Synthetix: Why I invested in the Decentralized Synthetic Assets Platform
Synthetix is a decentralized trading platform of synthetic assets built on top of Ethereum. The beauty of Synthetix is that you can become part of the system by buying the SNX token which grants you weekly dividends based on your stake in the protocol. These dividends come from fees paid by traders actually using the platform to make trades on synthetic assets, and soon on synthetic derivatives (binary options, etc.) , all done on top of Ethereum blockchain. I’m not going to explain how Synthetix platform works as this topic has already been explained numerous time. Instead I focus on the future potential of the platform with the addition to leverage and derivatives.
In 2019, Synthetix released the platform to trade basic synthetic assets such as sBTC, sETH and some traditional assets such as sXAU, giving you exposure to Gold via crypto assets only. As the team delivered a lot of goodies throughout the year in terms of functionality, the platform became the target of a new kind of hackers, which were front running oracle price updates to make money without risk. That is where the team put on hold new market additions and released security measures to patch the current security holes and ensure that the platform can scale going forward without additional risk and bring the exciting part of Synthetix, which I call Decentralized Synthetic Derivatives Assets. But first, let me explain what is a derivative.
What is a derivative?
A derivative is a contract between two parties that derives its value from an underlying asset, which can be almost whatever you want (equity index, corporate bond, commodity (oil, gold, etc.) , interest rate, etc.) You have two families of derivatives: options and forward/futures.
The derivative opportunity
The derivative market is worth approximately between $544 Trillion and $1200 Trillion (1T = 1000B) on a notional contract basis. To put things in perspective, total crypto market cap is $187B and total stock market is $73T, so derivative market is at least 7x bigger. Here is an infographic I did to show you the perspective.
So Synthetix is about to enter the world’s most biggest market and is uniquely positioned to benefit from it.
Currently, Synthetix generates trading volume of roughly $11M fortnightly, which approximates $286M annually without growth, solely based on basic long/short crypto assets without leverage. We can see that there is already a nice market for synthetic assets.
Now, we all know that traders like to take risk and so, leverage. Now you tell me who is currently doing the biggest daily trading volume of all exchanges? Kraken? No.. Bitstamp? No.. Bitmex? Hell yes.
Today Bitmex has generated $1.78B of trading volume on its platform. And now every centralized exchange has futures and/or options trading. Look at Binance, Kraken, etc. they are all promoting futures with leverage, etc. because this is where the money is, with leverage you can charge higher fees and attract more wannabe traders/get rich quick kids. But we also know that approximately 90% of traders lose money over time.
The Synthetix position
Synthetix is uniquely positionned to take advantage of the global trend of crypto exchanges moving to leverage trading for two reasons.
- The platform is the only decentralized one which will offer these products in the coming future.
- Trading via Synthetix removes the burden of liquidity which is faced by a lot of exchanges. It is extremely hard to attract new traders when there is no liquidity on your exchange. With Synthetix, there is no liquidity issue as the trade size is potentially unlimited (except by the sUSD market cap/ SNX collateral locked on, which supports the Synthetix system).
On top of that, synthetic assets used to replicate traditional derivative assets will be another unique feature of the Synthetix exchange coming in 2020. There is no other competitors except maybe FTX and the market is huge (see the infographic above). Imagine being able to long or short with leverage or taking call/put options on any assets you would like without the burden of liquidity and the friction of traditional exchange fees and costs?
I say sYES.
Currently, Synthetix platform generates $11M of trading volume and $32K exchange fees fortnighly. SNX market cap is roughly $100M at the moment. Based on these data, I derive a Net Fees Yield (%), which is explained as: how much is the market valuing SNX based on fees generated by the platform annually, divided by SNX market capitalization. Grossly speaking, this is the dividend yield of holding SNX.
To value current business, I calculate NFY based on current data and based on two growth assumptions. Model 1 factors a 10% growth of volume (ie $286M *1.1) compared to what has been estimated, currently (11M fortnightly volume * 26 = 286 expected volume for ongoing year). Model 2 takes into account 20% growth. Note that this is the current assumptions we have to value the current business model of Synthetix.
Then I take on the valuation of Synthetix with the addition of derivatives to the business model. Basically I use two assumptions, higher volume and, constant or higher fees per trading volume generated. Finally, I use different Net Fees Yield as the business model will scale and then requires a lower dividend yield to hold your SNX stake.
Finally, I arrive to SNX valuation and price target based on the different assumptions (Models A, B & C, NFY Base, Base2 & Base3 and a SNX coin supply of 250M to take into account future inflation).
My SNX price target is $5, roughly a x9 compared to current price of $0.57.
SNX market cap is roughly $100M at the moment with a price of $0.57 and offers an opportunity to buy a stake in one of the most innovative crypto startup, with a defined and valid use case for a working product, which is already profitable.
I’m long SNX.
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Thanks for reading
- Twitter handle: @SecretSalsa_
I have not been compensated to write this article.
All the above does not constitute investment advice.