Synthetix' assets failure scenarios

Question

Synthetix project provides the system where different assets like USD, BTC, stocks are emulated by minting tokens representing them (sUSD, sBTC) collateralised by SNX token. Prices are defined via oracles.

Docs https://docs.synthetix.io/

The system looks like a more fragile system than DAI as the collateral implemented in SNX which doesn't have value and utility outside of Synthetix tools.

What potential risks and possible failure scenarios for such architecture?

Is there any resources that examine how Synthetix' assets (e.g. sUSD) could to lose their peg forever? Any models simulating crash?

Answer 1

There are some risks mentioned in the Synthetix Litepaper:

• One risk involves the debt SNX holders issue when they stake their SNX and mint Synths. As previously explained, this debt can fluctuate due to exchange rate shifts within the system. This means that to exit the system and unlock their staked SNX, they may need to burn more Synths than they originally minted.

Note that Synthetix also currently uses Ether as an alternative form of collateral (also mentioned in the Litepaper).

Another risk factor could be related to the reliance on oracles. The value of all synthetic assets in the Synthetix system is determined by oracles that push price feeds on-chain.

In certain scenarios (such as extreme market conditions), there could be discrepancies between the actual market price and the price feed provided by oracles.

This happened in May 2022 in two cases related to LUNA:

• Luna Classic pricing error leads to Mirror Protocol exploit (Notably, Mirror is also a synthetic asset protocol.)

• DeFi protocols declare losses as attackers exploit LUNA price feed discrepancy