Synthetix V3 application prospect and data interpretation

Author: BitAns, Krypital Group

This article is for exchange and learning only, and does not constitute any investment reference.

After the bankruptcy of FTX, the trading volume and attention of the decentralized derivatives exchange have been significantly improved. In recent years, with the improvement of L2 and various Appchain open source architectures, the reliability and concurrent performance of Dex have been greatly increased. The Dex PERP track has become the most profitable category of products in the bear market. As the industry continues to explore the degree of decentralization, such products will undoubtedly become an important part of the industry's follow-up.

At present, the mainstream decentralized derivatives designs on the market mainly include the Orderbook model represented by Dydx, and the Pool and Vault model represented by Snx. Today's Snx has been reconstructed and upgraded from a 17-year-old asset synthesis platform to a modular liquidity protocol, aiming to become a general liquidity layer for on-chain financial products. New features and improvements are expected to usher in new business increments and valuations. In this article, we will interpret Snx V3 with data and application scenarios.

TOC：

I. Snx V2 Existing Mechanisms and Issues

II. Snx V3 new function modules

A. Liquidity as a Service

B. New Debt Pools and Collateral Mechanisms

C. Perps V2 and Perps V3 Engines

D. Oracle machine improvement plan, anti-oracle machine delay arbitrage

E. Cross-chain liquidity scheme

III. Economic Model + Revenue Data

Snx V2 operation mechanism

In order to better understand V3, we need to briefly review the existing design of Snx and the various problems that exist.

There are two types of core users in the Snx ecosystem

1. It is a pledge user Staker

Pledge Snx to get system inflation rewards and Trader transaction fees.

2. It is a trading user Trader

Users who use atomic swaps or Perps transactions within the Snx protocol

Principle of Synthetic Assets

The principle of pledging stable currency is to generate tokens equivalent to US dollars by mortgaging assets. In the same way, users can also mortgage assets and generate tokens that anchor the price trends of stocks, gold and other assets through the price data of oracle machines.

The Snx ecosystem currently has sUSD that anchors the price of USD, sBTC that anchors the price of Bitcoin, and sETH that anchors the trend of Ethereum, etc. They are collectively referred to as Synths synthetic assets.

The whole system liabilities are settled in sUSD. The Snx V2 version only allows Staker pledgers to generate sUSD from Mint by staking Snx. The essence is to mortgage Snx to lend sUSD. Therefore, the minted sUSD is the liability of the user and the entire system.

When the pledge ratio reaches more than 400% (this ratio will be decided by DAO voting according to market conditions), you will get Snx inflation rewards and transaction fee rewards. If the pledge ratio is lower than 160%, the collateral Snx will not be replenished within the 12-hour buffer period, or the pledge ratio will be over 400% if the sUSD debt is returned, otherwise the Staker may face the risk of being liquidated. If the pledge needs to be released, the Staker needs to return all sUSD debts to withdraw.

The process of atomic exchange

The transaction between Snx synthetic assets is completed by destroying one token and minting another token through smart contracts. **So when tvl is satisfied, there will be no slippage except for fluctuations caused by price delays. **

The Principle of Dynamic Debt Pool

The total value of all Synths assets in the entire system = total issuance debt of the system

If the trading user Trader converts sUSD into other Synths assets, such as sBTC, the amount of the overall debt will increase or decrease with the rise or fall of the corresponding Synths price. Therefore, the liabilities of the entire system are not fixed, so it is called a dynamic debt pool. The total debt of the entire system is shared by all Snx mortgagers in proportion. So a Staker who only participates in minting sUSD without doing any operations, its debt is also dynamically changing**.

case:

Assuming that there are only two people in the system, A and B, they pledged Snx to mint 100sUSD respectively. Assuming that the current price of btc is 100u, when A buys sUSD and replaces it with sBTC, the Snx protocol will destroy 100 sUSD in the debt pool and generate 1 new sBTC in the debt pool.

If B does not do anything. As shown in FIG. When Bitcoin doubles, the debts of A and B become 150 sUSD, but A’s asset value is 200 sUSD, and B’s asset value is still 100 sUSD. At this time, A sells sBTC to get 200 sUSD, and only needs 150 sUSD to redeem Snx, while B needs to purchase an additional 50 sUSD to redeem the mortgaged Snx.

So when a trader suffers a loss, his loss will reduce the total value of the global debt pool, thereby reducing the average debt level of all pledgers, allowing each pledger to share the benefits in proportion, that is, reducing debt. Conversely, when a trader makes a profit, it will increase the pool's liabilities. Each Staker will share the loss equally, that is, they need to purchase additional sUSD to redeem their own Snx.

