While banks have been falling apart, and feds cranked the money printers, Synthetix has been building. The beauty of a bear market is that the noise dies down, shillers vacate, and the sustainable protocols emerge from the haze of hype. Through the price cascades and blatant fraud of recent months, actual defi performed as intended, and the CeFi pretenders exploded. Endless speculation and guessing chased FTX and the related fallout, while the blue chip defi protocols systematically processed transactions, in a transparent and verifiable manner. Maybe this defi thing we’re building has legs after all?
While the storm raged outside, we’ve been working on a ground up rebuild of Synthetix, to become something both familiar and new. To imagine how Synthetix v3 could shape DeFi over the coming year, we need to let our imagination run wild, and build upon the Synthetix we know. We have lost some spartans along the way, and gained some new recruits, so let’s revisit the goal of Synthetix v3, what it is, what it’s made of, and the progress to date.
Synthetix v3 is a suite of financial primitives that enables anyone to pool collateral, build derivative markets (of any kind), and define how rewards can be distributed to stakeholders. We have reimagined how a liquidity layer can function, and created the tools for anyone to use. Compared to the current Synthetix v2 protocol:
Synthetix v2 is one configuration of what Synthetix v3 is capable of
Synthetix v3 is a generalized version of v2; a toolkit for creating a wide range of DeFi protocols and more
Synthetix v2 is a product, Synthetix v3 is the platform
Synthetix v2 can be thought of as a narrow application of Synthetix v3
Synthetix v3 is the collection of lego pieces, v2 is just one of the things you can create
With v3, Synthetix will keep doing what it has been doing, but better, as well as providing the foundational platform for endless other derivative products to harness.
The building blocks of v3, that can be assembled into hopes, dreams and profit.
Pools: a collection of collateral that can be connected to one or more Markets, allowing its collateral to be delegated for use by the Market(s). The Market withdraws/deposits stablecoins from the Pool depending on its performance (and any additional debt, like the skew of a Perps market, or the combined synthetic assets of a Spot Market)
Oracle Manager: accepts a range of onchain and offchain price oracles, which can be used by any Markets. For example Spot and Perps Markets use both on-chain and offchain oracles. The Oracle Manager is designed to agnostically accept a range of oracles, which currently include Chainlink and Pyth. Synthetix doesn’t run oracles, but ingest them and make them usable.
Markets: interact with Pools, Oracle Manager, users and the wider defi ecosystem. Markets typically perform a function, like a game, insurance market or perpetual futures market. A profitable Market would over time deposit more stable coins into the pool than it withdraws.
Rewards Distributor: can be used by Pool owners to bootstrap or incentivise liquidity using additional tokens or earnings, separate to the Market’s performance depositing stablecoins.
On mainnet: the core system of Synthetix v3; a Collateralized Debt Position that accepts snx and issues snxUSD stablecoin.
In audit: Synth Spot Market; ERC-20s that are synthetic representations of crypto assets, that can be exchanged for snxUSD, at a rate determined by price oracles.
In development: Perps v3 market - a multi-collateral perps market, likely with built in cross-margin. v3GM to automate the deployment of governance votes.
Once v3 Perps are completed, audited and released, Synthetix v3 will have feature parity with Synthetix v2. The full v3 system and all its primitives will be live, and we can sit back and what what innovations the community creates. Governance will be able to focus on the growing surface area for Synthetix dominance:
Scaling liquidity of different collateral types and the snxUSD stablecoin
Scaling the number and range of Markets
Scaling cross-chain: new EVM chains to launch on, with cross-chain teleporters (when we find suitable oracles - know of any?)
Continued infrastructure decentralization, for increased resilience and censorship resistance
Governance end-game of bringing it all on chain - more on this below
Adjacent to v3 is the development of v3 Governance Module, or v3GM, that seeks to solve the Defi governance conundrum - and take governance to its natural end game.
Crypto governance is speed running the challenges that countries and companies have learned over hundreds of years. Democracy is a nice idea, but having a referendum on every decision is bonkers, and in reality the meme of “everyone gets to vote” is a nightmare. Direct democracy simply doesn’t work. Enter representative governance, where token holders elect councils or representatives to be engaged and make high quality decisions.
Crypto governance has the benefits of being decentralized, more merit based, less discriminatory, and composable. However for it to take the final step, we need fully on-chain tools, and here’s where v3GM comes in. If we are to transcend the governance of traditional organizations, we need to bridge the gap entirely, and automate the governance decisions. v3GM is the embodiment of on-chain governance, which was always the goal for Synthetix Governance, to become more censorship resistant and resilient.
v3GM will fix defi governance by:
Removing the need for trusted actors in protocols
Better protecting DAO treasuries
Maintaining agility of development which is crucial to innovation
Giving ultimate control to token holders
With v3GM, the state of the protocol is stored in a code repository, and changes that are proposed will be voted on by the Spartan Council. If approved, they will be automatically deployed. This is enabled by revolutionary tooling, and there is a proof of concept implementation currently being tested.
