Synthetix is a decentralised asset issuance and trading protocol. The platform enables synthetic asset creation on the Ethereum blockchain. Synthetic assets, formerly known as Synths, are ERC20 (Ethereum-based) tokens that track the price of an underlying real-world asset. Users can trade Synths on the Synthetix Exchange and profit from price movements.
Synthetix's native cryptocurrency is known as the Synthetics Network Token (SNX). SNX performs several functions for the Synthetix platform:
- It is used as collateral for the Synthetix Exchange.
- It is used to mint (create) Synths.
- It enables infinite liquidity for Synths traded on the Synthetix Exchange.
- It is used to distribute rewards to token holders that stake and, therefore, support the Synthetix platform.
In this guide, we will look at how staking in the Synthetix platform works and how the SNX token can earn rewards.
What is Synthetix staking and how does it work?
Generally, staking involves locking up cryptocurrencies to participate in a proof-of-stake (PoS) consensus mechanism. A PoS mechanism operates and secures an associated blockchain. Staked cryptocurrency tokens are locked for a specific period of time, which ensures the stability of the network. For supporting and securing the network, users that stake cryptocurrency tokens are rewarded.
While still referred to as staking, staking on the Synthetix platform is slightly different. As Synthetix is an asset issuance and trading platform, staking involves depositing and locking up the native SNX token in a collateral pool. The collateral pool acts as liquidity for the Synthetix Exchange. When a user stakes SNX, a synthetic USD token (sUSD) is minted. The sUSD tokens represent the user's debt in the collateral pool.
The collateral pool on Synthetix facilitates trading and is why the Synthetix Exchange can claim to have "infinite liquidity". Instead of a traditional order book, traders place trades against the collateral pool. When traders are profitable, the pool decreases in value as profits are distributed. When traders lose, the pool collects the losses and increases in value. For the provision of liquidity on the Synthetix Exchange and for taking on associated risks, those that stake SNX are rewarded. Rewards are paid out in both sUSD and SNX.
Those staking SNX receive a proportion of the trading fees, which are paid in sUSD and a proportion of newly minted SNX tokens, which are released on a weekly basis. 90% of all newly minted SNX tokens are distributed to the staking community.
The sUSD tokens that were created as a result of staking SNX can be used within the Synthetix Exchange to trade for other Synths (synthetic assets). However, it is important to remember the sUSD tokens represent debt in the collateral pool and are required when a user wants to unstake and withdraw their SNX tokens.
Anyone who holds the SNX token can stake their funds on the Synthetix network. However, if a user owns less than 500 SNX tokens, the gas fees (transaction fees) may surpass the staking rewards.
Where to buy SNX in Australia
Collateralisation ratio (C-ratio)
When staking SNX tokens, users must meet a minimum collateralisation ratio (c-ratio) of 600%. If $600 worth of SNX tokens is staked, a user would receive $100 of minted sUSD. As the price of SNX and sUSD changes, the c-ratio will also change. A user can increase the c-ratio by staking more SNX tokens and decrease the c-ratio by burning sUSD. The ratio must stay below 800% and must stay above 500%. If the c-ratio stays below 500% for more than 3 days, a user's position is liquidated.
The conservative c-ratio is in place to ensure the network remains safe during times of market volatility. The c-ratio percentage could change in the future.
Note. Rewards are made available once every week. To claim rewards, a user's c-ratio must be above 600%.
How to stake Synthetix
Staking SNX tokens can be completed directly through the staking section of the Synthetix online platform. The platform allows users to mint Synths for the network, manage staking and claim rewards. To connect with Synthetix, a user will require a Web 3.0 digital wallet, such as MetaMask. A Web 3.0 digital wallet acts as a bridge between a user's digital assets and the Synthetix platform.
How to stake on Synthetix:
- Visit Synthetix. Head over to the official Synthetix staking website and click "Connect Wallet" in the top right corner of the screen.
- Connect Wallet. Select your Web 3.0 digital wallet from the pop-up and connect it to the Synthetix platform.
- Stake SNX and mint sUSD. Once your wallet is connected, click "Staking" in the left tab, followed by "Mint & Burn". Choose to either mint the maximum amount of sUSD dependent on your SNX holdings or choose to mint a custom amount. In the next window, enter the amount of SNX to stake and click "Mint sUSD".
- Confirm. Approve the transaction in your Web 3.0 digital wallet. Once confirmed, your SNX tokens will have been staked and sUSD tokens will have been minted. You will now begin to accrue both sUSD and SNX tokens. These can be checked in the Synthetix platform.
