Over the years, the Synthetix community has voiced concerns over the complexity of staking SNX. Given SNX serves as the collateral backing all trades within the network, the percentage of SNX staked is critically important. Although high inflation paid to stakers was an effective strategy to increase staked SNX in 2019, its effectiveness diminished in 2021/22.
With the emergence of Perps and its innovative skew balancing mechanism (as displayed below), SNX staking has become safer than ever. Yet, the complexity of the process still presents a significant barrier to entry for new stakers.
V3 SNX Staking
To address this, I propose the implementation of an SNX staking module using Synthetix V3. This module simplifies the staking process: users merely need to deposit SNX and won't face market risk or the need for hedging. This simpler approach to staking aims to draw new users to the Synthetix V3 system. Initially, the Treasury Council will fund this pool (see STP-4) but in the future, a portion of protocol fees may be allocated to this staking pool. This new form of SNX staking will become the primary gateway into the Synthetix ecosystem.
SNX Liquidity Provisioning (SNXLP)
In addition to the new staking module, Synthetix V3 introduces SNX Liquidity Provisioning (SNXLP). LPs will supply collateral for markets within Synthetix V3 and will receive all generated protocol fees, less any fees dedicated to initiatives such as integration incentives. Much like staking in V2x, LPs will still be required to hedge their debt and monitor their collateral ratios. The SNX LP system has several advantages over the old staking system. It allows LPs to choose which markets to collateralise, and it allows for new permissionless markets. It is likely that spot markets will be far more delta neutral in V3 minimising the overhead for stakers, making it even more likely that stakers in V3 will transition to LPs over time. The SNX LP mechanism will efficiently supply the collateral required to scale Synthetix.
**To ensure the transition to V3 goes as smoothly as possible, the SNX staking pool will be launched as a trial. This will help identify and address any potential issues in a controlled environment before the full-scale launch. The funding for this trial pool will come from the Treasury Council. This trial pool will be a testing ground to understand the dynamics, behaviour, and potential issues of V3, thereby minimizing the risks of migrating to the new protocol and ensuring a seamless transition for all stakeholders.
Synthetix V3 will continue to be governed based on the magnitude of collateral provided by SNX LPs, this ensures alignment, as those underwriting the risk in the protocol continue making decisions about protocol changes. However, it is possible in the future SNX Stakers using the new staking module could be granted limited governance rights.
The precise funding amount to be allocated from the Synthetix treasury for this trial pool will be established after comprehensive discussions within the community. However, there are more than 90m SNX tokens not staked, this presents an opportunity to significantly increase the amount of SNX actively participating in the protocol, without requiring an extremely high yield. Additionally, as the yield will be paid in SNX initially, it is likely most stakers will roll rewards back into the pool, which would lead to even higher staking growth.
The transformation of SNX staking and the introduction of SNXLP is a major step towards making the Synthetix ecosystem more accessible to a wider audience. Simpler staking not only introduces new participants to the network but also encourages them to transition towards SNX LPing in the future.