Synapse Thesis

This report was prepared by InternDAO

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Synapse: Evolution From Cross-chain Bridge To “Roadway” Layer Zero

Summary of Report:

  • Synapse Chain is in production
  • Cross-chain liquidity will be hosted on its own layer 0 chain, drastically increasing capital efficiency and increasing robustness via decentralization
  • Developers and users can seamlessly interact with assets regardless of their native chain, reducing friction across crypto’s multi-chain ecosystem and allowing for projects like cross-chain yield aggregation and deeper, more efficient lending markets
  • We believe Synapse creates real value by solving cross-chain liquidity issues and will be able to capture value for token holders, and is one of the few products in crypto widely used and love. With the introduction of an L0, the $500m valuation seems underpriced.

Introduction:

One must have a basic understanding of Synapse before appreciating the significance of this report. At InternDAO, we want to focus on real alpha and not explanatory fluff, the type of information that gives significant edge in markets. So, if you’re not familiar with the purpose of Synapse protocol, we recommend first consulting the following resources or reviewing our summary table below:

Stats:

  • Ticker: $SYN
  • C-Cap / Supply : $510m // 175.8m
  • F-Cap / Supply : $726m // 250m
  • Inflation: ~$2.2m (763,500 SYN) per week
  • Project Summary: Synapse is a fast bridge between EVM compatible chains, utilizing MPC/TSS and incentivized AMM pools to allow for quick, decentralized movement between chains. They have a native nUSD token that is the base asset for most pools, and is what ends up being swapped to deliver liquidity across chain.
  • Token Value: Governance & Revenue Sharing. Every bridge transfer has an associated fee that goes back to the protocol. In the future this will be used as revenue for token holders, but currently it goes to the treasury.

Report Background

There were two important events that made this report possible (1) @AureliusBTC applied to, and was accepted into, InternDAO and (2) the DAO was in the midst of compiling a comprehensive internal guide to layer 1’s and bridges. During our internal research it was clear that Synapse protocol (Aurelius’ creation) had become one of the leading bridges in crypto.

Pretty colors :3
Pretty colors :3

The protocol was built by a lean and talented team and has attracted steady growing volumes and a thriving community due to their ability to ship fast and ship well. Synapse was consistently integrating new chains, adding each as market fundamentals and narratives pivoted based on the needs of their users. It was clear that they were in sync with the market and understood how their product plugged into the space.

Rainbow!
Rainbow!

Additionally we watched the team and community elegantly steer themselves away from their previous identity as Nerve Protocol, securing a future for Synapse that awarded those who planned to back the project for the long haul. Their ability to pivot and refocus on a new, and needed product is a rare skill to find. It was these attributes that intrigued the DAO.

We approached Aurelius about writing a public Synapse report and the resulting interview blew us out of the water. The team had a lot planned, yet almost none of it had been communicated effectively yet.

So here we are, writing a report about why we’re bullish on the bridge and exploring the even larger vision that is being built.

The Multi-chain Vision

To understand the significance of Synapse, one has to understand that the future will be multi-chain.

As late as mid 2020, the thesis that there would be “one chain to rule them all” was widely accepted and discussed in the cryptocurrency world. Fast forward to today, and rarely do you hear that argument anymore. By now, most opinions have changed due to the rise of alternative smart contracting platforms and the following boom cycle that drew in tremendous liquidity from investors, speculators, builders, and users.

There are generally two ways that the future can be assembled:

(1) Build out a system with a unified messaging standard. This is the approach of Cosmos IBC, Polkadot and Avalanche Subnets

(2) Have translators sit in the middle of different chains, interpreting and passing on messages. This is the most common approach, and is a generalized form of the type of work done by bridges.

Synapse uses the second approach, as do bridges like Multichain and Wormhole. Most cross-chain movement that occurs happens with these types of solutions, where translation happens via a third party that interprets messages across chains. The issue with (2) is that it’s technically hard and there are many competing ways to build out out the tech.

Synapse’s Progression & Vision

Synapse decided to tackle this difficult issue, and set out to be the leading bridge in crypto. Of course, they encountered some large problems.

First, the current “multi-chain AMM” model requires that liquidity live in siloed chain pairs, resulting in fragmented liquidity that is limited to single hops across chains. This meant that liquidity was not ecosystem-wide nor deep and that users suffered as a result.

Second, the majority of competing bridges were using unsustainable models that either subsidized or incentivized routing over their bridge. Paying users to bridge or covering their fees is not how to sustainably drive adoption.

As such, the Synapse team postulated a new approach, one that solved both the liquidity fragmentation and incentivization problems. In doing so, the team knew they could create value for the Synapse protocol at large.

The cross-chain liquidity routing layer 0 was born.

Cross-chain Liquidity Routing Layer 0

If you read through the Synapse documentation you’ll find an interesting snippet:

“Once the Synapse Chain reaches the Archean Phase, SYN will provide economic security for the chain by requiring validators to stake it in order to operate on the network. As the native token of the Synapse Chain, SYN may also be used to pay for transactions within the network as well as for bridging to other chains.”

Synapse will be implementing its own blockchain in order to improve the efficiency of the bridge.

By introducing a native chain into its plans, Synapse has given itself optionality. If it chooses to integrate with IBC or launch a Polkadot sidechain, then it can experiment with both forms of cross-chain messaging (1) and (2). As the first bridge with real usage to launch a native chain, Synapse will have a massive leg up on the competition. Synapse will not require siloed AMM pools on each chain, replacing them instead with natively hosted liquidity on its own layer 0 chain. In doing so, Synapse deepens its moat as the ecosystem’s cross-chain liquidity provider. The result is a fundamental building block, solving cross-chain liquidity for both developers and users, and drastically increasing capital efficiency while also opening up new cross-chain use cases.

By abstracting away problems associated with bridging and bootstrapping cross-chain liquidity, Synapse creates a single chain for developers and users to seamlessly and intelligently interact with assets regardless of where they primarily live. We reckon this is a major breakthrough for layer 1 aggregation - comparable to Cosmos IBC, but with a larger ecosystem at launch since it will be hooked up to every EVM chain.

Synapse Layer 0 Strategy and Ecosystem

Synapse’s stated goal is to attract an ecosystem of developers to build on top of its cross-chain liquidity. By natively solving the cross-chain liquidity problem, ecosystem developers can focus on  building out unique use cases such as cross-chain collateral, intelligent yield aggregation, and deeper, more efficient lending markets. Moreover, ecosystem developers can focus on building more elegant user experiences that allow users to seamlessly interact across layer 1’s while still keeping governance in a single place.

We believe that Synapse creates true value by solving the cross-chain liquidity problem and in doing so will be incentivized by native L1 dApps that wish to encourage Synapse to route through them. If this thesis plays out, then Synapse will either be able to subsidize its native emission schedule with emissions from other dApps or accrue additional value back to SYN holders beyond collected fees.

Lastly, if Synapse can truly establish a cross-chain liquidity moat then the future for nUSD becomes extremely bright and we wouldn’t be surprised to see a cross-chain collateral stable born out of the Layer 0.

After understanding the future of Synapse, its valuation at $500m starts to feel underpriced. At launch, it should have a comparable userbase to many different L1s that are routinely valued at 1b+ (some of which haven’t even launched yet!).

Suffice to say, we are quite bullish on the future of $SYN.

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