Synthetix L2H2

It is now August 2022, so once again I’m late in delivering my unrequested half-yearly Synthetix perspective.

In defence of my lateness, I did take a few weeks off to become an enjooooooyer of Paris ahead of ethCC, so I’ve only had a few days to write this. One day I hope to become as prolific a writer as Arthur Hayes or failing that at least reach the output Cobie had for that weird two-week period earlier in the year. But alas, my writing aspirations must wait for there is still far too much work to do convincing the world to stop getting scammed by CeFi.

Before we delve into Synthetix, let’s zoom out a little and see how the world has fared over the last six months, jk, let’s ignore that dumpster fire and focus on crypto.

Crypto Market Overview

Now, having literally chosen the worst scaling solution possible for my users to defend my own ETH bags, you might think things would be going pretty poorly for me. And yet somehow the crypto world seems to finally be realising Ethereum’s rollup-centric scaling roadmap might not be insane. L222 finally has some momentum, and if we can all put our coordination hats on and get Proto-Danksharding (EIP-4844) done in a reasonable timeframe we’ll be able to obliterate one of the core pillars of the already wobbly Alt L1 thesis, transaction costs.

There is still a lot of work remaining though, rollups are by no means “done”, just ask Polynya. There are a number of dimensions we need to see progress in before we can abandon L1 as the execution layer. But my view is we now have sufficient competition in the rollup space that it is time we all collectively lean into the narrative that the L1 execution layer days are over. If we wait until rollups are perfect to start this work it may well be too late by the time the market starts to recover. If Ethereum is to lead this next crypto recovery we must support the roll-up vision and trust that market forces will deliver us a robust L2 ecosystem. You all know that my OP bags are packed, but if Optimism were the only project working on this I would feel less confident moving execution away from L1, but given we have many competing solutions I believe we should start this process immediately. In fact, this is already happening, even some of my favourite psyops master layer two sceptics are coming around.

I said I would ignore the macro dumpster fire, but I can’t help myself, so let’s take a quick aside to speculate on what the macro market is going to do over the next six months and also discuss the dump truck that just ran us all over. I personally think the market has priced in max monetary policy pain already. I read an article the other day that discussed some of the stonk-wielding fintech heroes of the last half a decade and how they have been utterly eviscerated. We are talking 2018 rug pull ICO level drawdowns in wealth, for actual businesses. Now, the market can always go lower, especially in absence of fundamentals. But it now feels like short of central banks utterly losing control of inflation and populist uprisings, by early next year we are back to dovish monetary policy. I am no macro expert, nor thankfully am I a central banker, because god help us, the insane monetary policy experiments I would run if I were. So feel free to ignore this. But against this backdrop, many people are still waiting for “muh capitulation candle”. I think on the balance of probabilities we haven’t seen it yet, but it is getting closer to a coin toss in my mind. Whether we can break the $800 ETH level though I don’t know. I’ve been slowly building conviction on a theory that the normal process of:

blow-off top -> bull trap -> crab market -> capitulation

that usually plays at the end of a bull market, was compressed from months into a few weeks, and we are now already in a slow grind up. This would be an unprecedented process for a crypto market cycle, so it requires a preponderance of evidence to justify it, evidence we do not yet have. But the longer we continue to grind up the more convinced I am that the worst is behind us. This begs the question of how exactly did we compress this normally slow process into a blowtrapcrabcapitulationcatastrophy?

The answer is narrative and memetic cooption. When DeFi emerged as the dominant narrative in late 2019 and early 2020, many people woke up and thought to themselves, “well I don’t like all this decentralisation nonsense, but I love number go up, I wonder if I could get away with masquerading as DeFi while being utterly antithetical to it.” This thinking led many projects that were either dead or dying or stagnant to latch onto this new narrative for dear life in a brazen and self-serving attempt to save themselves. The poster child for this fuckery is definitely Alex Mashinsky from Celsius, who proceeded to gaslight and bluster his way into somehow having Celsius included in the DeFi conversation. And to his credit, it allowed CEL to go from being a DOA shitcoin with a sub $20m market cap at the start of 2020 to a multibillion-dollar Ponzi to a giant smouldering crater in less than three years, hats off to him.

