In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

Gain a comprehensive understanding of Synthetix’s operating mechanism, business structure and valuation logic.

Core Investment Logic

Synthetix is currently worth active attention for the following reasons.

The decentralized derivatives trading track has huge space, with obvious potential against decentralized spot trading (Uniswap) and centralized derivatives trading (BitMEX).

From a track perspective, L2 is most favorable for decentralized derivatives trading; with the main online launch of arbitrum and the upcoming launch of optimism, L2 has truly arrived.

Synthetix’s core business logic “dynamic debt pooling” has been tested and proven for more than 2 years; under the dynamic debt pooling mechanism, Synthetix is expected to achieve “unlimited liquidity with unlimited tradables”, with stronger network effects and easier “winner takes all”.

Synthetix’s core function: L2+ leveraged trading will be launched soon, which is expected to usher in a new business increment and gain upward valuation.

There are 4 sub-projects within the system that may launch tokens to be distributed to SNX holders.

The team is motivated and willing to take responsibility, with high level of project governance and good community building.

Valuation

Combining historical valuation and cross-sectional valuation data, we believe that SNX is currently reasonably valued and slightly undervalued.

Key Risks

Synthetix is exposed to the following major risks –

Regulatory risk.

Predictor risk.

Delayed/unexpected go-live of key features risk.

The risk of substitution of similar projects.

Project Basics
Project Details
Synthetix defines itself as a “derivatives liquidity protocol”. Its main business is Synthetix Asset / Derivatives Trading.

There are two types of roles within Synthetix’s main business system –

Trader

Traders can trade dozens of assets in Synthetix, including cryptocurrencies, equity, foreign exchange, commodities, etc. Traders can trade in Synthetix without slippage and can trade in real time at predicted machine prices, and the proceeds can be settled and withdrawn in real time.

Staker

Staker is essentially a liquity privoder, which pledges SNX (Synthetix’s project token) to provide trader with nearly unlimited liquidity under the “dynamic debt pool” mechanism. staker can receive SNX incremental rewards and trader’s trading Synthetix

Synthetix is currently only available on the ETH and Optimism ETH chains.

Briefly, the main business process of Synthetix currently consists of the following steps –

Minting

Users pledge SNX to generate sUSD at a 500% collateral rate. sUSD is always anchored to 1USD

Trading

Within the kwenta exchange (and previously Synthetix.exchange), users can use sUSD to trade for any of the system-backed synthetic assets (replaced by synths below), including

Cryptocurrency assets, which include sToken (long assets) and iToken (reverse synthetic assets, used for shorting), such as sETH and iETH, sDeFi, etc.

Foreign exchange assets such as sEUR, sJPY.

Equity assets such as sTSLA and sFTSE (FTSE 100).

Commodity assets sXAU, sXAG.

The process of trading actually destroys sUSD and casts synths.

Destruction

After the transaction is completed the user can exchange synths for sUSD (in effect destroying synths and recasting sUSD) and return sUSD to get back SNX (due to the design of the dynamic debt pool, it is not always possible to exchange all collateralized SNX here, more on this mechanism below).

It is important to note that

The underlying asset used as collateral is not a stable coin or ETH, but the project’s own token, SNX, whose price is more volatile, so on the one hand, the project encourages people to increase the pledge rate to maintain the stability of the project, in the following way

New SNX tokens will be issued when the user pledge rate is above the system’s target pledge rate (equivalent to single coin pledge mining).

Users receive a transaction fee bonus when their pledge rate is above the target pledge rate, ranging from 0.1% to 1% for different assets, but mostly 0.3%. The percentage of the user’s share is determined by the ratio of the user’s debt (sUSD minted by the user) to the total system debt; on the other hand, the liquidation of the system is triggered when the user’s pledge ratio is less than 200% for more than 2 days.

Users can buy synths directly without generating sUSD, e.g. if a user wants to short BTC, he/she can convert USDT to sUSD via curve and then buy iBTC in Synthetix.

In the process of trading synths, the price is traded instantly at the prophecy machine price: 0 slippage, (mostly) only 0.3% commission + gas fee, and no trade failure. There is no amm, and the counterparty is not another individual, but the whole system. The whole process is supported by a “dynamic debt pool”.

About Dynamic Debt Pooling

The design of the Dynamic Debt Pool is unique to SNX and is the core, most difficult to understand and, in my opinion, the most exciting part of the design. It is the dynamic debt pool that supports the real-time, slippage-free nature of Synthetix trading.

