What is Synthetix?
One of the fastest-growing applications of crypto is DeFi — decentralized finance — which describes a variety of innovative approaches to many aspects of finance, include borrowing and lending, insurance, and in the case of Synthetix, synthetic asset and derivatives trading.
Synthetix produces derivative tokens called synths which track the value of a stock, currency or commodity. Holding synths exposes the holder to the underlying asset without needing to purchase the asset directly. However, these synths aren’t the same as an actual asset in that they cannot be redeemed for the underlying asset, and collateral value such as voting rights are not carried through to a synth holder.
Synthetix uses smart contracts to carry out trades. Smart contracts are effectively self-fulfilling contracts that remove the need for a third party, or ‘trustless’. The Synthetix protocol is designed with pooled collateral to provide liquidity and zero slippage on trades of derivative tokens. Synthetix has partnered with Chainlink, a decentralized oracle network, so its smart contracts source decentralized price feeds that avoid the reliance on any single party to provide pricing information.
The platform’s collateral is provided by the minting and staking of Synthetix’s own token, the Synthetix Network Token (SNX). Whenever a new synth is created, SNX is minted and locked up in a smart contract.
What is SNX?
SNX is an ERC-20 token created by the Synthetix protocol that serves multiple purposes. In addition to serving as collateral on the protocol, by staking SNX, a holder will receive a portion of trading fees from the network as an incentive to contribute to the liquidity pools.
A significant amount of SNX needs to be staked in order to release a new synth into circulation, ensuring tradable derivative tokens are over-collateralized. In theory, this drives up the price of SNX; the token becomes rarer and its fundamental value increases because locking it up adds a new synthetic token into circulation.
Synthetix also applies rebalancing methods to stabilize the price of SNX. If SNX price rises, the system releases SNX tokens that weren’t tied up guaranteeing synths. These tokens are then sold on the open market. Doing this increases the supply, driving the price of SNX down.
How is Synthetix different from Bitcoin?
Bitcoin was created as a peer-to-peer payment network. This means that it is meant to act as a form of money or as a store of value akin to gold. Mining a new Bitcoin requires a lot of computational power and a lot of energy; both cost money, and the charge is shunted to the purchaser, providing Bitcoin with what some consider fundamental value.
SNX, on the other, is a cryptocurrency with a purpose entirely different than Bitcoin. SNX is used to maintain the Synthetix network by minting new synths. The supply adjusts in response to the price of the cryptocurrency, whereas the supply of Bitcoin increases at a similar rate apart from when it undergoes a halving, an event where the amount of Bitcoin minted as a reward is halved.
In addition, the synths created on the Synthetix network have little to do with Bitcoin. While a synth could be created to track the value of Bitcoin, which would mean it has the same value as a Bitcoin, it would not be the same as holding BTC itself. In addition, many of the other synths created track real world assets, such as gold. Bitcoin’s value is not tied to any other asset.
Synths are also created in a different way than Bitcoin. Synths are created when a user stakes their SNX at a rate of 750% higher than the value of the asset they are creating. New Bitcoins, on the other hand, are minted when miners use their computers to solve difficult mathematical puzzles.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about Synthetix, including an opinion that SNX is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of SNX prior to making it available on Wealthsimple Crypto and has concluded that SNX is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated Synthetix based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of Synthetix, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created Synthetix;
- The supply, demand, maturity, utility and liquidity of SNX;
- Material technical risks associated with Synthetix, including any code defects, security breaches and other threats concerning Synthetix and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with Synthetix, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of SNX.
Like all other crypto assets, there are some general risks to investing in SNX. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. In addition to these general risks, we note that as with any DeFi protocol, Synthetix presents a slightly elevated short history risk relative to more established cryptocurrencies like Bitcoin. If the protocol were be restricted, SNX may experience large price decreases. Further, the Synthetix community is not under any legal or regulatory obligation to disclose material information to the public regarding its activities. Holders of SNX have no recourse to Synthetix or Wealthsimple if SNX declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading SNX. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: July 26, 2021