We saw Where Synthetix v3 could take us, so let’s plot a potential path to get there. Reading that post is recommended, but we’ll start with a recap of Synthetix v3 for the impatient.
Synthetix v3 recap
Synthetix v2 is the system most of us know as “Synthetix”.
Two years in the making, Synthetix v3 is the liquidity layer for defi. At the v3 End Game, you can add Synthetix v3 to an EVM chain, and get the components to construct almost any protocol that currently exists in defi. It’s a suite of financial primitives that are crucial to understand in order to grasp the progress, permutations and possibilities:
- Liquidity Providers (LPs) can delegate collateral to Pools. Additionally, LPs can mint sUSD by taking a loan against their collateral, which increases their rewards and the circulation of the native stablecoin.
- Pools accept collateral from LPs and can be configured by the pool owner to collateralize derivative markets. There can be a many-to-many relationship between Pools and Markets, as Pools can back multiple Markets, and Markets can be backed by multiple Pools.
- Markets generally use a combination of price oracles and synthetic assets to create a product offering for end users. They charge fees for doing so and return earnings to Pools.
- Rewards Distributors are custom rules for additional incentives for Pools or other participants. This allows for greater customization and flexibility in incentivizing participation within the Synthetix ecosystem.
The creation and management of all components will become permissionless, meaning anyone can create and administer them.
Building with the Synthetix v3 primitives can dramatically accelerate the development, collateralization and adoption of defi derivative products.
Current protocol state
For the past two years, v2 has been the operating protocol, while v3 has been in development. Now that v3 is on mainnet, we’ve entered a gradual transition period, where increasing attention will be on v3, while v2 is still operating.
- Synthetix v2 might be getting long in the tooth, but its a fighter and has been battle tested through all of the crashes, liquidations, CeFi frauds in recent memory
- v2 collateralizes the best decentralized perps protocol (Perps v2), which prints fees in an astonishingly consistent and delta neutral fashion
- There is a permissionless ecosystem of existing integrators, all building for a decentralized future - including Kwenta, Lyra, Polynomial, Dhedge and many new joiners
- Feature development finished a while ago, but necessary maintenance continues
- The large majority of the v3 system is on mainnet, including the spot market, which with further governance decision can be unleashed to their true capability
- v3 has the ability to accept SNX into a Pool, mint the newUSD stablecoin, be traded to sETH on the Spot Market, all thanks to an agnostic Oracle Manager system
- There aren’t Rewards Distributors implemented yet, but that shouldn’t be far off
- All new integrators should be looking to v3 - dedicated v3 docs here
Milestones to the v3 end game
A roadmap is still in the works, so here are some milestones loosely in order based on dependancies. Combine these milestones, add a governance upgrade, and we will have arrived at the v3 End Game. The possibilities once we arrive at the v3 End Game are unbounded, and the topic of another post.
New stablecoin and stablecoin migration
- Despite the v3 system being live, the community is still deciding (via SIP-323) what to name the damn coins, so for this post we’ll use “newUSD” (currently snxUSD in the docs and v3 code) and “oldUSD” which is the v2 sUSD we all know and love
- newUSD already exists (and is minted by the v3 system), and soon we will have a Curve pool to swap with oldUSD
- Over time newUSD will have greater utility and liquidity with the growth of the v3 system, and we expect users and integrators to migrate oldUSD to newUSD either by swapping, or through the v2→v3 migration path described below
- To add to the confusion, newUSD on v3 will then inherit the “sUSD” ticker from oldUSD on v2, and oldUSD will be renamed to something with less caché (and front end compatibility)
Once the migration is complete, the v3 system will have taken the sUSD ticker, as well as for the other synths like sETH etc - rough plan:
- Rename sASSET on v2 to legacyASSET, so that sASSET tickers are freed up
- Fix all the existing integrations that break or don’t correctly update
- Launch sASSET on v3
- Dependancies: Perps v3, SIP-323 passing governance, Curve pool, and updates from integrators
- Perps v3 is an upgrade to the already dominant Perps v2 (currently about to cross $15b in cumulative volume and $10m in fees for LPs - more Perps v2 stats here)
- For users, Perps v3 bring multi-collateral (so any synth can be used as collateral), as well as native cross-margin (one margin account for all markets you trade)
