Synthetix, what comes next, part zero
May 23rd, 2023

I started this series with Part One yet somehow landed back at zero; actually, that's a lie. I didn't set out to write a series of posts at all. I wanted to write a stand-alone post but it quickly turned into a shit show about oracles. I decided to try again, focussing on the Treasury Council. So, once more I present you, an extremely late "State of Synthetix" post.

As I’ve reintegrated into the community over the last few months, the question I’ve asked myself is “What is missing from the project?”. I’ve concluded there is a hesitation to pursue high-risk, non-obvious paths. That makes sense since incentives are strongly aligned for everyone to work on the critical path. Very few people have the time to sit around concocting crazy plans for Synthetix. As an aside, if you are curious about where I went late last year, that is for another post. For now, I will simply say I don’t do drugs anymore.

Over the last year, the core contributors have become increasingly efficient, the introduction of the Core Contributor Council facilitated this, but so did the hiring of a lot of incredible people to replace the OG’s that burned out during the 2018/19 death march. This resulted in a lot of progress on core initiatives; ending V2x, designing V3 and reimplementing Perps. The latter two were both unsolved problems at the start of 2022, and now a little over a year later Perps continues to scale and the initial components of V3 have been deployed to mainnet.

What has accumulated in this time, are opportunities to deviate from the status quo significantly. There have been changes made in the last year, of course, some of them very effective, but there is room for more drastic change.

This post will lay out the opportunities I’ve identified, in some cases a broad sketch of the problem with some options, and in other cases detailed plans. The Treasury Council is also working on a new proposal template to present initiatives like those listed below. This will ensure changes are communicated more transparently. But for the avoidance of doubt, we don’t owe you shit, we are a discretionary body, so don’t come crying to me if you don’t like the formatting of the proposal template, or if the TC does something without consulting you, I’m looking at you, Sam.

I should also be clear that everything listed below is conceptual, nothing has been confirmed by a Treasury Council vote yet, however, many of these proposals have support within the TC.

So here you go, in no particular order:

  1. Core Contributor alignment

  2. Trading incentives

  3. Passive SNX staking

  4. Integration incentives

  5. 3:1 SNX split plus buyback

  6. Distribute SNX to stakers

  7. TC-funded working groups

  8. Synthetix ecosystem fund

  9. Subsidised keeper fees

  10. Perps referral program

  11. TC proposal template

  12. Unwinding the TC

Core Contributor Alignment
I understand that this might delve into the philosophy of equity allocation in startups or token allocations in DAOs, but I believe it's a crucial point. The early community either grasped it intuitively or I beat it into their heads, I can’t recall which. Based on my experience, many people working in startups have multiple motivations, but economic freedom is often a significant one. Working in a startup is already a risky endeavour, and working in a DAO can be even riskier. In Synthetix, having alignment is crucial because there is little to no hierarchy. Self-motivated people are more drawn to this kind of atmosphere. However, we also have to make sure we maintain financial alignment. I suggest setting aside SNX every quarter for bonuses. The bonuses will be distributed at the discretion of the TC, incorporating feedback from the CCs concerning the impact their peers have had on the protocol. This will ensure a fair distribution based on merit. The exact amount of SNX to be allocated is still to be determined, but ideally, it should be several million.

Trading Incentives
Although OP incentives have been successful in increasing trading volume, SNX incentives may yield a more impactful feedback loop, especially since the incentives will be in escrowed SNX, which should introduce traders to SNX staking. Ideally, 5-10m SNX should be allocated to this incentive program over time.

Passive SNX staking
The difficulty of staking SNX has made it challenging to attract new participants to the ecosystem. Although efforts have been made to simplify the process, such as the implementation of dHedge strategies. Even understanding why these hedging services are necessary is a barrier, it is hard to quantify how many potential stakers have been lost to the ecosystem due to complexity, but I think we can safely assume it is multiples of the actual number of stakers. To make staking easier, we can create a passive staking pool that works alongside active SNX staking. New stakers can try staking without facing too many challenges and better understand Synthetix. Think of it like a freemium model, where the "price" is risk and complexity, if we reduce these while paying a lower yield we may attract a lot more stakers. This yield should initially be paid by the Treasury, potentially in SNX, but ideally in sUSD. This yield should also be dynamically calculated based on the ratio between active and passive stakers, with a cap on passive staking of ~10% of fees. Again this is a very rough conceptual outline, the specifics are up for debate. A trial of three months with a capped spend of $1-2m sUSD or the equivalent in SNX would be sufficient to identify whether this increases the percentage of SNX staked, both passively and actively.

