After the bankruptcy of FTX, the trading volume and attention of decentralized derivatives exchanges have increased significantly. In recent years, with the improvement of L2 and various Appchain open source architectures, the reliability and concurrency performance of Dex have been improved. experienced tremendous growth. Dex PERP has become the most profitable product 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 in the future.
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, Snx has been reconstructed and upgraded from an asset synthesis platform in 2017 to a modular liquidity protocol, aiming to become a universal liquidity layer for on-chain financial products. New functions and improvements are expected to usher in new business growth and valuation. In this article, we will interpret Snx V3 with data and application scenarios.
TOC：
I. Interpretation of the current functional mechanism of Snx V2
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 improvement plan to prevent oracle delay arbitrage
E. Cross-chain liquidity solution
III. Economic Model + Revenue Data
I. Snx V2 operating mechanism
To better understand V3, we need to briefly review Snx's existing design and the various problems that exist.
There are two types of core users in the Snx ecosystem:
1. Staker: Stake Snx to obtain system inflation rewards and Trader's transaction fees.
2. Trader: A user who uses atomic swaps or Perps transactions within the Snx protocol.
The principle of synthetic assets
The principle of staking stablecoins is to generate tokens of equal value to U.S. dollars by pledging assets. Similarly, users can also pledge assets and use oracle price data to generate tokens anchored to the price trends of assets such as stocks and gold.
Snx ecosystem currently has sUSD anchored to USD price, sBTC anchored to Bitcoin price, sETH anchored to Ethereum trend, etc. They are collectively called Synths synthetic assets.
The entire system's liabilities are settled in sUSD. Snx V2 only allows Stakers to mint sUSD by staking Snx. In essence, sUSD is borrowed by staking Snx. Therefore, the minted sUSD is the liability of users and the entire system.
When the pledge ratio reaches 400% or more (this ratio will be determined by DAO voting based on market conditions), the Staker will receive Snx inflation rewards and transaction fee rewards. If the pledge ratio is lower than 160%, the Staker may face the risk of being liquidated if the collateral Snx is not replenished within the 12-hour buffer period or the sUSD debt is repaid to increase the pledge ratio to more than 400%. If the pledge needs to be released, the Staker needs to repay all sUSD debts before the withdrawal.
The process of atomic exchange
The transaction between Snx synthetic assets is completed by destroying one token and minting another token through smart contracts. Therefore, when TVL is satisfied, there will be no slippage except for the fluctuation caused by price delay.
How Dynamic Debt Pools Work
The total value of all Synths assets in the entire system = the total issued debt of the system
If a trader trades sUSD into other Synths assets, such as sBTC, the amount of overall debt will increase or decrease with the rise and fall of the corresponding Synths price. Therefore, the debt of the entire system is not fixed, so it is called a dynamic debt pool. The total debt of the entire system is shared by all Snx mortgagees in proportion. Therefore, the debt of a Staker who only participates in minting sUSD without doing any operations also changes dynamically.
Examples:
Assume that there are only two people in the system, A and B, and they pledge Snx to mint 100sUSD. Assuming the current price of BTC is 100u, when A buys sUSD and exchanges it for 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 make any operation. As shown in the figure above. When Bitcoin doubles, the debts of A and B become 150 sUSD, but the value of A's assets is 200 sUSD, and the value of B's assets 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 buy 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 stakers, so that each staker will share the benefits in proportion, that is, reduce the debt. Conversely, when a trader makes a profit, the pool debt will increase. Each Staker will share the loss, which means that he needs to buy additional sUSD to redeem his Snx.
Snx supports spot atomic swaps and perpetual transactions. When the pool is large enough, the impact of a single transaction on the pool will tend to be stable, and Staker can obtain the transaction fee for each transaction. According to the Kelly formula, Staker will be in a profitable mode in the long run.
However, if the system is imbalanced between long and short positions, in extreme cases or one-sided market conditions, Stakers may face the situation where others are making profits while you are losing money. In order to further reduce Stakers’ risks, V3 provides more mechanisms to maintain the system’s Delta neutrality.
What does Snxv 3 bring?
Liquidity as a Service
After two years of reconstruction and development, Synthetix v3 has upgraded itself to become the liquidity layer of decentralized finance. Synthetix V3 will be launched in phases in the next few months. In the planning, the existing functions of v2 will become a subset of the functions of v3. After the final version is launched, developers can directly integrate the Snx debt pool to obtain liquidity when developing new derivatives markets, including perpetual futures, spot, options, insurance, exotic options and other derivatives markets. Without starting from scratch.
Current products in the Snx ecosystem
The application cases proposed by Snx are as follows:
Perpetual futures/options/structured products: support perpetual futures, leveraged position trading, including basis trading and funding interest rate arbitrage.
Case: Kwenta and Polynomial exchanges are currently online, and GMX can actually be built on Synthetix v3.
NFT-Fi Lending/Perpetual Contracts: Users can borrow synthetic assets anchored to NFT trends, or create a market for perpetual contracts that speculate on the future price of NFTs.