If you’re still reading, anon, let’s put this all together.
Defi Summer 1.0 started with the product-market fit of token incentives that turned into wild feedback loops of hypergrowth. It was an exhilarating breeding ground for seminal protocols, and exciting enough to convince ourselves Defi had found legitimacy. While this was true for proving composability and ponzinomics/mimesis, the yields were unsustainable and eventually came crashing down.
We’re now 2 years on from the peak of Defi Summer, somehow eth is $2,000 again, and the ingredients for Defi Summer 2.0 are brewing. Unlike in 2020, defi could now sustainably accommodate an order of magnitude more capital. Amongst the esoteric and bizarre inventions, we’ve managed to figure out some of the fundamentals:
Moving money actually works:
High speed low price Layer 2s that mean most transactions cost less than a dollar, and take only a few seconds to execute - a trader’s paradise. Synthetix leads the charge on L2s with Optimism, and with v3 we’re poised to deploy on any EVM chain
Ubiquitous onramps and bridges between chains, even directly to L2s from exchanges, so that it's easier to get funds into crypto and between apps - we even have bridge aggregators…
Products, not just ponzis
Robust financial primitives of lending, borrowing and derivatives that have been working as intended for years (can’t say the same for bridges yet)
Revenue earning protocols, from functionality users are willing to pay for
A real alternative to bad centralized actors
Improved transparency with verifiable protocol health, assets, liabilities and public governance - eat our heart out
Robust developer tooling, testing infrastructure, and experienced auditors mean protocols are more likely to scale with additional capital
So, let’s cast our minds forward to late 2023, after Defi Summer 2.0 has kicked off. Bedrock is here, and Optimsm has 2 second block times - as fast as your centralized exchange? We’ve managed to move past the Alt L1 phase, because rollups are pure fire and delivering the performance we all want and need. Base has gone live, Synthetix has deployed Perps v3 backed by eth, and is gobbling up TVL and fees wherever you can find an EVM. Synthetix has completed its metamorphosis into a platform, and entirely new protocols are being conceived, created and launched on top of the v3 defi primitives.
Synthetix will have evolved into a thriving ecosystem of Markets and Pools, largely developed and managed by third parties. These Pools will feature diverse collateral types, risk profiles, and yields, while the Markets will vary significantly in functionality and purpose, backed by different Pools. Pool owners will decide which Markets to support, and Market owners will establish functionality and rewards for Pool participants. Stakers will have the freedom to select Pools to collateralize based on performance, rewards, and reputation, catering to a wide range of interests.
In this version of reality we could see
An abundance of Pools with diverse collateral types and compositions, some proposed by Synthetix and others by third parties, sufficiently approved by Synthetix governance
Numerous Markets created by third-party integrators, covering a vast array of functionalities, including several innovative DeFi protocols established as Synthetix Markets
The range of Markets that could be built are endless
Perpetual Futures / Options / Structured Products: trading using synthetic assets to represent leveraged positions for perpetual futures, including basis trading, and funding rate arbitrage vaults. GMX could be built on Synthetix v3.
NFT-Fi borrowing/perpetuals: Users can borrow synthetic assets collateralized by NFTs or create perpetual contracts speculating on the future value of NFTs, with rewards distributed to Synthetix stakers. For instance, nftperp.xyz could be built on Synthetix v3
Insurance markets: Users can purchase insurance contracts for various risks, collateralized by Pools and governed by smart contracts. Eg Nexus Mutual could be built on Synthetix v3.
Prediction markets / Binary Options / Sports Bettings: Users can trade shares based on the outcome of events, such as election results or sports games. Overtime Markets, for example, could be built on Synthetix v3.
Games: any game could leverage Synthetix collateral, to provide competitive prizes. Eg a lottery is easy to implement on Synthetix v3.
Offchain / RWA Markets: Markets could be developed for real-world assets such as art, carbon credits or other offchain assets or instruments. With sufficient oracles and trusted entity verification, this "trust" could generate capital on chain, backed by Synthetix and snxUSD. The opportunities are endless.
Synthetix v3 is setting the stage for anyone to simply add Synthetix to a blockchain, integrate oracles, and instantly create a thriving DeFi ecosystem. With mature on-chain representative governance in place, we're empowering an entire ecosystem that operates with resilience and censorship resistance.
We’re ready to start building with you, so can the devs do something?