Most recent update: [March 4, 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or Synthetix, made available on the VirgoCX Platform, including an opinion that Synthetix is not itself a security and/or derivative.
What Is Synthetix?
Synthetix is a system that allows synthetic assets to be created on the Ethereum network. Synthetic commodities, such as gold and silver, as well as synthetic cryptocurrencies, synthetic inverse cryptocurrencies, synthetic cryptocurrency indexes, and synthetic fiat currencies, are all supported by Synthetix. The platform expands the crypto ecosystem's exposure to non-blockchain assets, resulting in a more mature financial sector.
Synthetix allows for almost any asset that has a consistent pricing mechanism to be given blockchain based (on-chain) exposure. The platform consists of a dual token model comprised of a token that represents the synthetic asset or Synth (e.g., sUSD, sEUR,sXAU, etc.) and a collateral token, called, SNX or Synthetic Network Token. It’s important to note that the protocol has its own stablecoin, sUSD.
It’s important to make one thing clear. Synthetic assets or synths are not the same as fiat or asset backed stablecoins. For example, USDC or BUSD are backed by fiat and each token digitally represents 1 USD held in reserve. Another example would be Paxos, where 1 PAX Gold or PAXG token is backed by a single fine troy ounce (t oz) and stored in a vault. It represents ownership of the underlying physical gold.
Synths do not require you to own the underlying asset, as it merely represents exposure to the price movement of the underlying asset. This is critical to note.
How Does Synthetix Work?
Synthetix relies on decentralized price oracles to get prices for every asset it represents. These oracles provide real time pricing on the blockchain. This is the main mechanism that bridges the blockchain to the pricing of real-world assets.
Synthetix deploys a dual token model to offer its synthetic asset minting services. The first is native token called SNX and the second are called synths, which can be created in the minting process to mimic and provide synthetic exposure to any asset.
To generate synths a user must acquire SNX from an exchange usually, and deposit it on the Synthetix platform. This allows one to create a new synth token of choice, locking up the SNX as collateral. The SNX that is locked needs to maintain an over collateralized percentage (600% or 750% for example) based on the rules of the underlying software. The reason why the collateralization ratio is so high is because their official documentation says:
“This mechanism allows Synthetix to support instantaneous, near-frictionless conversion between different flavors of Synths without the liquidity and slippage issues experienced by other decentralized exchanges. The resulting network of tokens supports an extensive set of use cases including trading, loans, payments, remittance, eCommerce, and many more.”
For example, if a user wanted to mint a synthetic U.S dollar as an example, and deposited USD $750 in SNX tokens, then they would receive USD $100 worth of sUSD tokens.
In other words, it’s important to note that synths are created by locking up the collateral token, SNX, and minting synthetic assets against it. So, each synth is debt against the posted collateral, and this is why you will see a debt balance on the platform. The synth must be burned to unlock your SNX. Debt positions need to be maintained at a certain collateralization ratio, which fluctuates and is determined by Synthetix governance. This is the mechanism that prevents deficits during extreme market crash events, as the governance is there to ensure that the synths are sufficiently collateralized and will not result in a system deficit in extreme cases. The downfall to this is that users will need to manage the collateral ratio manually by either adding more collateral in SNX tokens to the platform or by minting and burning synths to continue earning staking rewards.
Let’s walk through an example of how to trade synths on Synthetix. There are two methods to do this:
- Purchase ETH on exchange, convert the ETH for sUSD on Kwenta, and then exchange for other Synths like sBTC
- Purchase SNX tokens on an exchange, stake or lock them on Synthetix, and mint your synth
When you stake or lockup your tokens, you are eligible to receive two main types of rewards as long as the collateralization ratio remains intact.
- Staking rewards denominated in SNX
- Exchange fees from the synth trades denominated in sUSD
Another, interesting part of the economics of Synthetix is that SNX is a cryptocurrency traded on exchanges where the price fluctuates based on open market conditions. This means that price movements in SNX have a direct impact on your synth exposure in real time.
The History of Synthetix
Synthetix started off as a USD backed stablecoin project in 2017 called Havven. Havven publicly launched in February 2018 and distributed the native ERC-20 token HAV. In late 2018, the company rebranded as Synthetix.
What’s important to note is that Havven enabled the creation of a single stablecoin, nUSD, while the rebranded Synthetix platform allows the creation of a wide variety of synthetic assets, outside of just stablecoins or digital assets pegged to fiat currencies.
Who Is the Founder of Synthetix?
Kain Warwick is the founder of Synthetix, which was originally called Havven, but rebranded in late 2018. He is also the founder of blueshift, a digital payment platform in Australia. He is an avid angel investor who has made 17 investments in startups mostly in the blockchain and crypto space.
How Many Tokens Are in Circulation? What Is the Token Supply?
The circulating supply of SNX tokens is approximately 170 million with a total supply of 231 million tokens. That being said, Synthetix monetary policy has changed to increase the total supply to 250 million over the next few years.
What Are Some Unique Characteristics or Updates on Synthetix or the SNX Token?
SNX is an ERC-20 token and Synthetix is built on the Ethereum blockchain, which allows the synths or synthetic assets created to be traded on various Decentralized exchanges like Uniswap or Kwenta.
Synthetix has transitioned to the Optimistic Ethereum Mainnet after months of collaboration with Chainlink and Optimism. This will allow a wider range of assets to be deployed synthetically, including natural shorts on all Synths and eventually Synthetic Futures. This layer 2 scaling solution will ease some of the downfalls of being on the Ethereum blockchain.
What Is the Risk Surrounding Synthetix?
This is still a very early-stage project that is constantly being upgraded by developers, so the makeup of the platform could change in the long term.
Another risk to consider is that if the price of SNX declines dramatically due to macro market conditions, users will have to burn a lot more synths to reclaim their SNX tokens.
There is also the increased risk of competition as the DeFi ecosystem is still in its infancy. This means it is reasonable to expect increased competition which may cause users to move to other platforms.
Prior to listing Synthetix on the VirgoCX Platform, VirgoCX performed due diligence on Synthetix and determined that Synthetix is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of Synthetix and/or its primary development team;
- The supply, demand, maturity and liquidity of Synthetix; and
- Legal and regulatory risks associated with Synthetix.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.