Synthetix Founder: What plans do we have for the coming months?

Written by: Kain Warwick, Founder of Synthetix

Compiled by: Babywhale, Foresight News

My previous article provided an in-depth discussion on the future of Synthetix. This article will take a different approach; it will serve as a simple and practical guide to help the community understand the experiments we must undertake in the coming months. Without a more flexible new V3 architecture, all the proposed experiments below would not be possible. We have spent a long time getting to this point, but now we are ready for rapid testing and iteration.

The practical questions we need to consider now include:

• How do we launch V3 and Perps V3?
• How do we scale collateral?
• What are the limiting factors for scaling collateral?
• Should we enable non-SNX collateral?
• What is the best strategy for maximizing value for SNX holders?
• How do we convert fees into benefits for SNX holders?
• Are there untapped traders on other chains?
• How do we effectively reach these traders?

Current Status of the Protocol:

• Synthetix V2x has launched on Ethereum;
• Synthetix V2x has launched on Optimism;
• Synthetix V3 has been deployed on Optimism but has not yet been activated;
• Synthetix V3 has been deployed on Ethereum but has not yet been activated;
• Perps V3 and Synthetix V3 have been deployed on the Base testnet;
• Most liquidity is in the V2x system on Optimism;
• We can also deploy on other EVM networks: Arbitrum, Avalanche, Polygon, etc.;
• We will introduce new SNX staking pools in V3.
• We currently do not have a viable strategy for cross-chain liquidity.

The naming conventions for the project are somewhat confusing. We have Synthetix V2x and V3, as well as Perps V2 and Perps V3; this is difficult for those outside the community to understand. I suggest we create names that help distinguish these versions. We can utilize the astronomical names previously used to choose galaxies for these versions. We can combine them instead of using different versions; thus, Perps V3 on Synthetix V3 could be called Andromeda. Although we have deployed some features of V3, it cannot yet be referred to as the Andromeda version until we deploy all features.

Experiment 1: Deploying Andromeda to Base

This deployment includes Perps V3 and Synthetix V3, as well as non-SNX collateral. We need to decide which non-SNX collateral to include and the fee distribution between SNX and non-SNX collateral. This will help us determine whether to support collateral minting of sUSD on Base. I believe we should enable USDC and ETH (initially deferring the use of LSD) as collateral. My reasoning is that this is a different deployment, and we will be able to determine the demand balance between ETH and USDC as collateral. Another reason for deploying only ETH and USDC is that it means we will not put any pressure on the liquidity on Optimism. If we enable SNX collateral on Base, a significant portion of LPs may migrate, which would reduce liquidity on Optimism. Andromeda will allow users to collateralize ETH or USDC and mint sUSD; these sUSD will be used by traders on Base and cannot be swapped with sUSD on Optimism and Ethereum. We also need to incentivize USDC/sUSD liquidity on Base. Additionally, we should enable a USDC/sUSD wrapper so that traders holding USDC can easily obtain sUSD without having to swap for it.

I believe we should initially allocate 50% of the fees to LPs and 50% to SNX stakers. Regarding the payment of fees to SNX holders, I think we should buy back and burn SNX on Base. This will require creating a wrapped SNX token on Base that can cross-chain to Ethereum; fortunately, there is already a SIP to implement this, but unfortunately, I have already voted against it.

One key factor is to formally determine the fee sharing between SNX holders, LPs, and integrators. The community is discussing some proposals, but there seems to be some consensus that the integrator's fee is 20%. This would result in a ratio of 20/40/40 between integrators, LPs, and SNX holders.

What Are We Considering?

We are considering many aspects simultaneously, and while this is cumbersome, we must start somewhere:

• Demand for staking ETH on Base;
• Demand for staking USDC on Base;
• Sensitivity to fee shares;
• Sensitivity to liquidity incentives;
• Demand for trading Perps on Base;
• Demand for traders converting USDC to sUSD.

How Do We Define Success?

Over $10 million in ETH and/or USDC collateral (50% fee share), over $20 million in daily trading volume, or reaching 25% of the trading volume on Optimism.

What If It Fails?

Fortunately, points 1-4 are quite different from point 5; as long as we have enough liquidity, trading will not be affected. If there is no demand for collateral assets to mint sUSD, trading will not occur, and we will need to re-experiment with SNX as collateral or higher incentives. If demand from LPs is low, we can adjust the fee distribution or LP incentives to test if demand increases. If the experiment fails, we need to validate several possible conclusions in subsequent experiments. One is that the demand for collateral assets to mint sUSD on Base is extremely low; we can experiment on other networks like Arbitrum to verify this.

What If It Succeeds?

If this experiment is successful and there is significant demand from both traders and LPs, we must decide on the next experiment. There are two options: replicate this experiment on Arbitrum or replicate it on Optimism.

Experiment 2: Deploying Andromeda to Optimism

If the experiment is successful, I am inclined to deploy Andromeda to Optimism; specifically, this includes Perps V3 + V3 + USDC and ETH as collateral. This is a significant shift in our mechanism, as it means SNX will no longer be used as collateral. However, traditional Perps will still be running, so we will conduct reasonable tests on the demand for SNX-supported Perps versus ETH/USDC-supported Perps. While the upgrade of Perps is valuable, it does not necessarily bring incremental benefits. This new deployment should incentivize users and traders minting sUSD in the form of OP/SNX.