Dynamic debt” means that the liabilities of the user and the system change in real time. When a user pledges a SNX to mint sUSD, the minted sUSD is considered a newly created debt of the system, and when the sUSD is traded into synths, the debt rises and falls as the synths increase or decrease in value, and the system’s debt is always shared by all SNX pledgers on a pro rata basis. This makes it possible for a user who only participates in the casting of sUSD without doing anything, to have his debt change dynamically.

The simplest example is as follows: suppose there are only two people in the system, A and B, who have each minted 100sUSD.

Eventually, both A and B’s debt becomes 150 sUSD, but A’s assets are worth 200 sUSD and B’s assets are still worth 100 sUSD. At this point, A sells sBTC for 200 sUSD and only needs 150 sUSD to redeem the SNX, while B still needs to buy 50 sUSD to redeem the collateralized SNX The key to understanding this is that

The key to understanding this is that for a user who pledges SNX to generate sUSD at any given moment, he always receives a fixed amount of sUSD in assets and he always carries a fixed percentage of sUSD in liabilities. At the time he pledges SNX to generate sUSD, the two are exactly equal, and the total amount of debt varies in real time based on the total market value of synths, and thus the debt he carries varies with the total market value of synths.

As you can see, for the SNX staker, Synthetix’s debt pool model is actually a dynamic zero-sum game (fees are also allocated proportionally to the staker): the profit may come from the fact that the price of his asset rises more, or the price of his asset falls less on the way down; and vice versa. Or, for those who participate in Synthetix’s pledges, they are essentially long “their own investment capacity / the investment capacity of other participants”. Holding on to the sUSD is certainly an option, but it also exposes you to the risk of “someone else’s investment power is too strong so I lose money”. According to Taleb, when users pledge SNX to generate sUSD, they are already “sink in the game”, which is a bold design where everyone is taking the risk, so that everyone is truly a “stakeholder”.

The trading experience supported by the dynamic debt pool model is excellent: no slippage and real time trading (regardless of prophecy machine latency), near infinite liquidity (within the safety of the protocol) for all underlying trades. Assuming that both L2 and leveraged trades go live as expected and the experience is as expected, the trader experience will be excellent.

But for the staker, the situation is much more complex, especially since the highly gamed logic of “I will really lose money if someone else makes money” is intuitively a bit hard to accept. But in fact, if we compare the dynamic debt pool model of Synthetix, a decentralized derivatives exchange, with the AMM model of uniswap, a decentralized spot exchange, we find that there are many similarities.

Uniswap gives the swapper a real-time trading / low slippage experience by incentivizing LPs to provide liquidity by fully allocating trading fees to LPs through the AMM model.

Synthetix provides a real time trading / low slippage experience for trader by incentivizing staker to provide liquidity through a dynamic debt pool model that fully distributes trading fees to staker + tokens.

Why doesn’t Synthetix use AMM?

For derivatives trading, an illiquid underlying can be a disastrous experience for users, which is why many centralized derivatives exchanges, which are already very large, still do not support many underlying instruments (e.g. Bybit). The liquidity of the common AMM model is subject-specific, with little correlation between the liquidity of different trading pairs. Synthetix’s mechanism not only allows a single underlying to have unlimited liquidity, but more importantly, all underlying transactions can share this liquidity.

Operational Data

As of June 7, 15:00, Synthetix core data is as follows –

Pledge data

Current TVL is $1.43 billion; 70% of the outstanding SNX are pledged on the website; in addition to fees, Synthetix uses incremental tokens to encourage users to provide liquidity. The annualized return on fees is currently around 5%, while the return on SNX single coin pledges is around 25%, which together make up 30% of the staking APY.

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

Trading Data

57,839 cumulative trades; cumulative volume of nearly $6 billion; over $25 million (including sUSD trades) in volume in the last 24 hours. Over $21.7 million in transaction fees since February 2020.

Over $250 million of sUSD in circulation, with a total value of over $650 million of synthetic assets in circulation.

In addition to its primary business, Synthetix’s other businesses currently include

Lending

Synthetix supports users pledging renBTC for sBTC or sUSD and ETH for sETH or sUSD, and is designed to give users who do not wish to hold SNX a way to access the system (lending in this case is regular collateralized lending, i.e. fixed debt lending), and currently generates a total of $45 million in debt through this format 45 million in debt, most of which is sUSD, as follows.

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

Liquidity Mining

Synthetix provides incentives for a variety of behaviors in order to keep the system stable in the long run, such as maintaining a stable sUSD price by incentivizing the curve’s sUSD-pool.

