What will the future of Synthetix be like?

Original Title: 《Synthetix, what comes next, part zero》

Author: Kain Warwick, Founder of Synthetix

Compiled by: Frank, Foresight News

After re-engaging with the community over the past few months, I often ask myself, "What is Synthetix missing?"

My conclusion is that people tend to hesitate when pursuing high-risk, non-obvious paths. This makes sense, as the incentive structures are closely tied to everyone's work on the critical path, which also leads to few having the time to sit down and devise crazy plans for Synthetix.

Over the past year, the core contributors of Synthetix have become increasingly efficient, thanks to the introduction of the Core Contributors Committee, along with hiring many outstanding talents to replace the exhausted OGs from the "death march" of 2018 and 2019. This has helped Synthetix make significant progress on core initiatives, including ending V2x, designing V3, and re-implementing Perps.

The design of V3 and the re-implementation of Perps were both in their infancy at the beginning of 2022. Now, just over a year later, Perps continues to expand its market coverage, and the initial components of V3 have been deployed to the mainnet.

In summary, Synthetix has undergone some changes over the past year, some of which have been very effective, but there is still room for greater improvement. This article will outline the opportunities I have identified, providing problem overviews and option sketches in some cases, while offering detailed plans in others.

The Synthetix Treasury Committee is also developing new proposal templates to present initiatives as listed below, ensuring that changes to Synthetix are communicated more transparently and misunderstandings are avoided. It is important to emphasize that everything listed below is conceptual and has not been voted on by the Treasury Committee; however, many aspects of these suggestions have received support from the Treasury Committee:

• Core Contributor Positioning
• Trading Incentives
• SNX Passive Staking
• Incentive Integration
• 3:1 SNX Split and Buyback
• Distribution of SNX to Stakers
• Treasury Committee-Funded Working Groups
• Synthetix Ecosystem Foundation
• Subsidizing Keeper Fees
• Perpetual Contract Referral Program
• Treasury Committee Proposal Template
• Dissolution of the Treasury Committee

Core Contributor Positioning

I know this may delve into the equity distribution philosophy of startups or the token distribution issues in DAOs, but I believe this is a crucial point. The early Synthetix community either intuitively understood this issue or I imposed my understanding on them.

In my experience, many people working in startups have multiple motivations, but economic freedom is often one of the significant factors. Meanwhile, working in a startup is already a risk, and working in a DAO is even riskier.

Because there is almost no hierarchy in Synthetix, self-motivated individuals are more easily attracted to this environment; however, we must also ensure alignment with financial incentives.

I suggest allocating a portion of SNX as bonuses each quarter, with the distribution method determined by the Treasury Committee, and incorporating feedback from CCs (Core Contributors) to fairly distribute based on each colleague's impact on the Synthetix protocol. The exact number of SNX to be allocated is yet to be determined, but it should ideally reach several million.

Trading Incentives

While OP incentives have successfully increased trading volume, SNX-based incentives could create a more impactful feedback loop, especially since these incentives would be provided in the form of staked SNX, which would lead more traders to understand and participate in SNX staking. Ideally, 5 to 10 million SNX should be allocated to this incentive program over time.

SNX Passive Staking

Although Synthetix has implemented a series of measures to simplify the staking process, such as the dHedge strategy, the difficulty of participating in SNX staking remains a significant barrier to attracting new participants into the Synthetix ecosystem.

Even getting users to understand why these hedging strategies are necessary is a challenge, as it is hard to quantify. This complexity has caused Synthetix to lose too many potential staking users, and I believe it is conservative to assume that the number of potential staking users is several times that of actual staking users.

To make the staking process easier, we could create a passive staking pool that works alongside active SNX staking, allowing new staking users to try staking without facing too many complex processes and better understand Synthetix.

We can think of it as a freemium business model, where the "price" represents risk and complexity. If we reduce risk and complexity while offering lower yields, we may attract more investors. This yield should initially be paid by the Synthetix treasury, possibly in the form of SNX or sUSD, but it is preferable to use sUSD.