For example, nftperp.xyz can be built on Synthetix v3
Insurance Market: Users can purchase insurance contracts for various risks, pledged in a pool and managed by smart contracts.
For example, Nexus Mutual could be built on Synthetix v3.
Prediction Markets/Binary Options/Sports Betting: Users can make bets based on the outcome of an event.
Case: Election results or sports games. Currently, Lyra and dhedge are available in the Snx ecosystem.
RWA Market: With reliable oracles and trusted entity verification, synthetic assets such as artworks, carbon quotas or other off-chain assets can be developed 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 the counterparty of Trader, and the size of Staker's debt pool determines the liquidity ceiling.
Currently, a single collateral may lead to the following problems:
This will cause the system's maximum open position to be limited by the market value of Snx itself, which means that the liquidity of traders is limited.
Different synthetic assets have different volatility. Staker's income and risk-return may not match.
In extreme circumstances, there may be a risk of spiral liquidation
From Kwenta, we can see the total positions currently held by the Snx network. In the case of cooperative incentive activities with OP, the short and long positions of BTC and ETH have approached the upper limit of the system's carrying capacity many times.
To solve the above problems, V3 launched the following features:
a. 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 returns. In order to solve this problem. (This article will list relevant cases in the section on anti-oracle delay attacks below)
Synthetix V3 passed the SIP-302: Pools (V3) proposal, allowing Stakers to decide which markets to support liquidity for based on their own risk preferences. Voting governance can determine the collateral type and upper limit of each pool, so that even if risks arise, they can be limited to a small range. It also provides Snx stakers with the opportunity to take higher risks and gain higher returns. This gives stakers more control over their exposure. For example, they can decide to only provide exposure to mainstream assets such as ETH and BTC, and not participate in market debt pools for long-tail assets such as NFT.
b. Multi-collateral mechanism
V3 creates a universal 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.
Voting will be used to decide which assets to support as collateral in addition to the current Snx. For example, ETH can be voted on as collateral. The eight proposals SIP-302~310 related to it have been passed.
So the new fund pool and vault system has three main advantages:
Better risk management: Pools are tied to specific markets and therefore have specific exposure
Better hedging capabilities: The capital pool is connected to a specific market, allowing for precise hedging
Greater collateral range: Pledgers can pledge any asset that the funding pool chooses to accept, addressing the risk of a single asset.
Perps V2 and V3 engines
Perps is a decentralized perpetual engine launched by Snx based on debt pool liquidity.
The Beta version of Synthetix Perps V1 was released in March 2022, and without any trading incentives, it generated over $5.2b+ in trading volume and provided Stakers with $18.1 million in trading fees.
Synthetix Perps V2, launched in December 2022 and currently in use, reduces fees, improves scalability, and capital efficiency.
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 features such as cross margin, new risk management functions designed to eliminate market bias. These include price impact measures and dynamic funding rates.
Founder Kain Warwick said Synthetix aims to launch Perps V3 and its new decentralized perpetual contract exchange front-end Infinex in the fourth quarter of this year.
The team said 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 DEX currently needs to sign for each transaction.
Maintain Delta Neutral
Perps V2 can effectively match buyers and sellers. Snx pledgers only need to act as temporary counterparties and temporarily bear asset risks. Incentives will reward traders to keep the market neutral.
Synthetix incentivizes long and short open interest in the market to remain balanced through funding and discount/premium pricing features. The side with the most congested trades will be charged funding fees, and the other side will receive funding fees.
On centralized trading platforms, funding fees are usually charged every 8 hours, while funding fees in Synthetix are charged in real time as positions continue. Similarly, transactions that cause the long-short ratio to deviate will be charged a premium, and transactions that keep the long-short ratio balanced will receive a discount. This mechanism will enable arbitrage traders to actively arbitrage when deviations occur, reducing the risk of LP in one-sided markets.
Oracle Improvement Plan
Anti-Oracle Latency Arbitrage
Oracle Latency Arbitrage was the main reason why Dex platforms were unable to compete with centralized exchanges.
In previous versions of Synthetix, Synth relied on the oracle Chainlink to provide prices, but the update of the oracle price on the chain lagged behind the price changes in the spot market, and there was a possibility of front-running at this time. In the context of Synthetix's no-slippage trading, Snx stakers may face heavy losses as a result. For example, a user observed that the price of ETH rose from $1,000 to $1,010 in a short period of time, and the quote given by Chainlink was still $1,000 at this time, then the user could exchange sUSD for sETH at a price of $1,000 in Synthetix. After the oracle price 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 Snx stakers due to front-running.
Additional example: The strategy currently adopted by GMX, Snx's largest competitor
Source: CapitalismLab
Snx currently provides an oracle management mechanism: market creators can choose from multiple oracle solutions, set up custom aggregations, and give integrators more control over the oracles that power the market. The 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.
Synthetix (Snx) also explored two solutions to solve the oracle latency arbitrage problem.
