As always I will preface this post with a disclaimer, this post is purely my opinion, I believe the path laid out here is sound, I arrived at it through numerous conversations with members of the Synthetix community. However, I have no mechanism to enforce this path other than being annoying. While I remain one of the largest token holders in the project, the Spartan Council by design puts significant restrictions on how much power even the largest token holders can wield. So while I will do my best to advocate, it is possible the path governance converges on differs significantly from what is described below.
I don’t usually do this, but this post is over 3,500 words, so I will write up a quick overview in case you are too busy to wade through the whole thing. This post will cover a plan for Synthetix through the rest of the year. It proposes splitting the current scope of the project and the upcoming V3 upgrade into two distinct streams with different teams. It covers the scope of what I am now calling Synthetix V2x but does not address the scope of V3. You can find a high level overview of the V3 scope in this post. Below I provide an update on a number of key project initiatives all of which are converging on deployment around the middle of this year. At which point we will finally be able to deliver the full promise of Synthetix. Low latency oracles from Chainlink will enable leverage and shorting on a much wider range of assets as well as the removal of fee reclamation. Meaning Synthetix on L2 will be the first fully composable on-chain exchange that competes with the full range of features of a centralised exchange. This plus the launch of multiple other protocols on OΞ will significantly undermine the value proposition of chains like Solana and BSC. It also highlights a number of soon to launch projects that will add value to both Synthetix and the OΞ ecosystems. All of this managed by a robust and scalable governance framework that exceeds anything currently in production. It paints a very bright near future where all of the effort and investment from the last several years will finally come together and pay off. Hopefully that is enough to get you to read through the rest of the post, if it doesn’t maybe you were “ngmi”.
Many people throughout history have been dubbed the last person to know everything worth knowing, from GOΞthe to Da Vinci, we will never know the exact point in history where the accumulated information about the world exceeded a single person’s ability to grasp it. But we are undoubtedly past such an inflection point and have been for a while. As gOΞs civilization so gOΞs subsets of it. I believe we are also well past the point where any one person can possibly know everything that is worth knowing about DeFi. Back in late 2018, sitting in a small theatre in Prague before the start of Devcon IV, that was not the case. Essentially everything happening in DeFi and everyone doing it were all in a single room. Today it can be challenging to keep up with even a single project. What is becoming increasingly clear is that the more decentralised a project becomes the more rapidly its surface area expands. This is incredible in terms of the progress that a loosely organised group of humans can make. However, there is a significant trade-off in difficulty to take all of the disparate threads being spun out by each subset of individuals and weave them into a coherent narrative. While I suspect we may have reached the tipping point in Synthetix where no single person is aware of every aspect of the project, with my typical hubris I will attempt to craft a narrative out of what I know anyway. Describing not only what is happening now, but most critically what will happen over the rest of the year. Without such a narrative it is challenging for the community to identify what is important and prioritise the right things. While I fully expect that what I describe below will not perfectly adhere to reality, I hope this post creates a sense of directionality for everyone involved.
The V3/V2x split
I like to think that one of our core values as a community is learning from other projects so that we don’t attempt to reinvent everything from first principles. To this end, it makes sense to learn from one of the most important organisational and narrative shifts of the last few years: the emergence of the ETH1.x ETH2.0 dichotomy. Prior to the creation of this narrative it was somewhat unclear to the community what the transition process would look like. The creation of the ETH1.x narrative allowed the community to understand that while ETH2.0 was the future, it was also critical to continue work on the existing network. Prior to this, there was a lot of confusion, as Serenity felt like something that was simply going to emerge out of the existing network and replace it completely. I‘m therefore proposing Synthetix take a similar approach with the launch of V3. There is still much work required within the existing network and the original plan of rushing out V3 in an attempt to replace V2 would have been a significant mistake, obviously almost exclusively my fault as usual. It is almost impossible to keep the existing infrastructure functioning and upgrade it while doing deep research and development on V3 contracts.
The conclusions I have drawn from observing the success of the ETH1.x/2.0 split is that the Synthetix core contributors must coordinate to form working groups responsible for research and development on the V3 transition. I also believe the V3 merge should be pushed back until later this year or early 2022. My reasoning is that Synthetix V2x still requires a minimum of 2-3 months of implementation work, and once finalised, the L1 to L2 migration must also be implemented, including the merging of the debt pools; this work will likely take several additional months. The good news is that while that process is playing out, the full functionality that Synthetix promised to deliver in late 2018 will have been delivered. Futures will be live and many more Synths will be rolled out. This will allow for a much heavier focus within the community on user acquisition and onboarding of users into the new OΞ ecosystem. By this time we should have significant liquidity on OΞ as well as Uniswap, Chainlink and several other projects.
