Synthetix Ecosystem Report
It’s been an interesting few weeks for Synthetix.
Like the majority of the projects in the wider crypto market, for Synthetix the heady days of the bull market that began after New Year were followed by a long, difficult hangover. The SNX token price gradually gave way before dipping so hard that at least a few hodlers must have been cursing their “diamond hands.”
Simultaneous with this fall, alarm bells began ringing as the protocol got its toughest test yet, with the liquidation of many of the accounts that back the platform resulting in their collateral being dumped on the market, further contributing to price depreciation. When one account containing a massive $15 million went under, it seemed that one of crypto’s greatest fears, the “death spiral,” could be about to visit itself upon Synthetix Spartans.
That did not happen though. Despite the classic “wen $6?” meme that has existed since almost the beginning of the project being briefly reactivated, SNX has rebounded and today (July 13th) lies near the top of the 7-day price charts at more than double its recent low.
While crypto and its participants are certainly no strangers to volatility, this report will seek to dive into some of the possible reasons for Synthetix’s recent abrupt changes in trajectory and speculate on what its future might hold, and the projects being built on top of it.
Spartans Need to Look to Their Armor
While rapid drops in value are by no means unique to SNX, the role of the token in collateralizing the protocol through the staking and minting of debt does have implications when judging its resilience to violent swings in price.
Like all decentralized platforms, Synthetix’s vitality is dependent on those using it.
The Synthetix protocol’s health is a result of the aggregate health (or liquidity) of its most important participants, the SNX stakers. In order to stay healthy and avoid liquidation as an SNX staker, it is necessary to maintain collateral with a value double one’s portion of the system debt. This is vital for a staker’s own bottom line and integral for the health of the system as a whole.
While it would be nice to explain the workings of the protocol in simpler, more digestible terms, this is actually the point where it gets trickier. The complexity of the Synthetix platform is what lends it its functionality but, unfortunately, it is also something that makes explaining how all of the moving parts fit and move together quite a task. Still, nothing ventured, nothing gained..
You maintain the all-important 200% collateralization ratio (c-ratio) of your account by ensuring your wallet contains the necessary number of SNX to back your debt (expressed in sUSD). If the price of SNX goes down in dollar terms, it obviously makes sense that your c-ratio also changes. In order to correct this, one might assume that all one need to do is repay the minted sUSD and save those precious SNX from the risk of loss. Well.. actually.. Nope!
When a holder mints sUSD in order to collateralize the system and qualify for a portion of the token inflation and platform fees, they’re doing more than simply generating a stablecoin. They’re also taking on the responsibility to manage the debt they’ve generated. Should traders on the Synthetix platform outperform both the market and the trades the staker makes using their minted sUSD, the staker will find themself short when it comes to repaying their debt. If they don’t have funds to pull from elsewhere and if the SNX price keeps falling then their remaining locked SNX will be vulnerable to liquidation.
As the value of the SNX had fallen heavily in June, many stakers found themselves in danger of falling victim to liquidation. For some, this danger was made greater by the earlier introduction of a new feature that they had failed to respond to, the generation of sETH by way of an ETH wrapper.
Despite succeeding in its purpose of better enabling sUSD to hold a tight USD peg, this wrapper added an extra layer of complexity to debt management. Suddenly, it was necessary for even those who had been properly managing their debt to familiarize themselves with a new variable in order to do so. Previously, minters of sUSD could hedge the debt pool simply by mirroring the distribution of synths (eg. number of sETH — iETH = the amount of sETH to be bought from minted sUSD), ensuring that when it came time to unlock their SNX they’d have assets with the value necessary to do so. Unfortunately for the inattentive, the wrapper inverted the hedging required for ETH, resulting in even the dHedge pool (an automated debt management solution launched by dHedge) losing out. This, as well as wider market conditions, conspired to create a state ripe for problems.
Look out below!
Currently, when an account is liquidated on the Synthetix protocol, the liquidator clears the account’s debt using sUSD (usually) bought or borrowed from the market, receiving 110% of the value back from the account’s SNX for doing so. It is not uncommon for a liquidator to then sell this SNX for sUSD in order to continue doing their “noble” work. However necessary, this selling puts downward pressure on the price and, with enough volume, can result in further liquidations taking place.