Incentives for users to pledge sUSD to short sBTC and sETH

Due to the excessive long positions of BTC and ETH in synths, the systemic debt will grow too quickly in a unilateral upward market of ETH, which may affect the stability of the whole system. From the perspective of reducing systemic risk, Synthetix is incentivizing users to pledge sUSD to short sBTC and sETH, and the current data is as follows.

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

Make a binary options trade

The current volume of options is not high, in the $100,000 range.

xToken

In simple terms xToken is an investment strategy package (also an ERC-20 token) for the current cryptocurrency that balances pledging returns and liquidity. For example, xSNXa’s strategy can be described as “aggressive pledge on SNX + cautious long on ETH”. In addition to xSNX, xAAVE, xKNC, xBNT and other tokens have been launched so far. xToken’s xSNX and xBNT pools were attacked by the prophecy machine some time ago. The total AUM (Asset Under Management) of the project is currently around $25 million.

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

dHedge

dHedge is a Synthetix-based distributed asset management protocol that enables users to manage multiple synthetic assets without custody. dHedge is backed by a number of institutions including: Framework Ventures, Three Arrows Capital, BlockTower Capital, DACM and Maple Leaf Capital. BlockTower Capital, DACM, and Maple Leaf Capital.

For traders, creating a pool of assets on dHedge allows them to take advantage of Synthetix’s zero slippage and unlimited liquidity trading mechanisms, which can attract users to invest for a share of the profits.

For the general public, it gives them the best way to share in the returns of top traders’ investments: no custody, all data from the chain.

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

dHedge currently ranks in the top 5 asset pools in AUM

Product completeness issues

Needless to say, Synthetix does not seem to be a complete product now that L2 trading and leveraged trading are not yet live. After all, with only 1x leverage to go long/short + hundreds or thousands of gwei, what trader can afford to do that?

But from another perspective, which is the track that benefits most from L2? Without a doubt, it is the on-chain derivatives trading.

On the issue of product completeness, we will discuss in detail in II.2 past developments and roadmap

System Stability

There have been many critics of Synthetix, including many KOLs, and to summarize, the main points of the critics are

The combination of SNX’s token model + pledge model is too Ponzi, high pledge rate + long lock-up period pushes up the token price, once the SNX token price drops, sUSD will be unanchored and the whole system will fall into a death spiral.

A similar model has long been played in China’s A-shares, where companies speculate on their own share prices and then pledge them to brokers to get money to continue speculating. This game is dangerous because when the price is too high, the whole situation will become a weir, as soon as someone starts to sell, it will immediately cause a catastrophic collapse, which will cause a death spiral, SNX plunge, the collateral assets burst, SNX plunge increases, the collateral assets continue to burst”.

There is some truth to this concern, as the stability of the system and the liquidity of the trades rely heavily on the pledged SNX, and a SNX crash that triggers a crisis of trust and liquidity, leading to a de-anchoring of the sUSD, could seriously destabilize the entire system, not to mention the derivatives trades built on it.

In fact, Synthetix was designed to start with a collateralization rate of 750% and to reward users above the target collateralization rate in order to mitigate the impact of a SNX price drop on the stability of the protocol.

How well does the protocol resist risk in practice? We chose the stability of sUSD as an indicator of the stability of the system. Looking back at the price fluctuations of sUSD, it is clear that in February-March of 20 years, the SNX price fell by more than 50% and the sUSD price fell to 0.8 at one point, and for a long time afterwards, the sUSD price was below $1.

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

Token prices from Jan-Apr 20: sUSD vs SNX

Arguably, this was Synthetix’s most dangerous moment.

Just before and after 519, SNX price also dropped more than 60% from its highs, but sUSD was very stable in its anchoring.

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

Token price in the last 4 months: sUSD vs SNX

In fact, we can see that since the SNX token price rose to 5U in July last year, the stability of the system has been greatly improved, which is reflected in the more “stable” price of sUSD, which basically fluctuates between 1-1.05U.

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

Price fluctuations of sUSD vs SNX from Dec’18 to present

As a result, we believe that the SNX system is indeed an inverse system, and that the rise and fall of the SNX will further drive its price up and down, and the fall of the SNX price will affect the stability of the Synthetix system.

However, there is a threshold above which the stability of the Synthetix system increases significantly. We believe that the SNX price has now passed this threshold and that the stability of the Synthetix system has been verified in this relatively extreme market.

