Synth Supply

Synths are created through a collateralized debt position (CDP) mechanism. Users lock collateral (e.g., ETH, SNX) to mint synthetic assets like sUSD or sBTC. The total synth supply is directly tied to the value of the underlying collateral pool, ensuring each synth is fully backed. This process is non-custodial and permissionless.

• Example: Locking $150 of ETH as collateral to mint $100 worth of sUSD, maintaining a 150% collateralization ratio.

Synth supply value is maintained by decentralized price oracles (e.g., Chainlink) that feed real-time asset prices to the protocol. This ensures synths accurately track their underlying assets. Peg stability mechanisms, like automated market makers (AMMs) and arbitrage incentives, correct price deviations, ensuring sUSD trades at ~$1. The integrity of the oracle is paramount for the entire synth supply's validity.

Synth supply is elastic, expanding and contracting based on user minting and burning. All minters share a common debt pool, representing the system's total synthetic liabilities. A user's debt is a percentage of this pool, not a fixed amount, which fluctuates with the entire synth supply. This design distributes exchange rate risk among all participants proportionally to their minted debt.

Protocols often incentivize collateral stakers with staking rewards, paid in a native governance token (e.g., SNX). These rewards are a form of controlled protocol inflation, funded from fees generated by synth trading. This mechanism encourages users to lock collateral, thereby securing and growing the synth supply. Rewards are typically proportional to the staker's share of the debt pool.

Modern synth supply is not limited to a single blockchain. Protocols use cross-chain messaging (e.g., CCIP, LayerZero) and bridges to mint synths on multiple networks (Ethereum, Optimism, Base). This expands the accessible collateral base and user base, increasing total synth supply diversity and liquidity. It allows exposure to assets from other chains without direct bridging.

A growing synth supply generates protocol fees from exchange trades (e.g., between sETH and sBTC) and potentially from minting/redemption. These fees are a key revenue stream, often distributed to stakers or directed to a treasury. A sustainable fee model is crucial for long-term protocol health, funding security, development, and staker incentives that support the synth ecosystem.

For synths pegged to assets like the US Dollar, protocols employ on-chain algorithms to stabilize the price at the target peg. This indirectly manages supply by creating arbitrage opportunities.

• Rebasing: Some protocols adjust (rebase) every holder's synth balance to contract or expand supply, pushing the market price toward the peg.
• Minting/Burning Arbitrage: If a synth trades above peg, the protocol allows minting at $1.00 to sell for profit, increasing supply to push the price down. The reverse process burns supply.

To protect the system's solvency, protocols automatically liquidate under-collateralized positions. This process burns synths and sells collateral to repay debt, directly reducing synth supply.

• Liquidation Triggers: Occurs when a user's collateralization ratio falls below a minimum threshold.
• Supply Reduction: The forced repayment and burning of synths during liquidation is a critical, automated lever for reducing excess supply and bad debt.

Ultimately, synth supply parameters are managed by decentralized governance. Token holders vote on key levers that control supply growth and risk.

• Controlled Parameters: Includes collateral types, collateralization ratios, debt ceilings, liquidation penalties, and fee structures.
• Dynamic Adjustment: Governance can proactively adjust these parameters in response to market conditions to manage systemic risk and supply expansion.

Market Cap is calculated by multiplying the total synth supply by its current market price. It represents the total value of all outstanding tokens and is a key indicator of a synthetic asset's size and adoption relative to its underlying collateral pool.

• Example: A synthetic asset sETH with a supply of 100,000 tokens and a price of $3,000 has a market cap of $300 million.
• This metric is distinct from Total Value Locked (TVL), which measures the value of the underlying collateral backing the synth supply.

The Collateralization Ratio measures the health of the backing system by comparing the total value of locked collateral to the total value of the issued synth supply. It is a critical risk metric for overcollateralized protocols.

• Formula: (Total Collateral Value / Synth Market Cap) * 100.
• A ratio above 100% indicates overcollateralization, providing a safety buffer against price volatility. A falling ratio can signal increased systemic risk and may trigger liquidation events to restore safety.

Supply Velocity analyzes the rate of change in synth supply over time, while Turnover examines how frequently the supply is minted and burned. High velocity can indicate active trading, arbitrage, or speculative activity.

• Mint/Burn Rates: Tracking daily mint and burn volumes shows net demand for the synthetic asset.
• Holder Analysis: A rapidly changing supply with a stable number of holders suggests high trading activity, whereas a growing supply with more holders points to new user adoption.

Holder Distribution analysis examines how the synth supply is concentrated among wallets. A common metric is the Gini Coefficient, which quantifies inequality in token distribution on a scale from 0 (perfect equality) to 1 (maximum inequality).

• A low Gini Coefficient suggests a decentralized, healthy distribution, reducing the risk of market manipulation by a few large holders (whales).
• This analysis is crucial for assessing the decentralization and potential price stability of the synthetic asset.

This metric tracks how closely the market price of a synthetic asset tracks its intended peg, such as the price of Bitcoin for sBTC. Deviations create arbitrage opportunities.

• Premium/Discount: Calculated as (Synth Price - Target Price) / Target Price. A persistent premium may indicate high demand or minting friction, while a discount could signal low demand or redemption issues.
• Monitoring this metric is essential for assessing the price oracle reliability and the efficiency of the protocol's mint/redeem mechanisms.

Synth supply directly drives protocol revenue through minting fees, redemption fees, and exchange fees (for AMM-based synths). Analyzing fees relative to supply reveals protocol sustainability.

• Annualized Revenue: Projected from daily fee volume generated by activity involving the synth supply.
• Revenue per Token: Fees divided by total supply can be a measure of utility and efficiency. A growing supply with stagnant fee generation may indicate inflationary pressure without corresponding utility.

In pooled collateral systems like Synthetix, all minters share a collective debt pool. When you mint synths, you take on a percentage of the total system debt. This structure mutualizes risk but also creates unique economic considerations:

• Your debt adjusts based on the aggregate performance of all synths.
• Profits or losses from other traders' positions affect your debt balance.
• This design incentivizes minters to consider the long-term health of the entire synthetic asset ecosystem.

Protocols often implement supply caps or minting limits on individual synthetic assets to manage risk and maintain market stability. These caps prevent excessive concentration and mitigate the impact of a single synth's failure. Control mechanisms include:

• Hard caps: Absolute limits on the supply of a specific synth.
• Dynamic issuance fees: Increasing minting costs as supply approaches its cap to disincentivize further creation.
• Governance votes: Allowing token holders to adjust caps in response to market conditions.

To maintain system solvency, protocols employ automated liquidation mechanisms. If a minter's collateral ratio falls below the required minimum (e.g., due to collateral value drop or synth appreciation increasing their debt), their position becomes eligible for liquidation. This process typically involves:

• Liquidators purchasing the undercollateralized collateral at a discount.
• Using the proceeds to burn the corresponding synth debt, restoring health to the system.
• This mechanism protects the protocol and ensures synths remain fully backed.

Protocols use economic incentives to align participant behavior with network security. Staking rewards (often in a native token like SNX) are distributed to minters who maintain sufficient collateralization. These rewards serve multiple purposes:

• Compensating for risk: Rewarding minters for locking capital and assuming debt pool risk.
• Regulating supply: Incentive rates can be adjusted to encourage or discourage minting.
• Securing governance: Stakers often gain voting rights on key parameters like collateral ratios and fees, tying economic stake to protocol stewardship.