Disrupting the Derivates Market - Synthetix


Hey DEFI TIMES community,

The derivates market is the biggest in the world. Estimates are claiming that it is even more significant than the world’s GDP. Investopedia describes it like this:

The derivatives market is, in a word, gigantic—often estimated at over $1 quadrillion on the high end. How can that be? Largely because there are numerous derivatives in existence, available on virtually every possible type of investmentasset, including equities, commodities, bonds, and currency. Some marketanalysts even place the size of the market at more than 10 times that of the total world gross domestic product (GDP). However, other researchers challenge these estimates, arguing the size of the derivatives market is vastly overstated.

Bringing derivates on the blockchains seems to be a no-brainer. Especially if you get derivates on the Ethereum blockchain, the value of ETH will profit enormously.

Why? Because ETH is the native, trustless currency on the Ethereum blockchain. It is the preferred payment method for DeFi services.

When you buy derivates, you pay with ETH. When you create derivates, you provide the collateral with ETH or other tokens.

Now imagine a world where only one percent of the world’s derivates market is replicated on the Ethereum blockchain. Suddenly, $10 trillion of value will be tradable. To keep up with that, ETH needs to appreciate massively.

Today, we want to explore one of the leading protocols bringing derivates to the Ethereum blockchain: Synthetix.

Let’s see how it works!


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How Synthetix works

Synthetix allows users to mint and trade synthetic assets (Synths) on the blockchain. These assets do not provide users the right to claim underlying assets in the real world. They only reflect their prices.

On Synthetix, you can mint real-world assets (e.g., US Dollar) or crypto-assets (e.g., Bitcoin).

These assets are minted using a process called “collateralization.” You can lock the native Synthetix token (SNX) in a smart contract and receive Synths in exchange.

The collateralization ratio has to be higher than or equal to 750% to ensure that the Synths are fully backed. 

A simple example of a Synth is gold. Let’s assume a user wants to mint Synths that reflect the gold price on the Ethereum blockchain.

He then buys $2,000 worth of SNX and locks them in a smart contract. After that, he can mint $233 worth of gold tokens.

If the value of SNX decreases and the collateralization ratio falls below 750%, the position gets liquidated.

Types of Synths

At the moment, there are five categories of Synths available to mint: fiat currencies, commodities, cryptocurrencies, inverse cryptocurrencies, and cryptocurrency indexes. 

Here are some examples:

Fiat currencies: sUSD, sEUR, sKRW

Commodities: synthetic gold and synthetic silver, both measured per ounce

Cryptocurrencies: sBTC, sETH, and sBNB

Inverse Cryptocurrencies (the price of inverse Synths rises when the price of the underlying asset falls): e.g. iBTC

Cryptocurrency Indexes: sDEFI and sCEX

As of today, over $1.7 billion are locked in Synths.

Tokenomics

SNX is the native token of the Synthetix protocol. SNX is used to mint Synths, which are always backed with a 750% collateralization ratio. This concept ensures that there is a demand for SNX as the Synthetix protocol grows.

Users who stake SNX to mint Synths are also eligible to receive trading fees of the Synthetix exchange. Every time you trade synths on Synthetix, a fee is charged by the protocol. The costs are then allocated to SNX stakers.

Therefore, SNX is a utility token and a capital asset because holders earn a dividend; they profit from the growth of the platform.

SNX is an inflationary token. Stakers also receive SNX inflation rewards, which is an additional incentive to stake your SNX. So if you hold SNX, it is probably a good idea to stake them. Otherwise, your position will be diluted over time.

Conclusion

Synthetix allows users to mint all kinds of synthetic assets on the Ethereum blockchain. These Synths only reflect the price of the underlying asset. For example, if you own a Synth that reflects the gold price, you don’t have the right to claim gold in real life. An Amazon stock Synth doesn’t give holders the right to vote on shareholder meetings.

When you hold Synths, you can bet on rising or falling prices (sSynths vs. iSynths). 

Synthetix has the potential to disrupt a massive market. The derivates market is one of the biggest markets in the world.

If Synthetix manages to bring only a small portion of the derivates market to the Ethereum blockchain, SNX could profit immensely. That’s why the value of SNX is closely correlated with the actual usage of the Synthetix platform.

As always, do your own research before you invest in SNX. We at DEFI TIMES believe that Synthetix brings immense value to the Ethereum blockchain.


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All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.

Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.