By splitting into two distinct groups we will be able to ensure that we have continuous progress in terms of V3 R&D without becoming distracted by urgent tasks within V2x. This will allow for a much more comprehensive review of the proposed V3 functionality. Initially the V3 team will likely be significantly smaller than the V2x team, but as more functionality on V2x is delivered engineers will be able to join the V3 team and the balance should shift in favour of V3 as we get closer to it’s delivery. This will also ensure that governance has a chance to provide input into the ongoing R&D of V3 and that data from the transition to L2 can be incorporated into the design process.
Kwenta Escape Velocity
As it stands now the Kwenta team is significantly impacted by being embedded in the rest of the Synthetix project infrastructure. The project has grown so large that many of the governance mechanisms are now quite defensive, Kwenta is often impeded by these processes and procedures introduced by decentralised governance. Jordan came up with a plan to spin out Kwenta as a distinct team that will be able to govern and manage itself outside the larger Synthetix governance framework. In addition, it will likely launch a token that will be distributed to SNX holders and allow for its own distinct community to form. The plan is for Kwenta to have a dedicated team, initially consisting of existing Synthetix core contributors, as well as a number of additional contributors. The sDAO will provide support to ensure that the project is funded for several years, ensuring there are no resource constraints on the development of a crucial user interface for the protocol.
V2x Scope Finalised
It is important that we finalise the scope for Synthetix V2x so that we can initiate the migration from L1 to L2 and the debt pool merge. Currently, there are a number of remaining components:
- L2 Exchanges
- L2 Shorts and deprecation of inverse synths (iSynth)
- TWAP exchanges
- Synth Teleporters
- L2 staking migration
- Cross chain debt snapshots
- Revamped loans
- Limit orders
By far the most critical remaining component of V2x is the implementation of exchanges on L2. While it has taken far longer than we hoped to get to this point, we are now only a few weeks away from having everything ready to enable exchanges on BTC, ETH and LINK. While the delays have not been ideal, they provided sufficient time for Chainlink to implement a number of latency upgrades on the L2 aggregators. The latest data shows frontrunning has been eliminated on fees of 50bps, even lower fees will be achievable through additional optimisations. This will allow for the removal of fee reclamation, resulting in Synthetix regaining composability with other protocols for the first time in almost two years. It really cannot be overstated how enormous a development this will be on OΞ. Especially as more protocols migrate and liquidity transitions to this new L2 infrastructure.
L2 Shorts and iSynth deprecation
Migrating shorting to L2 has a few challenges, mainly around contract size and some refactoring of the code based on the experience of shorting on L1. It is expected that shorting will be live shortly after exchanges are enabled on L2. Once shorting is enabled on L2 the process to deprecate iSynths on L1 will likely also commence. This is an important component of the debt pool merge between L1 and L2.
I am almost hesitant to write about futures given how long we have all been waiting for them, so I won’t discuss the remaining scope before they can be deployed. Instead I will address the impact futures will have on the protocol and user experience. Futures on OΞ will be the first ever example of a high throughput composable leveraged trading protocol.
This is an important point but one that I think is often missed. We have had a number of leveraged trading protocols on Ethereum for a while now, but all of them have suffered from one or several limitations.
The main limitation being the throughput of L1 limiting leverage. It is likely that while we start with 5-10x leverage on OΞ that futures will be able to scale up to 50x+ leverage. This is a level of leverage that is currently only available on centralised exchanges.
The second limitation for existing platforms is a lack of composability. Off Chain order matching breaks composability and this has been the primary mechanism decentralised exchanges have used to work around L1 throughput. dYdX is probably the best example of this as it uses starkware for scaling, which means while the experience is very powerful, it is isolated from the rest of DeFi. Futures on Synthetix will be fully composable and will enable novel integrations into many other protocols, including platforms like dHedge, Set Protocol, and other upcoming projects in a range of areas including options. As is often the case though it is the use case you can’t even imagine yet that proves to be the most powerful. I am personally very excited to watch what engineers come up with when they have access to high leverage composable trading.
