Synthetix has recently experienced remarkable growth. This article explores what makes Synthetix unique today, its recent performance, and how its V3 upgrade represents a major innovation within decentralized finance.
Understanding Synthetix
Launched in 2017 by Kain Warwick and Justin Moses, Synthetix began as Havven, a platform offering a crypto-backed stablecoin called nUSD. Since then, it has evolved significantly, now supporting synthetic asset creation on both Ethereum mainnet and Optimism.
Synthetix functions as a foundational liquidity layer for numerous DeFi protocols. Users stake the native SNX token to mint sUSD, a synthetic dollar. This sUSD acts as the protocol’s native stablecoin, overcollateralized by SNX and representing the user’s debt within the system.
The total available liquidity for protocols built on Synthetix depends on the amount of SNX collateral locked. Stakers are incentivized through SNX token rewards and a share of the fees generated from the synthetic debt, currently offering an annual yield around 40%. If the amount of staked SNX drops below a certain threshold, new SNX is issued to encourage more staking and deepen liquidity.
Synthetix supports two main types of synthetic assets: spot and perpetual futures. Spot synths track the prices of various assets like cryptocurrencies, commodities, and forex, enabling exposure without direct ownership. Perpetual futures allow leveraged trading on these assets, with Synthetix liquidity acting as the counterparty.
SNX stakers assume counterparty risk. If traders on integrated platforms like Kwenta earn substantial profits, stakers’ debt increases, and vice versa. Mechanisms like funding rates help mitigate this risk by encouraging arbitrage, aiming for a neutral position for liquidity providers. The upcoming V3 upgrade will further refine this with isolated risk pools.
Key Platforms Built on Synthetix
Synthetix’s Total Value Locked (TVL) currently stands at $375 million, representing the total value of staked SNX. One prominent protocol leveraging Synthetix liquidity is Kwenta, a perpetual futures trading platform on Optimism. Kwenta has no native liquidity of its own; instead, it uses Synthetix’s deep liquidity pools.
All trading on Kwenta is denominated in sUSD. Users must either stake SNX to mint sUSD or purchase it on the open market to start trading. A significant portion—60–70%—of the fees generated by protocols using Synthetix comes from Kwenta. These fees are distributed to SNX stakers.
Other major protocols and frontends built on Synthetix include:
- Lyra
- Thales
- dHedge
- Polynomial
The Role of Infinex
Infinex is an upcoming on-chain perpetual exchange designed to replicate the user experience of centralized exchanges in a decentralized manner. Focusing heavily on interface and usability, it plans to offer both "simple" and "pro" modes to attract a broad range of traders.
Notably, Infinex will not have its own token. Instead, it will be governed by SNX holders. All revenue will be used to buy and stake more SNX, further deepening Synthetix’s liquidity. Higher trading volume leads to greater buy pressure on SNX, creating a potential virtuous cycle of growth and liquidity expansion.
Recent Performance and Metrics
Data from Token Terminal shows a notable divergence between recent on-chain activity and the current SNX price. Despite increased usage, the token’s price has not fully reflected this activity—at least not until recently.
Key products like the Perps V2 upgrade have driven much of this growth. This upgrade introduced new synthetic assets available on platforms like Kwenta. Additionally, Synthetix has received substantial OP token grants from Optimism, which are used to incentivize usage on Kwenta and other integrated platforms. Kwenta also distributes its own KWENTA token to further boost engagement.
TVL is intrinsically linked to the price of SNX because SNX is the only asset that can be staked. As SNX price increases, so does the TVL, and vice versa. This single-asset dependency is set to change with Synthetix V3.
Synthetix V3: A New Chapter
Synthetix V3 comprises a series of upgrades positioning the protocol as a cross-chain liquidity layer for all of DeFi. Currently in alpha, V3 will be rolled out gradually with multiple new features.
Key improvements include:
- Multi-collateral staking (beyond just SNX)
- Permissionless liquidity provisioning
- A more developer-friendly ecosystem
- Seamless cross-chain functionality
Multi-Collateral Staking
A cornerstone of V3 is the introduction of multi-collateral staking. Currently, only SNX can be staked to back synthetic assets. V3 introduces a vault system where each vault is represented by a different type of collateral—such as ETH, wBTC, or SNX itself.
These vaults are added via governance and can be grouped into pools designated for specific markets. For example, a pool might consist of ETH and DAI vaults, providing liquidity for a crypto derivatives market.