What Are We Considering?

• Demand for staking ETH to mint sUSD on Optimism;
• Demand for staking USDC to mint sUSD on Optimism.

How Do We Define Success?

• Liquidity reaches 20% of V2x;
• Trading volume reaches 50% of V2x.

What If It Fails?

If the demand for collateral minting sUSD is minimal compared to the traditional system, this will provide valuable information. If LP demand for ETH or USDC is low, we can adjust the fee distribution to see if it is an incentive issue. If demand remains low, we can conclude that expanding the protocol will likely require SNX collateral. If there are many LPs but trading volume is relatively low compared to the traditional system, then the issue is less clear, but this scenario seems unlikely. In either case, after adjusting the fee distribution, the next step should be to reintroduce SNX collateral. This new three-token collateral system (SNX/ETH/USDC) would ideally have a new name (Barnard) to distinguish it from the system deployed on Base.

What If It Succeeds?

If successful, the next step would be to close the traditional perps market and switch to using USDC/ETH as collateral on Optimism. This means traders, LPs, and integrators will receive more incentives. I need to point out that each of these experiments requires a SIP, and they can also be modified through SCCP, so this will be an ongoing process as we attempt to debug the optimal parameters.

Experiment 3: Deploying Carina on Ethereum

If non-SNX collateral succeeds on both Optimism and Base, the next experiment will be to deploy an optimized version of perps, Carina, on the mainnet. It will be purely supported by Ethereum (ETH and LSD) and aims to support stablecoin design through Delta-neutral strategies; projects like Ethena have already begun deploying this technology, and we need a perps market on Ethereum to support it. This experiment is independent of the others, so its success or failure will not significantly impact the roadmap.

Experiment 4: Deploying Andromeda to Arbitrum

The reason for waiting to deploy on Arbitrum until we have more data is that it is one of the most popular networks we have not yet deployed on. There is a large active DeFi user base on Arbitrum, and we want to maximize the protocol's effectiveness there. It is worth noting again that the reason we do not use SNX collateral across multiple networks is to ensure we do not dilute the existing SNX liquidity, which would affect the trading experience across all networks.

Experiment 5: Deploying SNX Chain Using OP Stack (Project Draco)

If the first two experiments are successful and stable, the next step is to deploy Synthetix Chain. This chain has several purposes: first, it serves as a "venue" for Synthetix governance; second, it allows SNX holders to borrow against their SNX as collateral to issue sUSD. This sUSD can be traded on any supported network. The third purpose of the network is to provide a unified venue for fee distribution. However, if burning SNX on each network is the preferred method of fee distribution, this aspect may not be necessary. Additionally, sUSD issued on SNX Chain may also be used as collateral on other networks. As part of Project Draco, the debt of the V2x system will migrate to V3 on SNX Chain.

Synthetix in 2024

If all these experiments succeed, the state of the protocol in early 2024 will be Synthetix Andromeda running on three Ethereum L2s: Optimism, Base, and Arbitrum. Andromeda will include the latest version of Perps while using ETH and USDC as collateral, along with a USDC wrapper for easy access to sUSD. Synthetix Carina will also run on Ethereum, which is an optimized version of Perps using ETH (and LSD) as collateral. The Draco project is in development, with plans to migrate all governance functions to the Synthetix Appchain in 2024. sUSD issued on Synthetix Chain has the potential to be tested as a form of collateral in the future alongside ETH/USDC and other forms of collateral. This will allow SNX holders to borrow against their SNX and enhance collateral and liquidity on other networks.

Finally, I would like to share some thoughts on this significant strategic shift. Eliminating the reliance on SNX collateral through these experiments is a major change for Synthetix. Back in 2018, many believed that using SNX tokens as collateral was crazy, and in fact, many still believe so. Some thought it was a good idea to slightly adjust this concept, as seen with LUNA. But regardless of your stance on SNX collateral, it is undeniable that it has worked until now and will likely continue to do so for a long time. Before DeFi Summer, SNX collateral allowed the project to survive and grow, but now it is time to test whether SNX collateral has hindered the project's development in the near term.

It is possible that eliminating SNX collateral may not work at all, as SNX is too critical to the network's operation. This would provide very valuable information that we could use to plan for expansion to multiple networks in 2024. However, I have noticed a significant shift in the conversations I have had about Synthetix, and I believe many in our community who insist on keeping SNX as the only collateral may underestimate its impact on protocol participation. Regardless of how historically confident we have been that SNX collateral is the right approach, there are very strong skeptics in the DeFi community. I am starting to realize that among every vociferous skeptic, there are more silent skeptics who choose not to publicly criticize Synthetix but instead opt out entirely. One of the biggest outcomes of these experiments will be to see how much additional enthusiasm we can generate when introducing non-SNX collateral.

Making decisions in uncertain situations is never easy; it requires us to be willing to take risks and be brave enough to make mistakes. For years, this openness and epistemic humility have been key factors in the success of the Synthetix community, but now it is time for us to challenge some core ideas.