Community Governance

Synthetix has always been considered as one of the models of community governance. Currently, Synthetix’s community governance is a system of 4 DAOs cooperating with each other and constraining each other, which is slightly complicated but fully considers the interests of multiple parties including developers, commoners, giant whale users, and project owners, and achieves a good balance between decentralization and efficiency.

In brief, the governance of Synthetix is divided into 4 DAOs, specifically: The Spartan Council, protocolDAO, grantsDAO and SynthetixDAO, among which The Spartan Council, protocolDAO and SynthetixDAO check and balance each other. The Spartan Council, protocolDAO, grantsDAO and SynthetixDAO, of which The Spartan Council and protocolDAO are checks and balances that determine the adjustment of key parameters of the protocol (where the Spartan Council uses open parties in the calculation of voting rights to constrain large investors); and grantsDAO and SynthetixDAO are used to manage community funds.

More information can be found at –

and founder kain’s thoughts on the launch of Spartan Council –

Past Developments and Roadmap
Past Developments

Synthetix, formerly Havven, a dual token system stablecoin project, was founded by Kain Warwick in 2017

Havven raised a total of $30.3M via ICO from Jan-Mar ’18 at 0.5U / HAV (later SNX)

At the end of July 18, Havven was launched and its business can be briefly described as “issuing stable coin nUSD by pledging the native token HAV on the chain

In early December 18, the business was reoriented to synthetic assets, and the project was officially renamed Synthetix, its token HAV was renamed SNX, and nUSD was renamed sUSD.

In February ’19, Synthetix was successfully launched on the ETH mainnet

In March 19, a “bold” adjustment was made to the SNX token model. In short, the total number of SNX was increased from 100 million to 245 million, and the excess was released to staker as a reward within 5 years, with the reward portion locked for 1 year. The move generated a lot of criticism at the time, but the results showed that the pledge rate of SNX increased from 20% to 80%; meanwhile, the price of SNX tokens increased nearly 50 times in the next 8 months.

The first half of ’20 saw the team go live with ETH as a pledge, sFTSE sNEKKI, binary options, incentives to short ETH, a new clearing mechanism, and more.

Until the 20-year DeFi summer, Synthetix was the top protocol in terms of DeFi lockup volume, and for quite some time, was second only to maker and above compound and uniswap, among others. Of course, this was mainly because its collateral was all its SNX.

Synthetix has the highest performance requirements of any mainstream DeFi product, and the team is well aware that the current performance of ETH is far from what derivatives exchanges require, so Synthetix is one of the most aggressive of the mainstream DeFi projects in embracing L2, working with Optimism Ethereum (hereinafter OE)

As early as the first half of FY20, Synthetix was actively looking for an L2 solution and conducted a demo of OE’s L2 transactions

In September 20, Synthetix began pledging SNX and retrieving SNX in a test environment.

In January ’21, although it is dangerous to fragment SNX liquidity on L1 and L2, pledge and cast operations are now available on OE, and the team has now designed different incentives to encourage pledging on L1 and L2.

For now, the core trading operations are still only available on L1, and the team plans to switch to L2 as soon as the main OE website goes live in July

Although OE is supported by uniswap and link in addition to Synthetix, the wrong technical route for L2 is still a major potential mistake and waste for Synthetix, as the recent debate on OE and Arbitrum has shown.

Roadmap

On May 20, Kain Warwick just published an article –

which describes Synthetix’s plans for the rest of the year, and the proposal that Synthetix will operate in two versions, v3 and v2x.

The scope of v2x is largely clear, and several of the most important updates to the protocol are within v2x, including

L2 trading: we are just a few weeks away from enabling BTC, ETH and LINK trading on L2

Debt consolidation between L1 and L2, which requires a lot of preparation –

Synthetic asset ‘passer’

Staking Rewards Migration: Staking rewards will subsequently be migrated to L2 in full

Cross-chain debt snapshot

Once this is done, debt consolidation between L1 and L2 can be performed

Shorting of L2 is launched and the reverse synthetic asset (iSynth) of L1 is abolished

Leveraged trading : Leveraged trading on the OE will start at 5-10x and eventually leverage of 50x+ will be possible.