With the launch of Uniswap V3, TWAP exchanges can finally be rolled out for L1 cross asset swaps. The Curve implementation of cross asset swaps has been highly successful but this new upgrade is likely to generate an order of magnitude more volume given it can be integrated into 1Inch and other aggregators.
Synth teleporters are a special kind of L1<>L2 bridge that supports the merging of the debt pools across both networks. Rather than a standard bridge that locks tokens on one side and mints them on the other side, a Synth teleporter will not simply lock the token on one side and mint another as this would break assumptions about the total system debt. Instead these teleporters will transport Synths from one network to the other, bidirectionally burning a Synth on one side and minting on the other. This will preserve the total Synth balances across both networks allowing the debt pools to remain in sync.
L2 staking migration
Migrating all of staking to L2 is critical to ensure future protocol upgrades, particularly V3, are as smooth as possible. One of the final components of V2x will be fully migrating the inflationary supply to L2.
Cross chain debt snapshots
Cross-chain debt snapshots are required to enable exchanging on both L1 and L2 using a single debt pool; this will ensure all debt on both L1 and L2 is factored into staking on L2.
There are currently three different implementations of loans operating within Synthetix. These need to be wrapped up and merged into a single implementation that reduces tech debt and complexity and allows for ETH and BTC to be used as collateral at scale. This unified loans system needs to be integrated into Kwenta and Staking and potentially even incentivised to ensure that Synths can further scale on L1. This plus the launch of the ETH wrapper should ensure we have a much tighter peg and much more liquidity for Synths across the ecosystem.
Currently limit orders are within the scope of V3, though with the proposed changes to timelines above it may make sense to move limit order implementation back into V2x. This is the only outstanding functionality to deliver feature parity with CEXs so it will become a higher priority as the rest of the features above are delivered.
L2 Debt Pool Merge
Some of the functionality above is a dependency for the L2<>L1 merge, but much of it will run in parallel. However, once the required functionality is deployed the merge can proceed. This is critical, as it will ensure that Synths are fungible across both L1 and L2, and will mean that liquidity is not fragmented. Ideally all staking will be migrated to L2 before the merge, but this is not strictly necessary and will be a question for the core contributors and council as it gets closer. While it is technically more challenging to merge the debt pools while staking is occurring on both networks, this is safer, as ensuring Synths are fungible across both networks will reduce the chance of a race to migrate to L2, and a Synth liquidity crisis on L1. Another benefit to full staking migration and debt merge being completed is that it enables the community to extend Synth exchanges onto other networks in the future, should that prove desirable. While my strong preference is to focus on Ethereum and OΞ, it is possible that there could be benefits to supporting Synths on other chains and even enabling exchanges of Synths. However, I do believe that staking should remain solely on OΞ.
L2 and Frontrunning
I recently published a very long and boring post on the history of frontrunning synthetix, so I won’t go into too much detail here, except to say that the current view from those who have the most experience with frontrunning is the improvements that Chainlink have already made to the oracles running on OΞ are sufficient to allow for the removal of fee reclamation on L2. Fee reclamation is the mechanism used by the protocol to prevent frontrunning, but it breaks composability. If composability is restored on OΞ for all exchanges it is likely that exchange volume will increase exponentially as more liquidity migrates to OΞ. This is because cross asset swaps and other transactions that tend to be high volume will be far easier to implement on OΞ. Once we have 1inch and other aggregators routing through OΞ liquidity expect this trend to increase even further. And while we are hopeful that we will see many other AMMs launch on OΞ in addition to Uniswap, even if we only have Uniswap, we will be in a far better position than we are currently on L1. In addition to the improvements this brings to the trading experience, it is likely trading incentives will be launched soon after L2 trading goes live; this will drive awareness and help bootstrap adoption of trading on L2. While trading incentives have been ready to deploy for sometime, the view has been waiting until the trading experience is more optimal is the best path. Given the removal of fee reclamation and the launch of shorting and futures this approach appears to have been prudent as we can now focus on driving user acquisition into a product that will have much higher differentiation. 20x leveraged shorts on sTLSA anyone?