- For integrators, Perps v3 has a similar interface to Perps v2, but is simpler, offers more events, and enables delegation of all actions to other addresses - hello automation, vaults, one-click trading and anything else the community can cook up
- Perps v3 is getting close to audit, with much of the core code complete
- Get your testnet wealth ready for a Perps testnet trading competition at your favourite front end some time in July
- Dependancies: Testnet trading comp, SIP-TBC passing audit and governance, and getting to mainnet
Incentives shifting to v3
- While the v3 system is alive on mainnet, without markets that earn revenue for LPs, there is no reason for Synthetix users to move from v2 to v3
- Once Perps v3 is live and earning fees for the v3 system, it would make sense to shift inflation incentives from v2 towards v3, so that collateral migrates
- At that point, the v3 system will be earning increasing revenue, Perps v2 could be would down in favor of the newer and more featured Perps v3
- Dependancies: Perps v3 being live, newUSD liquidity, governance deciding on changes to inflation and any other incentives
Upgrade v2 stakers to v3 LPs
- Let’s be honest, we’re all debt locked in v2 and grateful a migration path is coming
- To allow SNX stakers to migrate from v2 to v3 without unstaking, SIP-306 uses a Legacy Market that appears as a single LP in the v3 system
- The Legacy Market accepts v2 collateral from the migrating user, issues a v3 LP account token, and recreates a v3 collateral lock from the v2 escrow timeline
- SIP-306 is currently in audit, and once released there will be instructions for existing v2 stakers to migrate and become v3 LPers
- Migration of v2 stakers to v3 does not interrupt or reduce the liquidity available on v2x (even for Perps v2) - instead the migration transfers the staking responsibility from a user on v2x to a user on v3
- Dependancies: SIP-306 implementation completing audit, inflation incentives shifting to v3
- SIP-311 creates Teleporters that burn newUSD on one chain, transmit a cross-chain message, and mint newUSD on another chain - like a bridge but better
- This means that newUSD stablecoin liquidity can be available on any chain where Synthetix is deployed, without the need for custodial bridges, associated token pools, or slippage in transfer
- Teleportation could be extended to all synths, with mind expanding implications
- Teleporters are one part of making all Synthetix deployments behave as a single system, so collateral can be shared across one homogenous liquidity layer
- Moving between chains and from rollups back to L1 can be done without the challenge verification time
- Teleporters utilize Chainlink’s CCIP Write to securely relay the cross-chain message, so Teleporters could be used between any EVM chain where Synthetix is deployed, and supported by Chainlink CCIP Write
- Currently in development, Teleporters are working across multiple testnets
- Dependancies: Chainlink releasing CCIP Write to mainnet, SIP-311 implementation completing audit
Cross-chain pool synthesis
- SIP-312 enables Markets and Pools on all chains know the current state of the combined collateral across all chains
- A Perps v3 market on Chain A, knows about the collateral on Chain O and E
- This means that Perps markets can be deployed to new chains, that can leverage the collateral of the existing SNX Pools on Optimism and Ethereum
- Currently in testnet development
- Crosschain Pools require both CCIP Write and Chainlink Functions to be deployed to all networks that require this feature before the feature can be used on any chain
- Dependancies: Chainlink releasing CCIP Write and Chainlink Functions to mainnet, SIP-312 passing audit
Permissionless Pools and Markets - the End Game
- The creation and administration of Pools and Markets is currently limited to the Spartan Council, until governance enables permissionless access
- The full implication of this is the Synthetix v3 End Game, and deserves its own post
- Dependancies: Governance feeling more comfortable with the v3 system
What are the requirements for deploying on other chains?
Synthetix v3 can currently deploy to any EVM-supported chain, but it will have isolated snxUSD/liquidity, which kind of defeats the point of a extensible derivates platform. With both Teleporters and Cross-chain Pool Synthesis described above, the Synthetix liquidity layer is ready to be extended onto any EVM chain.
Whats the difference between Perps v2 and v3?
Perps v3 are supporting all v2x features, plus a few new ones like cross margin instead of isolated, and the ability to deposit other collaterals besides newUSD as margin.
Depends on mostly governance at this point, and comfort with the v3 system - we could kick off migration and get the liquidity going without negative impact on v2x.
What does migration to v3 look like?
Users click a button to migrate to v3 and start using a v3 UI. V2x markets continue operating as normal and enjoy a clean half life as oldUSD is migrated to newUSD by market forces. At some point off in the distance we force migrate to clean out the dormant accounts.