TWAP Exchange

Lending Enhancements : There are currently three different loan implementations within Synthetix. These need to be packaged and combined into a single implementation to reduce technical debt and complexity and allow ETH and BTC to become collateral at scale. This unified lending system needs to be integrated into Kwenta and Staking to ensure that synthetic assets can be further scaled on L1

Limit Orders: Limit Orders were originally in the scope of V3, but based on the potential changes to the timeline above, it may make sense to move the implementation of Limit Orders back to V2x. This is the only feature that is not yet implemented in the same way as centralized exchanges

Also in this article, Kain suggests splitting the trading protocol Kwenta into a separate team, and possibly introducing tokens that would be distributed to SNX holders. In addition, the binary options protocol Thales, the L2 native options protocol Lyra, and the fundraising protocol Aelin may also be issued as separate coins.

It is also worth noting that in the 21-year plan, Kain makes a point of mentioning the acquisition and expansion of other projects.

Team, investors and partners
Founder: Kain Warwick

Kain Warwick graduated from the University of Sydney in 2000 and was the guitarist and vocalist of the band. retail payment network with over 1200 locations in Australia)

COO: Jordan Momtazi

Previously VP of Business Growth at Synthetix and currently a member of the Spartan Council, Jordan is also a serial entrepreneur with extensive experience in sales and was responsible for corporate partnerships in Sydney at PayPal. He has also worked at blueshyft, where he was responsible for growth.

CTO: Justin Moses

Justin Moses was also a partner with Kain at blueshyft, where he was a technical advisor.

After raising $30 million in an ICO in early 2018, Framework purchased 5 million SNX tokens for $3.8 million in October 2019. framework is deeply involved in Synthetix, driving a number of improvements and optimizations to Synthetix, and is also It is also listed as a “Liquidity Partner” on the Synthetix website.

In February 2021, Synthetix announced a $12 million funding round led by Paradigm, Coinbase Ventures and IOSG Ventures. The investors in this financing are purchasing SNX tokens directly from the Synthetix DAO treasury and “will provide liquidity in the form of SNX collateral to participate in and contribute to the development of community governance systems

Synthetix’s current liquidity partners include Framework Ventures, ParaFi Capital, Three Arrows, XBTO, IOSG Ventures, DTC Capital, Hashed, DeFinance Capital

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

Business Analysis
Industry Analysis
Synthetix belongs to the decentralized derivatives exchange segment, so let’s first analyze the industry

The potential for decentralized derivatives trading is huge

From the data of centralized exchanges, the number of derivatives (including perpetual contracts, futures and options) traded is similar to that of spot (21Q1 data, where perpetual contracts are traded nearly $5 trillion per month and futures and options are traded $70 million per month, and the growth rate is much higher than that of spot.

And while relative uniswap and pancakeswap volumes are now less than 10x the size of centralized exchanges at their peak, decentralized derivatives volumes are still several orders of magnitude behind centralized derivatives volumes (Binance daily derivatives volumes are already over $50 billion, while all decentralized derivatives exchanges’ daily trading volume of all decentralized derivatives exchanges combined is still around $100 million), the potential is significant.

In addition, the recent domestic consolidation of derivatives on centralized exchanges will also benefit decentralized derivatives programs.

Synthetic assets have the expectation of “trading everything

Synthetic assets can create more trading targets. For example, Synthetix currently supports sDeFi (an index of 14 DeFi blue chips) and sCEX (an index of 7 exchange platform coins), among others, which are actually very simple to implement. In theory, creating a new asset can be done with just a community proposal + some code + prophecy machine support.

The synthetic asset class gives traders the expectation of “trading almost any tradable underlying”.

Top institutions add to the track

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

The data above is the derivatives lock volume data for DeFi pulse

In addition to nexus muual for the insurance market and barnbridge and SNX for the interest rate market, the funding for the above projects is as follows –

dydx received investments from a16z, polychain and Three Arrows

uma received investments from IOSG, dragonfly, coinbase ventures, bain capital ventures

futureswap has received investments from Framework Ventures

ddx’s investors include Polychain, Dragonfly, Three Arrows Capital, Coinbase Ventures

opyn’s investors include Paradigm, dragonfly, Synthetix founder Kain Warwick, Aave founder Stani Kulechov and compound founder Robert Leshner

ribbon finance’s investors include dragonfly, coinbase ventures and ETH co-founder Joseph Lubin, Synthetix founder Kain Warwick, uma founder Hart Lambur

While most of the projects mentioned above are currently modest in terms of funding, the fact that so many top institutions and DeFi project founders have invested is a testament to the interest and space in this track.

Problems Facing

The potential is also huge because there are still many problems. Leaving aside the issue of market education, there are at least the following issues that hinder the development of on-chain derivatives.