This yield should also be dynamically calculated based on the ratio of active to passive staking users, with a cap of about 10% on fees for passive staking users. Of course, this is just a very rough conceptual outline, and specific details are open for discussion. I think we could conduct a three-month trial with a spending cap set at 1 to 2 million sUSD (or equivalent SNX), which should be sufficient to determine whether this will increase the percentage of SNX passive and active staking.

Incentive Integration

As Synthetix transitions to a liquidity layer, our reliance on integrators has become a matter of life and death. Of course, the community can fund new Synthetix internal trading frontends.

In the long run, we must adjust the incentives for integrators, which is crucial. We have had long discussions on Discord about how to achieve this, so I will quickly review the viewpoints of the debating parties:

• Purists believe that no fees should be taken from SNX stakers, and all we need to do is enable integrators to add an additional fee on top of the base protocol fee. The benefit of this approach is that it reduces complexity for integrators while still allowing them to capture revenue. However, integrators oppose this method as they believe it would make them less competitive, but this approach remains the status quo;
• On the other hand, some community members believe that a certain percentage (e.g., 10%) of fees should be allocated to integrators as a subsidy, allowing all integrators to earn the same fees without engaging in price wars;
• There is also a compromise solution that guarantees a certain percentage of fee subsidies, but integrators can also charge optional additional fees, providing basic incentives for integrators while allowing for additional revenue upside if they achieve differentiated competition in the market;

The SIP-2002 proposal moves us away from the purist viewpoint, but it does not affect the revenue generated by SNX stakers. The issue is that if fees continue to grow, despite being a step in the right direction, it will not be a sustainable mechanism.

I propose subsidizing integrator fees by allocating a certain percentage (e.g., 10 million SNX) from the treasury, which can be staked on their behalf, generating a 3-5% base fee revenue (depending on the percentage of staked SNX). The benefit of this approach is that it does not require increasing the circulating supply of SNX to pay these fees.

If this incentive is successful, it can be incorporated into the protocol without needing to stake SNX on behalf of integrators; if it fails, it can gradually be reduced without further binding to integrators and reallocated to other incentives or distributed to SNX stakers.

3:1 SNX Split + Buyback

Last year, I attempted to halt the inflation pace before reaching 300 million SNX, and fortunately, that proposal failed because we had not yet reached a point of sustainable zero inflation.

Today, the issue of SNX inflation is equally important. In V2x, I believe we can terminate inflation with minimal impact. Unfortunately, we are now planning to transition to V3, and the question of whether inflation incentives are necessary has become a point of contention once again.

The main reason for retaining inflation in V3 is to ensure there is a mechanism to kickstart permissionless liquidity pools. Several suggestions have already been made on how to achieve this, such as adopting a veCRV voting model. Even if inflation is the only solution to this issue, I believe we cannot overlook the offsetting effects of buybacks and burns.

If we conduct a 3:1 split, we will have about 90 million SNX available for buyback and burn at a market price of 60 million dollars.

Where will the funds for burning these tokens come from? Treasury revenue. Based on recent earnings, the Treasury Committee earns about 5 million dollars annually. If 100% is used for buybacks, it would take about ten years to complete. If trading volume increases in the coming years, the timeline will be significantly shortened.

You might ask why we don't just directly burn the over 30 million tokens in the Treasury Committee wallet? These tokens are effectively locked, so the impact is minimal; however, once the buyback is completed, it makes sense to consider proportionally distributing the remaining SNX to stakers.

Distribution of SNX to Stakers

The question is, why not just burn this portion of SNX?

The reason is that these SNX can be used for incentives. If fully distributed, it would equate to a continuous 3% inflation rate for three years, allowing Synthetix to test whether inflation is necessary without actually increasing the token supply. However, these tokens are currently burdened by significant debt, so to distribute them, the debt would also need to be correspondingly transferred or repaid.

Therefore, if fee revenue is used to buy back and burn SNX, the debt cannot be repaid until the buyback is completed. However, there is an option to sell SNX off-market to repay the debt, but this offsets the burning effect. Thus, if buybacks begin, any distribution of SNX would need to wait until the buyback is completed, which could take many years.

