Tokenomics Discussion Review

April 17, 2023

The following post contains a review of a community Discord conversation from the spartan-council channel regarding tokenomics.

Special blog post incoming! A couple of weeks ago there was an extensive community discussion in the spartan-council channel of the Discord about tokenomics, collateral, etc. It was brought to our attention that it might be beneficial to some of our readers to review this conversation, and we agree. So let’s get into it.

As a brief background, SNX is the only collateral that can currently be staked in the Synthetix protocol. This drives value to SNX stakers, since they are rewarded for offering up their collateral to backstop the network.

One of the challenges of SNX being the only accepted staking collateral is a very real ceiling being put on scalability, since the economic bandwidth is ultimately constrained by the market capitalization of SNX. Network activity is also constrained by staking participation, which is usually between 60% and 80% and varies based on market conditions. We can recall that during a previous incentive program, sUSD briefly traded near $1.10 due to the liquidity constraint.

However, given that many aspects of the protocol are being reimagined in V3, an opportunity is presented to rework tokenomics surrounding the SNX token as well.

As the macro landscape in crypto continues to shift away from centralized exchanges, the capability of this could be very attractive if the scaling issues are worked out. Adding other, more liquid staking collateral would alleviate some of the constraints, but there are of course pros and cons. This is where the Discord conversation comes in…

Let’s start with a comment from CT, who was discussing the value proposition of SNX with SynthaMan and synthquest:

CT’s concerns were that users will not be interested in the token if it doesn’t offer any value beyond governance. Synthquest brought up the possibility that another protocol may fork V3, not offer a token, and then distribute all of the fees to LPs (stakers), which would be way more desirable for LPs.

It might also be beneficial to include Afif’s comments here:

There were also several other important comments from members of the community, like Burt Rock, Hauntid, and JVK.

In V3, it may eventually be possible to create markets with nearly any collateral type including ETH (pending governance of course). From there, it would be as simple as the Spartan Council voting on whether or not the debt pool would back that market.

JVK also brought up that being an established “blue-chip” DeFi protocol offers Synthetix a reputation-backed advantage that a potential fork would have to overcome in order to attract users. He believes this is especially true given all of the recent CEX mayhem:

Afif agreed with this, but reiterated that the focus should be making the product the best that it can possibly be. And Daver suggested a configurable fee share depending on the protocol’s immediate liquidity needs.

Kain then clearly presented some of the ideas hashed out earlier in the discussion in a way that seemed to resonate with everyone. He also agreed that a dynamic fee sharing system was likely the best path forward.

Overall, this was a fairly productive community discussion that is going to be an ongoing topic of conversation. We will continue to provide updates as they come, and monitor more formal governance discussions as they happen!