Synthetic Ether (sETH) is a soft peg of standard ether (ETH), designed to stay as close in value as possible. In the early days, however, sETH has often traded at a discount, making it difficult for traders to move seamlessly between the collateralized and synthetic worlds without incurring high costs.
Uniswap's constant product model forces the price of sETH lower when the demand for ETH is higher. However, the larger the ETH/sETH liquidity pool grows, the less impact any one trade has. As such, Synthetix encourages investors to add liquidity to the pool by offering SNX incentives. Synthetix hopes that the combination of these rewards and the Arbitrage Pool incentives will bolster a strong peg.
