TL;DR: Synthetix is about to revolutionize DeFi with its V3 launch, enabling customers to pool collateral, create onchain monetary markets, and energy numerous new protocols with Synthetix liquidity and infrastructure. In essence, V3 provides a extra dynamic and modular method to onchain spinoff creation, liquidity development, and infrastructure administration, increasing the chances of what may be constructed atop the protocol.
Synthetix stands on the cusp of making a DeFi revolution with its upcoming V3 launch. It’s going to assist to usher in a interval of mass innovation all through the world of onchain derivatives and monetary devices.
What’s Synthetix V3? Let me clarify.
At its core, all the Synthetix V3 system is a Collateralized Debt Place (CDP) protocol. Much like MakerDAO/Liquity, you are taking your collateral (SNX, ETH/wsteth/different LSDs/and so on), deposit it right into a contract, after which generate a stablecoin. In Synthetix’s case, the system-generated stablecoin is sUSD.
The differentiator for Synthetix is you could as a substitute delegate your total CDP, collateral and all, to a bigger basket of collateral referred to as a Pool.
Swimming pools may be thought-about a collective CDP, with baskets of collateral used to generate sUSD and allocate liquidity to spinoff markets for merchants to make the most of. Pool house owners are the deciders of how liquidity is allotted. Due to this, although anybody can create and handle a pool, most stakers will probably direct their collateral to extra ‘trusted’ swimming pools. For instance, the Spartan Council Pool, whose house owners are immediately elected by SNX token holders.
Swimming pools then use this collateral and allocate it to spinoff Markets. Markets are arguably an important piece of all the protocol, as they’re the logic that turns LP liquidity into onchain monetary devices. Properly-designed markets hope to generate delta-neutral charges for LPs – which, on this case, signifies that the charges earned by liquidity suppliers are unaffected by perps dealer revenue and losses, making certain secure returns no matter volatility. A current instance of a ‘well-designed market’ is Synthetix Perps, which has returned $24m+ in charges to Synthetix Stakers. Synthetix Perps has built-in danger administration designs like price-impact and dynamic funding charges, which work collectively to maintain the market delta impartial.
LP’s, Swimming pools, Markets & Merchants
Earlier than we go any additional, let’s first shortly break down the stream of liquidity within the Synthetix V3 system.
Liquidity Supplier –> Swimming pools –> Markets –> Merchants
That is all the system in a nutshell, with LPs offering the preliminary collateral, then swimming pools receiving this delegated collateral and utilizing this collateral to generate sUSD and allocate it to markets. Markets deploy this sUSD to supply liquidity for markets like Synthetix Perps, after which merchants make the most of this liquidity for buying and selling.
The stream of charges goes the alternative approach
Merchants –> Markets –> Swimming pools –> Liquidity Suppliers
All swimming pools throughout the Synthetix V3 system will distribute charges on a pro-rata foundation, which means that those that present extra collateral to the pool will obtain extra charges. There’s one caveat right here in that Pool House owners can create a rewards distributor. This distributor can siphon off a share of the generated charges, and distribute them to any handle, collateral sort, and so on., in any approach. Moreover, the rewards distributor can obtain incentives from an outdoor supply, and distribute these further rewards to LPs, these can embrace token rewards, inflationary rewards, and so on.
A rewards distributor, managed by the pool proprietor, may determine to allocate 10% of all charges to the unique creator of the market, or 10% of all charges to SNX stakers. Alternatively, the rewards distributor can distribute further rewards to LPs out there – an instance is inflationary SNX, which might be distributed by way of a rewards distributor. It is maximally configurable. To be taught extra about it, examine it within the official Synthetix V3 docs.
Earlier than delving into markets, let’s start with a broad overview of all the system. Beneath is a graphic of the Synthetix V3 system to visualise the construction.
I’m positive you perceive the illustration. Now, let’s delve deeper into the markets.
Markets in Improvement & Potential Markets
Some further markets being developed proper now embrace Perps V3 & Spot, which can allow the creation of perpetual futures and spot artificial belongings. Markets are maximally configurable and modular. Builders can create a marketplace for any spinoff utilizing any accessible onchain Oracle. Here is a non-exhaustive listing of potential markets from Synthetix Core Contributor Cavalier’s current weblog put up on Synthetix V3:
Perpetual Futures / Choices / Structured Merchandise: buying and selling utilizing artificial belongings to characterize leveraged positions for perpetual futures, together with foundation buying and selling, and funding charge arbitrage vaults. Instance – GMX might be constructed on Synthetix v3.NFT-Fi borrowing/perpetuals: Customers can borrow artificial belongings collateralized by NFTs or create perpetual contracts speculating on the longer term worth of NFTs, with rewards distributed to Synthetix stakers. For example, nftperp.xyz might be constructed on Synthetix v3Insurance markets: Customers can buy insurance coverage contracts for varied dangers, collateralized by Swimming pools and ruled by sensible contracts. Eg. Nexus Mutual might be constructed on Synthetix v3.Prediction markets / Binary Choices / Sports activities Bettings: Customers can commerce shares primarily based on the result of occasions, equivalent to election outcomes or sports activities video games. Eg. Additional time Markets might be constructed on Synthetix v3.Video games: any recreation may leverage Synthetix collateral, to supply aggressive prizes. Eg. a lottery (or no-loss lottery, like PoolTogether) is simple to implement on Synthetix v3.Offchain / RWA Markets: Markets might be developed for real-world belongings equivalent to artwork, carbon credit or different offchain belongings or devices. With ample oracles and trusted entity verification, this “belief” may generate capital on chain, backed by Synthetix and snxUSD.
The alternatives are countless. Now, whereas these market prospects are intriguing, the important thing element powering these derivatives is liquidity. Let’s delve into how Synthetix V3 addresses the problem of onchain liquidity.
Liquidity as a Service or LAAS
Constructing onchain derivatives is HARD. Many protocols have tried, and lots of protocols have died.
The most important drawback plaguing spinoff protocols is often known as the hen and egg drawback. New spinoff protocols cannot onboard merchants as a result of they don’t have any liquidity, and so they cannot herald liquidity as a result of they don’t have merchants. It does not matter how novel or bespoke your protocol is; in case you have no liquidity, you are useless within the water, and that is that.
That is the place Synthetix is available in. Liquidity as a service.
Builders construct on Synthetix infrastructure after which persuade LPs to deposit collateral into swimming pools to funnel liquidity to their spinoff markets. As an alternative of getting to reinvent the wheel, you may as a substitute be throughout the Synthetix ecosystem, a protocol with a historical past of supporting modern concepts and new protocols.
I think about most protocols will use a mix of old-school liquidity development by way of token brrr and ask the Spartan Council for an preliminary seed of liquidity to get them off the bottom. That is the good thing about the Synthetix system – you possibly can collect liquidity your self and work by way of governance to collect liquidity to your new concept. However Synthetix doesn’t simply cease at offering liquidity. It provides an answer to builders by managing backend infrastructure complexities as nicely.
Infrastructure as a service
Builders needn’t handle infrastructure particular to liquidity provisioning, leaving them to deal with the 2 most vital components of their protocols – spinoff mechanism design, and a correct frontend to assist onboard and educate merchants.
Simply think about the numerous hours builders throughout DeFi have spent constructing infrastructure that might’ve been spent on creating a greater product. Synthetix V3 will quickly summary all of that ache away.
Synthetix V3 handles every part, and also you needn’t rebuild liquidity administration, and reward distributors, for every market you construct.
Go Deeper
Right here’s a non-exhaustive listing of different assets for studying extra about Synthetix V3:
