sETH is a derivative token created by Sythentix protocol. Synthetix is a decentralized financial protocol that facilitates the creation of synthetic assets and facilitates their exposure to the blockchain ecosystem. The protocol is built on Ethereum and assets created are collateralized by the Synthetix Network Token (SNX). Essentially, sETH is a synthetic token that is pegged to the price of ETH. By leveraging the Synthetix protocol, Synthetix Assets (Synths) can be traded with infinite liquidity and zero slippage thanks to the protocol’s unique pooled collateral model. All trades conducted between Synths require a fee which is then distributed to SNX collateral providers.
SNX is the native currency of the entire Synthetix protocol. It operates as a utility token.
What are sETH’s key features and how does it work?
Firstly, the Synthtix Assets are built so that they can capture price movements of the underlying assets. Assets on the platform can be created from cryptocurrencies, fiat currencies, stocks, commodities, amongst other assets. Assets are created once they have been voted and approved by the Synthetix community. Since all synths on the protocol are collateralized by SNX, sETH is minted via the Mintr application. SNX holders stake their SNX to interact with Synthetix contracts on the platform in order to mine assets. The amount of SNX a user must stake and the amount of the synthetic asset returned is determined by the collateralization ratio. The collateralization ratio is different for each synthetic asset and is determined through community governance mechanisms. When an SNX staker mints any Synth, for example, sETH, they incur a debt that must be paid back to unlock the original SNX that they deposited. Upon SNX being deposited and the debt being assigned to the staker, a Synthetix contract issues the new asset to the staker. Synthetix uses various methods to ensure that synthetic assets remain pegged to their underlying asset. The first is arbitrage. If a peg drops, SNX stakers can buy back the asset and burn it to reduce the debt they have created from minting Synths. The second method to maintain the Synth peg is via (in the case of sETH) the sETH liquidity pool on Uniswap. Rewards are distributed to those who provide liquidity in the sETH/ETH pool on Uniswap. This has resulted in one of the largest liquidity pools on the platform, which helps to ensure the peg is stable due to frequent swaps.
Synthetix stakers are incentivized by rewards. Exchange rewards are distributed to SNX stakers when Synths are exchanged from one asset to another. As mentioned, rewards are also distributed for staking and providing liquidity. These rewards ensure that there is enough collateral to retain the Collateralization Ratio at the predetermined rate and to absorb any potential large price shocks.
What can sETH be used for?
The Synthetix.Exchange platform allows users to view and access the trading interface for synths. As such, users can leverage the range of synthetic assets available on the platform and access real-world assets such as gold and more.
The Synthetix protocol offers users a variety of tools to capitalize on the blockchain space, as well as on applications built on top of the Synthetic platform. Examples of such applications include:
Kwenta - a derivatives trading platform
Lyra - a decentralized options protocol
Thales - a binary options protocol
sETH
