Author: THOR HARTVIGSEN

Translation: Deep Tide TechFlow

Synthetix has recently achieved significant growth. This article aims to analyze the current uniqueness of Synthetix, its recent performance, and why V3 is a significant innovation in DeFi.

The Current State of Synthetix

Synthetix was launched in 2017 by Kain Warwick and Justin Moses. The project was initially called Havven and provided a stablecoin (nUSD) collateralized by crypto assets. Since then, the protocol has made significant progress and now offers synthetic assets on the Ethereum mainnet and Optimism.

Today, Synthetix serves as a liquidity layer for many DeFi protocols. On Synthetix, users stake the native token SNX to mint sUSD (synthetic dollars). Therefore, sUSD is Synthetix's native stablecoin, overcollateralized by SNX and representing users' debt on the protocol.

As a result, the total available liquidity that protocols built on Synthetix can utilize depends on the quantity of collateral (i.e., SNX) on the protocol. Why do users stake SNX to achieve this synthetic liquidity? Because stakers receive rewards in native SNX tokens and also earn fees generated by this synthetic debt (currently at an annualized yield of 40%). If the staked SNX quantity falls below a certain threshold, the issuance of SNX increases to attract more users to stake SNX and increase liquidity.

Synthetix supports two different types of assets: spot and futures. Spot synths track various assets such as cryptocurrencies, commodities, forex, etc. This allows users to gain exposure to the underlying assets without actually holding them. Synthetic futures allow users to trade leveraged futures of various assets. The liquidity on Synthetix acts as the counterparty for these trades. As a result, SNX stakers bear counterparty risk. This means that if traders utilizing Synthetix liquidity on protocols like Kwenta make substantial profits, the debt of the stakers will increase, and vice versa. However, there are mechanisms in place to mitigate this risk, including arbitrage opportunities (funding rates) provided to traders when trading activity deviates. This is designed to make liquidity providers (SNX stakers) market-neutral, with V3 introducing isolated risk.

Kwenta

Currently, Synthetix has a total locked value (TLV) of $375 million, which means that $375 million worth of SNX has been staked. An example of a protocol built on top of Synthetix and utilizing its liquidity is Kwenta. Kwenta is a perpetual futures trading protocol on Optimism that doesn't have native liquidity but inherits liquidity from Synthetix. All trading pairs on Kwenta are priced in sUSD, so to trade these synthetic assets, users need to mint sUSD by staking SNX (or buying sUSD on the market).

All trading fees generated on Kwenta are paid to SNX stakers. On average, Kwenta accounts for around 60-70% of all fees generated from utilizing Synthetix liquidity. There are also other protocols/frontends built on top of Synthetix, including:

Lyra;

Thales;

Kwenta;

dHedge;

Polynomial.

Infinex

Infinex is an on-chain perpetual exchange that aims to simulate the trading experience on centralized exchanges in a decentralized manner. Given that the user interface and experience are at the core of this protocol, "Simple" and "Professional" modes will be provided to make it easier to onboard new traders.

This agreement will not have any new native tokens, but will be governed by SNX. Additionally, all revenue will be used to deepen liquidity on Synthetix by buying and staking SNX. The higher the trading volume, the greater the buying pressure on SNX and the deeper the liquidity. This could create a virtuous cycle.

Synthetix V2 Metrics

Below are charts from Token Terminal showing SNX price and trading volume utilizing Synthetix liquidity. As shown, there is significant divergence between recent on-chain activity and SNX's current price.

Recently, Synthetix has launched several products, with the Perps V2 upgrade playing a significant role in increasing activity. This upgrade introduces various synthetic assets that can be used on protocols like Kwenta. It is worth mentioning that Synthetix has acquired a substantial amount of OP tokens from Optimism, which are being used to incentivize users to use products like Kwenta. Additionally, Kwenta also distributes KWENTA tokens as an additional incentive.

Below is a chart of Total Value Locked (TVL). In the case of Synthetix, it is directly related to the price of SNX, as shown in the chart below. This is because, as mentioned earlier, SNX is the only asset that can be staked on the protocol.

Synthetix is a core infrastructure in DeFi, with its liquidity being utilized by multiple protocols, as mentioned above. Currently, the limitation on liquidity or TVL is that only SNX can be staked on Synthetix. This will change in V3.

Synthetix V3

Synthetix V3 includes a series of upgrades that elevate Synthetix to a new level: providing a cross-chain liquidity layer for DeFi. V3 is currently in the alpha stage, with different features being gradually rolled out.