But obviously, Celsius were not the only ones who opportunistically latched onto DeFi, Binance Smart Chain, an erstwhile zombie network which had approximately zero tx’s per week for years, somehow managed to pull this off as well. Leading to one of my favourite memes of all time.

Yet no one quite coopted the meme of DeFi as well as Mr Kwon, now some of you are saying, Woah Woah Woah, Terra was a Cosmos blockchain, it was decentralised! To this, I say the best lies have a grain of truth in them, but a truly exceptional lie has a microscopic fragment of truth buried deep in the centre of a moon. Yes, the chain was decentralised, but the decision-making processes and coordination of the project make Amazon look decentralised. This consolidation of power allowed the creation of one of the greatest Ponzi schemes of all time. To be clear I am not attributing malice here, no one can ever know what the people who created this nightmare were thinking. But I am inclined to believe that they genuinely bought into the supercycle and the idea that you could meme into existence a stablecoin from unsustainable yield if you simply sustained it enough. Matt Levine has talked about this a lot, and I am inclined to agree, you can see how once Terra scaled to billions of dollars that you might forget that you built it on a very shaky foundation. Now, I freely admit I’ve had a lot of fun playing with and getting rekt by many a DeFi-based Ponzi over the years, Ampleforth, Based, OHM, Basis Cash 😬, it is a long list. But these projects had many elements that prevented them from scaling to the ludicrous level of Terra. Firstly they were pretty obviously a PvP game DeFi degens were opting into. Of course, it is inevitable that some unsuspecting rubes were harmed in the production of these yield farming games, but at no point did anyone confuse them with a high yield savings account. Mainly, I suspect, because no one involved was fucking insane enough to concoct the growth hack of “risk-free 20% yield”. Fundamentally Terra was a semi-decentralised blockchain, operating as a platform upon which a centralised company created an on-chain Ponzi. This unfortunately leant it an air of legitimacy that even Celsius or Nexo would be envious of. Once it gained momentum though, governance went from theatrical to operatic. The best example of this was the creation of the LFG, upon which so much of the stability of the protocol rested in the end, it is still unclear whether anyone was even controlling these funds outside of Do, and we probably won’t know until the inevitable lawsuits and prosecutions play out.

Unfortunately, the cooption of the DeFi meme by centralised projects and companies resulted in years where actual core DeFi protocols languished in obscurity on a chain that was far too expensive for anyone but ETH whales to use, meanwhile these “cheap” new “DeFi” alternatives attracted tens of thousands of users and billions in deposits, but were utterly centralised. Guess what happens when you give a pile of money to a small group of unaccountable despots? Inevitably they end up blowing up and selling the pico bottom, I don’t know what the underlying mechanism is, but we have seen it play out so many times it must be an undiscovered law of nature. If you could manage to deconstruct and counter-trade it, you would be a billionaire. The result of all of this was insane systemic and contagion risk on a giant pile of leverage which managed to nuke the market in a way that seemed utterly impossible a few years ago. And given the unprecedented scale of this destruction of wealth, it is possible we simply blew right through every support down to $800 ETH and that was our capitulation candle. It would be a weird coincidence given that $80 was the bottom last cycle, but crypto does love a good 10x. If this scenario is true we will never see ETH at that $800 level again. As I said I am not yet convinced  The longer we go without retesting $1k though, the more confident I am we already saw capitulation, courtesy of our CeFi friends.