There has been a plan for a while now to spin out the binary options functionality into its own project. The project has been in stealth mode for a number of months, with a dedicated team incubated out of the Synthetix community. This has been another example of the talent and dedication the ecosystem attracts with this group taking the lead to deliver a polished and end to end binary options platform. Once live it will be a significant driver of volume through the protocol and be complementary to the Synthetix network. Thales also plans to deliver decentralized options on much more than just synth price speculation (adding sport outcomes, elections, flippening) with on-chain resolution. In addition, it is likely the project will launch its own governance token that will be distributed to SNX holders to bootstrap liquidity and governance. @nocturnalsheet has a saying, Synthetix forces you to be rich. First it was the CRV distribution, then Uniswap and then 1inch. All of these protocols SNX holders were incentivised to participate in early, and therefore got a disproportionate share of value capture. If history is a guide, it is likely this will continue as Synthetix aggressively adopts and incentivises emerging projects.
Lyra is an L2 native options protocol founded by one of the Havven white paper authors. Lyra will demonstrate for the first time what’s possible when you combine Synthetix’s composability with L2’s scalability. A vastly improved options trading experience with automated risk management for liquidity providers. Lyra is likely to be another example where governance tokens for this protocol will be distributed to SNX holders either directly or via yield farming.
I am working on a small side project that will enable anyone to raise a pool of capital to pursue a specific deal. This could be purchasing tokens from a treasury OTC, and then distributing them with a vesting schedule, which happens regularly. It could be access to an early stage VC round into a new project, or any number of other one-off deals. It is usually very hard to get access to these kinds of deals unless you are a major fund with significant capital to deploy. The opportunity space for what's possible once this structure gains momentum is vast and potentially quite creative. It delivers on crypto's promise of open and transparent access while also helping fund quality projects through a novel mechanism. The governance token for this protocol (AELIN) will be distributed 50% to SNX stakers. Stay tuned.
The final aspect of the project that needs to be covered is the continued governance transition away from a centralised foundation to a fully decentralised model where every aspect is controlled by token holders. While this is not yet complete we have reached an inflection point where meta-governance is beginning to take hold and remove the remaining areas of centralisation. The largest remaining task is the transition of the sDAO which is currently a discretionary DAO not controlled directly by token holders. A SIP to make this transition is pending and will propose to decommission the sDAO, and replace it with a treasury council that will control and manage the shared funds for the benefit of the protocol and all token holders. Synthetix has one of the most highly engaged communities in crypto combined with one of the most progressive and experimental governance structures. This has allowed the community to rapidly evolve governance, while maintaining stability and cohesion within the community.
Pulling it all Together
In the next few months we will have a scalable platform on which to finalise the scope of Synthetix V2x, but more importantly the room to design V3 the right way. This will ensure we take all the lessons learned from the L2 launch and design an upgraded system that properly utilises the additional throughput of OΞ. We will have leverage and shorting as well as a much wider range of Synths. This will all be controlled by a stable and scalable decentralized governance framework, with a treasury that ensures we have funding for the protocol in perpetuity. We have a wide range of new projects launching that leverage Synthetix and L2 and even more will follow. We will have restored composability, finally allowing the huge number of engineers in the space to start experimenting with Synthetix again. The Kwenta team will have the room to innovate outside of the core protocol, allowing them to move quickly and take advantage of the incredible opportunity we have as one of the first projects to launch on OΞ.
The Path Forward
When I look at the wider Ethereum community today, it is hard to miss how much excitement and vindication exists. For a group of people that toiled in obscurity through the last “bear winter”, seeing all of the amazing projects emerging over the last year has been incredible. Combined with the first phase of ETH2.0 finally launching and upcoming hard forks to implement 1559 and the rapid rollout of multiple scaling solutions, there is a sense we are approaching a moment where it will be impossible to ignore how powerful and world changing Ethereum will be over the next decade. To me it feels like Synthetix is in a similar place, we have to an extent been forgotten among all the amazing defi launches of the last year and have been in a holding pattern for almost a year as we worked with Optimism to get Synthetix launched on L2. Yet we are approaching a point where multiple releases will converge and we will finally have the protocol we have been trying to build for the last four years. It has been a gruelling and painful process but we are so close you can almost taste it. So there is some noticeable frustration within the community that this has not been translating to more awareness. I will never get sick of saying how poor information propagation is within crypto, even once everything above is delivered and implemented it will still take weeks or months before the wider defi community is aware of it. With crypto the key is patience, we have the will and the resources to keep delivering until it is impossible for anyone to ignore what we have built. You must not let frustration creep in, keep your head down and keep building. The market can stay irrational for a long time, but not forever.