A Brief History of the Future of Synthetix: Multi-chain exploration and superchain SNX Chain

Written by Kain Warwick, founder of Synthetix

Compiled by: Babywhale, Foresight News**

My last article took a long look at the future of Sythetix. This post will take a different approach and it will be a simple and practical guide to help the community understand the experiments we must carry out in the coming months. Without the new, more flexible V3 architecture, all of the experiments envisioned below would not have been possible, and it took us a long time to do it, but now we're ready to test and iterate quickly.

The actual issues that need to be considered now include:**

• How to launch V3 and Perps V3?
• How to increase the size of collateral?
• What are the limiting factors for extended collateral?
• Do we want to enable non-SNX collateral?
• What is the best strategy for SNX holders to maximize value?
• How do fees translate into earnings for SNX holders?
• Are there unreached traders on other chains?
• How do we reach out to these traders effectively?

Status of the Agreement:

• Synthetix V2x is available on Ethereum;
• Synthetix V2x launched on Optimism.
• Synthetix V3 has been deployed to Optimism, but has not been enabled to date;
• Synthetix V3 has been deployed to Ethereum, but has not been enabled to date; Perps V3 and Synthetix V3 deployed to the Base testnet. Most of the liquidity is in the V2x system on Optimism; We can also deploy other EVM networks: Arbitrum, Avalanche, Polygon, etc.
• We will introduce a new SNX staking pool in V3.
• We currently do not have a viable strategy for cross-chain liquidity.

Now there is some confusion about the naming convention of the project. We have Synthetix V2x and V3, and Perps V2 and Perps V3; This is difficult for people outside the community to understand. I suggest that we create names that help distinguish these versions. We can take previously used astronomical names and select galaxies for these versions. Instead of using different versions, we can combine them; So Perps V3 on Synthetix V3 can be called Andromeda. While we have deployed some features of V3, it cannot yet be called an Andromeda release until we have deployed all of the features.

Lab 1: Deploy Andromeda to Base

The deployment includes Perps V3 and Synthetix V3 as well as non-SNX collateral. We need to decide which non-SNX collateral to include and the allocation of fees between SNX and non-SNX collateral. This will help us determine if sUSD is supported on Base. In my opinion, we should enable USDC and ETH (which should initially hold LSD) as collateral. My reasoning is that this is a different deployment and we will be able to determine the balance of demand between ETH and USDC as collateral. Another reason to deploy only ETH and USDC is that it means we don't put any pressure on liquidity on Optimism. If we enable SNX collateral on Base, there may be a significant portion of LP migration, which will reduce liquidity on Optimism. Andromeda will enable users to stake ETH or USDC and mint sUSD; These sUSD will be used by traders on Base and are not interchangeable with sUSD on Optimism and Ethereum. We also need to incentivize USDC/sUSD liquidity on Base. In addition, we should also enable the USDC/sUSD wrapper so that traders with USDC can easily get sUSD without exchanging it for sUSD.

In my opinion, in the beginning we should give 50% of the fee to LP and 50% to SNX stakers. In terms of paying SNX holders, I think we should buy back and destroy SNX on Base. This will require the creation of a wrapped SNX token on Base that can be cross-chained to Ethereum, luckily there is already a SIP to enable this, unfortunately I have already voted against.

One of the key factors is the formalization of the fee share between SNX holders, LPs, and integrators. Some suggestions are being discussed in the community, but there seems to be some consensus that the fee for integrators is 20%. This results in a 20/40/40 ratio between integrator, LP, and SNX holders.

**What are we considering? **

We're looking at many aspects at once, and while it's cumbersome, we have to start somewhere:

• The need to stake ETH on Base;
• The need to stake USDC on Base;
• Sensitivity to fee shares;
• Sensitivity to liquidity incentives;
• The need to trade Perps on Base;
• The need for traders to convert USDC to sUSD.

**What counts as success? **

Over $10 million in ETH and/or USDC collateral (50% fee share), or more than $20 million in daily trading volume or up to 25% of the trading volume on Optimism.

What if it fails? **

Thankfully, points 1-4 are quite different from points 5; As long as we have enough liquidity, trading will not be affected. Without the need to mint sUSD for collateralized assets, then trading would not be possible and we would need to re-experiment with SNX as collateral or higher incentives. If the demand for LP is low, we can adjust the fee allocation or LP incentive to test whether the demand increases. If the experiment fails, we need to test several possible conclusions in subsequent experiments. One is that the demand for sUSD minted by collateralizing assets on Base is extremely low; We can run experiments on other networks like Arbitrum to verify this.

**What if it succeeds? **

If this experiment is successful, and there is a lot of demand from both traders and LPs, we will have to decide on the next one. There are two options: replicate this experiment on Arbitrum or replicate on Optimism.

Lab 2: Deploying Andromeda to Optimsim

If the experiment is successful, I tend to deploy Andromeda to Optimism; To be clear, Perps V3 + V3 + USDC and ETH are included as collateral. This is a significant shift in our mechanism because it means that SNX will no longer be used as collateral. However, traditional Perps is still running, so we will do reasonable testing on the need for SNX-backed Perps vs. ETH/USDC-backed Perps. Because while Perps upgrades are valuable, they don't necessarily lead to increments. This new deployment should incentivize users and traders who mint sUSD in the form of OP/SNX.