TLDR

Multi-collateral instead of just SNX;

Permissionless liquidity layer;

Developer-friendly ecosystem;

Seamless cross-chain implementation.

Multi-Collateral Staking

Multi-collateral staking is one of the core principles of the Synthetix V3 vision. Currently, only SNX can be staked to provide liquidity for synthetic spot and perpetual markets. V3 introduces the concept of collateral pools, with each pool represented by a specific collateral (token). A collateral pool can be ETH, another one can be SNX, and a third one can be wBTC. The collateral types comprising these pools are added through governance. Additionally, collateral pools can be added to a pool registry for protocols that wish to utilize certain liquidity. For example, a pool can consist of an ETH collateral pool and a DAI collateral pool, which can then be used on on-chain derivative markets like Kwenta. Some benefits include:

As a staker, you can choose which assets to provide as collateral and earn rewards, giving you more freedom.

Stakers can mitigate risk by providing liquidity only to pools associated with specific markets. Risk-averse investors may only provide liquidity to pools used by the BTC and ETH markets, avoiding riskier assets.

Due to the association of pools with specific markets, better hedging is possible, reducing counterparty risk.

Permissionless Liquidity Layer

With V3, developers can create new markets utilizing liquidity pools on Synthetix in a permissionless manner. One major barrier in DeFi is establishing liquidity in the early stages, typically incentivized through token issuance.

In addition to being able to select which liquidity pools a market should integrate, market creators can choose an oracle for their product and create custom reward structures for liquidity providers. The listing of new synthetic assets no longer requires governance and can be easily achieved. These assets can be anything from spot OP to ETH options.

Synthetix will ultimately serve as a liquidity-as-a-service platform, easily integrable by new products.

Seamless Cross-Chain Implementation

The ultimate goal of Synthetix V3 is to be available on any EVM chain. The so-called Teleporters will allow liquidity provided on one chain to be used on other chains. For example, if a user provides liquidity to a pool on Optimism, a market on Arbitrum can utilize that liquidity to support their platform.

Here is an overview of the structure of Synthetix V3 spot markets: users deposit their assets into vaults, which are added to specific pools. These pools can be used by the protocol to create markets on top of the Synthetix liquidity pool. These markets are the objects with which users interact on dapps built on top of Synthetix, such as Kwenta.

Path to V3

Here is a brief overview of the plans leading up to the release of the full version of Synthetix V3:

Stablecoin migration - V3 introduces a new synthetic stablecoin to replace the current V2 sUSD. The name is yet to be determined, but one suggestion is to keep the new stablecoin as "sUSD" and rename the current V2 version as "oldUSD" or "legacyUSD". Over time, as the new V3 stablecoin and synthetic assets gain liquidity and empowerment, users will need to migrate their assets from V2 to V3 (via Curve pools).

Perps V3 - Perps V3 will introduce the aforementioned multi-collateral. The most important aspect for traders on protocols like Kwenta and Polynomial is that all synthetic assets (not just sUSD) can be used as collateral for trading. The UI/UX will also be simplified and more intuitive. Most of the core code is already completed and nearing audit. The testnet may go live in late July.

Upgrade V2 SNX Stakers to V3 LP - This feature allows current SNX stakers to migrate to V3 without having to repay debt and close positions. (SIP-306).

Teleporters - Teleporters are a crucial part of the cross-chain functionality in V3. To enable cross-chain liquidity utilization, they destroy sUSD on one chain and mint sUSD on another chain, eliminating the need for slippage and cross-chain bridges. Teleporters are currently in development and running on several testnets. (SIP-311).

Cross-Chain Pool Synthesis - This is another core aspect required to achieve the vision of seamless cross-chain liquidity. It enables markets and pools to understand the status of collateral on other chains. With this feature, new perpetual markets can be launched on one chain and leverage liquidity from another chain. Currently being tested on the testnet (SIP-312).

Conclusion

The ultimate goal of Synthetix is very exciting, but the key lies in creating demand and attracting developers to build solutions using Synthetix as a liquidity layer. The more protocols (such as Kwenta) built on Synthetix, the higher the returns for liquidity providers (stakers on Synthetix). As the yields increase, the provided liquidity will also grow, and deeper liquidity will attract more protocols to build on Synthetix. It's a mutually beneficial cycle.

As mentioned earlier, 60-70% of fees earned by SNX stakers come solely from traders on Kwenta. Trading on Kwenta is strongly incentivized by a significant emission of OP and KWENTA tokens, making it difficult to estimate the extent of recent user growth.