Decomposing the Value-Capturing Structure of SNX, Synthetix’s Native Token

January 18, 2025

ValueVerse Team

15 min read

Decomposing the Value-Capturing Structure of SNX, Synthetix’s Native Token

Introduction

Synthetix V2 is a protocol for decentralized liquidity provision on Ethereum and Optimism. It has evolved into a critical layer of the infrastructure that handles liquidity for diverse DeFi protocols and products. The two key problems the project targets in DeFi are achieving very deep, efficient liquidity for decentralized trading and creating access to an expansive list of asset classes without needing direct ownership.

At the heart of Synthetix's functionality is a pooled collateral model; SNX token holders stake their assets to mint synthetic tokens (sUSD) that track the behaviour of a reference asset. The system allows for the production of synthetic assets and trading activities using the protocol.
Synthetix's key value propositions include:

High liquidity between Synths, eliminating slippage for supported trading pairs.
Access to a diverse range of asset classes through synthetic assets.
A decentralized perpetual futures platform with deep liquidity and low fees.
Composable liquidity that can be integrated into various DeFi protocols (i.e. Kwenta, Lyra/Derive, and 1inch).

The SNX token is two-fold: it is used as collateral over the minting of the synthetic asset, sUSD, and as a governance token. Stakers have skin in the game, and when they mint Synths, that represents a debt to the system - an incentive for them to be at least somewhat on "the same side" of the protocol's overall health. They get trading fees from Synth exchanges and perpetual futures trading in exchange. Note that since the passing of SIP 2043, no more inflationary rewards (SNX) have been distributed to stakers as of December 2023.

Synthetix benefits a broad range of DeFi users, including traders seeking efficient low-slippage trading, investors gaining exposure to a wide array of assets, liquidity providers (SNX stakers), and developers building atop the liquidity infrastructure provided by Synthetix.

Key Roles and Agent Coordination in Synthetix's V2 Ecosystem

Synthetix requires a network of distinct roles that work together to keep its ecosystem of synthetic assets operational. These are the key participants to which liquidity provision, governance, development, and protocol are contributed. Synthetix has the following leading roles:

SNX Stakers: Provide liquidity and participate in governance. Users stake SNX tokens to mint so-called synthetic assets (sUSD) to provide collateral for the system. SNX stakers can further participate in governance by voting to elect different councils and on protocol proposals. By owning a stake in the system, they now have an interest in the health and growth of this protocol.
Traders: Trade synthetic assets and perpetual futures markets using the Synthetix protocol. The protocol provides traders with deep liquidity and low slippage while generating fees distributed to SNX stakers.
Core Contributors: These are the people who make changes within the Synthetix protocol following governance decisions. They are in charge of the system's technical evolution and are governed by the Core Contributor Committee.
Developers: Create dApps and protocols that use the Synthetix infrastructure to increase people's participation in the ecosystem. These external developers utilize the liquidity available within Synthetix and the synthetic assets to develop new and exciting DeFi products.
Governance Councils:

Spartan Council: The chief governing body delegated by SNX stakers to approve Synthetix Improvement Proposals (SIPs).

Treasury Council: Manages Synthetix's financial resources and decisions.

Ambassador Council: Responsible for the promotion and representation of Synthetix.

Grants Council: Distributes resources to projects that enrich the Synthetix ecosystem.

While each of these roles is important to understand, understanding how they interplay and contribute to the Synthetix ecosystem is equally, if not more important. To have a better understanding of these dynamics, we outline the key actions, incentives
and challenges of each role:

Figure 1

Synthetix: Dissecting Agent Coordination. Adapted from Synthetix Docs.