Transaction cost problem

Derivatives exchanges themselves are much more complex in smart contract design than spot exchanges such as Uniswap, and derivatives traders trade more frequently and are more sensitive to execution prices and transaction fees. Currently, products on Ether are subject to the constraints of the Ether network and face serious problems such as high network fees and transaction delays. L2 will solve or partially solve this problem, so on-chain derivatives trading projects are active practitioners of L2, except Synthetix which is actively working with OE, dYdX which is working with StarkWare which supports ZkRollup technology, and mirror which is working with OE. In addition to Synthetix, which is actively working with OE, dYdX is working with StarkWare, which supports ZkRollup technology, and mirror, which runs on top of the terra public chain.

It’s a matter of liquidity

Centralized exchanges complete aggregation through order books, with users acting as counterparties to each other, and without market makers, it is difficult to efficiently aggregate orders based solely on the liquidity provided by users’ own cutthroat buying and selling demand. And on decentralized exchanges, especially before AMM caught fire, market maker decentralized derivatives exchanges were too inefficient on-chain to effectively provide liquidity even after AMM caught fire (there were only a handful of projects with TVLs over 50 million U), and it became difficult for users to complete transactions at the desired price.

The problem of resilience to extreme risk

While trolling of centralized exchanges for “unplugging the net” is common, it is clear that head centralized exchanges such as Coinan have stronger solvency, while decentralized exchanges, apart from the mechanism, have to rely on insurance funds and foundations for deposited cash, with questionable solvency. There is also the risk of prophecy machine attacks, etc.

Project Competitive Landscape
Basic Market Landscape & Competitors

Technically speaking, the largest project in the synthetic asset space is makerDAO, but Synthetix is cutting into derivatives trading with synthetic assets, so we do not consider makerDAO as a competitor of Synthetix.

In the track of decentralized derivatives trading.

One category is “pure” on-chain derivatives trading projects, represented by dydx, mcdex, perpetual, opyn, ddx, etc. The current performance of ETH has more impact on this part of the project than SNX, in terms of tvl, volume, liquidity, etc., except for dydx, which still has a long way to go. trading volume is also very far from Synthetix.

The second category is the synthetic assets to cut into, in addition to Synthetix, there are also mirror, linear, uma and other projects that have become large scale, among which, uma is also a very interesting project, but its direction is more focused on the long-tail market rather than derivatives trading, and we do not regard it as a competitor of SNX.

We chose mirror, which has the highest trading volume and token market cap, to compare with Synthetix.

Synthetix vs mirror

Since mirror does not run on the ETH chain but on the terra chain, and is tightly coupled with the other tokens in the terra system, LUNA/UST, it would take a long time to understand the subtle and complex relationship between them, so we will only briefly introduce mirror here.

mirror (token MIR) is a synthetic asset protocol running on the terra public chain that allows users to generate synthetic assets (mAssets) by overcollateralizing USTs (stablecoins anchored by 1USD) and to generate new mAssets by overcollateralizing them, in the same way that mirror also allows users to trade mAssets at prophecy machine prices without slippage. Currently, mAssets are mainly synthetic U.S. equity counterparts, but also include a small number of cryptocurrency-based synthetic assets such as btc and eth.

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity
In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity
In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

Synthetix and mirror’s last 24h transactions on June 7 around 13:00

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity
In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

Synthetix volume for the past 1 month and mirror volume for the past 3 months, both from the official website statistics module

As we can see, the trading pairs of Synthetix and mirror partially overlap, which clearly shows the characteristic of “Synthetix is mainly cryptocurrency, mirror is mainly US stock assets”.

Thanks to the excellent performance of terra public chain and excellent liquidity incentive policy, mirror is growing rapidly in terms of tvl, close to 1/3 of Synthetix at the peak.

From the perspective of trading volume, we can see that mirror’s average daily trading volume is around $30 million, while Synthetix’s average daily trading volume is around $45 million, which is not a significant difference between the two sides. Although a large portion of mirror’s volume comes from MIR pairs, and most of the volume comes from the terra chain, we believe that mirror is now a substantial threat to Synthetix from the perspective of a derivatives exchange

There doesn’t seem to be much Synthetix can do about this threat other than to keep working on L2 trading and leveraged trading, as Kain says

“With all the amazing DeFi project launches last year, we’ve been somewhat forgotten and have been on hiatus for almost a year working with Optimism in order to launch Synthetix on L2. However, we are approaching the tipping point where, after bringing together numerous boards and upgrades, we will finally launch the protocol we have been trying to build for the past four years. It’s been a difficult and painful process, but we’re so close to it. As a result, there are voices of obvious frustration within the community that these advances and developments are not being seen by the community. I have long criticized the dissemination of information within crypto as being so poor that even with all of the above plans in place, we still have to wait weeks or even months for it to be discovered by the broader DeFi community. With cryptocurrency, the most important thing is to have patience, and we have the will and resources to keep delivering until it’s impossible for anyone to ignore what we’ve built

This may also partially explain the price movement of SNX since January.