Treasury Committee-Funded Working Groups

This is one of my favorite proposals. As we enter a new era for the Synthetix protocol, we have a demand for functions such as sales and support. While outsourcing these functions to integrators is possible, there are still potential gaps, and I think it is somewhat like Salesforce.

Salesforce is a platform that relies on a network of integrators, yet it still requires internal teams to work with integrators on large client transactions and ensure support for the integrators themselves. As of today, Synthetix can support market makers and large traders on the platform, providing them with sufficient liquidity and trading functionality.

It is necessary to maintain a team focused on engaging with large traders and integrators to ensure new users smoothly familiarize themselves with and adopt Synthetix. Previously, our approach was simply to hire new core contributors to fill this role.

However, I believe that funding independent working groups to perform these functions and report directly to the Spartan Council can increase transparency and accountability. The Treasury Committee will directly provide funding, allowing us to test this new coordination model. To attract the right people to join this working group, some continuity is needed, so I suggest conducting this trial for 6 to 12 months. If, after the trial, the protocol decides not to adopt this approach, I will pay a termination fee in SNX.

Another working group I propose is an analytics group responsible for ensuring that all data related to the protocol is available and up-to-date, and for ensuring we provide real-time dashboards for all key metrics. Historically, this approach has failed due to low priority and technical complexity.

Synthetix Ecosystem Foundation

In the early days of the protocol, Synthetix DAO decided not to invest outside the protocol due to the risks of such investments and concerns about losing focus on the core mission of funding protocol development. While it could be argued that if we had leveraged our position for early trading over the past five years, the Synthetix project could have received better funding support, this could sometimes put pressure on funding protocol development, especially when liquidity assets were dwindling at the end of 2019.

Given the plan to gradually reduce treasury funds and the opportunity to fund ecosystem projects through the remaining time in the bear market, it makes more sense than ever to allocate a portion of the treasury to an ecosystem fund, especially since we expect the number of new projects built on Synthetix to significantly increase in the coming years. This ecosystem fund will be proportionally owned by SNX stakers and can ultimately be used for specific allocations or even for further buybacks of SNX tokens.

Subsidizing Keeper Fees

Due to the lack of potential for order flow payments in the design of the Synthetix protocol, it is challenging for Synthetix to achieve zero-fee trading. However, we should strive to eliminate any fixed costs associated with trading, and the Treasury Committee should subsidize keeper fees to ensure that low-volume traders are not priced out.

Ideally, this should be done by directly subsidizing keepers, but given the complexity of this approach, initially providing rebates directly to traders for keeper fees may be a better option. The specific implementation method is open for discussion and could be done using SNX or sUSD.

Perpetual Contract Referral Program

In theory, this is another initiative that integrators can handle. A protocol-level referral program makes it more powerful than any additional referrals.

Referral programs have historically been very effective in crypto trading, but a usable product is needed. Given that Perps are ready, facilitating broader adoption of the protocol through a referral program has significant potential. These referrals should be paid in staked SNX, ensuring that there is no immediate impact on price, and that the SNX is preferably staked (either passively or actively), as it is locked anyway.

As the trading experience improves and more markets are launched, this will create a flywheel effect, allowing traders to connect with SNX stakers, and large referrers will become significant stakeholders in the ecosystem.

Treasury Committee Proposal Template

The Treasury Committee is currently creating a proposal template to enhance the transparency of current and future Treasury Committee initiatives. This template will be based on the SIP template but may be adjusted over time. While community feedback is not always necessary and can sometimes be counterproductive, having a single document outlining each initiative and explaining its rationale will be very helpful for community members to reference.

Dissolution of the Treasury Committee

In my view, the Treasury Committee must eventually be dissolved. There are various ways to achieve this, but the main idea is that if the protocol is functioning normally, the Treasury Committee can be divided into smaller parts and allocated to new or existing governance bodies to avoid becoming a single point of failure for the protocol.

While the Treasury Committee has made some progress since the sDAO, there is still room for improvement, and it has remained unchanged as a governing body for too long.

Conclusion

As mentioned at the beginning, these are just suggestions, and I am merely one of four voters in the Synthetix Committee. This article aims to spark discussion and ensure the community is aware of possible directions moving forward. I am happy to debate and discuss all these proposals on Discord.