With the aggregate collateralization ratio of all SNX wallets under stress, once liquidations started picking up there was a very real danger in June that it could result in a “death spiral” effect, something that would have played havoc with the entire system. Luckily, this was narrowly avoided thanks to the bounce in crypto asset prices that occurred after BTC dropped beneath $30k on the 22nd.
As an aside, evidence of the liquidation system’s role in recent SNX token prices becomes evident here. An aspect of the liquidation process is that once a c-ratio falls below 200% the account owner has three days to correct it back up to the system-governed “safe” threshold (at which stakers are rewarded for minting). When BTC and the market dipped on the 22nd, it set in motion the drop that hit Synthetix especially hard three days later when large amounts of now-liquidatable SNX were rapidly dumped on the market.
Far from it being over, Synthetix is only just getting started!
Now, it might be natural to come away from reading the above section and conclude Synthetix is a project with a risk/reward relationship more heavily weighted towards the latter. This is, however, not a conclusion borne out by its incredible resurgence in price in recent days and, frankly, the reality of the situation.
No “death spiral” occurred, the system c-ratio never came close to leaving sTOKENs undercollateralized, and a whole swathe of developments have come forth that demonstrate that the Synthetix ecosystem is one worth participating in.
The Return of a “Benevolent Dictator”
Several months ago, Kain Warwick, Synthetix’s “benevolent dictator” and all-round DeFi bigwig, stepped back from the project and took to spending his bull market gains and sparring on Crypto Twitter with some unique “insights.” This was all going on while the SNX price was consistently falling, something that did not have the greatest influence on optics.
In addition to being conspicuously absent, Kain himself has since admitted that the Core Contributors, while still in place following his stepping back, were not functioning as efficiently or effectively as they might. Bugs were being left unremedied for months [1, 2] and a lack of direction became the norm due to the division of responsibility. Under these circumstances it’s likely that the events of late-June served as something of a wake-up call.
With Kain, Core, the Spartan Council and others all now well-aware of the potential damage that the protocol faced, various changes have been instigated to try to optimize the way Synthetix functions as both a decentralized protocol and also a hierarchically managed project. An immediately encouraging quality of the manner this new direction is being established is the willingness to see problems for what they are and address them in a way that meets the interest of token holders.
“I remain one of the largest token holders in the project” — Kain Warwick
When one of the largest holders is the newly returned captain reinvigorated in the task of steering the project to calmer, more bountiful waters, it undoubtedly goes some way to reassuring token holders who may have gradually become uncertain about who or what exactly is at the helm.
Repair and Grow
Plans are now being set in place to alter the liquidation system and prevent it contributing to price depreciation during a rapidly falling market in the way that it did in June.
As of now, the idea is that rather than liquidated accounts having their SNX sent to a liquidator in exchange for sUSD, accounts could actually self-liquidate for a penalty or be liquidated by others who would receive a small fee for doing so. The actual debt would then be absorbed by all of the system’s minters, who in compensation would be able to claim the recovered SNX from an escrow account at a later date. This will prevent SNX becoming available for immediate sale by, in essence, socializing the debt.
While the precise mechanics of this process are far from being solidified, the socialization of the liquidation process in this manner would help to curtail the risk of a death spiral. This should provide Spartan’s with an effective defense against the danger the protocol most recently faced.
While noble, throwing yourself into solving problems isn’t always enough to pull a token back into the spotlight in crypto and make “number go up.” For Synthetix, however, a willingness to mend what is already in place is paired with a hunger to expand and develop new functionality. Rather than spending time licking its wounds, Synthetix is rapidly expanding its value proposition. The first (and most long-awaited) of these new strings to its bow is the launch of Optimism.
“After many months of hard work and collaboration between Chainlink, Optimism and Synthetix we are extremely excited to announce exchanges on OΞ will be enabled the week of July 26th, with a final deployment date pending Spartan Council approval.” — Kain Warwick
Joining Uniswap, Synthetix will soon be available on the newly-launched Optimism Layer 2 scaling solution. This will make a select choice of Synths available to trade at much-reduced fees and with the majority of platform functionalities intact. Despite all the delays, Optimism is looking like it will set a high bar as a layer 2 scaling solution that maintains the trustlessness so sought after by cryptocurrency aficionados.