Snx supports spot atomic swap and perpetual trading. When the size of the pool is large enough, the impact of a single transaction on the pool will become stable, and Staker can obtain transaction fees for each transaction. According to the Kelly formula, Staker will be in a profitable mode in the long run.

However, if the long-short system is unbalanced, in extreme cases or under unilateral market conditions, Staker may face a situation where others gain and you lose. In order to further reduce the risk of Staker, V3 provides more mechanisms to maintain the system Delta neutral.

What Snx V3 Brings

****Liquidity as a Service

After two years of refactoring and development, Synthetix v3 has upgraded itself as a liquidity layer for decentralized finance. Synthetix V3 will be launched in stages in the next few months. In the plan, the existing functions of v2 will become a subset of functions of v3. After the final version is launched, developers developing new derivatives markets can directly integrate Snx debt pools to obtain liquidity, including derivatives markets such as perpetual futures, spot, options, insurance, and exotic options. Instead of starting from scratch.

Products in the current Snx ecosystem

The application cases proposed by Snx are as follows:

1. Perpetual futures/options/structured products: Support perpetual futures, leveraged position transactions, including basis trading and funding rate arbitrage.

Case: The currently launched Kwenta, Polynomial exchanges, and GMX can actually be built on Synthetix v3. 2. NFT-Fi lending/perpetual contract: Users can borrow synthetic assets that anchor NFT trends, or create a market for perpetual contracts that speculate on the future price of NFT.

For example, nftperp.xyz can be built on Synthetix v3 3. Insurance market: Users can purchase insurance contracts for various risks, which are mortgaged in the pool and managed by smart contracts.

For example, Nexus Mutual can be built on Synthetix v3. 4. Prediction Market/Binary Options/Sports Guess: Users can predict the outcome of events.

Examples: Election results or sports games. Lyra and dhedge are currently online in the Snx ecosystem 5. RWA market: With reliable oracle machines and trusted entity verification, it is possible to develop synthetic assets such as artwork, carbon credits, or other off-chain assets to trade on the chain.

New Debt Pools and Collateral

As mentioned above, in Snx's Pool and Vault mode, Staker needs to temporarily act as Trader's counterparty, and the size of Staker's debt pool determines the upper limit of liquidity.

The current single collateral may have the following problems

1. It will cause the maximum open position of the system to be limited by the market value of Snx itself, that is, the liquidity of traders is limited,
2. Different synthetic assets have different types of fluctuations. Staker's returns and risk rewards may not match.
3. In extreme environments, there may be a potential danger of spiral liquidation

From Kwenta, you can see the total positions currently held by the entire network of Snx. In the case of cooperative incentive activities with OP, the short and long positions of BTC and ETH approached the upper limit of the system many times.

In order to solve the above problems, V3 introduces the following functions

Segregated Debt Pool

In the existing Synthetix V2, all transactions go through a single Snx debt pool, and different synthetic targets have different volatility, holding risks and yields, in order to solve this problem. (This article will list relevant cases in the anti-oracle delay attack section below)

Synthetix V3 passed the SIP-302: Pools (V3) proposal, allowing Stakers to decide which markets to support liquidity for according to their own risk preferences. Through voting governance, the collateral type and upper limit of each pool can be determined. Even if risks arise, they can be limited to a small range. At the same time, it also provides Snx stakers with the opportunity to take higher risks and obtain higher returns. This gives stakers more control over their exposure. For example, you can decide to only provide exposure to mainstream assets such as eth and btc, and not participate in the market debt pool of long-tail assets such as nft.

Multi-Collateral Mechanism

V3 creates a generic collateral vault system that is compatible with multiple collateral types. This means that in addition to $Snx, Synthetix will also support other assets as collateral for Synths to expand the market size of Synths assets.

Governance through voting will decide which assets to support in addition to the current Snx as collateral, for example, you can vote to let ETH also be used as collateral. Eight related proposals SIP-302~310 have been adopted.

So the new pool and treasury system has three main advantages:

1. Better risk management: pools of funds are linked to specific markets and therefore have specific exposures
2. Better hedging capabilities: the fund pool is connected to a specific market, allowing precise hedging
3. Larger scope of collateral: pledgers can pledge any asset that the pool chooses to accept, addressing the risk of a single asset.