Integration incentives
With the transition of Synthetix to a liquidity layer, our reliance on integrators has become existential. Of course, nothing is stopping the community from funding a new internal Synthetix trading front-end. But hopefully observing the challenges encountered by integrators has shown this would not be a trivial exercise. It is therefore critical we align integrator incentives for the longer term. How to achieve this has been debated at length in Discord, so I will quickly recap the two sides of the debate. The purists say no fees should be diverted from SNX stakers, and that all we need to do is enable integrators to add an incremental fee to the base protocol fees. The benefit to this is reduced complexity for an integrator while still allowing them to capture fees. Integrators have argued against this as they believe it will make them less competitive but this approach is currently the status quo. The other side argued that a percentage of fees, for argument’s sake ~10%, should be allocated to integrators, this would mean all integrators earned the same fees and that there would not be a race to zero between integrators to offer cheaper execution for traders. There is a middle-ground option where some percentage is guaranteed, but an optional incremental fee can also be charged by an integrator, this allows for a base incentive for integrators with additional upside if they achieve significant differentiation in the market. SIP-2002 shifts us away from the purist view, but it does not impact fees generated for stakers, the issue is that if fees continue to grow this will not be a sustainable mechanism, though it is a step in the right direction. I propose to implement the integrator fee by carving off a percentage of SNX held by the treasury, say 10m SNX and staking this on behalf of integrators, this would create a base fee of 3-5% depending on the percentage of SNX staked. This has the additional benefit of not increasing the amount of SNX in circulation to pay for these fees. If this incentive is successful it could then be incorporated into the protocol without the need for staking SNX on behalf of integrators. If it is unsuccessful and does not create further alignment with integrators it could be wound down and the SNX allocated to another incentive or distributed to SNX stakers.

3:1 SNX split plus Buyback
Last year I attempted to turn off inflation before we hit 300m SNX. Fortunately, this proposal failed as we were not yet in a place where zero inflation would have been sustainable. Today the question of inflation is equally relevant, in V2x I believe we could switch off inflation with minimal impact. Unfortunately, we are now planning the transition to V3 and the question of whether we need inflationary incentives is open to debate again. The primary reason for keeping inflation in V3 is to ensure there is a mechanism to bootstrap liquidity for permissionless pools. There have been several suggestions about how to achieve this, with veCRV style voting for example. Even if inflation is the only solution here, I don’t think it negates having a countervailing force of buy-back and burn. If we do a 3:1 split we would have around 90m additional tokens to buy back and burn with a market price of $60m. Where does the money come from to burn these tokens? Treasury fee yield. Based on recent yield the TC is earning around $5m per year, if 100% of this is allocated to buybacks it would take about ten years to complete. If trading volume increases over the next few years this timeline would be reduced significantly. You might ask, why not just burn the 30m+ tokens in the TC wallet? These tokens are effectively locked already so this would have minimal impact, but once this buyback is completed, it makes sense to consider distributing the remaining SNX to stakers pro rata.

Distribute SNX to stakers
Again the question is why not just burn the SNX? The reason is that this SNX can be used for incentives and can equate to a 3% inflation rate for three years if distributed completely. This would allow us to test the need for inflation without actually inflating the token supply. The issue is that these tokens are currently encumbered by significant debt, so to distribute them the debt would either need to also be transferred or paid off. There are competing forces at play here because if fee yield is used to buyback and burn SNX the debt will not be paid off until the buyback is completed. One option would be to sell SNX OTC to pay back the debt but this offsets the burn, so it seems like if buybacks are initiated any distribution of SNX would need to wait until that was completed. Which could be between many years.

