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Decentralised synthetic assets

Synthetix 2021

Synthetix 2021


Synthetix 2021, it feels more like the title for a 80’s sci-fi movie than a roadmap post, I guess it kind of is. Imagine a future where everyone in the world is connected to one another by handheld devices that allow them to hold, trade and transfer every imaginable asset. This week science fiction becomes reality. The launch of Optimistic Ethereum will finally enable Synthetix to fulfil its mission of reinventing how people exchange value.

Before detailing everything planned this year I should address a question a few people are probably asking right now, who the fuck are you to tell me what the roadmap of Synthetix is in 2021? This is a great question! The simple answer is that historically it has been my role, and while I no longer have authority to dictate what happens, no one has told me not to do it this year so I figured why not? A better answer is that, while I‘m not a core contributor, since the synthetixDAO does not pay me a grant, I do have access to all of the core contributors as well as other key community members. I have used this access to collect the many priorities and distilled them into a coherent narrative reflecting what the community wants to achieve this year, at least for now. Like every year it will shift as new information is obtained. This is very much my personal perspective on what Synthetix 2021 might look like, it should be read as such. Unfortunately for all the authoritarians out there, I no longer have any direct power to implement anything described in this post, other than by advocating for these priorities in community forums. Consider this then the opening salvo in that campaign!

Now let’s dive into what I think needs to happen this year. I will run through a high level overview first and then expand on the many components of Synthetix V3 later in the post. To compile this list I reviewed feedback and discussions across many channels including research.synthetix.io, Discord, Telegram, Slack, Twitter and more.

High Level Priorities

Optimistic Ethereum
The transition to Optimistic Ethereum, a layer two scaling solution, will alleviate many of the issues experienced in 2020. There are two primary advantages to this transition: lower gas costs and higher throughput. Lower gas costs are good for all users and make the system more efficient. Higher throughput will enable us in partnership with Chainlink to reduce oracle latency, allowing for leverage via Synthetic Futures as well as a number of other protocol improvements. The exact sequence of the transition to Optimistic Ethereum is still to be determined, however, my view is that there are two conflicting goals which must be reconciled. The first is that we must maintain a single set of Synths, we should avoid L1sUSD vs L2sUSD. The second is that we should launch with a siloed debt pool to reduce risk to L1 as well as implementation complexity. I believe these two things can be reconciled with a staged rollout that runs through multiple phases. Justin and I are working on a post that will describe our latest thinking around how to stage the rollout.

Synthetix V3
This represents a complete re-architecture of the Synthetix contracts (the first time since late 2018) and provides an opportunity to rethink what's possible. Synthetix uses an upgradeable proxy pattern to enable upgrades that do not require token holders to migrate. While this has significant UX benefits, it means legacy code and contracts can become hard to remove. Synthetix V3 solves this by requiring each token holder to migrate from the old contracts to the new contracts enabling us to forgo backwards compatibility and redesign everything from scratch.

Governance Improvements
Governance improvements were one of the highlights of 2020 for Synthetix, but there is still much to do. Improvements to the election process for the Spartan Council, reduction in power for the protocolDAO and continued decentralisation of the synthetixDAO are all key outcomes for this year. As well as a relaunch of a leaner, more incentive-compatible grantsDAO. In addition there is a proposal to add a new category of governance which is solely focussed on coordinating the Synthetix community to participate in external protocol governance, dubbed Synthetix Ambassadors, These representatives would have the community delegate governance tokens from other protocols such as Curve and Uniswap in an incentivised way to ensure mutually beneficial participation in ecosystems outside of Synthetix. Ambassadors would then be elected by the community in a similar fashion to the Spartan Council. There are numerous protocols where governance and prioritisation impact the Synthetix network and Ambassadors would be responsible for helping facilitate communication between these communities while advocating for the Synthetix community.

Synthetic Futures
As mentioned above it became clear during 2020 that oracle latency and the limitations of layer one were going to significantly reduce the ability to offer pooled leverage. Synthetic Futures are expected to deliver a minimum of 10x leverage to provide a comparable experience to existing futures markets, which is only possible after the transition to L2 with the current oracle architecture. The combination of Synthetic Futures and Optimistic Ethereum is what will allow Synthetix to compete with and ultimately exceed the user experience of centralised futures markets.