Project Pros and Cons

The competitive advantage of Synthetix over other decentralized derivatives exchange projects stems from –

Proven product core logic: dynamic debt pooling.

First-mover advantage in the synthetic asset space.

A reputation for rapid response and high execution built up during the DeFi boom.

The support of top-tier institutions, and a motivated team.

Synthetix’s competitive disadvantages are primarily –

The irreconcilable tension between protocol security and capital utilization: Since the protocol primarily incentivizes pledging SNX to provide liquidity, and SNX prices are volatile, capital utilization has to be reduced to ensure protocol security. The current 500% overcollateralization rate and 200% liquidation line provide relative assurance of protocol security, but make capital utilization significantly lower. Considering the token model and other factors, we expect this conflict to remain irreconcilable for a long time.

Dynamic debt pool model is costly to understand, costly to accept

Pass-Through Analysis
SNX is currently the project’s only token that captures value. As mentioned above, SNX captures value within the ecosystem through SNX rewards and fee income on top of the official recommended collateral rate.

A total of 100 million tokens were available at the time of the initial ICO, of which

60 million were used for the ICO

20 million for the team and advisors

12 million for the Foundation

5 million set aside for partnerships

3 million reserved for the marketplace

And in March ’19, the project’s token model was significantly changed to incentivize SNX holders’ stake behavior, expanding the total number of tokens to 245 million by 2024

In-depth Analysis Synthetix: A Derivatives Trading Marketplace with Unlimited Liquidity

Note: “Year one” refers to March 2018 to March 2019 and is now in “Year four

At the end of 2019, the above new tokens were replaced with a smoother release.

Currently, the total number of SNX tokens is 227,477,432 (227 million), with a full circulating market cap of 2,710,001,373 USD and a current circulating volume of 114,841,533, representing 54% of circulation.

The market capitalization in circulation is 1,398,875,508 USD, ranking 66 among all tokens.

Note: The above data is from https://coinmarketcap.com/

Risk
We have summarized the risks that Synthetix may face, in order of impact, as follows –

Regulatory Risks

While in the short term, sovereign regulation of derivatives on centralized exchanges (such as the recent CN regulation) may benefit SNX, the fact remains that the biggest risk to Synthetix still comes from regulation, and in the long term, there is a high probability that trading synthetic assets on US stocks will draw the iron fist of the SEC. After all, to become a decentralized Bitmex, one also needs to take the risks that Bitmex takes.

Prophecy Machine Risk

In 2020, Synthetix will switch all of its prophecy machines to link, which is expected to reduce this risk, but attacks against prophecy machines are still a significant risk for the project in the long term.

Delayed / unanticipated key functionality go-live risk

This includes delays in the launch of the project’s own planned content, as well as delays in the launch of the OE, and a less-than-expected upgrade to the L2 experience – which is still too different from the cex derivatives trading experience.

Similar project substitution risk

There is no definitive product in the decentralized derivatives trading space, and with so many new projects, Synthetix has a first-mover advantage, but there is still a risk of substitution of similar projects

Initial Value Assessment
Five core questions
What business cycle is the project in? Is it mature, or in the early to mid stage of development?

The project is in the early stage of operation, some core product features are not yet online, the core product logic is successfully validated, and PMF (Product / Market Fit) validation is complete.

Does the project have a solid competitive advantage? Where does this competitive advantage come from?

The competitive advantage of the project mainly comes from the proven product core logic, first-mover advantage in the track, and excellent team and investment institution.

Is the project’s medium- to long-term investment logic clear? Is it in line with the general trend of the industry?

The project’s medium- to long-term investment logic is clear, and the direction of the decentralized derivatives exchange fully supports the higher market capitalization space, which is in line with the general industry trend.

What are the main operational variables of the project? Are such factors easy to quantify and measure?

At this stage, the main variables are the time to go live with L2 and leveraged trading and the actual experience; in the long term, the main variables come from the adaptation to the regulatory system of each country; all of the above factors affect the core data such as pledge volume, trading volume, position volume, etc., which can be viewed directly on the chain.

