What is Synthetix, which is second only to MakerDAO, with more than $100 million in assets locked?

The DeFi platform Synthetix recently locked in the value of the US dollar to the second place in its class, second only to MakerDAO, whose growth is explosive, and the value of the lock has soared 60 times since February, exceeding $100 million. Vance Spencer, co-founder of Framework Ventures, which led Synthetix's latest round of $3.8 million in financing, explores his investment theory in depth and outlines the next steps in the platform.

Vance said that the business model of both Synthetix and MakerDAO is to monetize the balance sheet. The difference in the economics of these two platforms in tokens will lead to MakerDAO becoming a digital central bank and Synthetix becoming a decentralized BitMex. Vance lists the future plans for the platform. The first is to use non-SNX collateral so that users can pledge ETH to produce synthetic assets.

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The business model of Synthetix and Maker is simple: monetize the balance sheet.

Maker allows users to place ETH collateral on the balance sheet and generate synthetic stable coins (Dai) at the specified guarantee ratio. In the process, the user is required to pay a fee, which is distributed to the MKR and DAI holders through the purchase or destruction mode and DSR.

By establishing a staking incentive mechanism, Synthetix builds a balance sheet in its native token system, allowing users to generate more diverse synthetic assets (such as sBTC, sETH, iMKR, etc.) and charge users for creating and trading debt. These costs, along with the agreement inflation, were passed back to Synthetix's staker, motivating them to keep their collateral.

The business model of the integrated asset platform, after a little adjustment, is basically similar to a bank; it establishes a balance sheet of user deposits, lends funds according to the rate of return, and distributes the proceeds to the holders of the stake.

Two major differences between Synthetix and Maker

1. The scope of assets under which network debt is priced determines the size of the market.

In this regard, Maker is relatively simple, tends to risk, and is similar to a bank – it generates debt in the form of Dai and pricing it while tracking the dollar. When the user opens a CDP (mortgage debt warehouse), the user issues ETH collateral and promises to repay the borrowed Dai. Because all of the agreement debts are issued in the form of Dai, and Maker has a sound liquidation procedure for CDPs, the user can be sure that the network will not be under-guaranteed.

Synthetix is ​​more complex and riskier, and it is likely to enter a different, larger market than Maker. Currently, users can choose to generate or trade (re-pricing) debt from one of 24 different assets when they use Stake SNX (Synthetix native currency) or use Synthetix.Exchange. When a user generates a $1 sUSD, the SNX-rated mortgage pool is responsible for supporting $1 sUSD. However, when a user uses a synthetic asset such as sBTC to trade (re-pricing) with sBTC, the network's debt fluctuates with the price of sBTC. Network debt volatility can be large, so a greater degree of excess guarantee (+750%) is required to ensure the safe operation of the network. Ultimately, this ratio will decline as SNX's liquidity increases, the implementation of liquidation procedures, and the maturity of the network.

The ability to generate different types of synthetic debts has greatly increased the market for addressable fees for synthetic asset agreements, but has also increased the likelihood of under-guarantee. To solve this problem, Synthetix will need to build a synthetic asset book by integrating different collateral types and using open interest rates based on annual interest rates.

2. The cumulative difference in value between liquidity and governance tokens

The difference between Maker and Synthetix in token economics will lead to a different ending for the two platforms.

Maker currently establishes a balance sheet with ETH, charges users and maintains Dai positions, and allocates fees to MKR and Dai holders. MKR tokens are used for network governance and are the lender of last resort when network guarantees are insufficient. The value of MKR is based on the amount of outstanding debt, so the stabilization fee determines the number of MKRs purchased and burned. In order to pay the existing stabilization fee, approximately 0.8% of the MKR needs to be destroyed; 0.5% has been burned. The MKR holder is the last lender and the risk manager in the system. If MKR is able to expand its stability agreement across multiple collateral types, it will become a digital central bank.

