Synthetix is the backbone for derivatives trading in Defi, thus making it possible for anyone from anywhere to gain on-chain exposure to different types of assets.

For clarity on derivative trading, the word derivative comes from the word derive, in trading terms derivative is a financial security that has value and it is reliable upon and derived from an underlying asset or group of assets.  The derivative derives its price from the fluctuations in the underlying asset.

The idea is to connect with the deep liquidity of synthetic assets to power a new era of financial tools.  Synthetix is a decentralized synthetic asset issuance protocol that has been built on Ethereum.  These assets are further collateralized by the SNX (Synthetic Network Token).  When SNX is locked in the contract on the decentralized network using DeFi apps, it makes it possible for the issuance of synthetic assets (Synths).

The Synths back the “pooled collateral model” thus making it possible for users to convert between Synths directly by making use of the smart contract without the need of counter parties.

This pooled collateral model is useful because it solves the liquidity and slippage issues, which is faced by DEX’s. Those SNX stake holders who are incentivized to stake their tokens will benefit from the pro-rata portion of the fees, which has been generated by them by the activities on the Synthetix Exchange depending upon the kind of contribution that they can make on the network.

The value of the SNX token is derived from the “right to participate” in the network and to capture the fee, which is generated by the Synth Exchanges.  Therefore, trading on the Synthetix Exchange does not require the trader to hold the SNX.

Those who are just trying to understand SNX and the entire process will do better to understand SNX as a collateral, Synth Pegging Mechanism, Synthetix Exchange, The Current risks and risk mitigation strategies along with future functionality.

It is important to understand that every time an SNX holder stakes their SNX and mint Synths, they are issuing a debt.  The value of the debt will fluctuate when there is an exchange rate shift within the system. So, the users to exist the system and to unlock their staked SNX tokens might have to burn more Synths than what they originally minted.

While several investors understand this risk, it is important to understand that the price of most Altcoins are correlated to Bitcoin and Ethereum. Therefore, it is possible for major price fluctuations in the SNX token to happen for reasons which will have little to do with SNX or the Synthetix system.