TC-funded working groups
This is one of my favourite proposals. As we enter this new era of the protocol we have developed a need for functions like sales and support. While outsourcing these functions to integrators is possible there is still a potential gap, I think of this a little like Salesforce. Salesforce is a platform, but it does not directly facilitate implementations, instead, they rely on a network of integrators. Yet Salesforce still requires internal teams to work with integrators for large client deals and to ensure that integrators are themselves supported. As of today, Synthetix can support market makers and large traders on the platform, there is sufficient liquidity and functionality to make it worthwhile for entities like this to trade. Integrators should be engaging with these types of users, however, a dedicated group that engages with both large traders and integrators to ensure a smooth onboarding process would be highly beneficial. The historical approach would be to just hire new core contributors to fill this role. However, I think there is an opportunity to increase transparency and accountability for these functions by funding independent working groups to perform these functions and report directly to the Spartan Council. The TC will fund this directly, allowing us to test this new type of coordination. To attract the right people to this working group some continuity is required, hence I propose running this trial for 6-12 months at a minimum with a break-up fee paid in SNX if the protocol decided not to pursue this approach after the trial. An additional working group I propose is an analytics group, which will be responsible for ensuring that all data about the protocol is available and up to date. As well as ensuring we have live dashboards for all key metrics. Historically this has failed due to low prioritisation as well as technical complexity.

Synthetix Ecosystem Fund
In the early days of the protocol, the synthetixDAO made a decision not to pursue investments outside the protocol, this was due to the risk of such investments as well as a concern about losing focus on the core mandate of funding protocol development. While arguably the project would have been better funded had we leveraged our position to go into early-stage deals over the last five years, it is also likely that at times this would have put pressure on funding protocol development, especially towards the end of 2019 when liquid assets were getting low. Given the intent to wind down the treasury and the opportunity to fund ecosystem projects through the rest of the bear market, splitting a percentage of the treasury for ecosystem funding now makes more sense than ever. Especially as we expect the number of new projects building on Synthetix to grow significantly over the next few years. This fund would be owned by SNX holders pro-rata and could eventually be distributed or even used to fund further buybacks of the SNX token.

Subsidised Keeper Fees
It is unlikely that Synthetix will ever be able to achieve fee-free trading, given the lack of payment for order flow potential in the protocol design. However, we should strive to remove any fixed fees associated with trading. The TC should subsidise the keeper fees to ensure low-volume traders are not priced out, this should ideally be via subsidising the keepers directly, but given the complexity of this approach, it may be better to initially pay a rebate for keeper fees directly to traders. The specific method, either via SNX or sUSD is up for debate.

Perps Referral Program
This is another initiative that, in theory, could be handled by integrators; however, a protocol-level referral program makes any additional referrals offered by integrators even more powerful. Referral programs have worked extremely well historically for crypto trading; however, they require a working product. Given that Perps is finally ready, boosting adoption with referrals has the potential to be very powerful. These referrals should be paid in escrowed SNX, this will ensure there is no immediate price impact and that this SNX will ideally be staked (either passively or actively) since it is locked anyway. As the trading experience improves and more markets are released this will create a flywheel where traders are exposed to the staking side of SNX and where large referrers become significant stakeholders in the ecosystem.

TC Proposal Template
A proposal template is being created to promote transparency in current and future TC initiatives. This template will be based on the SIP template but may be adjusted over time. Although community feedback is not always necessary and can even be harmful in some cases, having a single document that outlines the initiative and explains its rationale will be helpful for community members to reference.

Unwinding the TC
In my opinion, the TC will have to be dismantled at some point. There are various methods to do this, but the main idea is that if the protocol is working properly, the TC can be divided into smaller portions and assigned to new or existing governing bodies to avoid being a single point of failure for the protocol. While progress has been made since the time of the sDAO, there is still room for improvement, and the TC has remained unchanged as a governing body for too long.

**As mentioned at the beginning, these are proposals only and I am but one of four votes on the council. The purpose of this post is to start a discussion and ensure the community is aware of the potential paths forward. I’m eager to debate and discuss all of these proposals in Discord.

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