Perps V2 and V3 Engines

Perps is a decentralized sustainable engine launched by Snx based on the liquidity of debt pools.

The Beta version of Synthetix Perps V1 was released in March 2022. Without any transaction incentives, it generated more than $5.2b+ in transaction volume and provided Staker with $18.1 million in transaction fees.

Launched in December 2022, the Synthetix Perps V2 solution is also the version currently in use, which can reduce fees, improve scalability and capital efficiency. Isolated Margin

Synthetix Perps V3 is scheduled to be released in the fourth quarter of this year. Synthetix Perps v3 supports all v2x functions, plus some new functions, such as cross margin, new risk management functions, and aims to eliminate market bias. These include price impact measures and dynamic financing rates.

According to founder Kain Warwick, Synthetix aims to launch the Perps V3 version and its new decentralized perpetual contract exchange front end, Infinex, in the fourth quarter of this year.

The team stated that Infinex will focus on making it easy for users to trade decentralized perpetual contracts. Compared with other decentralized exchanges, it aims to provide a better user experience and eliminate the cumbersome process that current DEXs need to sign for each transaction.

Maintain Delta Neutral

Perps V2 can effectively match buyers and sellers, and Snx pledgers only need to act as temporary counterparties, temporarily taking on asset risks, and incentives will reward traders to keep the market neutral.

Synthetix incentivizes long and short open interest in the market to remain balanced through funding fees and discount/premium pricing features. One side of the transaction congestion will be charged a funding fee, and the other side will get a funding fee.

On centralized exchanges, funding fees are usually charged every 8 hours, while funding fees in Synthetix are charged in real time as positions continue. Likewise, trades that shift the long-short ratio will be charged a premium, and trades that balance the long-short ratio will be charged a discount. This mechanism allows arbitrage traders to aggressively arbitrage when deviations occur. Reduce the risk of lp in the unilateral market.

Oracle improvement plan

Anti-oracle delay arbitrage

Oracle Latency Arbitrage (Oracle Latency Arbitrage) is the main reason why Dex platforms were unable to compete with centralized exchanges before.

In the previous version of Synthetix, Synth relied on the oracle machine Chainlink to provide prices, but the update of the oracle machine price on the chain lags behind the price changes in the spot market. At this time, there is a possibility of pre-emptive transactions. In the context of Synthetix’s no-slippage transactions, Snx stakers may face heavy losses. For example, if a user observes that the price of ETH has risen from $1,000 to $1,010 in a short period of time, and Chainlink still quotes at $1,000, then the user can exchange sUSD for sETH at a price of $1,000 in Synthetix. After the price of the oracle machine is updated, each sETH can earn a profit of $10 without considering the handling fee, and the user's income comes from the loss of the Snx pledger who suffered the front-running transaction.

Supplementary case: the current strategy adopted by Snx’s largest competitor, GMX

Source: CapitalismLab

Snx currently offers an oracle management mechanism: marketplace creators can choose from multiple oracle solutions, set up custom aggregations, and thus give aggregators more control over the oracles that power the marketplace. Oracle managers provide new opportunities to support new markets and assets.

Example: Selecting the lowest price for spot Bitcoin based on the time-weighted average price (TWAP) of Chainlink, Pyth, and Uniswap.

Synthetix (Snx) also explored two solutions to solve the oracle latency arbitrage problem.

1.hindsight oracle solution: The solution proposed by Synthetix and the Pyth team. This solution reduces the possibility of oracle delay arbitrage through asynchronous transaction and configuration delay time. This helps reduce transaction costs on DeFi platforms, making them more competitive.

2. Chainlink's low-latency data source: Another solution provided by the Chainlink team for Synthetix. This solution aims to provide low-latency data sources to reduce the opportunity for oracle latency arbitrage. This solution is superior to the hindsight oracle solution in some aspects, such as not relying on a third-party executor (keeper) to complete the transaction, thereby reducing transaction costs while protecting the data privacy of the data provider.

Pyth and Snx cooperation introduction:

Off-chain oracles enable fast on-chain prices at competitive fees. Played a major role in significantly reducing transaction fees. **Due to solving the delay arbitrage problem of the oracle machine, the current transaction fee of Synthetix’s major currency pairs is between 2 per thousand and 6 per thousand, which is comparable to that of Binance’s advanced VIP users. **

Cross-chain solution

Teleporters - For Stablecoins

The SIP-311 proposal proposes the concept of Teleporters. After the Teleporters go online, they can burn newUSD on one chain, transmit cross-chain messages, and mint newUSD on another chain.