This table highlights how complex the stakeholder interdependency is in affecting Synthetix. Stakers and Traders are symbiotic: Stakers provide liquidity, and traders create fees that stakers capture through direct distributions or through indirect methods such as using fees for SNX burning. Core contributors work closely with developers, who implement changes to the protocol and support developer efforts. Almost all decisions that involve all stakeholders and resources are made by governance councils. These relationships are enforced through various incentive structures—fee distributions and governance power. However, there are also sources of conflict, like the tension between individual profit motives and system stability. The ecosystem's health relies on a fragile balance in which each role endures specific difficulties that could affect others. For example, the collateralization levels of stakers immediately affect trading environments, and governance decisions impact the work of core contributors and developers. This heavily interconnected system emphasizes the necessity for aligned incentives and effective coordination within it to preserve the health of the protocol and allow it to thrive.

The value-capturing of $SNX

This section utilizes the Value Capturing Theory (VCT) framework to break down the intrinsic value of the SNX token. By scrutinizing the token's fundamental value drivers, the mechanisms through which it captures value, and the unique implementation patterns within the Synthetix ecosystem, we examine SNX's role in facilitating the creation and trading of synthetic assets.

Origins of Value (OoVs)

1. Future Cashflow (2₁)
Value derived through systematic reduction in SNX supply via the buyback and burn mechanism. This deflationary mechanism directly impacts token value by continuously reducing circulating supply based on protocol activity. As trading volumes increase across Synthetix's synthetic assets and perpetual markets (supported by the Andromeda release), a portion of the generated fees is allocated to purchasing and burning SNX tokens, creating a direct correlation between protocol usage and value accrual for token holders through supply reduction.

[2_1] = F(\text{TradingVolume}, \text{FeeRate}, \text{BurnRatio})

$\text{TradingVolume}$ is the total volume of synthetic asset trades
$\text{FeeRate}$ is the percentage fee charged on trades
$\text{BurnRatio}$ is the proportion of fees allocated to SNX buyback and burn

2. Risk Exposure (7)
Represents the collateralization requirements and associated risks that SNX stakers must accept. When staking SNX to mint the synthetic asset sUSD, holders expose themselves to potential liquidation if their collateral ratio falls below required thresholds, as well as debt pool fluctuations due to market volatility of the synthetic assets.

[7] = F(\text{CollateralRatio}, \text{StakedAmount}, \text{DebtPoolRisk}, \text{LiquidationThreshold})

$\text{CollateralRatio}$ is the current ratio of collateral value to debt value
$\text{StakedAmount}$ is the amount of SNX tokens staked by the user
$\text{DebtPoolRisk}$ represents the aggregate risk from synthetic asset price fluctuations
$\text{LiquidationThreshold}$ is the minimum collateralization ratio before liquidation

3. Future Cashflow (2₂)
The Future Cashflow OoV is realized through trading fees distributed to SNX stakers who provide collateral for the system. When traders use Synthetix for synthetic asset exchanges or perpetual futures trading, the generated fees are distributed to stakers proportional to their collateral contribution.

[2_2] = F([7], \text{StakerShare}, \text{TotalFees}, \text{StakingDuration})

$\text{StakerShare}$ is the proportional stake of the user in the total staking pool
$\text{TotalFees}$ represents all fees generated from synthetic asset trading
$\text{StakingDuration}$ is the length of time SNX remains staked

4. Conditional Action (8)
Reflects the specific actions required to derive value from the token within the Synthetix ecosystem. Token holders must actively participate in governance through council elections and proposal voting.

[8] = \text{Binary}

5. Governance (3)
Manifests through SNX's multi-council governance system, where token holders can influence protocol decisions by electing council members and voting on proposals. This includes control over protocol parameters, treasury management, and ecosystem development through specialized councils.

[3] = F([7], [8], \text{VotingPower}, \text{CouncilElection}, \text{ProposalOutcomes})

$\text{VotingPower}$ is determined by staked SNX amount
$\text{CouncilElection}$ represents participation in council member selection
$\text{ProposalOutcomes}$ reflects the influence on governance decisions

The Origins of Value (OoVs) form a network of interdependencies that define its economic model. A primary value driver emerges from the connection between both Future Cashflow mechanisms (21 & 22) and Risk Exposure (7), where participants earn both direct fee rewards and benefit from token burns by shouldering the responsibilities and risks of collateralization. The protocol's governance structure showcases a three-way interaction - Governance (3) value is inherently linked to both Risk Exposure (7) and Conditional Action (8), as voting power is directly proportional to the amount of tokens staked and exposed to potential liquidation risks. This governance framework is ultimately activated through Conditional Action (8), which manifests the Governance (3) value through the practical mechanism of voting, creating a system of participatory protocol management.

