Original title: What is Synthetix V3?
By Matt Losquadro, Synthetix
Compiled by: Kxp, BlockBeats
Synthetix V3 represents a major milestone for the protocol as it undergoes a radical overhaul to become a permissionless derivatives liquidity platform for the next generation of on-chain financial products.
In this post, we will take a deeper look at Synthetix V3 and how it differs from current systems, including its goal of becoming a liquidity layer that any derivatives market can build on. We will also explore the features and benefits of Synthetix V3, as well as the phased rollout plan for its release. This post will serve as a foundational post on which the rest will be built, so let’s get started.
What is Synthetix?
Synthetix is a decentralized liquidity layer built on Ethereum and Optimism, providing liquidity backend support for some of the most exciting protocols in DeFi.
Stakers provide liquidity to collateralize a range of synthetic assets and receive rewards and market returns for doing so. This liquidity provides oracle price guarantees for trading synthetic assets and perpetual futures, eliminating the need for traditional order books and counterparties. As a result, liquidity becomes composable and fungible between markets, and traditional slippage is eliminated.
Synthetix liquidity currently supports two main synthetic assets, spot synthetics and perpetual futures:
Spot synthetics track the value of real assets such as crypto, fiat currencies, and commodities, allowing users to gain exposure to multiple assets without holding the underlying assets
Perp is a decentralized perpetual futures trading platform that uses Synthetix liquidity as the counterparty to traders, providing deep liquidity and low fees. Stakers (Perp LPs) will bear the risk of the combined performance of all traders while earning trading fees.
Off-chain oracles reduce fees to 5-10 basis points, and risk management tools ensure long-term market neutrality.
Funding rates and premium/discount mechanisms incentivize traders to balance the market to achieve delta neutrality.
Because Synthetix supports strong liquidity and derivatives, some of the most innovative and interesting DeFi protocols have been built on Synthetix: Kwenta, Lyra, Decentrex, Polynomial, dHEDGE/Toros Finance, and Curve/1inch for atomic swaps, etc., and many more protocols are being developed based on Synthetix liquidity.
A brief history of Synthetix
Synthetix has gone through many iterations and changes to become what it is today. The journey began with Havven, a protocol similar to MakerDAO (before MKR introduced multi-collateral DAI). Havven was a stablecoin protocol backed by the Havven Token, which was later rebranded as Synthetix as a spot synthetic trading protocol. In the early days of DeFi, the protocol recognized the need for deep liquidity and low fees. Since then, Synthetix has gradually evolved from a user-oriented derivatives protocol to a protocol focused on the provision and growth of liquidity and derivatives.
It is worth noting that it did not discard smart contracts during the iteration process. The protocol improved the contracts and used them to create new architectures. Synthetix has been built on its previous architecture for five years, which means it is in urgent need of a rebuild, and that rebuild is Synthetix V3.
What is Synthetix V3?
Synthetix V3 is a complete overhaul of the protocol from the ground up. It achieves the goal that Synthetix set out long ago: a permissionless derivatives liquidity platform that powers the next generation of on-chain financial products. With the launch of V3, Synthetix will become the liquidity layer that any derivatives market can build on top of.
Synthetix V3 benefits from years of research and development to become the most powerful and composable derivatives liquidity protocol. It establishes a new foundation for the next generation of on-chain financial products, becoming the most versatile and modular approach. This diagram provides a high-level overview of the Synthetix V3 architecture:
Synthetix V3 long-term vision
Synthetix has two key value propositions as a liquidity layer:
For stakers: a range of pools/vaults available for deposit, which are connected to a range of derivatives markets, so the level and type of market exposure and expected returns can be selected
For protocols: a set of pools/vaults used to provide collateral for new derivatives markets, or provide tools and rewards for creating pools and attracting collateral.