- Claiming rewards. To claim your rewards, click on the "Home" tab within the Synthetix platform. On the homepage, click the "Claim SNX" box. On the following page, you can see when the next reward period ends and whether a claim is open or closed. You must claim your rewards within 7 days of issuance or they will be forfeit and rolled back into the collateral pool. Note: To claim rewards, a user must keep their collateralisation ratio within 1% of 600%. This effectively means it can't be below 594%. The collateralisation ratio in the wallet can be monitored on the staking platform.
How to withdraw SNX tokens
To remove staked SNX tokens, a user must pay the corresponding sUSD debt in return. Only after sUSD tokens have been burned can SNX be removed. Please note that there is an 8-hour waiting period before you can burn the sUSD you have originally minted.
- Visit Synthetix. Head over to the official Synthetix staking website and connect your Web 3.0 digital wallet.
- Mint & Burn. On the home webpage, click the "Staking" tab on the left, followed by "Mint & Burn".
- Burn sUSD to unlock SNX. On the burn page, you have four options. 1) You can burn the maximum available amount of sUSD in your wallet. 2) You can automatically select the amount of sUSD to burn that will bring your collateralisation ratio back to the optimum. 3) You can burn a custom amount of sUSD. 4) You can purchase sUSD to clear the total debt required to withdraw your original SNX tokens.
Select the option that you want and, if required, enter the amount of sUSD you wish to burn.
- Confirm the transaction. Approve and sign the transaction via your Web 3.0 digital wallet. Once approved, the sUSD tokens will be burned and your SNX tokens will be released.
DeFi staking and lending
Outside of the Synthetix platform, SNX tokens can earn yield in other DeFi applications. One of the most common platforms for earning yield from SNX tokens are decentralised exchanges (DEX).
DEXs are run by automated market makers (AMM). This is an automated algorithm that sets exchange prices based on liquidity pools. Liquidity pools are filled with liquidity provided by users, which other traders on the platform can utilise to make instant exchanges. In return for depositing tokens to a liquidity pool, a user is rewarded with either a share of the transaction fees, the native DEX token or both.
To provide SNX tokens as liquidity, a user needs to head over to a DEX such as Uniswap or SushiSwap. A user then needs to find a liquidity pool on the exchange that contains SNX. As liquidity pools work as cryptocurrency pairings, a user will need to deposit an equal amount of both cryptocurrencies. For example, if the liquidity pool is SNX-ETH, a user would need to deposit an equal proportion of SNX and ETH. Once deposited, a user can then start accruing a share of the transaction fees collected by that liquidity pool. The more a liquidity pool is used, the more transaction fees are collected.
Is staking Synthetix safe?
Locking up cryptocurrencies within any protocol always comes with associated risks and Synthetix is no different. Before staking any SNX tokens, a user must understand all of the risks involved.
The purpose of staking SNX is to provide collateral that traders can use within the Synthetix Exchange. Transaction fees are collected after each trade and placed into the collateral pool. However, the pot of collateral can fluctuate. The collateral pool can decrease when traders profit and increase when traders lose. If traders are continually profitable, staked SNX tokens may reduce.
Due to the high transaction fees associated with staking on Synthetix, the process is really only viable for those staking over 500 SNX tokens. Anything less than 500 tokens and gas fees may outweigh the benefits of staking.
Staking rewards must be claimed within a 7-day window. If rewards are not claimed within that window, any yield earned is placed back into the collateral pool. A user might end up losing funds if they fail to claim rewards within the stipulated time.
Pros and cons of staking Synthetix
- Rewards. By staking SNX tokens, a user can earn rewards for collateralising the network. If SNX tokens were not staked, any profits would be dependent on the market price of SNX.
- Active user base. A high percentage of all SNX tokens are staked within the Synthetix platform.
- Significant roadmap. The Synthetix Exchange could one day open the entire world to trading synthetic assets.
- Active investing. Staking SNX in Synthetix requires users to actively manage their collateralisation ratio and collect rewards on time. This is a much more active form of staking in comparison to other blockchains and protocols.
- Gas fees. Transaction fees on the Synthetix platform are higher than most other platforms on Ethereum.
- 1-year transfer period. SNX staking rewards have an escrow period of 1 year during which a user cannot transfer them. Claimed rewards can be staked back into the system to increase returns.
Synthetix is a complex trading and asset issuance platform that requires an adequate level of understanding before committing any SNX investment. If token holders that hold over 500 SNX tokens are happy with the intricacies surrounding the collateralisation ratio, staking SNX can be a way to earn extra income from otherwise idle assets.