Asset expansion
If Synthetix is truly to become the place where you can exchange any asset, we must expand the range of assets offered. This includes expanded cryptoassets and commodities but most importantly it requires the expansion into equities. It goes without saying that this adds a number of challenges, including market closures, dividends and regulatory oversight. However, Synthetix is now well positioned to deal with all of these challenges as it has evolved from an early stage project with numerous aspects of centralisation to one of the more decentralised projects on Ethereum.

dApp Upgrades
A huge amount of effort went into improving the various dApps users interact with in 2020. We now have a modern and robust platform from which to expand. Alongside this the core contributors working on these dApps have been decentralising key components to ensure that they can operate via The Graph and on IPFS. This process needs to continue including changes to how the dApp teams coordinate themselves to further insulate them from the protocol contributors. This could take the form of spinning out the dApp repo from the protocol and opening it up to a much wider range of contributors. It will likely also include incentives from the relaunched gDAO to deploy alternative front-ends for various aspects of the protocol. Much of this will be coordinated by the dApp teams in conjunction with the community.

optionsDAO
This was an initiative that looked to take Binary Options markets launched in 2020 and expand the trading functionality to ensure binary options had more liquidity. The current plan is to spin out the optionsDAO as a standalone protocol, several teams have approached the synthetixDAO to take this on. The sDAO will provide upfront funding based on certain conditions including future value capture for SNX holders. The oDAO will enable several improvements over the existing binary options implementation. Firstly it will support any binary outcome by leveraging the oDAO itself to resolve markets. Secondly it will implement a robust trading platform on L2 that enables trading of binary options in a much more user friendly way, allowing for increased liquidity and market efficiency. It could also adopt some of the other architectural improvements that have been discussed in discord such as new issuance mechanisms, liquidity pooling and price discovery.

Acquisitions and expansion
In traditional finance one company typically acquires another to gain access to a scarce resource. This can include novel IP, certain skills and experience, manufacturing capability, existing customers or any number of things. But fundamentally an acquisition is about a cost benefits analysis. If buying something saves you time or provides access to an otherwise scarce resource, even if it means paying a premium, it often makes sense. Right now the sDAO is extremely well capitalised and the Synthetix Protocol has one of the highest market caps in crypto, this provides an opportunity to strategically acquire other protocols or teams in the space and fold them in as core contributors to Synthetix allowing for a rapid expansion of the development resources contributing to the protocol. The scale of Synthetix now requires a further expansion of the core contributors, but this process is both expensive and time consuming and is a drain on existing resources. It is possible that some of that could be circumvented through strategic acquisitions. Yearn has demonstrated it is possible for two DAOs to create a partnership or merger that is mutually beneficial. The Synthetix community should remain open to similar opportunities.

Those are the high level items I believe should be prioritised in 2021, ultimately all of the above must go through a rigorous governance process in order to be implemented, but the prioritization of each item currently falls to the core contributors. Over the last few months that has begun to shift with the Spartan Council taking a more active role in prioritisation. This makes sense as they are the most legitimate body to represent the interests and wishes of token holders. I hope to see this process continue this year, particularly with respect to the many functional improvements under the umbrella of Synthetix V3 which will be covered below. Many of the topics discussed in the V3 section are still in the R&D phase, some have been discussed by the community but the vast majority still need to be presented as SIPs.

Overview of Synthetix V3

New SNX staking mechanism
The current SNX staking mechanism defies a number of crypto conventions, which can cause confusion for SNX stakers. Staked SNX currently remains in the user wallet which then creates issues as it is non-transferrable. It also introduces significant complexity into the token that could be avoided if staking were handled by a contract. This mechanism would require users to send SNX to a contract to stake and SNX outside this contract would always be freely transferable.

eSNX
SNX paid out as inflation is locked for one year from claiming. This change would create eSNX which would be paid out directly to wallets but not immediately staked as is the case now. Instead stakers would be able to burn it and receive escrowed SNX which would unlock after a year, this creates more flexibility for stakers. It would also allow the protocol to pay for external incentives in eSNX rather than SNX creating better long term alignment. It should be noted that a market for eSNX, trading at a discount to SNX, would likely emerge.