Now don’t get me wrong, DeFi is by no means perfect, there is a lot of governance theatre and inefficiency even within the OG DeFi protocols, and don’t even get me started on DeFi 2.0. But directionally and ideologically the majority of DeFi is moving is net positive, and it is becoming even more transparent and decentralised as we develop better governance tooling. I have a lot more to say on governance but I will save it for a dedicated post. One final point I will make before moving on is that much of the weird governance theatre and inefficiency that exists today in DeFi is the direct result of misguided regulators, led by your friend and mine Monsieur Gensler. I was a lot more concerned early on that the Gensler SEC was particularly fixated on crypto, but over time it has become clear they are trying to run a slow-motion regulatory coup attempt with the target being all of finance. I wonder how that is going to work out. Unfortunately, this puts our US DeFi friends in a very regulatory defensive position, which is ironic, because they are doing far more to prevent the next Celsius level blow-up than the SEC yet they are viewed with even more scepticism than many CeFi companies. We all have a lot more education to do. Thankfully we have many people working tirelessly to lobby and educate the behemoth that is the US government on why DeFi is positive for markets and the world. In the meantime, we are lucky to have some crazy people who are undeterred by regulatory interference and are simply building the best systems they can regardless of how they might be perceived.

So if we are lucky we have a macro backdrop that, even if it doesn’t get better, at least doesn’t get worse. And we have a crypto backdrop, specifically an Ethereum scaling backdrop that is extremely positive. Because we haven’t even gotten to the fucking MERGE yet, let alone the purge, the surge and the final stage V hasn’t told you about, the splurge.

A Resurgent Ethereum Ecosystem

So Ethereum finally has the momentum back, and this is bringing the focus onto not just OG DeFi projects but to the nascent roll-up native projects which for the last year have had even less attention than L1 DeFi. There is some amazing shit being built across many layer two networks. But I am going to be self-indulgent and focus on the Synthetix ecosystem on Optimism, plus my mentorship projects:

Kwenta: Perps and other instrumentsLyra: Vanilla options AMMThales: Parimutuel optionsAelin: Deal PoolingOvertime Markets: Sports bettingExotic Markets: Weird Options Polynomial Finance: structured product vaultsdHedge: Decentralised hedge fundsToros: Tokenised derivativesQuixotic: NFT marketMean Finance: Automated DCA strategiesExactly (pre-launch): Fixed rate lending marketsAmmalgam (pre-launch): Hybrid AMM/lending protocol

On top of all of that many of the OG DeFi projects have deployed to Optimism (in alphabetical order to save my dm’s from blowing up):


We now have more than enough infrastructure to support a large-scale migration of liquidity from L1, and not just Ethereum L1 but all of the alt L1’s as well. We simply need to meme it into existence. As a keen observer of DeFi summer and the craziness of yield farming, I expected this effort would be easier than it has been to date. But when I think back to what drove the most insane capital movements back then it was a combination of strong incentives, grassroots excitement and whale games. We are starting to see the first two build momentum, but to date, many of the ETH whales have been very lazy about migrating to Optimism. TVL is still only ~$1B. One of the reasons for this was that wave one of the OP airdrop was EXTREMELY anti-whale. Maybe even the most anti-whale airdrop since dYdX rugged the entire United States. While this is lovely and egalitarian, it has not created an environment where whales feel compelled to come and play, yet. But this new wave of protocol-level incentives is likely to change that. And whales are an important signal in the flow of capital. When users see large accounts like Alameda splashing around farming incentives it is a tacit signal that the pool is safe(ish). But whales need a LOT of liquidity for a migration to be worthwhile, so it is going to take time because on Optimism liquidity for almost everything is still a fraction of L1. But it is getting better. To conclude, the mutual investment Synthetix made into Optimism and Optimism made into both Synthetix and the wider Synthetix ecosystem over the last year is finally paying off.

So the Ethereum community finally has an L1 which is scaling and an L2 ecosystem which is ready to grow exponentially. Which is finally shifting the focus of those of us who have survived the onset of the bear back to where it all started in 2020, Ethereum DeFi. Welcome back degens, I hope your hangover is fucking painful. So other than all this scaling mumbo jumbo what have we been up to while you were off cavorting on the latest, fastest, highest uptime 😅 ETH killer? Well, in the ensuing years we worked out that while crazy algo Ponzis and yield farming games are fun, they are pointless unless they are bootstrapping something with fundamentals. And so in 2022, we bring you the meme to end all memes, something magical, called revenue. Yes, that is right, we have an actual ecosystem where people are paying to use DeFi platforms and some of them even make enough revenue to fund themselves. Crazy I know, but hear me out…

For an ecosystem to be functional and sustainable, consumers of services must pay for them and the money they pay must be sufficient for the service to continue to operate.