As a long-overdue arrival, however, the Optimism boon for token holders is arguably surpassed by other new and exciting developments joining and developing on the Synthetix ecosystem.
Thales is a binary options platform built on top of the Synthetix protocol and funded in large part by seed investments from the Synthetix Foundation and associated parties.
As a Synthetix-associated project, it benefits from a large reservoir of talent sourced from the Synthetix community (with one of its two co-founders serving on the Spartan Council and the other an Ambassador) and connections granted by the protocol’s position within the DeFi space. These only just saw it complete a $2.5 million funding round led by Apollo Capital and Framework Ventures.
Perhaps most importantly, Kain will also have both a financial interest in Thales doing well and a personal reputational interest born out of it being one of the first of a new batch Synthetix projects he has endorsed since his return.
The THALES token distribution model warrants special recognition, as the model used plays a major role in acknowledging past Synthetix stakers and incentivizing both retention and new staking.
There will be 100 million THALES tokens with the following distribution:
• 35% of the 100 million to SNX stakers.
• 45% for community incentives (liquidity mining programs and related initiatives).
• 20% for current and future Thales core contributors.
It is this 35% issued to SNX stakers as a reward and as an incentive that should function as a tempting incentive to stick with Synthetix even when the price of the SNX token is struggling.
With an intuitive and sleekly-designed app already demonstrated to the community and testing underway, the THALES token looks ready to launch soon and, given all the project has going for it and barring calamitous market conditions hitting the entire space, appreciate in both notoriety and value “soonthetix.”
Lyra is an options AMM designed to run on Optimism that will use Synthetix to hedge the delta risk of its liquidity providers (LPs). As trades occur on Lyra, LPs take on exposure to the underlying assets being traded. To protect the LPs, Lyra automatically trades long/short on the underlying asset via the Synthetix protocol, earning SNX holders fees.
This integration with Synthetix means it is likely to be another example of a project not only contributing fees to SNX stakers, but also one where governance tokens will be received either directly (historical staker airdrop) or through yield farming. Like Thales, it will benefit from being built off an important DeFi protocol and having the support of its team.
Again, Kain and other interested parties will also have both a financial interest in LYRA doing well. Assuming it doesn’t drop to zero, considering the amount of SNX Kain has staked, he may be able to buy a few houses just from farming it alone.
With no site, no social media, and nothing much to go on but a snippet from a blog post and several descriptions on Discord, Aelin is in the very early stages of development. Hell, it doesn’t even have a logo or typeface yet (the above image is speculative). Nevertheless, Aelin’s stated ambition of working as a low complexity, generalized protocol for structuring one-off deals should bring it some attention, especially when combined with yet more SNX token brrr.
Its workflow was described thus:
A deal sponsor uses a factory contract to create a pool of liquidity in, say, USDC and people fill the pool with USDC to the pool limit. Then the deal sponsor goes out and funds the deal. It could be an allocation in an early stage DeFi project or it could be buying tokens OTC from a treasury, but once they find the deal they announce it and all of the holders of the Aelin pool (aePool) token can then decide whether to redeem their tokens for the USDC they put in at the original fixed rate or to convert their tokens on the terms of the deal.
An example would be if a person were to approach a treasury and offer to buy 10 million USD of tokens with a six month lockup for a 20% discount. The benefit to the sponsor is they get a fee paid in the deal structure.
As another project earmarked for an airdrop of tokens to SNX stakers, should it make it down the development path all the way to launch it’ll be another fine contributor to the wallets of Synthetix OGs especially, and newcomers alike.
Synthetix had a rough few weeks. Like the rest of the market, it’s also now had a rough few months. What makes the protocol resilient, however, is the continued dedication of its core builders and their pragmatic approach to managing the project and keeping it moving forward.
The coming weeks will be a test of whether Optimism is all that it was promised it would be. Time will tell whether it is able to provide the user experience it has been hinted it will grant while sparing users from barriers that make it a bridge too far for those looking for a truly trustless and decentralized trading experience.
Regardless of Optimism’s success, what with the crazy gas-guzzling months of the early part of the year seemingly behind us for now, and with expansion on the horizon, there’s still plenty of opportunity for those who are a part of the Synthetix ecosystem to get something out of holding onto it and participating in its next chapter.