Hindsight oracle solution: A solution proposed by Synthetix in cooperation with the Pyth team. This solution reduces the possibility of oracle delay arbitrage through asynchronous transactions and configuration of delay time. This helps reduce the transaction costs of DeFi platforms and makes them more competitive.
Chainlink's low-latency data feed: Another solution provided by the Chainlink team for Synthetix. This solution aims to provide a low-latency data feed 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 transactions, thereby reducing transaction costs while protecting the data privacy of data suppliers.
Pyth and Snx cooperation introduction:
https://www.youtube.com/watch?v=UAFR4c4-DPk&ab_channel=PythNetwork
Off-chain oracles enable fast on-chain prices with competitive fees. Played an important role in significantly reducing transaction fees. Due to solving the oracle delay arbitrage problem, Synthetix’s trading fees for major currency pairs currently range from 2 to 6 thousandths, which is comparable to Binance’s premium VIP users.
Cross-chain solution
Teleporters - for stablecoins
The SIP-311 proposal proposes the concept of Teleporters. After 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 the need for cross-chain bridges and transfer slippage.
Allows the liquidity layer to share collateral between all chains
Quickly move between chains and back from L2 to L1 without challenging verification times.
Cross-chain liquidity pool
Targeting Debt Pools
SIP-312 proposal enables all on-chain markets and mining pools to obtain the current status of all on-chain combined collateral
This means that Perps markets can be quickly deployed on new chains and can leverage collateral from existing debt pools on Optimism and Ethereum mainnet.
As mentioned above, through Teleporters and cross-chain liquidity pools, the Synthetix liquidity layer can be extended to any EVM chain, and the new chain can directly obtain liquidity support from other chains after it is deployed and launched.
Economic Model + Revenue Data
The Synthetix protocol generates revenue from several different sources. Mainly through fees from swaps and synthetic asset exchanges, perpetual swap and Snx liquidation fees, and fees from synthetic asset minting/destruction. All revenue from the protocol will be distributed to integrators and Snx stakers.
Integrator's profit distribution
Products developed by accessing the Snx protocol, such as Kwenta, are also called integrators. Snx will reward a certain percentage of fees based on transaction volume, and pay it in Snx: 10% of the first $1 million, 7.5% of the fees from $1 million to $5 million, and 5% of the fees for > $5 million. Integrators can freely decide how to use these fees. For example, empower their own platform coins.
The Snx development team no longer runs the front end themselves, but instead hands over specific business to integrators. The incentive scheme for integrators will make it more network-effective and is expected to be integrated into more products and become an important DeFi component.
User growth
Data as of July 23, when this article was published. Synthetix's current TVL, monthly trading volume and fee income are comparable to those of its competitor GMX, but the total number of daily and monthly active users is much lower than that of GMX and dydx.
PerpV2 Trading Volume
Synthetix Perps received the Optimism chain's liquidity incentive plan this year. Synthetix Perps trading users will receive OP airdrop rewards
OP incentives started on April 19th, and currently the OP incentives can cover approximately 80% of the transaction fees.
According to messari data, Perps has a strong driving force on 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 grown significantly. This means that the largest increase in transaction volume is the increase in original user transactions.
The OP's rewards program will run until September 13th, so it will be easier to understand retention rates after Q3.
Transaction user data trends
Data Sources:
https://dune.com/queries/452148/859385?1+Project+Name_t6c1ea=Synthetix&4+End+Date_d83555=2023-06-28+00%3A00%3A00
PE Level
As trading volume increases, revenue and pledger returns increase. Snx's PE has returned from 50X in the bull market to a more reasonable range of 10x-15x.
Weekly fee income data for stakers
Data Sources:
https://dune.com/synthetix_community/fee-burn
Exploration of new token models
Snx is currently in full circulation, and approximately 5% of inflation rewards are provided to Snx stakers each year.
In August 2022, Kain Warwick, founder of Synthetix, released proposal SIP-276, suggesting that the issuance of Snx be set at 300 million and that additional issuance be stopped after reaching that number. However, the proposal has not yet been passed.
In June this year, Kain proposed to implement a new Snx staking module in Synthetix V3. This module will simplify the entire staking process. Users only need to deposit Snx without facing market risks or considering hedging needs. Initially, the Finance Committee will fund the staking pool, but part of Synthetix's protocol fees may also be allocated to the staking pool in the future. Kain emphasized that this simpler staking method is intended to attract more new users to the Synthetix V3 system. The proposal is currently under discussion. It is expected to further increase the Snx staking rate.
Summarize
In the long run, the decentralized derivatives trading track has huge potential. 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, enhance user experience, and attract more users to participate in the Synthetix protocol. After the full function of V3 is launched, it will usher in new business increments and valuations. It is expected to be integrated by more products and become an important defi component.
However, the growth of new users is slow at this stage, and the development cycle required for the launch of all V3 functions has not been determined. The income from SNX staking under the new token model and the retention rate after the third quarter will be important valuation indicators for SNX holders in the short term.