V3 focuses on four key areas:
1. Liquidity layer for DeFi derivatives: Driving the development of next-generation permissionless derivatives
2. Multi-collateral staking empowers stakers
3. Composable, developer-friendly system
4. The future belongs to cross-chain
Liquidity Layer for DeFi Derivatives: Driving the Next Generation of Permissionless Derivatives
V3 realizes Synthetix’s long-term vision to become a permissionless liquidity provision platform that provides builders with the tools to easily create new financial derivatives.
Launching a derivatives protocol can be challenging and often faces the cold start problem of attracting collateral. With Synthetix, developers can create new markets and seamlessly connect with existing collateral pools. This allows almost any derivatives protocol to be built on Synthetix V3 instead of starting from scratch.
The creation of Pools/Vaults/Markets will initially be managed by Synthetix governance and transition to fully permissionless deployment over time. One could even say that Synthetix provides liquidity as a service, as new protocols seeking to add liquidity to on-chain derivatives can easily and efficiently build on top of Synthetix.
V3 will transform Synthetix into a multi-market ecosystem including perpetual futures, spot, options, insurance, exotic options, and more, all backed by multiple debt pools
Synthetix welcomes builders to leverage its protocol and foster their communities for success, which is exciting for both Synthetix and the Ethereum ecosystem.
Multi-collateral staking empowers stakers
V3 creates a universal vault system that is not restricted by collateral type. Each vault supports a single collateral asset, but vaults can be combined into pools connected to one or more markets. All external collateral will be incorporated into the protocol through Synthetix governance.
The new pool and vault system has three main advantages:
1. Better risk management: Pools are tied to specific markets and therefore have specific exposure
2. Better hedging capabilities: The capital pool is connected to a specific market for precise hedging
3. A wider range of collateral: Pledgers can pledge any asset that the pool chooses to accept
Stakers can allocate their capital to an increasing number of pools, which gives stakers more control over credit as the V3 system provides more options for liquidity and hedging.
A simpler, cleaner developer experience
The core goal of V3 is to make the Synthetix system more efficient, simpler, and provide a more optimized user experience by optimizing and cleaning up old solutions.
Developers no longer need to be Synthetix experts to understand how to build on Synthetix. Instead, rich developer tools, sandboxes, and guides make it easier than ever to build on V3, and they only need to think about which market they want to build.
The future belongs to cross-chain
Synthetix V3 will be able to be deployed on any EVM-compatible chain to support synthetic assets on any chain.
Some of the most exciting features of V3 will be based on cross-chain functionality, such as transferring assets from one chain to another without the protocol having to do any additional work.
The Road to Synthetix V3
Synthetix V3 will be rolled out in phases over the coming months, with users slowly transitioning from the existing V2 X system to V3. The features discussed in the next section [Synthetix V3 Feature Deep Dive] will not be available to the public at the initial launch. The V3 system is optimized for modularity, so the scope and sequence of its features are being optimized and will rely on Synthetix governance. Nonetheless, it is still important to understand the various works going on inside Synthetix V3.
Initial stage - Synthetix V3 core contracts are now live on the mainnet, although this is just the beginning of the journey to V3. Many features are not yet available in this upgrade, but the foundation has been established. The current function is to borrow the new stablecoin snxUSD as snx collateral, which will be used for integrated markets in the future.
Multi-collateral compatible system - V3 creates a universal collateral vault system that is compatible with multiple collateral types. Synthetix governance will decide which assets to support as collateral in addition to the current SNX and ETH.
V3 Spot Markets — The first markets expected to launch on V3 are spot markets. These markets allow the creation and trading of spot synthetics to be done entirely on Synthetix V3. Wrappers and spot market incentives will work together to enable delta-neutral markets that can support any ERC-20 wrappable synthetic asset.
Order Types: Atomic Order, Asynchronous Order, Wrap and Unwrap (Wrapper), For more information about V3 Spot Market, please visit Spot Description.
Perps V3 — Synthetix perpetual contracts built on V3 infrastructure.