Benefits include:
- Stakers can choose which assets to supply as collateral, enjoying more freedom and opportunity.
- Pool-specific markets allow stakers to isolate and avoid undesired risk.
- Better hedging opportunities and reduced counterparty risk due to dedicated liquidity pools.
Permissionless Liquidity Layer
V3 enables developers to create new markets using Synthetix liquidity in a permissionless manner. A major hurdle in DeFi—bootstrapping initial liquidity—is minimized, reducing the need for heavy token emissions early on.
Market creators can select oracles, design custom reward structures for liquidity providers, and list new synthetic assets without governance proposals. This opens the door for a wide range of new products, from spot synthetic assets to options markets.
Synthetix will effectively serve as a liquidity-as-a-service platform, easily integrated by new DeFi applications.
Cross-Chain Liquidity
A primary goal for V3 is enabling Synthetix to operate on any EVM-compatible chain. "Teleporters" will allow liquidity provided on one chain to be utilized on another. For example, liquidity staked on Optimism could support a perpetuals market on Arbitrum, all without traditional bridging.
This is the foundational structure for V3 spot markets:
- Users deposit assets into collateral vaults.
- Vaults are added to specific liquidity pools.
- Protocols create markets using these pools.
- End-users trade via dapps like Kwenta that are built on top.
The Path to V3 Implementation
The full release of V3 will be phased:
- Stablecoin Migration: V3 will introduce a new synthetic stablecoin to replace the current V2 sUSD. A smooth transition is planned, likely involving a Curve pool to facilitate migration.
- Perps V3: This upgrade introduces multi-collateral support for perpetual markets. Traders will be able to use various synthetic assets (not just sUSD) as margin. Core development is complete, with testnet expected soon.
- V2 to V3 Migration: Current SNX stakers will be able to migrate to V3 without closing their positions or repaying debt (SIP-306).
- Teleporters: Essential for cross-chain functionality, Teleporters burn sUSD on one chain and mint it on another, eliminating slippage and bridging delays (SIP-311).
- Cross-Chain Pool Synergy: This feature allows markets and pools to be aware of collateral status on other chains, enabling new perpetual markets to launch using liquidity from another chain (SIP-312).
Final Thoughts
Synthetix’s ultimate vision is compelling, but its success depends on generating demand and attracting developers to build on its liquidity layer. The more protocols (like Kwenta) that are built on Synthetix, the higher the yields for liquidity providers. Higher yields attract more capital, creating deeper liquidity that in turn draws more builders—a powerful flywheel effect.
It’s worth noting that a large majority (60–70%) of fees earned by SNX stakers currently comes from Kwenta alone. Kwenta’s growth has been heavily incentivized by OP and KWENTA token emissions, making it challenging to gauge organic adoption. Nonetheless, the fundamental value proposition of Synthetix as a scalable, cross-chain liquidity provider remains strong.
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Frequently Asked Questions
What is Synthetix?
Synthetix is a decentralized liquidity protocol that enables the creation of synthetic assets. Users can stake collateral to mint synthetic versions of cryptocurrencies, commodities, forex, and other assets, enabling decentralized exposure to a wide range of markets.
How do SNX stakers earn rewards?
SNX stakers earn rewards in two ways: through newly issued SNX tokens and by collecting a portion of the fees generated by trading activity on platforms that use Synthetix liquidity, such as Kwenta. Rewards are distributed based on the amount of SNX staked.
What is synthetic asset trading?
Synthetic asset trading allows users to gain price exposure to an asset without actually holding it. These assets are backed by collateral stored in the Synthetix protocol and track the price of the underlying asset through decentralized oracles.
What are the benefits of Synthetix V3?
V3 introduces multi-collateral staking, allowing assets other than SNX to be used as collateral. It also enables permissionless market creation, better risk isolation, and cross-chain liquidity, making the protocol more scalable, flexible, and secure.
What is sUSD?
sUSD is a synthetic USD stablecoin native to the Synthetix ecosystem. It is minted when users stake SNX or other approved collateral and is used for trading synthetic assets on integrated platforms.
Is there counterparty risk for SNX stakers?
Yes, SNX stakers act as liquidity providers and assume counterparty risk. If traders profit significantly, stakers’ debt increases. However, mechanisms like funding rates are designed to balance this risk and protect stakers over time.