Divine Fish Dialogue Kain | Senior Scientist in DeFi Meets the Leader of DeFi

On April 15, Synthetix made its debut in China, where its founder and CEO Kain Warwick had a video conversation on the Mars Finance App with Cobo co-founder and CEO Shen Yu. The two discussed and shared insights on the hottest topics in the DeFi space, including synthetic assets, Layer 2, NFTs, DAO governance, and the future development of Ethereum. Below is a整理 of the guest's sharing.

The live broadcast was exclusively supported by the Mars Finance App; translation was provided by Dorothy, head of Synthetix Greater China.

*This article is for knowledge sharing only and does not constitute investment advice**

Introduction to the Synthetix Project

Shen Yu:

I am very pleased to communicate with the founder of Synthetix about the future developments of DeFi and the current status of Synthetix. First, could you please introduce yourself and the Synthetix project?

Kain:

Hello everyone, I am a serial entrepreneur with 20 years of experience. I started my entrepreneurial journey in the cryptocurrency space in 2014 by founding a payment company that helped users buy cryptocurrencies with cash. In 2017, I established the stablecoin protocol Havven. Later, during the bear market, I experienced a transformation, and in 2018 and 2019, we transitioned the protocol into Synthetix, a project that issues derivatives.

We not only create stablecoins like SUSD but also support various assets such as gold, Tesla stocks, commodities, indices, and foreign exchange. Our vision is to issue a wide range of assets on Ethereum, allowing everyone to trade without barriers or thresholds.

Synthetic Asset Track

Shen Yu:

Why did you transition from a stablecoin protocol to a synthetic asset project during the bear market in 2018? What kind of setbacks and difficulties did you encounter during this process? Additionally, I am personally curious about the current development of DeFi, which revolves around assets that have already been digitized. After the explosion of ICOs in 2017, many assets were left on-chain. Synthetix chose the path of bringing off-chain assets on-chain, which is not an easy road and may encounter many problems and setbacks. How did you solve these issues?

Kain:

In 2016, the entire industry only had USDT as an option. As we all know, USDT has various issues. When I was starting my business, I felt that the market needed more options, especially decentralized and highly transparent choices, which would be more ideal for users.

However, in 2018, with the issuance of stablecoins like TUSD, GUSD, and HUSD, Havven's decentralized stablecoin found it difficult to compete with these fiat-backed stablecoins in the market at that time. We wanted our stablecoin product to have richer and more differentiated use cases, which led to this transformation.

Moreover, while native tokens are easier for everyone to understand and use, there is still significant demand for the commodities, stocks, and securities we issue. At that time, there were no good decentralized trading channels for native tokens issued by Synthetix, including BTC, LTC, and XRP, making it difficult for users to trade these tokens on decentralized exchanges. Therefore, Synthetix provided a good option for everyone.

Synthetix Operating Mechanism

Shen Yu:

Okay, we have a general understanding of Synthetix's early development process. Could you please elaborate on the operating mechanism of Synthetix? Since it involves synthetic assets, the entire system is relatively complex, and many novice users may not have a systematic and macro perspective to understand some of the operations. Could you take this opportunity to explain how this system works?

Kain:

In simple terms, Synthetix aims to create a relatively balanced and stable system where you can stake a valuable asset and borrow the synthetic assets you need, such as synthetic assets that map to BTC or ETH, or even borrow synthetic assets corresponding to USD, KRW, JPY, gold, stocks, and various other valuable assets. These assets are created through staking, meaning they are not your assets but rather your liabilities, and this debt can be converted into any synthetic asset at any time. This design is quite similar to staking loans, with the only difference being that the assets you borrow are convertible.

Layer 2

Shen Yu:

A significant challenge currently facing DeFi is that the overall network performance has been impacted by the DeFi boom, leading to network congestion. In this situation, the community is exploring many Layer 2 solutions. Synthetix also began exploring and testing some Layer 2 directions early on. We would like to ask about Synthetix's current practice in Layer 2 networks, what progress has been made, and why this solution was chosen?

Kain:

From the perspective of smart contract design, our product is quite complex, so the gas fees required to call our contracts have always been higher than those of other projects.

Therefore, as Ethereum's price rose and the network became increasingly congested, we realized early on that we needed to address this issue. We spent six months exploring feasible solutions, and at that time, we saw that the only viable solution was Optimism. Uniswap had collaborated with Optimism to create a demo called Unipig, and after seeing that demo, we felt it was exactly what we wanted. We then spent five to six months working with Optimism to develop our Layer 2 network solution, which is expected to launch a complete Layer 2 solution next month.

(Question to Shen Yu about Layer 2)

Shen Yu:

I am mainly concerned about whether a unified and combinable network can be formed. Currently, I am still in the observation and learning stage. We look forward to Synthetix launching applications on Layer 2 soon.

