Users of Synthetify protocol could be divided into three roles:
A staker is responsible for the initial creation of debt and synthetic assets. Stakers lock their collateral tokens inside a smart contract and use it to create synthetic USD (xUSD) that can be later exchanged for other synthetic assets. As a reward for participating in the debt pool, they receive pro rata fees generated by the exchange and inflation rewards. To unlock collateral tokens, stakers need to burn synthetic tokens resulting in decreasing their debt. All stakers need to maintain sufficient ratio of collateral to debt (dependent on selected token) or part of their collateral can be liquidated to ensure network safety. Collateral is dependent on the price of tokens and debt is calculated basing on price of already minted tokens.
A trader performs exchanges of assets using Synthetify exchange. To engage in a trading activity, a trader needs to buy synthetic assets from other markets like centralized exchanges or mint it themselves, and therefore acting as a staker. Traders do not need SNY or any other collateral tokens to perform trades.
To ensure the safety and solvency of the protocol, a liquidator can pay off debt of an undercollateralized staker and receive a fair share of staker's collateral. Liquidation includes penalties of 80% that are transferred to the liquidator and 20% to an exchange-owned account to improve platform stability.
This example explains the core mechanism of Synthetify and risks of participating in the debt pool.
Step 1 Both Alice and Olivia have the same amount of debt (50%). Entire platform's debt is equal to $10k. Olivia holds $5k of synthetic USD and Alice holds $5k of synthetic SOL.
Step 2 The price of xSOL doubles making Alice’s balance worth $10k, which causes debt to rise to $15k. Olivia still holds xUSD and the value of this token is stable.
Step 3 Both Alice and Olivia are still responsible for 50% of the entire platform debt each. Debt increased by $5k so the debt of Alice and Olivia will rise by $2.5k. When we match positions against owned debt for Alice and Olivia, we see that Alice ended up with $2,5k profit and Olivia lost $2,5k since her debt increased by this amount.