In this theoretical article, a hedging strategy for the SNX token is proposed. Thanks to this strategy you will be able, for the first time in the history of Synthetix, to totally hedge your risk against the c-ratio.

In brief, this use case will provide the opportunity to:

• Enter in the Synthetix ecosystem with a significant risk reduction.
• Hedge the volatility of the SNX token and reduce the c-ratio volatility.
• Create a completely customized strategy to generate an income in DeFi.

What is Synthetix? 

Synthetix is one of the longest-standing dApps in the DeFi world. Currently, it boasts a $395 million Total Value Locked (TVL) and has secured a leading position in the DeFi derivatives space.

Synthetix defines itself as a new financial primitive that allows the creation of synthetic assets by collateralizing the SNX token. 

This back-structure is the foundation for many other dApps, such as Kwenta or Lyra, which use the assets provided by this protocol, known as synths, to offer trading of various types of derivative instruments, such as perpetuals and options.

The core of the entire Synthetix ecosystem is the staking app, which is available in the Ethereum and Optimism network and that allows users to lock SNX within the dApp to mint the stablecoin sUSD, with a variable ratio. This stablecoin serves as the key to access all dApps built on top of Synthetix and can be swapped for any available synths.

It's important for stakers to always monitor the c-ratio, which represents the rapport between the value of locked SNX and the value of minted sUSD, as this factor will play a crucial role in today's use case.

We can see the c-ratio as the counterpart risk against the traders that every day use the dApps for trading the available synths in the different dApps.

Introduction to the Use Case

If you want to enter in the Synthetix ecosystem and mint sUSD you will have to manage the c-ratio of your position to not be liquidated. So first of all, let’s understand how the c.-ratio is affected by two different factors.

C-ratio = $ Staked SNX / $ Active debt

The c-ratio is influenced by two factors:

• SNX price
• Active debt (sUSD position)

Today the c-ratio requested by the dApp to mint sUSD is 400%, this means that if the c-ratio goes down to 300% you will need to add new SNX to the position or burn some sUSD previously minted.

Starting with the second point,the active debt variable, without delving too deeply into technical details, it's enough to know that when minting sUSD, you become part of the debt pool in the Synthetx ecosystem. This pool is made of all the available synths on Synthetix and is therefore influenced by the volatility of these assets. These fluctuations affect your c-ratio. 

To protect against this variable, the Synthetix team has released an index on dHedge that allows you to track the performance of the debt pool and hedge against exposure to this factor.

This leaves us with the SNX price variable, which can be possibly mitigated with MetalSwap hedging contract.

The problem is that SNX is a highly volatile token and it's risky to lock this asset while maintaining a healthy c-ratio far from the liquidation level.

MetalSwap, as a tool that protects you from volatility, could offer you the possibility to hedge against this second variable of the c-ratio and make, for the first time, this variable predictable.

Practical Example 

After conducting your research, you've decided to become an SNX staker and enter this ecosystem by staking $1,000 worth of SNX. Currently, the c-ratio required by the dApp to mint sUSD is 400%, meaning you need to lock $4 worth of SNX to mint $1 of sUSD and lock it within the staking dApp.In this specific case, you will mint $250 sUSD.

Now, your goal is to maintain the c-ratio close to 400%, especially if you want to be eligible for the revenue share and keep a healthy c-ratio situation.

Assuming you've covered the Active debt variable thanks to the solution offered by dHEDGE, you only need to protect against the fluctuation of SNX, which you will do by opening a MetalSwap hedge position.

By setting the target size as the number of SNX staked, you will be able to customize your position according to your needs, including selecting the most suitable time frame.

We just remind you that today SNX is still not a token available in the MetalSwap dApp but we can already try to calculate the cost and benefits of this position.

Let's examine the details of your position:

• Budget: $1000 in SNX token
• SNX prince: $2.09 
• Time frame: 2 weeks

The premium required for this position could be estimated close to 65$, but as the opening of position is an incentive by the MetalSwap OP Grant, the OP rewards will help you to reduce the premium cost, which according to the current OP distribution situation will be only 32$.

Synthetix Risk reduction

As we have seen, thanks to the combination of dHedge and MetalSwap, it is now possible to fully protect against c-ratio fluctuations within the Synthetix staking app and minimize the risk of liquidation. However, it is important to keep in mind that there are other risks associated with participating in this type of strategy:

• The smart contracts of Synthetix.
• The smart contracts of MetalSwap, despite having undergone audits, still represent a small risk.
• Another risk lies in the blockchain itself, whether it be Optimism or Ethereum, which is used for this type of operation.

Lastly, incentives derived from the Optimism grant will not always be like this, the further along the distribution goes the more the rewards will steadily drop and therefore it's important not to waste time in these early stages. 

- DeFi Foundation

✎ What is MetalSwap?

MetalSwap is a decentralized platform that allows Hedging Swaps on financial markets with the aim of providing coverage to those who work with commodities and an investment opportunity for those who contribute to increase the shared liquidity of the project. Allowing the protection for an increasing number of operators.

With MetalSwap we enable Hedging Swap transactions through the use of Smart Contracts, AMM style.