Future Development of Ethereum

Shen Yu:

Ethereum has just completed a hard fork upgrade called Berlin. Over the past year, especially during the DeFi boom, we have seen various innovations and applications develop on Ethereum. Regarding these phenomena, I would like to ask Kain about his outlook on the future of Ethereum. Additionally, I would like to discuss the next hard fork, especially the EIP-1559 proposal, and its potential impact on the DeFi protocol layer.

Kain:

Since March 12 of last year, Ethereum's usage and price have been on the rise. Finding a suitable scaling solution during this process is crucial. Synthetix began exploring feasible solutions in this area early on, and at that time, our options were very limited. Now, with more and more scaling solutions emerging in the market, current projects have many more choices compared to when we started. In the next 6-12 months, I believe that although these scaling solutions have uncertainties, I am relatively confident that we will see one or more scaling solutions validated, and we can achieve a certain degree of scaling this year.

Moreover, the EIP-1559 proposal primarily aimed to address user experience issues due to high fees. The fees have surged from single-digit Gwei to around 100 Gwei, which is a significant increase that is hard for users to bear. The original intention of the proposal was to solve this problem by changing the policy to burn Ethereum, but this process will have some negative impacts on everyone in the ecosystem, including protocol layers, users, and miners. Overall, I believe this proposal is beneficial for the entire Ethereum network, so I support it.

(Question to Shen Yu about his views on EIP-1559 and Ethereum as a miner and DeFi player)

Shen Yu:

This week, our fish pool just finished testing the MEV version of the node, capturing some arbitrage profits in DeFi, and sharing this revenue with our miner friends. Another thing is that we have seen a significant adoption of MEV pools recently, with about 60% of the network currently using MEV nodes, which has led to a decrease in the amount of wasted space in the network. In the past, there were a lot of arbitrage and IDO sniping transactions, but with MEV, these transactions no longer occupy a large amount of block space, so the network has improved over the past week or two.

Regarding EIP-1559, we believe it will improve user experience, and importantly, it will allow the Ethereum protocol itself to capture the dividends from the entire ecosystem's development process. Therefore, while it may sacrifice some short-term benefits for the entire Ethereum ecosystem, it will bring about an explosive economic model and potential in the future. So we support EIP-1559—although there may be short-term pain, it will lead to a better future in the long run.

Kain:

Since Shen Yu mentioned flashbots, I would also like to point out that the emergence of flashbots represents one of the most interesting aspects of the industry: sometimes we face a problem, come up with a solution, and that solution can also address an unrelated issue. For example, we face scaling issues and MEV issues, and the solution to MEV alleviates the block space usage problem without threatening network security. This is also one of the most interesting aspects of blockchain development.

DAO Governance

Shen Yu:

The next question is that we see the Ethereum ecosystem not only brings smart contracts and DeFi products but also the entire community has made many explorations and attempts around decentralized governance. Synthetix is also one of the earliest DeFi projects to begin transitioning to decentralized governance. I would like to ask Kain if he could share the progress and insights of community governance and envision the possible forms and prospects of DAO organizations in the coming years.

Kain:

The three most interesting aspects of the blockchain industry for me are, first, financial engineering; second, computer programming, both of which are very important skills and knowledge we need in this industry; and third, community governance, which I find more interesting and is my motivation to continue innovating in the industry.

Synthetix can be said to be one of the most proactive and aggressive projects in trying new governance models. We began transitioning from a foundation model to a DAO model quite early on.

Throughout this transformation process, I cannot say that we have reached a 100% decentralized state, but we are more decentralized than other projects. Our exploration in DAO may not seem particularly significant when viewed independently, but I hope our transformation process can leave a positive impact on the industry in the long run and provide a case for exploration.

Synthetix's governance model consists of two main parts:

1) Spartan Council (representative system), where every three months, all community members vote in Discord to elect eight members to form Synthetix's highest council, which can make decisions on all proposals (the founding team does not participate in this council and has no voting rights).

2) Three DAO organizations:
Synthetix DAO (managing the cash reserves left by the foundation)

Grants DAO (awarding rewards to ecosystem projects, also governed by the community)

Protocol DAO (updating the protocol)
Synthetix is composed of these three DAOs. It is not a company or a foundation; it is a relatively decentralized organization where the founders do not have voting rights in the highest council and cannot decide everything but can only influence or persuade to achieve their vision.

Additionally, I believe that the governance of all blockchain projects may be divided into two phases: the first phase is the previous company and foundation model, which is relatively centralized; the new phase is when projects emerge as DAO organizations from the start, which are completely decentralized.

When we first started our transition, we were feeling our way across the river without many tools. We worked with other companies in the industry, such as Compound and MakerDAO, to help develop better tools for the industry. Now, when new projects emerge, they can receive good support because they already have ready-made governance tools to use, making exploration relatively easier.

Here are a few governance tools that I think are good:

Aragon is a project that the entire Ethereum community really likes, but we later realized that this project has some issues; it has too many service areas and is not as convenient to use.