“What is this witchcraft?” you are probably thinking right about now.

We are not quite there yet, but we are very close to a point where it will be possible to do something approaching a fundamental analysis of protocol cash flow to determine its value. Now don’t be fooled, every fundamental analysis is just speculation wrapped up in a fancy package, because implicit in every such analysis are a bunch of assumptions about growth rates and risks and myriad other factors. But nevertheless, this kind of analysis is qualitatively different from the pure speculative gambling that has been going on in crypto for most of its existence. Even better, these fundamentals are self-reinforcing. Let me give you an example. Almost every DeFi protocol requires oracles to function, oracles are a core service. If none of the protocols make any revenue then they will of course never be able to pay for this core service. But if they all generate stable and sustained revenue, then suddenly one can look at underlying protocols and make an assessment of the revenue being generated by the protocols consuming core services and attempt to value the protocols that facilitate this. This is self-reinforcing as each component in this network of protocols, aka the market, begins to generate more stable revenue the overall market matures and becomes less speculative. Right now we have zero assets that are valued on anything approaching fundamentals, except of course Bitcoin, with Stock to Flow (lol). In a few years, we will have many and this will have a recursive and powerful effect on investment and belief in the space as well as consumer demand. It will lend an air of legitimacy to all of these services. Ok great, but if only we had a way of measuring this nascent progress towards fundamentals! Well, let me point you towards Now this is not perfect as it doesn’t make a distinction between revenue captured by various participants in each network, and there are other issues, but it is a step in the right direction and I believe it will be the key metric by which cryptoassets are valued over the next 12-18 months. Except for NFTs, those will still be valued based on the whims of lunatics.

This is the backdrop against which we are finishing what has already been a tumultuous year and there is a lot more work to be done for Synthetix. But we are incredibly well positioned to execute in this environment because Synthetix was one of the few protocols in 2017 to say, we give zero fucks about the regulatory implications of a revenue-generating token, we are going to build what we think makes sense and if we get thrown in jail for it c’est la vie. Luckily no one paid much attention to crypto for a while, and my personal view is that revenue generation was the least concerning thing about most projects since zero revenue was usually being generated. But suffice to say that the entire Synthetix community has been waiting years for the market to come to its senses and realise fees paid to token holders is the single most important metric to measure a protocol by.


Ok great, so the worst might be over, our chosen network is scaling in multiple ways, and we are generating hundreds of thousands of dollars in fees per day. Now what?

Right now there are four pillars of Synthetix development:

V2x: The current system, aka, the never-ending story
Perps V2: Upgraded perpetual futures, aka, let’s pretend the V1 never happened
V3: The completely rearchitected system, aka, the solution to the world’s problems
V3GM: The new Synthetix governance module, aka, thanks for nothing Aragon

Synthetix V2x

While we appear to have finally tapped into a geyser of fees erupting out of the atomic swamp the systems supporting this fee generation are woefully inadequate by the standards of modern Ethereum development.

I’ve also heard rumours there is a group of front-end engineers and designers, but I think they mainly participate in ethglobal hackathons from what I can tell. In all seriousness though, if you’ve ever dreamed of being the benevolent dictator of an amazing front-end engineering squad dm me.

Right now the goal of my life is to shut down development on V2x so we can focus on V3, I have been unsuccessfully spearheading this initiative since mid-2021. For some reason, the community keeps coming up with major improvements to V2x 🤦. Of course, they do! That is the entire reason we want to shut the thing down. It is now a Rube Goldberg machine, more duct tape than solidity. I’m told the community can expect pushback from the CCs for any further non-critical SIPs, I will believe it when I see it. Regardless, we somehow still have five items of scope to complete, here they are:

Debt Migration
Atomic Swap Price Update
Direct Integrations
Delta Neutral sUSD Scaling
Aave sUSD Direct Deposit Module (Alpha Leak)

The first SIP, Debt Migration, is a prerequisite for shutting down V2x, which appears to be the primary reason no one is willing to build it, basically the DeFi equivalent of Stockholm syndrome. Thankfully this critical SIP is finally resourced and should be ready within 4-6 weeks. It will allow positions on L1 to be migrated to Optimism with a single transaction removing the risk of creating a liquidity crisis as all staking moves to Optimism ahead of the launch of V3. This will allow for inflation and fees from L1 to be all directed to Optimism, finally ending the internecine fee war of 2022.