New features: native cross margin, expanded margin collateral types, lower gas fees based on new infrastructure, high compatibility oracle integration, etc. All of these are highly dependent on governance, although these are R&D projects from CC/community.
Traditional Markets Running on V3 - "Traditional Markets" includes all synthetic assets and liquidity within the V2 X system. Migrating them to Synthetix V3 requires the introduction of a "Traditional Market" within Synthetix V3 that V3 stakers can stake. The use of this market is a transitional solution until all synthetic assets are fully transitioned to native V3 markets. Once traditional markets are live, stakers will be able to migrate their positions to Synthetix V3.
Cross-chain and synthetic asset transmitters - Since V3 is fully EVM-compatible, it can be deployed on any EVM-compatible chain. Liquidity can be provided across chains, and synthetic assets/markets are not restricted to one chain.
Permissionless Market/Asset Creation — The creation of pools/treasuries/marketplaces will start with governance approval and then transition to a permissionless model.
Synthetix V3 Features in-depth analysis
Market creation: The V3 system is built around markets, which are a general abstraction that allows products to be built on top of the protocol. Markets determine the pricing logic used for the underlying assets.
Market examples: spot market, futures market, options, loans, etc.
Asset creation: New synthetic assets can be deployed using market pricing logic and price data streams. In V2 X, these assets required governance approval, but soon they will only need to rely on the necessary market logic and price data support.
Asset examples: Spot BTC, Spot ETH, ETH Perp, BTC Perp, ETH Options, etc.
Cross-chain Synthetix: The V3 system is compatible with any EVM-compatible chain. It has been built for cross-chain interconnection, with cross-chain liquidity and fee sharing, synthetic asset transmitters, and many other important functional improvements.
Synthetic asset transmitters are more efficient than AMM-based cross-chain bridging solutions because there is no slippage caused by insufficient liquidity on the target chain. Synthetic assets are only destroyed on one chain and minted on another.
Multi-Collateral Collateralization: V3 is collateral agnostic, allowing governance to use any collateral to back synthetic assets. This will increase the liquidity of sUSD and the markets supported by Synthetix. Collateral options will have adjustable variables such as collateral requirements and rewards that can be adjusted by governance.
Synthetix Lending: Users can now provide collateral to the system to generate sUSD without taking on the risk of a debt pool and without paying any interest or issuance fees.
Differentiated Liquidity Debt Pools: Users can choose the pools they want to provide collateral to, and then decide which markets and assets to support from those pools, rather than delegating collateral to an entire debt pool as in V2 X. This gives stakers more control over their credit, and allows them to support markets that may be deemed too risky by governance because all liquidity is in a single debt pool.
Example: Risk-averse stakers could delegate their credit to a pool that only supports ETH and BTC Perp markets, rather than the long-tail Perp market.
Oracle Management for Marketplaces: Market creators can choose from multiple oracle solutions and set custom aggregations, giving them more control over the oracles that power their markets. Oracle Manager opens up new opportunities to support new markets and assets.
Example: Select the lowest price of spot Bitcoin based on the time-weighted average price (TWAP) of Chainlink, Pyth, and Uniswap.
Reward Manager: Pool creators can attach reward distribution tools to treasuries to incentivize liquidity providers for specific collateral types. Rewards can come from market fees, token distribution, or anything else.
Here are some of the SIPs that are in progress. You can learn more about the current status of Synthetix V3 and how it will develop by clicking the links below:
· SIP-300: Synthetix V3
· SIP-301: Accounts (V3)
SIP-302: Funds (V3)
SIP-303: Markets (V3)
· SIP-304: Liquidations (V3)
· SIP-305: Staking Incentives (V3)
· SIP-306: Collateral Migration (V3)
· SIP-307: Proxy Router Architecture (V3)
· SIP-308: Market-provided Collateral (V3)
· SIP-309: Market-locked Collateral (V3)
· SIP-310: Feature Flags (V3)