Snapshot is a great project that allows users to vote by sending signals offline, saving gas fees.

Compound has a governance section that can directly change protocol code on-chain.

Additionally, the staking developed by Synthetix and 1inch has opened the door to liquidity mining. Our exploration has led to many new gameplay developments in the industry, ultimately resulting in the DeFi explosion.

NFT

Shen Yu:

In addition to the recent vigorous development of DAOs in the DeFi space, we have also seen a high level of innovation and enthusiasm in the NFT space, attracting a large number of non-blockchain users. Moreover, NFT projects that combine with DeFi have begun to emerge. We also see that Kain's brother has created a very cool NFT game project. Could you please introduce this project to everyone? Additionally, we understand that Kain is a very experienced collector in the NFT field, having collected many interesting NFT projects. Could you share your insights on NFT collecting and your views on the future development of NFTs?

Kain:

My two brothers, Kieren and Aaron, have created a battle game similar to Command & Conquer. I think the biggest attraction of such NFT games for players is that they can truly own game items without worrying about developers or game studios changing parameters or deleting items.

NFTs are more appealing to users compared to DeFi. This is because there are very few people who truly understand finance or are willing to use financial tools in the DeFi space, which is a small fraction of the global population. In contrast, art is a universal language that resonates with everyone, with no high barriers to entry. Combining real-world art with the digital world is fascinating, which is why I really like NFTs.

We have already seen many artists entering the NFT space, sharing their artworks with users worldwide. To share, I just won a bid today for a looping short film artwork from an artist named Life with Art. This piece was actually not expensive; it cost me one ETH. I don't really want to tell everyone because after I do, they might start bidding on his artwork.

(Please Kain share his most expensive NFT collectible)

I once spent 35 ETH to buy a limited edition card of the character Hayden from dontbuymeme, which I gifted to Hayden (the founder of Uniswap). However, the most valuable NFT I have purchased so far is probably a Cryptopunk, which I bought for about 31 ETH at the time and is now worth around $70,000.

(Also, please Shen Yu share his most expensive NFT collectible)

Shen Yu:

In the NFT space, I am actually a novice user and do not have a deep understanding of art, so I buy randomly. In 2017, I bought a lot from a now-defunct project called Crypto Nations, spending over 500 ETH. If that counts as an NFT, then that would be the most expensive thing I have bought.

Recently, I have been looking at some NFT collectibles, such as the recently popular 1111, which is selling quite well on Opensea. Yesterday, they announced that they would launch a satellite into space, and the photos taken by the satellite will be airdropped as NFTs to holders.

I believe that more interesting stories and directions will develop in the NFT space. In the future, NFTs may combine with distributed personal data, allowing everyone’s data to be verified, used, and traded on the blockchain through NFTs. Additionally, it may integrate privacy and other technologies, accelerating the progress of human society while ensuring personal privacy. A large amount of data can generate significant economic effects and accelerate scientific application development. Looking further ahead, the future of NFTs may not be limited to the current verification of digital art but may involve more data processing and usage closely related to humanity. Therefore, I am very optimistic about the future of NFTs.

Q&A Session

01

Question to Kain: What do you think about Synthetix clones?

Kain:

Our earliest clone was launched on Tron, and it was initiated by a community member who had been lurking in the community for a long time, asking many questions before finally launching a clone.

I am not surprised by these clones and have no concerns. They do not affect us because I believe that community and consensus are the most important factors, which are the decisive elements that influence a product. The shared faith of users and trust in the product or founder are things that cannot be imitated by others.

If it were a relatively simple spot trading platform like Uniswap, it might be easier to clone. However, a more complex product like ours requires an understanding and experience of financial products, which is not so easy to replicate. Therefore, we are still quite confident and do not pay too much attention to clones.

02

Question to Kain: What advantages does Synthetix have compared to UMA?

Kain:

Synthetix's advantage lies in our ability to support assets with relatively high valuations and good liquidity, such as BTC, ETH, and Tesla stocks, which already have good liquidity and high market capitalization. We can bring them onto Ethereum for direct trading.

UMA's advantage is in some long-tail products, which have poor liquidity and few transactions in reality. They are more suitable for designing unique and unconventional derivatives.

01

Question to Shen Yu: Will Ethereum's DeFi lose a significant share to BSC?

Shen Yu:

I believe that in the medium and long term, this will not be the case.

Ethereum currently has a very strong level of innovation, with a continuous stream of innovative and challenging projects emerging. This means it will not lose share simply because BSC has lower gas fees. Additionally, the entire Ethereum ecosystem is actively exploring, including Layer 2 networks and reducing gas fees, so in the long term, the overall infrastructure and value of the Ethereum ecosystem may far exceed what it is today. Therefore, I think these two networks can be viewed more as Ethereum's sidechain with BSC.