What is the management and governance of the project and what is the level of DAO?

The project has basically shifted to community governance, and the DAO level is in the leading position among many DeFi projects.

Investment Core Logic Summary
Synthetix is currently worth active attention for the following reasons –

The decentralized derivatives trading track has huge space, with obvious potential against decentralized spot trading (uniswap) and centralized derivatives trading (bitmex)

From a track perspective, L2 is most favorable for decentralized derivatives trading; with the main online launch of arbitrum and the upcoming launch of optimism, L2 has truly arrived.

Synthetix’s core business logic “dynamic debt pooling” has been tested and proven for more than 2 years; under the dynamic debt pooling mechanism, Synthetix is expected to achieve “unlimited liquidity with unlimited tradables”, with stronger network effects and easier “winner takes all”.

The core function of Synthetix: L2+ leveraged trading will be launched soon, which is expected to usher in a new business increment and valuation

There are 4 sub-projects in the system that will likely launch tokens to be distributed to SNX holders

Proactive team willing to take responsibility, high level of project governance, good community building

Valuation Assessment
We adopt.

Historical valuation comparison to compare SNX’s current and past valuations

Side-by-side valuation, comparing SNX with other DeFi projects on a P/S and P/E basis

Historical Valuation Comparison

We analyze SNX’s liquid market capitalization and Synthetix’s trading fees from February 20 to today, and calculate its “liquid market capitalization / annualized trading fees” based on monthly trading fees

Note: Trading fee data from
https://www.tokenterminal.com/terminal/projects/synthetix ,
Trading fees are taken from all available data

As you can see from the above data, after the recent selloff, SNX’s monthly “market cap outstanding / annualized trading fee” is already below 40, which is lower than most of the time in history.

Therefore, we conclude that SNX is currently valued at an undervaluation from the historical valuation comparison method.

Of course, this may be due to the fact that the market has been in a bull market for as long as the data has been available; and SNX was previously small enough to carry a higher valuation. So let’s do a side-by-side valuation comparison

Side-by-side valuation comparison

(Since bitmex does not issue tokens and is not listed, and coinbase and binance, which have market cap data, do not have much derivatives trading volume as a percentage of total platform trading volume, we cannot compare SNX and centralized derivatives exchanges in a side-by-side comparison.

Our side-by-side valuation comparison focuses on individual DeFi protocols

We consider “market capitalization outstanding / total revenue” as P/S (price-to-sales ratio) and “market capitalization outstanding / protocol revenue” as P/E (price-to-earnings ratio) and get the following data –

Note: Protocol revenue and token capture protocol revenue data are taken from tokenternimal, annualized protocol revenue and annualized token capture protocol revenue are based on the annualized backprojection of protocol revenue and token capture value for the last 30 days; market capitalization data are taken from CMC

Example of the difference between gross revenue and agreement revenue: uniswap’s transaction fee revenue is included in “gross revenue”, but the fee goes to the supply side (LP), and the agreement or UNI token does not capture this revenue, so it is not included in uniswap’s “agreement revenue”.

As we can see, from a P/S perspective, Synthetix is not only the highest valuation among several DeFi protocols, but also much higher than its competitor Mirror; however, from a P/E perspective, since all of Synthetix’s fee revenue is captured by SNX holders, which equates to all of the revenue being profit, Synthetix’s Synthetix’s P/E valuation is much more reasonable. Synthetix’s competitor Mirror, on the other hand, does not capture a portion of the revenue from its token MIR, as all of the fees are currently given to the LP of mAssets-UST, so this data is not comparable.

Moreover, since the total revenue of each protocol, except for the protocol revenue, is basically allocated to the supply side (LPs of dex, depositors of lending agreements), when the project owner allocates more revenue to the protocol, it will definitely reduce the revenue of the supply side, which will cause some of the original supply-side users to switch to other protocols, all other things being equal. Therefore, allocating a larger percentage of revenue to the agreement will reduce the total revenue of the agreement. We therefore expect that if Mirror also changes its fee allocation rules, its total revenue will also decrease.

Therefore, we derive SNX’s current valuation from the cross-sectional valuation comparison method as: Reasonable

Combining the historical and cross-sectional valuation data, we believe that SNX is currently reasonably valued and slightly undervalued.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/in-depth-analysis-synthetix-a-derivatives-trading-marketplace-with-unlimited-liquidity/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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