Value Capture Mechanisms (VCMs)

Indirect Dividends

Figure 2

Indirect Dividends VCM [21]: This mechanism enables value capture through automated token burning funded by trading fees generated from the multi-chain Andromeda Release. Unlike traditional dividend distributions that directly accrue value to token holders, this mechanism increases the relative value of remaining tokens by systematically reducing the total supply. When SNX tokens are burned, each remaining token represents a larger percentage of the total supply, creating an appreciation effect similar to a stock buyback in traditional finance.

\mathit{Origins\ of\ Value:} \quad \mathit{Future\ Cashflow}(21)

The VCM structure is denoted below as:

Equation 1

\mathit{Indirect\ Dividends\ Token} = \begin{cases} V = \{2_1\}, \\ E = \{(2_1)\} \end{cases}

Pooled Insurance

Figure 3

Pool Insurance VCM [7][22]: This mechanism enables value capture through a collateralization system where stakers collectively secure the protocol's solvency. By staking SNX and assuming system-wide risks, participants earn trading fees generated from synthetic asset exchanges or perpetual futures trading.

\mathit{Origins\ of\ Value:} \quad \mathit{Risk\ Exposure}(7), \quad \mathit{Future\ Cashflow}(2_2)

The structure of the Pooled Insurance VCM can be described as:

Equation 2

\mathit{Pooled\ Insurance\ Token} = \begin{cases} V = \{7, 2_2\}, \\ E = \{(7, 2_2)\} \end{cases}

Synthetix Governance Framework: Governing Bodies. From Synthetix Docs.

Generalized Governance VCM [7][8][3]: This mechanism enables value capture through participation in protocol governance, where the amount of tokens staked determines voting power. This results in a system in which those with the most economic interest have the most influence over protocol direction.

\mathit{Origins\ of\ Value:} \quad \mathit{Risk\ Exposure}(7), \quad \mathit{Conditional\ Action}(8), \quad \mathit{Governance}(3)

The Generalized Governance VCM is described below as:

Equation 3

\mathit{Governance\ Token} = \begin{cases} V = \{7, 8, 3\}, \\ E = \{(7, 8, 3)\} \end{cases}

One interesting aspect of Synthetix's VCM structure is the dynamic between collateralization, synthetic asset "minting," and governance. This purpose-built and interconnected ecosystem incentivizes active position management and engagement with the protocol. The innovations behind SNX also create value capture mechanisms that require active participation, creating a more engaged community than simpler token models.

Value Capture Implementation Patterns (VCIPs)

In this segment, we will discuss the two Value Capture Implementation Patterns (VCIPs) in Synthetix: Pooled Insurance (7,2₂) via the FeePool contract and Liquidator contract and Generalized Governance (7,8,3) via the DAO structure.

Pooled Insurance

FeePool Contract (OP): 0xf9FE3607e6d19D8dC690DD976061a91D4A0db30B A pooled insurance VCM is executed in the FeePool contract using a few inherited patterns of the VestingEntries library with EternalStorage state management. This core implementation implements Risk Exposure (7) as collateralization ratio verification (i.e., getPenaltyThresholdRatio()) and Future Cashflow (2₂) via feePeriod rotation mechanics.

The technical patterns demonstrate VCM inheritance through the following:

FeePeriod struct architecture managing epoch-based distribution
EternalStorage delegation for persistent state
Cross-chain debt share synchronization via external aggregators
Reward escrow integration using VestingEntries for fee claims
Proxyable pattern enabling upgradeable mechanisms

The contract uses SafeDecimalMath to ensure accurate fee calculations and implements ISynthetixDebtShare for cross-chain consistency. closeCurrentFeePeriod() is a prime example of the VCM pattern in use, doing risk exposure state (allNetworksSnxBackedDebt) management with reward distribution (_recordRewardPayment).

