to do so results in loss of claim to rewards on staked SNX.

SNX token thus serves the ecosystem partially as revenue sharing asset, partially as collateral asset and partially as work token, needed to perform service (minting Synths) within the ecosystem. SNX token may also be used for governance (voting) for community proposals (SIPs).

Synthetix CEO is Kain Warwick, founder of Australian crypto payment platform for retailers blue-shyft. He is currently CEO of both projects. CTO is Justin Moses, former Director of Engineering of MongoDB. The rest of the team has also significant credentials. Synthetix also boasts with lively community of traders, investors and engineers that actively participate on the project.

Market Opportunity

Total value staked by SNX holders is currently (Oct 2019) around 80 M USD, which makes Synthetix one of the top 3 DeFi projects by value locked and also number one derivative DeFi project by the same metric. More than 80% of total SNX supply is being locked in staking.

Staking SNX will currently yield gross yearly reward of more than 75%. Reward consists of newly created Synths (with aggressive inflation table) and fees from the exchange. Inflation will rapidly decrease from March 2020 to 20%, which makes this opportunity very time sensitive, giving asymmetric advantage to early SNX stakers.

Long-term rewards are based on exchange fees and subsequently Synthetix DEX, price of SNX will be directly correlated with exchange volume and DCF model can be used for valuations. Currently, external research points to DCF value between 0.5 USD – 1.5 USD per token.

KPIs: All relevant data can be tracked real time via Synthetix.dashboard.

Modularity: Synthetic assets are fully interoperable with the whole Ethereum ecosystem and can be used in broad range of other DeFi projects. Synthetic ETH (sETH) has the biggest liquidity pool on Uniswap DEX, and SNX stakers minting sETH can earn additional income via providing sETH liquidity there. Synthetic USD (sUSD), EUR (sEUR) or GBP (sGBP) can be used as decentralized stablecoin, competing with Maker’s DAI.

Total Addressable Market: TAM size of decentralized derivatives is unclear, but we may conclude based on traditional finance and centralized derivative exchanges that it has potential in multiples of value of spot market, possibly multi-trillion dollar market in next 10-20 years.

Market Awareness and price action: Despite being under the radar after pivot for long time, Synthetix is now making the headlines, after A16Z allegedly (without confirmation) bought 235k USD worth of SNX and SNX price went to new all time high.

Example – SNX staking 

Alice wants to invest 8000 USD in SNX tokens. Current price of SNX tokens (as of Oct 2019) is 0.8 USD, so Alice buys 10 000 SNX tokens.

Alice is a DeFi user, so she uses Uniswap and buys SNX for ETH. Then Alice connects her Ethereum address to Mintr Dapp (she wants to be safe, so she uses Trezor hardware wallet linked to MyCrypto). In Mintr, Alice locks up her SNX tokens as a collateral and mints sUSD into the Synthetix liquidity pool. How many sUSD should Alice mint?

Alice knows that in order to earn rewards, she needs to maintain at least the minimum collateralization required by the platform, which is 750%. In order to have margin for volatility, Alice aims for 800% collateralization. That means that with 8000 USD worth of SNX, she mints 1000 sUSD. Alice regularly monitors her collateral via Mintr dashboard, and whenever her collateral value decreases below 800% she burns sUSD, and whenever it increases above 800% she mints more sUSD for her staking to be efficient.

Twice a month, Alice claims her reward, which consists of newly minted SNX tokens and trading fees nominated in sUSD.

How much is Alice expecting to make? Let’s define some assumptions:

  • 1 USD = 1 sUSD
  • Price of synthetic assets are constant
  • Alice bought 10000 SNX tokens in 1st October 2019 and passively stakes SNX with sUSD for one year. 
  • SNX token price remains stable around 0.8 USD 
  • Synthetix exchange daily volume is around 2M USD, making 730M in yearly volume
  • Fees remain at 0.3% of trading volume, generating 2,19M USD in fees over the year 
  • 80% of all SNX tokens are staked at all times with 800% collateral ratio (starting with 70M SNX tokens staked), which makes Alices share on overall stake 0.014%.
  • SNX inflation schedule will remain as currently planned

Given these assumptions, over the year Alice will generate 3840 USD worth of newly minted SNX rewards and 312 USD worth of sUSD trading fees rewards, making a return of 52% p.a.

Please note!
All of our assumptions will almost never hold true and we need to consider following caveats:

  • We will either see increase of SNX value and trading volume of Synthetix platform or decrease of both, based on the success of project in the face of competition and adoption of larger DeFi ecosystem
  • There can be a significant slippage, caused by sUSD peg not holding 1:1, Ethereum network fees and low liquidity of SNX token.
  • In real world, there may be additional costs when liquidating synths upon withdrawing SNX from the ecosystem, based on overall debt ratio of the system.
  • SNX rewards are locked in the system for 12 months, so the unlocking and withdrawing SNX tokens (apart from initial deposit) cannot be done sooner than 12 months after they were claimed.

Alice is staking pretty much passively, and still earning a substantial reward. For active traders, there are even more opportunities.

Meet Bob, who aims to use the network to full extent. Not only is Bob minting sUSD, he also exchanges it to sETH and sBTC, participating on the volatility of underlying ETH and BTC. He can also hedge the market by holding iETH and iBTC (short positions), and get exposure to synthetic gold and stocks. On top of that, Bob is also using his sETH to provide liquidity in Uniswap between sETH and ETH, and runs an arbitrage bot between sETH and ETH to earn additional income.

Risks and red flags

Early stage experiment: exchange and it’s token model is despite traction still an early stage experiment with a risk of failure that is not different to any other early stage innovative project. Many features and concepts utilised by Synthetix are still untested on scale.

