You’ve heard about DeFi, you’ve seen crazy valuations thrown around, you heard rags to riches stories and you wonder what the hype is all about and how promising this sector is.
Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.
Decentralised Finance
We’ve already covered DeFi in a previous journal but we’ll do a quick recap right here.
The financial products and services that we all use: exchanges, banks, savings accounts, loans, mutual funds etc, are all centralised processes. A few problems arise from centralisation mainly linked to corruption and unfairness, how many times have you heard of banks closing down accounts or rejected loans for unfair reasons?
If this process was governed by code, these problems would theoretically fade away leaving room for a fairer financial sector. This is what decentralised finance is here to offer.
Lending, borrowing, exchanging, custody and more have all become available in DeFi. But there’s one particular aspect of CeFi that is not quite yet available in DeFi and its potential is bigger than any of the previously mentioned products/services.
Derivatives
Definition: contracts whose price is “derived” from an underlying asset like BTC or ETH. Example of derivative products are futures and options.
In 2017 you’ve heard “futures killed Bitcoin” because the timing coincided with the Bitcoin top. The reality is different, derivatives have onboarded a very large amount of capital over the past 3 years, which spot markets could not do alone. Like them or hate them, derivatives are an essential part of any financial market and they create opportunities for those seeking them. The global derivatives market is 10 times larger than the world’s GDP.
Right now, derivatives are taking a very large hit in crypto. BitMEX saw its owners facing criminal charges and now are fast-tracking KYC for all their customers (many of which joined because of no KYC), OKex also a very large derivatives exchange is facing an investigation. Plus, the FCA is banning derivatives offered to retail in the UK.
A large portion of capital would love it if there was a decentralised futures exchange where they own their own keys and can trade freely. But what if we told you that there’s one on the way?
Introducing Synthetix
Synthetix is one of the older DeFi projects whose team kept their heads down and worked through the 2018 bear market. It facilitates the issuance of “synthetic” assets that can be based on a fiat currency, a cryptocurrency, a commodity, an index, a stock or anything else. All “synths” are ERC20 tokens and therefore can be traded. “Synth” is basically a new fancier DeFi name for “derivatives”.
The project as a whole is built on the Ethereum blockchain.
The SNX Token
You’ve heard us talk about the economic model of tokens or Tokenomics many times. Most coins/tokens have absolutely no model programmed that will make them more valuable with the use of the protocol. SNX is not one of them.
In order to mint a synth you must stake a proportional value of SNX, in return stakers get a portion of the revenue earned by the protocol. So first you have a requirement for SNX to be bought (buying pressure) to use the protocol and second there is an incentive to staking: earning a share of the revenue created.
Synthetix Exchange
As of now, you can trade synths on Synthetic.Exchange. You can go long with normal pairs and short with inverse pairs. These are all basic functions that not a lot of people are interested in since it’s pretty much spot trading (except for inverse) and Uniswap is an easier to use protocol for that. This is not where the magic starts.
Synthetix Perpetual Futures
Perpetual futures are the single most traded product in crypto, it garnered billions of dollars in daily volume for years. The SIP-80 proposal is focused on offering that same product, improved and on the Synthetix protocol. This will create a leveraged trading environment all on DeFi, meaning you own your keys and trade freely.
There’s one problem though: Ethereum fees. They are sky-high and no one is willing to pay $10 for every trade, especially not those trading smaller accounts. Guess what? Being solved too.
Optimism
The Ethereum ecosystem has been promised scalability for years with ETH2.0 but it keeps getting delayed, and EIP1559 which would solve the fee problem as well is yet to be implemented. That’s why the focus right now has shifted to layer 2 scalability, the best to do it yet is with the Optimism network and one of the first projects working to implement it is Synthetix. This is a crucial component to successfully creating a decentralised futures trading platform.
Price Target
Okay, you’ve read this much and yet you don’t see any numbers thrown around which is really why you’re here. Congratulations, you’ve reached that section.
Theory: Right now, the crypto market is valuing coins/tokens unfairly. You have tokens ready to revolutionise the entire financial system but Bitcoin Cash is ranked 5th largest asset by market capitalisation with $5B in MCap?! SNX is 40th?!
By the end of this bullish cycle, we believe a reset is imminent where a fair MCap list is created. Let’s run some numbers quickly.
Total MCap: $400 Billion
Bitcoin Cash’s Share of MCap: 1.25%
A fair number to aim for at the next cycle in terms of Total MCap is $1 Trillion, an even fairer assumptions is that SNX occupies the same market share that BCH currently has. That puts SNX’s MCap at $12.5 Billion.
Right now, SNX’s MCap is about $400 million. That’s 31.25x. If the Total MCap remains the same at $400 Billion and SNX has the same valuation as BCH that would be a 12.5x from current valuation.
We will not be greedy ourselves, and take the average of the two numbers and call it a 20x potential.
We’ll also put it out there that the global derivatives market is worth $1.2 QUADRILLION and Synthetix can onboard any sort of asset. Believing it will take up all of this is very unreasonable however. Keeping our feet on earth is crucial.
Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.