Tokenised debt
This change requires the new staking mechanism mentioned above, it would provide a tokenised representation of the SNX locked in the staking contract which would be transferable, so a staker could easily move staked SNX between wallets without needing to unstake and burn. This is similar to how many lending protocols work and was pioneered by Compound with their cToken pattern.

Continuous staking rewards
The current staking rewards calculations are highly inefficient and subject to numerous attacks and manipulations. By migrating to a continuous staking system users would only be paid based on their contribution to the debt pool over time rather than at a specific “snapshot” this encourages more active management of positions and rewards users who continually provide collateral to the protocol.

Continuous vesting
Continuous vesting would change how the vesting schedules work so that any SNX earned would be added to a pool that vested continuously rather than in discrete snapshots one year after each claim. This reduces the complexity of storing claims data significantly as well as improving UX by adhering to existing conventions adopted by most protocols.

Open interests caps
This would introduce caps on the supply of each Synth to prevent various kinds of attacks on the protocol including flash loans.

Order matching (outside open interest caps)
If the above change was introduced it would likely require a system for placing limit orders if a cap had been hit that could then be matched between counterparties.

Siloed debt pools
The current debt pool is undifferentiated, which makes it hard to hedge across various asset classes. By splitting the debt pools into discrete asset classes stakers would be able to choose which pool to participate in and the market would adjust the yield within each pool accordingly.

Price thresholds
As it stands there is no mechanism for a user to specify a price for a trade, all orders within Synthetix are essentially market orders with zero slippage. This is impactful as with fee reclamation a user could get filled at a price that is different to the one they intended to trade at. Price thresholds provide users with security that a sudden price change will not adversely impact them, as the order would be rejected if the price moved by more than a certain percentage.

Order matching (during market closures)
As new asset classes are introduced many trade on traditional markets that are closed on weekends and holidays. It is possible that while markets are closed the protocol could automatically switch into counterparty mode where traders placed limit orders that were matched against other orders rather than against the debt pool via oracle. This would allow for continuous 24 hour trading of equities and other asset classes.

Keep3r implementation
There are an increasing number of functions within Synthetix that require an open keeper network to maintain, we have been working with both Chainlink and Keep3r to implement these tasks.

Oracle Threshold signatures
While oracle latency is not expected to be as much of an issue on L2, it is likely that exchanges will still be required for some time on L1, changing the oracle architecture to a pull system based on off-chain signatures would reduce the current attack vectors from L1 oracle latency.

Protocol migrator
This contract is designed to function in a similar way to a number of other on-chain governance systems. However, it will be connected to our existing governance process that relies on a combination of the protocolDAO and the Spartan Council to implement protocol changes. It will also likely include direct token holder veto powers as a further security measure for token holders. Ideally this mechanism will strike a balance between direct token holder voting and centralised governance. Providing the security of trustless protocol upgrades with the oversight of off-chain governance.

The planning sessions for Synthetix V3 will be recorded and available for the community to participate in, so it is likely that additional changes will be added through this process or that some of the above changes will be discarded based on community feedback. It is also likely that only a few of the above changes will make it into the first release, Synthetix V3.0, the most likely outcome is that the tech debt from the last few years will be discarded and a few core changes will be made, with the rest of the functionality added through incremental upgrades over the course of 2021. Like the current upgrade process these upgrades will most likely not require any user action. It will only be the initial release that will require migration by all token holders.

There is still much to do this year, but it is likely that by the middle of the year we will be switching into a new mode of operation. Rather than being in infrastructure mode we will be in user acquisition mode. This will require a shift in mindset, but it is critical that the focus of the entire community transitions to growing trading volume through the protocol. I trust all SNX holders will be prepared to make this transition as they have made each previous one as the project has evolved.

This year we finally take on CeFi, then we come for TradFi...

If you made it all the way through, congratulations, I’ll see you in the Spartan Citadel.


Kain Warwick

Kain Warwick

Kain is the founder of Synthetix.