**What are we considering? **

• Optimism on the demand for sUSD sUSD on sSecured ETH Minting;
• Demand for sUSD minted by USDC on Optimism.

**What counts as success? **

• 20% liquidity of V2X;
• 50% of V2X trading volume.

What if it fails? **

This provides valuable information if there is minimal demand from users (LPs) or traders who stake sUSD compared to traditional systems. If LPs have little demand for ETH or USDC, we can adjust the fee allocation to see if it's an incentive issue. If the demand is still low, we can conclude that SNX collateral will most likely be needed to scale the protocol. If there are a large number of LPs, but the trading volume is low compared to traditional systems, then the problem is less obvious, but this seems unlikely to happen. In either case, after adjusting the fee allocation, the next step should be to reintroduce SNX collateral. This new three-token staking system (SNX/ETH/USDC) should preferably have a new name (Barnard) to distinguish it from the system deployed on Base.

**What if it succeeds? **

If successful, the next step is to shut down the traditional perps market and switch to USDC/ETH collateral on Optimism. This means that traders, LPs, and integrators will have more incentives. I need to point out that each of these experiments requires a SIP and can also be modified via SCCP, so this will be an ongoing process as we try to debug the best parameters.

Lab 3: Deploying Carina on Ethereum

If non-SNX collateral succeeds on both Optimism and Base, the next experiment is to deploy an optimized version of Perps on mainnet, Carina. It will be purely Ethereum backed (ETH and LSD) and aims to support stablecoin designs with a Delta neutral strategy; Projects like Ethena are already deploying this technology, and we need a perps marketplace on Ethereum to support it. This experiment is independent of the others, so its success will not have a significant impact on the roadmap.

Lab 4: Deploy Andromeda to Arbitrum

The reason we have to wait until more data is available to deploy on Arbitrum is because it is one of the most popular networks that we haven't deployed yet. There is a large active DeFi user base on Arbitrum, where we want to maximize the effectiveness of the protocol. Again, the reason why SNX collateral is not used on multiple networks is to ensure that we do not fragment existing SNX liquidity and thus affect the trading experience across all networks.

Lab 5: Deploying SNX Chain with OP Stack (Project Draco)

If the first two experiments are successful and stable, the next step is to deploy Synthetix Chain. The chain has several uses: first, it is the "place" of Synthetix governance; Second, it allows SNX holders to borrow money against their SNX, thereby issuing sUSD. This sUSD can be transacted on any supported network. The third purpose of the network is to provide a unified venue for the allocation of costs. However, if destroying SNX on each network is the preferred method of cost allocation, this aspect may not be necessary. In addition, sUSD issued on SNX Chain may also be used as collateral on other networks. As part of Project Draco, the debt of the V2x system will be migrated to V3 on SNX Chain.

Synthetix for 2024

If all these experiments are successful, the state of the protocol in early 2024 will be that Synthetix Andromeda runs on three Ethereum L2s: Optimism, Base, and Arbitrum. Andromeda includes the latest version of Perps, uses both ETH and USDC as collateral, and comes with a USDC wrapper for easy access to sUSD. Synthetix Carina will also run on Ethereum, a Perps-optimized version that uses ETH (and LSD) as collateral. The Draco project is under development and it is planned to migrate all management functions to Synthetix Appchain in 2024. It is possible that sUSD issued on Synthetix Chain will be trialled in the future alongside ETH/USDC and other forms of collateral as a form of collateral. This will allow SNX holders to borrow with their SNX as collateral and improve collateral and liquidity on other networks.

Finally, I would like to share some observations on this major strategic shift. Eliminating reliance on SNX collateral through these experiments is a significant change in Synthetix. Back in 2018, many people thought it was crazy to use SNX tokens as collateral, and in fact, many still think so. It has also been suggested that it would be a good idea to tweak the concept a bit, as is the case with LUNA. But regardless of your stance on SNX collateral, there is no doubt that it has been in play until now and will likely continue to do so well into the future. Before DeFi Summer, SNX collateral allowed projects to survive and thrive, but now is the time to test whether SNX collateral has hindered the project in the near term.

It is possible that eliminating SNX collateral simply won't work because SNX is too critical to the operation of the network. This will be very valuable information that we can use to plan for expansion to multiple networks in 2024. However, I've noticed a noticeable change in the conversations I've had about Synthetix, and I think many of the people in our community who insist on SNX as sole collateral may be underestimating its impact on protocol engagement. No matter how convinced we are historically, SNX collateral is the right approach, there are very strong skeptics in the DeFi community. I began to realize that among every hoarse skeptics, there were more silent skeptics who were unwilling to publicly criticize Synthetix and chose not to participate at all. One of the biggest outcomes of these experiments is to see how much additional enthusiasm we can generate when introducing non-SNX collateral.

Making decisions in uncertain situations is never easy, and it requires a willingness to take risks and the courage to make mistakes. This openness and epistemological humility has been a key success factor in the Synthetix community for years, but it's time for us to challenge some core philosophies.