Synthetix – the permissionless derivatives protocol – went live with a range of new Synths and other improvements with its recent Hadar upgrade. The protocol upgrade includes multiple changes to the system, including improved delegation powers to allow for better mobile user experience along with a system pause for signers of the protocol DAO.
However, the most notable changes with the Hadar upgrade are the new suite of Synths (synthetic assets/derivatives) available to the protocol’s users.
Here are some details about the new Index Synths tracking the Nikkei 225 and FTSE 100, specifically around pausing for market closures and how the assets are denominated. https://t.co/hK6NKsToox
— Synthetix ⚔️ (@synthetix_io) April 2, 2020
In short, the release introduces six new crypto assets (with inverses) along with two equity indices and a commodity. These include:
- Nikkei 225 – Major equities on the Tokyo Stock exchange
- FTSE 100 – Main index for London Stock Exchange
- Brent Crude Oil
- Crypto Assets – sBCH, sDASH, sADA, sEOS, sXMR, sETC with accompanying inverse Synths.
The introduction of equity indices introduces several aspects which require specialized consideration surrounding design choices from the community.
The Complications with Synthetix and Global Equities
The primary consideration for adding traditional indices is that equity markets are closed on nights, weekends, and holidays. By adding these Synths, the synthetic asset must be implemented with the functionality to halt and begin trading in line with market closures and openings.
As a result, these Synths are embedded with a new function called “pauseSynth” preventing holders from trading in or out of the asset during market closures.
The protocol’s upcoming migration to ChainLink oracles will further improve this functionality as the fee reclamation mechanism will ensure that trades executed out of hours will be confirmed at the first price at market open.
The second consideration surrounds the fact that both indices are traded and quoted in their respective national currencies. For the FTSE 100, it’s the British Pound (GBP). For the Nikkei 225, it’s obviously the Japanese Yen (JPY). With that in mind, Synthetix relies on USD as the quoted currencies for all trades on the protocol.
The difference in quoted currencies creates some complications regarding UX, leaving the team with two primary options: either convert the respective prices into USD or treat it similar to other traditional derivatives and track the index in USD. Both choices offer significant design trade-offs and UX complications. If it’s converting the index to USD, the price of sNikkei would become $168 USD – creating a degree of UX friction as it complicates things for users familiar with the index quoted in Yen. The other would require the protocol to bootstrap liquidity in sGBP and sYEN stablecoins which is another challenge in itself.
The final decision was to provide an index that tracks the Yen denominated value but priced in USD, making the cost of one unit of sNIKKEI $18,065.41 USD rather than $168 USD post-conversion. The rationale behind this is that a USD denominated traders buying this index have the same level of exposure to the performance of the respective index on a percentage basis without the need to factor in currency volatility and exchange rates.
As such, the FTSE Synth will trade similarly at $5454.57 USD rather than GBP. Ultimately, this biggest benefit with this is that the protocol would not have to track changes to the system Debt via conversions from JPY/GBP to USD.
Synthetix’s continues to showcase its ability to rapidly expand its product offerings. The updated roadmap released for 2020 is nothing short of exciting and the addition of these new Synths is another step of many for the derivatives protocol.
As Synthetix expands the available Synths, additional liquid collateral types (like BTC, ETH, and DAI) and more robust oracle solutions, the value proposition for the globally accessible synthetic asset issuance platform should increase in tandem.
The coming year for Synthetix should be interesting to watch as more traditional assets are added to the exchange amid an interesting point of time for global capital markets. The new assets will offer DeFi users the opportunity to capitalize on the volatility on a globally accessible, crypto-native scale.
To stay up to date with all things Synthetix, make sure to follow them on Twitter.
For those interested in jumping in on discussions, check out their highly active Discord channel!
— Synthetix ⚔️ (@synthetix_io) January 22, 2019
Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.