Explained: The Synthetix Protocol and why its native token (SNX) is up 110% since the start of the year

The SNX token has registered a considerable price pump over the last few days. The relatively unheard-off native token of the DeFI protocol Synthetix has been displaying bullish momentum for several weeks now, even crossing the $3 mark for the first time in 6 months. The token’s latest gains come on the back of U.S. regulators safeguarding depositors from the collapse of the Signature Bank and the Silicon Valley Bank, effectively nipping any fallout effects in the bud.

However, that’s not the only reason behind the token’s recent price performance. Tag along as we tell you more about Synthetix and why its native token has been rising through the ranks this year.

Synthetix is an Ethereum-based DeFi protocol that allows users to mint synthetic assets. Synthetic assets, also known as “synths”, serve as a bond between real-world assets and digital assets. It allows users to invest in (mostly) non-blockchain assets, without actually purchasing them. Therefore, through this Protocol, users can invest in synthetic gold or silver. They can also invest in synthetic indices or fiat currencies. Users can also invest in synthetic Bitcoin (sBTC) and other cryptocurrencies.

This way, you are exposed to the price movements of the assets without owning them. Similar to derivatives in financial markets, you receive returns from the exposure of underlying assets via synths which are sort of pegged to the real assets. Simply put, traders are issued synthetic assets that mirror the market value of the currencies (both cryptos and fiat), traditional financial assets, and other commodities such as gold and silver.

One can also invest in inverse synthetic tokens. This allows investors to profit when the underlying asset starts losing its value. Also, note that synths are different from stablecoins pegged to fiat currencies or real-world commodities. For instance, by holding Paxos Gold, you own a corresponding amount of gold. However, this is not the case with synths. Similarly, synthetic stocks do not provide the dividends that actual shareholders receive.

It’s quite simple. To mint a certain synthetic asset, users provide 750 percent of the asset’s value in SNX tokens. Therefore, to mint $100 of sUSD, you’d have to lock up $750 worth of SNX tokens with the platform. This large collateralisation ratio helps the platform safeguard itself from instances when the real-world asset you have invested in experiences major price swings. When you want to exit your position, simply burn the synthetic assets to receive your locked-up SNX.

The protocol uses Chainlink’s oracle network to fetch instant real-world prices for the different synthetic assets. This allows users exposure to a host of real-world assets with little to no price slippage. The platform also has its own decentralised exchange platform called Kwenta, which allows users access to perpetual contracts with 25X leverage. This enables users to invest $2,500 in the available assets, even if they have only $100 in their wallets.

At the start of the year, SNX was changing hands at $1.46 per unit. At the time of writing, the token had jumped to $3.09. That translates into a 110 percent increase year-to-date. There are plenty of reasons behind this growth spurt. To begin with, most cryptocurrencies have seen a turnaround since the start of 2023. However, SNX’s gains have been amplified by several ecosystem upgrades.

For instance, in Feb this year, the protocol added 22 new tokens to its perpetual futures marketplace. In the same month, Synthetix also introduced the V3 of its protocol on Ethereum and Optimism. This upgrade brought improved functionality and more efficient cross-chain transfer of stablecoin. Finally, the platform also introduced the Synthetix Improvement Proposal 255 (SIP 255). This update introduced a burning mechanism for trading fees.

All these updates have borne fruit for the protocol with daily trading volume touching $100 million on Kwenta on March 10. The platform then doubled this, recording $200 million in daily trading volume on March 13. This can explain the recent jump, when SNX jumped from $2.08 on March 11 to $3.15 on March 13.

Synthetix has registered handsome gains this year. This growth can be attributed to several network improvements and the general buoyancy of the broader crypto market. However, cryptocurrencies are highly volatile and there’s no telling if the SNX token can maintain its growth trajectory. Therefore, it is extremely important to do your own research and invest only as much as you can afford to lose.