Synthetix (Ethereum) DAPP (Part 02)
In my last post, I tried to discuss the basic things of the decentralized application mentioned in the title. Today I am going to share the mechanism of this application, like how it works.
The Synthetix protocol has the ability to create synthetic assets using smart contracts. These Synths are backed by the platform's native token called SNX. This can be treated as collateral. Users can stake SNX tokens as collateral to mint new Synths. And finally, this can be traded on the platform or held as an investment. The process of minting Synths is simply locking up a certain amount of SNX tokens in a smart contract.
The value of the Synths created is determined by the amount of SNX staked and the current collateralization ratio. The ratio is very high, just typically set at 750%. This means that for every $1 worth of Synths created, $7.50 worth of SNX must be staked as collateral. This high collateralization ratio helps to ensure the stability and security of the system. Its high ratio works as a defender of price volatility.
Once minted, Synths can be traded on Synthetix's decentralized exchange (DEX). Synthetix.Exchange or various DeFi protocols are used that support synthetic assets. Users can trade between different Synths. So it is exposed to a wide range of assets like sUSD (synthetic USD), sBTC (synthetic Bitcoin), sETH (synthetic Ether), and even more exotic assets like sXAU (synthetic gold) or sEUR (synthetic Euro). The most unique feature of Synthetix is its use of an oracle system to provide real-time price feeds for the Synths.
Oracles are third-party services that supply the platform with accurate and up-to-date price information for the underlying assets. This work helps the value of the Synths to remain closely aligned with the value of the assets they represent. Finally, fairness and transparency are achieved in that way on the platform. Next post we shall try to share the role of these dapps in the decentralized finance World.
~ Regards,
VEIGO (Community Mod)
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