Synthetix: DeFi’s Shining Light

Synthetix is one of the original and most innovative DeFi protocols in Ethereum’s history, one of the first decentralized stablecoins and synthetic asset protocols, and the original yield farm, offering SNX token rewards for on-chain activity. Since its meteoric rise in 2020 and early 2021 along with other blue-chip DeFi protocols, its TVL has dropped significantly, dropping over 90% from its all-time-high of just under $3 billion. This is along with the SNX token dropping over 95% from its high.

Despite the stagnation of interest in its stablecoin and synthetic asset minting on Ethereum, the Synthetix team was able to continue innovating, and founder Kain Warwick returned to help drive new product development. As a result, Synthetix has rapidly grown trading volumes and its ecosystem on Optimism. In the month of June, the TVL of Synthetix doubled from $220 million to just under $500 million, making Synthetix the largest protocol on Optimism, with over 44% of the total TVL at $150 million. The recent growth can be attributed to the implementation and integration of atomic swaps on Ethereum’s L1 and the growth of perpetual futures on Kwenta. Synthetix also has many unique developments in their upcoming V3 that allow for greater user experience and experimentation that could garner even more traction in the coming months.

Atomic Swaps

One of the barriers to adoption for Synthetix synths has been the user experience of trading. Synthetic originally used a process called fee reclamation, which required a wait of 5-10 minutes from trade to actual execution in order for the system to verify prices. This inefficiency led to SIP-120, which was the introduction of atomic swaps. Users can now atomically swap assets through Synthetix by pricing synths through a combination of Uniswap and Chainlink oracles.

While atomic swaps were created in November 2021, it wasn’t until May 31, 2022 that atomic swaps were integrated directly into 1inch, a leading DEX aggregator, that they started to gain traction. Since atomic swaps allow for instant settlement for swaps, and 1inch aggregates trades to find the cheapest route for execution, swappers of stables to any token and vice versa can be seamlessly routed through synths to have best execution. For example, a swap from USDC to ETH could be routed through Synthetix as USDC > sUSD > sETH through 1inch and then immediately swapped for ETH using Curve. 1inch is also working on integrating the final step of the process, which should bring even more potential volume for synths through Synthetix. With routing through synths via 1inch offering swappers and arbitrageurs better pricing than going direct, atomic swap volumes exploded in June.