*Note, SWOT is an analysis of operational/fundamental elements. This is not a model to be used for technical or trading purposes. (NFA, DYOR)
Composed of four elements, Strengths, Weaknesses, Opportunities, and Threats, a SWOT analysis framework provides excellent insight for evaluating the state of a project’s well-being through the lens of a birds-eye view.
It can help formulate decisions on what areas require more attention, set performance goals, and organize a foundational understanding of where a project is headed.
Rarely (if ever) used in crypto, it is time to apply this timeless method of evaluation to the digital asset space.
💪Strengths (Internal) (Helpful)
1. Adoption is Measurably Growing
Synthetix is among an elite group of projects that have found a genuine market fit for its product. While the vast majority of crypto projects attract mercenary crowds that only seek to extrapolate value from the protocols, Synthetix’s perpetual product has begun to find a genuine application for traders that can be seen by the acceleration of fees the protocol generates. This is a crown jewel achievement as it cements the project's sustainability.
2. Proactive System Architecture Against Liquidations
Synthetix demands that market makers collateralize their positions whenever they issue new assets/synths. As we know, collateral is always an extremely risky design element in crypto projects due to their inherent risks of liquidation. Liquidations are possibly the absolute worst side-effect of poor position management and unforeseen market manipulations. They are devastating losses that impact individual entities and have negative externalities that spill over into the system within which they happen due to a recursive, negative feedback loop of selling pressures. Synthetix is building its systems with an extremely diligent approach on the side of minimizing the potentiality for liquidations happening.
3. Actively Employing L2's
While I am personally a proponent of monolithic chains, the role of L2s has undoubtedly helped propagate new use cases and drastically improve the functionality of many applications. Sythetix has rolled out a version of its protocol on the Optimism network, which has resulted in an explosion of activity, which in turn, resulted in an exponential increase in fees that the protocol generated. The dual positives of lower operational costs for users and higher throughput will likely continue to drive broader market adoption.
4. Schedar Fee Burn Upgrade
Burning has always been an aspect of crypto tokenomics with an ambivalent reaction from the general public. However, after the successful track record, Burn-mechanisms have exemplified success across a multitude of different projects, especially so with Ethereum’s EIP-1559, burning has come to be accepted as a viable parameter for economic uses. Synthetix found a unique way to implement burning in their own systems by transforming the fee distribution mechanism into a debt-offset mechanism. Now, whenever protocol fees are collected, instead of distributing them to users for claiming, the fees are deducted from their outstanding debts/the general protocols debt pool. Effectively becoming a vehicle to improve the health of the entire body of participants.
5. Technically Strong DAO
In a world of constant degeneration, Synthetix DAO stands out as a collective of intelligent, technically capable, forward-looking, talented people. There are always meaningful conversations taking place, such as the efforts to transform the protocol into a generalized layer of liquidity provision for all DEFI derivatives in the industry (part of the v3 roadmap).
6. V3 Governance Module (V3GM)
In tandem with the qualitative account of the DAO members, the DAO structure that is utilized by Synthetix deserves some credit for its innovative and (IMO) efficient structure. The V3GM uses appointed delegated councils to execute the decision making processes. Rather than just having one over-arching ruling body, there are four council bodies, including the Spartan Council, Grant Council, Treasury Council, and Amassador Council. Each Faction serves its own unique purposes and the constituent members of each council differ from council to council. This helps create a streamlined decision-making process by reducing the chaotic friction in overly decentralized structures while upholding decentralization at the macro level.
7. Inflation Mechanism Evolution
The primary source of incentives for nearly every crypto project has been driven by some form of an inflationary model. Be it a reward for mining, staking, or providing liquidity, the main driver of revenue for market making users has always been heavily skewed toward the issuance of native tokens. It is no secret that when guaged over any long-term time frame, inflationary rewards will impact a project’s market presence negetively. Currently sitting around the 5.79% annual inflation mark, the trajectory of the SNX inflation rate should be steadily declining as more stakers come online. With the implemenation is SIP-294 (Synthetix Improvement Proposal) as soon as the staking reached a 65% staker threshold the inflation rate reduced by removing 5% from staker rewards.
😞 Weaknesses (Internal) (Harmful)
1. Extremely high Collateral ratio
Synthetix is known for being one of the pioneers of excessively, over-collateralized products in the crypto market. Where in the traditional financial world users are familiar with 1-to-1 or no-collateral ratio credits, crypto introduced mainstream over-collateralization ratios. Synthetix’s model put it on steroids. Currently, at 500%, the amount of capital that needs to be locked up and effectively become stale (non-productive) is prohibitively high. It is understandable why they do this, the nuances in their design demand it, however by having such a high ratio demand, new potential market makers and stakers might be unattracted to such a structure.
🧐 Opportunities (External) (Helpful)
1. Infinite possibilities of creating markets
Synthetix allows for any arbitrary market to come on-chain. Stocks, bonds, corporate debt, if it trades, has some kind of a data feed, it can be synth’ed. The more the global economy grows, the more assets come to market, and the more diverse the Syntheix protocol becomes. This leads to a potentially unlimited positive feedback cycle by being able to invite a more diverse set of market participants that prefer non-natively crypto assets.
2. Startups are Building on top of It
Many new companies are bringing products to market that use Synthetix’s perpetual products as their base assets. Kwenta, Lyra, Theres, Polynomial, Decentrix, are all developing interesting decentralized options with the Synthetix developer tooling.
😳 Threats (External) (Harmful)
1. Collateral is a Honey Pot for hackers
Having one of, if not the, highest collateral systems in the industry make Synthetix a target for malicious actors that are constantly looking for ways to manipulate its system in the hope of accessing the underlying collateral. This creates heightened risks around liquidations as MEV users might look to force them in order to capture the collateral at a discount.
In the overly saturated world of DEFI copycats, Sythnetix distinguishes itself as a leader with its phenomenal technical developments. SNX is recognized for its contributions to the space by sporting integrations with other major DEFI protocols including Curve, Yearn, and 1inch.
While the negatives are few by count, the potential impacts of them are severe. Regardless of the risk vectors, however, the protocol is flourishing with no signs of slowing down. Their laser-focused roadmap, deeply conscious understanding of their domain, and the extremely robust coordination mechanisms of their DAO position SNX as a top DEFI protocol.
This is a project that I have not given enough credit to in the past. When they initially launched, they had a 600% collateral ratio, something that due to my limited understanding at the time, seemed to me as absolute buffoonery. I was wrong.
After digging in and seeing the truly world-class quality of the project I have developed extreme faith in Synthetix and will be looking to add the SNX token to my personal holdings.
DO NOT TAKE THIS AS FINANCIAL ADVICE.
If you know something that I don’t or feel as though I might have missed anything important, please do share, I would tremendously appreciate some feedback.
Thank you so much for reading,
I hope this serves you well on your journey.
Live long and prosper 🥂