Issuance decrease: On 1 March 2020 the SNX issuance is planned to be decreased from 75% to 21%, which may lead to price shock and consequent death spiral, that could be caused by SNX holders trying to frontrun each other, selling prior to 75% – 21% issuance decrease date.

However, there is a SIP (Synthetix Improvement Proposal) raised by community, to change the inflation schedule, or rather to smooth out the issuance decrease. Proposal also aims to introduce 3% perpetual inflation so SNX stakers won’t be incentivized solely on trading fees after 2024.

Adoption: Most activity on the exchange is currently performed by SNX stakers who minted synths and are testing the network. In order for Synthetix to be successful, it needs to attract users who are not SNX holders. These will initially be crypto-native users that can bet on gold and stocks without leaving the crypto ecosystem. However, it is not clear, how Synthetix plans to gain mass adoption from outside of the crypto world.

Debt fluctuation: SNX stakers provide collateral for the whole system, and share the debt of the system, which needs to be repaid. That can lead to a situation when, before unlocking SNX collateral, staker will need to repay their proportion of the overall debt first. Debt rising is especially dangerous to those stakers, who only mint and hold sUSD, if the price of ETH and BTC will shoot up. Because the network of SNX stakers pools and shares the debt of all synths, if sBTC and sETH value rises, sUSD minters debt also rises. This mechanics is best explained here.

Oracle risk: Oracle problem is well known in blockchain world. Synthetix is currently using their own oracle for price feeds, which is centralized and subject to counterparty risk. Synthetix aims to solve this issue by implementing various third party oracles, most notably Chainlink. However, the exact strategy is not yet formulated and viability of Chainlink price oracles is subject to debate.

Peg risk and spiral of death: Synthetix stands and fails with SNX tokens being locked as collateral to back the entire ecosystem. This, while granting SNX tokens value accrual properties, seems to be suboptimal over more liquid assets such as ETH and tBTC. Also there is no forced liquidity function (like in Maker), which means that in case of SNX price crash, risk of the system getting under-collateralized is even higher than in Maker.

Currently, Synthetix is a bit self-referential. SNX is used as collateral, but the value of SNX is largely derived from the success and utility of the Synthetix network itself. It’s a bit similar to a chicken and egg problem.

The price of synths is derived from the price of their underlying assets, but (like DAI), they do not always hold their peg. And with connection to risk of SNX collateral can lead to de-pegging of price of all synthetic assets.

Token related risks are very well documented by TheBlock research and in Synthetix team’s response. To address these risks Synthetix may adopt multi-collateral solution (starting with ETH), while preserving SNX value accrual properties by keeping the trading fee claims exclusive to SNX stakers.

Regulatory risks: In most of the jurisdictions derivative trading is strictly regulated and trying to build permissionless derivative platform may collide with law. While Synthetix is aiming to become fully decentralized application, without the possibility of censorship, the core team still has big control over the project and can be coerced to take it down or comply with regulations, which would be costly and would defeat the point of decentralization.

Centralization risk:
Recent drama around front-running attack on Synthetix was solved by amending the smart contract by the core team. While it turned out to be the right call, it showed that team still has substantial control (master key) to project’s smart contracts and thus, at this point at least, it’s not really immutable.

Ethereum systemic risk: Project currently runs solely on Ethereum (multi-chain approach was rejected by the team), which gives it access to the whole ETH tech stack, but also makes it a subject to Ethereum pitfalls and systemic risks, most notably risks connected to planned transition to Etherum 2.0. This transition can disrupt many decentralized projects, currently working on Ethereum.

Competition: While being a clear market leader in decentralized derivatives, there is still too early to tell the winner. Vast majority of crypto derivative trading still happens on centralized exchanges lead by BitMEX and Binance. New derivative exchanges such as Deribit and CoinFLEX are getting traction too. Decentralized derivative space is also growing – with direct competitors like Market Protocol, Vega, UMA.


Despite many risks in such early stage of the project, Sigil research team concludes, that SNX token is one of the most interesting investment opportunities in the DeFi ecosystem. SNX token mechanics has strong value accrual properties – claim to trading fees, issuance incentivizing early adopters, governance, velocity sink with staking and reward lockups.

Short term: We believe that SNX tokens provide solid opportunity until March 2020 with 75% issuance, however this opportunity may have already been priced in, after current price surge. Thus we do not think speculative long trade with horizon shorter than one year currently makes sense. We also see little sense in holding SNX without staking. As such, investor might stay alert on “buy the potential dip” opportunity and most importantly should be able to run staking to harness this opportunity in full. 

However, if an investor aims to hold and stake for one year, there is a pretty solid risk:reward ratio even with conservative assumptions.

There are two main events in short-term that could alter the SNX dynamics to watch out for:

  • 1 March 2020: issuance decrease date from 75% to 21% 
  • Voting around SIP (date to be announced), amending the issuance

Long term: Our long term thesis for DeFi and decentralized derivatives holds strong and thus our SNX view is very bullish in mid to long term (3-7 years). Potential return of this investment, given the traction of project and TAM can be in magnitudes with very favourable risk:reward. We see at least 1:10 risk:reward in the foreseeable future, depending on the crypto market dynamics, and potentially 1:1000 in case DeFi will gain significant adoption and Synthetix becomes go-to protocol layer for decentralized derivatives.

Author: Fiskantes

This research is performed by Sigil LTD for information and entertainment purposes only and is not to be taken as an investment or a financial advice. Sigil LTD holds long position in researched project and abides by no trade policy 3 days before and after publishing of this article. 

In case of any questions or feedback, please do not hesitate to reach out.
Thanks to Synthetix and Bankless communities for providing feedback. 

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