The following implementation provides concrete examples of how VCM properties are realized on data structures while maintaining upgradeability via proxy delegation patterns.

Liquidator Contract (OP): 0xB589Af3f2e3377A9a57da74bE1b6598926479505 The Liquidator contract implements a pooled insurance VCM involving the Risk Exposure (7) aspect following an inheritance pattern of MixinSystemSettings and ILiquidator interface. The core implementation is reflected in:

Data structure for Liquidation Entry flagging/deadline mechanics
C-ratio threshold verification with SafeDecimalMath for accuracy
Multi-phase liquidation process:

Flag account
Enforce delay period
Compute liquidation parameters (debt and collateral)
Liquidate via Issuer

Important technical patterns that can be observed include:

Flexible delegation of storage for persistent state
Cross-contract permission through the onlyIssuer modifier
Liquidation accounting using SafeMath arithmetic

The contract illustrates abstract VCM composition in which Risk Exposure specifies the eligibility and describes the sequential liquidation process, showcasing how complex risk management patterns emerge from atomic OoVs.

Generalized Governance

Figure 5

The Synthetix governance system is a generalized governance VCM that combines Risk Exposure (7), Conditional Action (8), and Governance (3) via an elaborate DAO hierarchy. Fundamentally, the system employs staked collateral as a form of weighted voting power, so governance rights are directly correlated to economic exposure. This Risk Exposure component ensures voters are materially invested in the protocol's success and assume collateral liquidation risk.

The governance process is a sequence of conditional actions organized in a pipeline from SIP/SCCP submission through council review and eventual implementation. Stakers elect the Spartan Council, the main deliberative body and the Protocol DAO executes approved changes via multisig architecture. This separation of powers model creates distinct stages of proposal evaluation and implementation, each gatekept by different conditions and thresholds.

This multi-DAO structure facilitates multi-layered governance function segmentation across focused areas of expertise — protocol governance, contract upgrade initiation, treasury governance, ecosystem coordination, and grant funding. While each DAO is built with unique permissions, the DAOs are integrated with the overarching governance layer. The multisig implementation of the pDAO is particularly illustrative of how these abstract governance mechanisms play out as concrete smart contract patterns, where ownership controls and signature requirements enforce the generalized governance VCM's rules.

This composition highlights how atomic governance primitives can be stitched together to assemble resilient, decentralized coordination systems. We have Risk Exposure to align voters through economic skin-in-the-game (liquidation risk) while maintaining process integrity with Conditional Action requirements across the governance lifecycle.

VCM-Derived Health Metrics: $SNX

Here, we present four critical health indicators for Synthetix based on the Value Capture Theory framework. These metrics provide insight into the operational efficiency and robustness of the protocol, with each metric corresponding to an Origin of Value (OoV). Three of these metrics come from Synthetix's Pooled Insurance VCM, where Future Cashflow (22) and Risk Exposure (7) OoVs are involved. The fourth metric is a look at the Generalized Governance VCM, precisely the Conditional Action (8) OoV and highlighting the staking-governance relationship in Synthetix:

Collateralization Ratio (CR)

Class (OoV): Risk Exposure (7)
Aspect: OoV-specific
Tier: Tier 1 (Primary)
Description: (Total value of SNX staked) / (Total value of synths minted), measured daily.

Rationale:

Demonstrates the overall health of the Synthetix collateral system
Serves as a key indicator of the protocol's ability to back synthetic assets
Highlights the collective risk management of SNX stakers

Liquidation Risk Index (LRI)

Class (OoV): Risk Exposure (7)
Aspect: OoV-specific
Tier: Tier 2 (Secondary)
Description: (Number of stakers within 10% of liquidation threshold) / (Total number of stakers), measured daily.

