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Penta Lab Research Report: Synthetix - Leading the Decentralized Derivatives Track but TVL Growth Lacks Momentum
Ranked first in the decentralized derivatives track in terms of Total Value Locked (TVL), and third in transaction fee revenue. Synthetix, as a decentralized liquidity layer, provides backend services for DEXs built on its ecosystem. It allows users to collateralize and mint synthetic assets such as cryptocurrencies, RWA assets, indices, and fiat currencies within its protocol. The properties of synthetic assets provide users with more options for trading assets, deeper liquidity, lower fees, and no trading slippage. According to Token Terminal data, as of February 20, 2024, Synthetix ranked first in the decentralized derivatives track with a TVL of $715 million and ranked third in transaction fee revenue with a scale close to $16 million.
As DeFi infrastructure transitions, the Synthetix ecosystem matures. As a backend service provider, Synthetix empowers liquidity for all frontend platforms built on its protocol and shares counterparties. Frontend trading platforms within the ecosystem include Kwenta, Decentrex, Lyra, Polynomial, and Atomic Swap. Among them, Kwenta has the largest trading volume and contributes the most revenue to the entire protocol. After the launch of Synthetix Perps V2 in December 2022, Kwenta experienced exponential growth in trading volume, achieving outstanding results with over $40 billion in trading volume and over $30 million in revenue in 2023.
With the upcoming upgrade to V3, growth potential is being rekindled. The V3 version has entered the Alpha testing phase, introducing more features for users: including the pledging of multiple collaterals, such as ERC20 tokens, to enhance the flexibility and risk management capabilities for LPs; implementing cross-chain functionality to create a fully interoperable derivatives market trading system; providing users with a range of tools and resources to build their own applications on Synthetix, including documentation, contracts, guides, and SDKs, simplifying the building process and incentivizing innovation.
Valuation: Currently, Synthetix's TVL deployed on Ethereum and Optimism stands at $460 million and $270 million, respectively. We expect Ethereum's TVL to remain at $460 million and Optimism to recover to its historical peak of $330 million over six months, with an incremental TVL of $20 million from the new Base chain, resulting in a six-month TVL estimate of $810 million. The current Market Cap/TVL ratio most relevant to Market Cap is 1.7x, which is one standard deviation above the average since August 2019. Although we recognize Synthetix's leadership in the synthetic track and its deflationary currency economics, we are concerned about its long-term competitiveness with other sustainable asset DEXs, as well as the need for breakthroughs in TVL and transaction volume growth through new chains. Therefore, we give an average Market Cap/TVL ratio of 1.2 and derive a six-month target market cap of $972 million, representing a 18% downside potential compared to the current market cap.
Key Risks: Ecosystem development falls short of expectations, intensified competition in the track, and a drop in SNX price triggering liquidations. |
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Post time 7-3-2024 20:37:07