Synthetix's balance sheet was created by motivating holders to hold the native token SNX. As the holder of SNX, you can pledge SNX to generate a debt position that is priced in sUSD. In the event of an over-guarantee (+750%) in the debt position, staker will receive a return on the agreed inflation and the costs incurred by the user in generating and trading the synthetic asset. At present, the rate of return to staker (10:1) is set at a higher inflation rate, but this situation is changing as the scale of transactions and synthetic assets expands. The current transaction cost of the SNX position can yield an annual interest rate of approximately 10%.

SNX holders provide liquidity to the platform by holding tokens and become the counterparty to each trader and user on the platform. If Synthetix can expand the clearing book, SNX will become an infinite flow pool that can generate any assets using the reliable data provided by the mortgage pool. In the short term, it looks like a decentralized version of BitMex.

Future Synthetix

Over the next 12 months, we expect Synthetix.Exchange to evolve into a decentralized version of BitMex with a variety of collateral types, clearing tools and SNX-denominated balance sheets to support the transaction. The synthetic asset market is huge. In the traditional financial sector, the size of the derivatives market is estimated to be 10 times the global GDP per year. In the cryptocurrency market, we saw a similar phenomenon in the success of BitMex and its perpetual contracts, which dwarfs the spot market. We believe that BitMex, an unmanaged, decentralized, and unlimited mobile version, will achieve a large-scale fit between the product and the market.

In the long run, Synthetix's business model may be much like providing liquidity to incur additional costs. In this world, new exchanges, forecasting markets, or other front-end applications are likely to emerge overnight, buy liquidity from Synthetix's balance sheet, and compete on the user experience to differentiate. Therefore, many of the basic assumptions surrounding liquidity, as well as the hierarchical order of business models, may change. Suddenly, a project no longer needs to pull users to gather liquidity.

How did Synthetix get to this point?

Synthetix Core's experience, ethics and commitment to the community make them one of the most productive teams in the blockchain space. Two years ago, the predecessor of Synthetix, Havven, focused on building a balance sheet to support synthetic stable coins. 9 months ago, Havven changed its name to Synthetix, redesigned its economics in tokens and expanded its portfolio of synthetic assets. The team is committed to testing and iterating product and protocol development, getting direct feedback from the community, and deploying improvements using a simple consensus as a governance model.

Looking ahead, Synthetix's path toward decentralized BitMex is clear: the agreement must be as functional as a professional derivatives exchange, and due to different market strategies, true decentralization must be achieved. As a mobile, full-featured, decentralized version of BitMex, Synthetix will leverage the lack of centralized hosting, personally identifiable information and access control to compete for transaction costs. Decentralization promotes open source collaboration, which is an important factor in building strong communities and accelerating improvements.

To achieve this goal, Synthetix has four plans:

1. Non-SNX collateral selection: For most people, the process of buying SNX, pledge, and then trading is cumbersome. Many traders prefer to use assets such as ETH or BTC as collateral to enter the system. Another benefit of multi-collateralization is that it builds a short exposure in the system that balances most long orders. The Synthetix team is working to add ETH as a collateral before the end of the year, while still bringing value to SNX traders.

2. Clearing Process: SNX staker's 750% guarantee level limits the number of tradable synthetic assets due to insufficient liquidity of SNX and the lack of liquidation of under-guaranteed positions. In order to operate the agreement safely on a certain scale, it is necessary to implement the designed clearing procedures.

3. Sound price supply: At present, Synthetix's price predictor operates in a centralized manner, allowing traders to respond to price changes in advance, but it also leads to price information being vulnerable. To solve this problem, the team plans to integrate Chainlink, a decentralized predictor provider, and deploy a unique transaction management system to prevent preemptive transactions.

4. Professional Trading Tools: The interface design, transaction type and execution speed on Synthetix Exchange are not in line with the standards of centralized exchange products. The team is redesigning, deploying more transaction types, and exploring layer-2 solutions to increase transaction throughput.

To truly decentralize, the development, management, and ownership of the network must be transferred to the community. This process will be gradual and takes time, but doing so creates a strong community, reduces regulatory risk, and enables Synthetix to act quickly and consolidate its decentralized value proposition.