• This means that the newUSD stablecoin can be used on any Synthetix-deployed chain without cross-chain bridges or transfer slippage.
• Allows the liquidity layer to share collateral across all chains
• Fast movement between chains and back to L1 from L2 without challenge verification time.

Cross-chain liquidity pool

against debt pools

• SIP-312 proposal to enable all on-chain markets and mining pools to capture the current state of all on-chain portfolio collateral
• This means that Perps markets can be quickly deployed to new chains and leverage Optimism and collateral from existing debt pools on Ethereum mainnet

As mentioned above, through Teleporters and cross-chain liquidity pools, the Synthetix liquidity layer can be extended to any EVM chain, and after the new chain is deployed and launched, it can directly obtain the liquidity support of other chains.

Economic Model + Revenue Data

Revenue for the Synthetix protocol comes from several different sources. Mainly through the perpetual contract and synthetic asset exchange fees, perpetual contract and Snx liquidation fees, and synthetic asset casting/destruction process fees. All income from the agreement will be distributed to integrators and Snx pledgers.

Revenue distribution of integrators

Products developed through the Snx protocol like kwenta are also called integrators. Snx rewards a percentage of fees based on transaction volume, paid in Snx: 10% of fees for the first $1M, 7.5% for $1M to $5M, and 5% for >$5M. Integrators are free to decide how to use these fees. For example, empowering their own platform currency.

The Snx development team no longer runs the front-end itself, but hand over the specific business to the integrator. Adopting an incentive plan for the integrator will make it more network effect, and it is expected to be integrated by more products and become an important defi component.

User Growth

Data as of publication of this article on July 23. Synthetix's current TVL, monthly transaction volume and fee income are comparable to competing products GMX, but the total number of daily and monthly active users is far lower than GMX and dydx.

PerpV2 transaction volume

Synthetix Perps received the Optimism chain's liquidity incentive plan this year, and Synthetix Perps trading users will receive OP airdrop rewards

The OP incentive started on April 19th, and the currently incentive OP can cover about 80% of the transaction fee.

According to messari data, Perps has a strong impetus to transaction volume due to subsidy incentives. The number of user transactions and transaction volume data have grown rapidly.

**According to the trend of the number of interactive addresses on the chain, but despite the increase in transaction volume figures, the number of users has not increased significantly. This means that the largest increase in transaction volume is the increase in transactions from existing users. **

The op's rewards program will run until September 13th, so it's easier to see retention after Q3.

Trading User Data Trends

Data Sources:

PE level

With the increase in transaction volume, it brings about an increase in income and an increase in the income of pledgers. The PE of Snx has returned to a more reasonable range of 10x-15x from 50X in the bull market.

Pledger weekly fee income data

Data Sources:

Exploration of new token models

Snx is currently in full circulation, and currently about 5% of the annual inflation rewards are provided to Snx pledgers.

In August 2022, Synthetix founder Kain Warwick issued a proposal SIP-276, suggesting that the Snx issuance be set at 300 million pieces, and that additional issuance will be stopped after the additional issuance reaches this number. But the proposal has not yet passed.

In June, Kain proposed implementing a new Snx staking module in Synthetix V3. This module will simplify the entire staking process, and users only need to deposit Snx without facing market risks or considering hedging needs. Initially the Finance Committee will fund this staking pool, but a portion of Synthetix’s protocol fees may also be allocated to this staking pool in the future. Kain emphasized that this simpler method of staking is designed to attract more new users to the Synthetix V3 system. The proposal is currently under discussion. It is expected to further increase the Snx pledge rate.

Summarize:

In the long run, there is a huge space for decentralized derivatives trading. The launch of Snx V3 is an important milestone for the Synthetix protocol, which introduces many new features and improvements. These improvements can improve the capital efficiency and security of the protocol, release the upper limit of liquidity, and enhance user experience at the same time, attracting more users to participate in the Synthetix protocol. After V3 is fully functional, it will usher in a new business increment and valuation. It is expected to be integrated by more products and become an important defi component.

However, at this stage, the growth of new users is relatively slow, and the development cycle required for the launch of all V3 functions has not been determined. The income of SNX pledge under the new token model and the retention rate after the third quarter will be important short-term valuation indicators for SNX holders.

Material references:

Delta

atomic swap

Cross-chain debt pool

dynamic debt pool

Multiple collateral

perps engine:

Hindsight oracle：

Cross-chain solution

gmx oracle machine arbitrage attack case

revenue data