The next two SIPs are about improving atomic swaps, while everyone is the community is very happy with the progress and fees being generated by atomic swaps the reality is they are far from optimised. In fact, it is likely that with the right tweaks to the mechanism we can increase volumes by 10x. Updating the price function will allow for lower fees which should drive more volume immediately. The second change, Direct Integrations will unlock even more volume. This mechanism will allow any protocol to deploy its own exchange function with specific parameters controlled by governance. For some protocols like Lyra, this will allow for extremely low fees as it will be possible for the Spartan Council to approve the Direct Integration module based on the design of Lyra which makes oracle latency attacks via this exchange function extremely unlikely. Even integrations like Curve will significantly benefit from this mechanism as there is still a possibility with the current parameters for a frontrunner to exploit the generic atomic swap interface. If Curve has a dedicated interface for atomic swaps that is directly integrated this will allow for much more optimal routing.

The last two items are about scaling the Synth supply, which is critical for the functioning of the entire Synthetix ecosystem. Almost every aspect of which will benefit from more Synths being available. This will also make atomic swaps even more competitive. Delta Neutral sUSD Scaling is a version of something that has been proposed many times before but has heretofore been unachievable. On-chain crypto collateralised perpetual positions that collateralise a stablecoin while remaining delta neutral. If you want a really great write-up of this concept read this essay from Arthur Hayes, specifically the section titled “Bitcoin-backed Stablecoins” all you need to do is replace every instance of Bitcoin with Ethereum. You will thank me later. After all, we are all recovering Bitcoin maxis, some of us are just more recovered than others. For those unwilling to go to primary sources, the tl;dr is you margin an ETH perpetual position with ETH and then issue a stablecoin against it, the primary issue with such a design has been a liquid perpetuals market on Ethereum, to which I say, Perps V2. It doesn’t hurt that sUSD is one of the most liquid decentralised stablecoins, and with a vastly more capital-efficient collateral pool, it will only increase in popularity.

The final SIP is the creation of an sUSD direct deposit module that would allow the protocol to issue and deposit sUSD into Aave, this sUSD would be debt within the system that all stakers would be responsible for but critically it would be elastic based on the funding rate in the asUSD lending market. This is not as efficient a solution as the SIP above but it creates an immediate injection of sUSD liquidity that will help restore the peg back to parity without relying on wrappers. It is expected that this mechanism can support 50-100m of additional sUSD supply.

Perps V2

In parallel to finally closing out V2x, perps must be rebuilt. There were a number of issues in the initial design that are constraining the user experience and volume of Perps V1. A single SIP is being written to address all outstanding issues, namely:

  • improvements to the underlying architecture
  • a more efficient funding rate algorithm
  • off-chain signing mechanism for price updates
  • A modified price function

Collectively these changes will allow for the lowering of fees and the introduction of more markets with higher open interest caps, as well as expanding delta neutral sUSD scaling.

Additionally, an update to the incentive proposal to expand open interest will go live at the same time as Perps V2 which will improve overall market efficiency and liquidity.

Synthetix V3

Shockingly the full depth of the changes to the protocol proposed in V3 are too large to fully cover even in a post as long as this, or maybe especially in a post as long as this. But the SIPs that describe the changes are being rolled out and presented to the Synthetix community already. So far even some of the controversial changes I expected to create issues have been accepted fairly well by everyone. This is probably more a reflection of the fact that the accrued Synthetix dogma over the last four years is nowhere near as rigid as it once was. There are likely many reasons for this, but one that I think is fairly likely is the fact that many of the OG’s have already retired and are no longer as fixated on every minor change to the protocol, while newer community members are more open to the changes necessary to push the protocol forward. I luckily find myself in the enviable position of being unable/unwilling to retire until Synthetix is sustainable and therefore the last dinosaur defending the legacy decisions of the Synthetix community, please wish me luck. If you want more detail on the changes and don’t like reading SIPs there was a great thread providing an overview of V3 which can be found here.