Rationale:

Gauges the vulnerability of the system to potential mass liquidations
Offers insight into the distribution of risk across SNX stakers
Acts as an early warning system for potential system-wide instability

Staking Yield (SY)

Class (OoV): Future Cashflow (22)
Aspect: OoV-specific
Tier: Tier 1 (Primary)
Description: (Annualized trading fees) / (Total value of staked SNX), measured weekly.

Rationale:

Illustrates the economic incentives for participating in the Synthetix ecosystem
Compares the attractiveness of SNX staking against other DeFi opportunities
Signals the sustainability of the protocol's reward mechanism

Voting Power Utilization (VPU)

Class (OoV): Conditional Action (8)
Aspect: OoV-specific
Tier: Tier 2 (Secondary)
Description: (Total SNX voted) / (Total SNX staked) * 100, measured per period.

Rationale:

Evaluate the overlap between economic stake and protocol governance
Reveals the level of active involvement from SNX stakers in decision-making
It helps identify potential gaps between token ownership and governance influence

These metrics cover Synthetix's token system health, from system solvency to system risk levels, staker profitability, and governance engagement. Each metric, tied to a specific Origin of Value (OoV), offers a nuanced view of Synthetix's value capture mechanisms.

Closing Remarks

Using the Value Capture Theory framework, our analysis shows the interactions between the SNX token's Origins of Value (OoVs) and its Value-Capturing Mechanisms (VCMs).
SNX serves a dual purpose in that it is used for both collateralization and governance participation; as such, an interplay exists between its economic incentivization and the extent of governance participation within the SNX ecosystem. Such a design engenders a highly invested stakeholder class.
Key aspects of Synthetix's value capture model include:

OoVs: Future Cashflow, Governance, Risk Exposure, and Conditional Action form the foundation of SNX's value.
VCMs: The Pooled Insurance, Generalized Governance and Indirect Dividends mechanisms effectively capture value through staking rewards (fees), control over the value of what is governed (e.g., Treasury), and systematic SNX supply reduction.
VCIPs: The FeePool Contract and Liquidator Contract, along with a multi-layered DAO structure, implement these mechanisms in a way that encourages active and thoughtful engagement.

These health metrics we've selected — Collateralization Ratio, Liquidation Risk Index, Staking Yield and Voting Power Utilization — offer valuable context on the protocol's functioning and stability. These metrics not only describe the current system, but they also, when closely monitored, act as precursors or early warning signs of where things may be headed.

Synthetix's value capture model combines SNX being staked and used as collateral to mint synthetic assets (sUSD) and facilitate participation in governance. This structure encourages keeping high collateralization ratios and active participation in governance. The model allows the trading of diverse synthetic assets with deep liquidity, while the health metrics provide users with intuitive signals of system health. The long-run success of this strategy is predicated on maintaining compelling staking yields (via fees) and updating governance accordingly in response to market forces.

Disclaimer: The content of this document is provided for informational, educational, or discussion purposes only and does not purport to be complete or definitive. It should not be considered as financial, investment or legal advice. While every effort has been made to ensure accuracy and completeness, the author does not guarantee that it is free from errors or omissions and may update, revise, or retract information without prior notice. Readers are advised to consult the most recent version for the latest details and to be aware of the inherent risks of cryptocurrency and blockchain technologies. The author does not make guarantees or representations regarding any discussed tokens or projects and shall not be liable for any direct, indirect, or consequential damages arising from the use or reliance on this content. Mention of any project, token, or protocol does not constitute an endorsement. By accessing this document, readers waive all claims against the author.

Acknowledgements

The authors gratefully acknowledge the financial support provided by Optimism during the Gitcoin Grants 21. This support enabled the research to provide comprehensive token design details for several selected Optimism projects, including Origins of Value (OoVs), Value-Capturing Mechanisms (VCMs), Value Capturing Implementation Patterns (VCIPs), and outline utility token metrics.

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