The point of this post is to provide an overview of the status though, and right now progress on V3 continues in spite of the distractions of maintaining V2x. Only a masochist would provide timelines in crypto, but it seems possible that V3 could launch this year. But this is highly dependent on freezing the scope of V2x. Unfortunately, much of this progress comes at the expense of the final pillar.

V3GM (Synthetix V3 Governance Module)

This is somewhat of a good news bad news situation, on one hand, the elections of councils within Synthetix are now being handled by V3GM, which is a big milestone. Unfortunately, it looks like further progress on the governance module is likely to be delayed due to resourcing constraints. The next major milestone was intended to be handing parameter control directly to the Spartan Council, but this is unlikely to happen prior to the rollout of Synthetix V3. The benefit to this is that most of the conceptual framework for V3GM is now done, so designing V3 to be ready to interface with V3GM will be far easier than retrofitting V2x to accommodate V3GM. I am personally disappointed the core contributors decided to delay V3GM because I think that it will be a critical aspect of weening the space off multisigs. But it is what it is, we have other priorities and we will get there eventually. V3GM is a flexible architecture that allows for both on-chain governance as well as elections without requiring direct token voting or poorly conceived vote delegation systems. One of the areas I hoped to see fixed during this bear market was governance, again much of my thoughts will go into another post, but hopefully, even with this delay, there will be sufficient time to deploy V3GM before we get caught up in another bull market.

Ancillary stuff

“What about Synth Teleporters”, you might be asking. They are still coming, but it was decided that waiting for Chainlink’s CCIP was worth it given that designing a low trust bridge, even between L1 and Optimism, was architecturally challenging if not impossible. We have come too far to risk the protocol to a novel bridge design, even with the many safeguards we had planned to implement. That said V3 will support teleportation it will just do so via the optimism bridge initially and later will be expanded to more networks via CCIP. We’re working closely with Chainlink and hope to be testing CCIP later this year.

Given the success in fee generation over the last few months, it is critical we optimise the protocol in all areas that will have a direct impact on fee generation. The rest of the year the core contributors will be laser-focused on exactly that. Hence the focus on the remaining scope of V2x and Perps V2, followed soon after by the launch of V3, will improve the capital efficiency of the entire protocol and therefore increase the potential volume and fees that can be generated even if it takes us a while to significantly scale up the synth supply.

One area I still find concerning within Synthetix that must be addressed prior to launching V3 is SNX liquidity. Lowering inflation will help with this, but we still need to ensure that there are market participants providing liquidity both on and off-chain. The deal that was struck with Jump was aimed directly at resolving this. I have personally been very critical of Jump in the past, mainly for the decisions they have made around focussing on ecosystems outside of Ethereum. But they are extremely well capitalised and they have shown an insane level of commitment to put funds at risk to defend the protocols they have invested in, there are not many institutional size players who can say that. The fact that they stepped in at a time when SNX liquidity was critical has earned them a lot of points in my view, again there were not many others willing to do so at the time.


It has taken much longer than I expected to get to a point where the protocol is generating sustainable fee revenue, but now that we are there the reliance on inflation for staking incentives can finally be wound down. We are approaching 300m SNX in total supply and will hit it later this year. I hope that as we approach this number we will be able to coordinate to fix the supply at that number and freeze inflation, provided we continue to deliver volume and fees I think this would be a very powerful signal to send to the market.

I have said recently that it feels a lot like early 2019 right now, and that feeling has only increased lately. Watching the market slowly pivot towards projects with strong track records and solid fundamentals has been extremely validating. I think Synthetix is well positioned to dominate this new revenue-driven narrative in the same way that it was one of the dominant protocols in the early TVL and yield farming wars.

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