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With the vacation season upon us, chaos ripping by way of the crypto trade, and Synthetix V3 coming into audit, I assumed it could be useful to summarize my perspective on the place Synthetix is true now and the place it could possibly be going. Every little thing included right here is my private opinion. I don’t signify different Core Contributors or any of the DAOs that govern the protocol. Developments in DeFi and my opinions are quickly evolving, so this ought to be handled as a snapshot.
Presently, most efforts among the many Core Contributors are centered on the upcoming launch of Synthetix V3. We’re on monitor to kick off the migration course of in January. Outdoors of this, we’re rolling out enhancements to the spot markets (optimized for cross-asset swaps) and perpetual futures markets, as these are each confirmed income drivers for the protocol.
For the uninitiated, Synthetix might be complicated. I’ve tried to clarify this “derivatives liquidity protocol” in a earlier publish. In brief, Synthetix is decentralized infrastructure that permits for the creation of crypto property that monitor the worth of different property (like {dollars}, different currencies, commodities, and the rest with a worth feed). This can be a extra formidable challenge than most “DeFi primitives” and it includes many elements.
Stablecoins
Crypto property which monitor the value of {dollars} are known as stablecoins. MakerDAO is likely one of the first makes an attempt on the creation of a decentralized stablecoin the place a collateralized debt place might be created with ETH, represented with the DAI token. To deal with scalability points, DAI is now partially collateralized by wrapping USDC, a centralized stablecoin.
Liquity is a protocol that points the LUSD stablecoin and operates on the same precept as MakerDAO. With an environment friendly liquidation mechanism, governance minimization, and issuance charges quite than curiosity, this was a big innovation over MakerDAO, although it suffers from some scalability points as nicely.
Synthetix’s sUSD stablecoin is partially collateralized with wrapped LUSD to assist its personal scalability. Synthetix’s governance rejected a proposal to wrap DAI as a result of its lack of decentralization. This was hotly debated. Many who rejected the DAI proposal subsequently felt vindicated through the occasions surrounding OFAC’s sanction of the Twister Money sensible contracts, the place the opportunity of DAI’s censorship immediately went from a priority for conspiracy theorists to a critical consideration.
A vital characteristic of Synthetix V3 is that it’s collateral agnostic. Governance will have the ability to set danger parameters tuned to numerous collateral varieties. With a liquidations mechanism as environment friendly as Liquity’s, the protocol ought to have the ability to supply stablecoins backed by ETH with related collateralization necessities, however with out an issuance charge. (Liquidity suppliers in Synthetix are as an alternative incentivized with market efficiency, like change charges.) Synthetix can also be capable of leverage markets which might be extra tightly coupled to the core system to extend stablecoin scalability in ways in which Liquity can’t.
Put merely, constructing a scalable decentralized stablecoin is a core problem that Synthetix is addressing. We will’t actually have decentralized finance with out one.
Derivatives Markets
Just like how Synthetix might be understood compared to decentralized stablecoin tasks, it’s also typically in comparison with varied protocols centered particularly on constructing perpetual futures markets. A key differentiator is that Synthetix is primarily centered on constructing a sturdy liquidity provisioning protocol that can be utilized with any kind of market (together with spot, choices, insurance coverage, and the rest that may be carried out with sensible contracts). The Synthetix neighborhood has additionally historically put a a lot higher emphasis on decentralization and censorship-resistance than different protocols.
For example, some perpetual futures market implementations depend on their very own off-chain oracles, however are asserting plans to make use of a brand new oracle system we designed with Chainlink. Many are additionally depending on USDC. If Synthetix V3 is profitable, it ought to be an apparent alternative to make use of Synthetix for liquidity provisioning and take away this dependence on a centralized stablecoin.
Synthetix’s Core Contributors plan to proceed iterating on perpetual futures markets constructed on our infrastructure. Our roadmap consists of extra progressive and sturdy monetary mechanisms than implementations presently in use. However, maybe extra importantly, we are able to leverage markets extra tightly coupled with the core system to resolve scalability and cross-chain challenges. For instance, an ETH perpetual futures market may settle for ETH and challenge an equal worth of stablecoins. We would additionally leverage artificial property to distribute collateral from socialized liquidations throughout chains.
Along with collateral agnosticism, a vital characteristic of Synthetix V3 is larger composability and permissionless performance. A aim of the structure is to permit anybody to construct a customized market implementation, register it with the system, after which have swimming pools of liquidity within the Synthetix protocol choose into offering it with credit score. Our market implementations are being constructed as “factories”, the place finish customers (even by way of a easy internet UI) will have the ability to deploy new property by specifying a worth feed, charge construction, and different configurable parameters.
Finally, the creation of markets will develop into trivial. The precious, tough downside that wants an answer is scalable decentralized liquidity provisioning.
Scaling Cross-chain
The roadmap for Ethereum includes finish customers interacting with a wide range of layer two scaling options (L2s) like Optimism as an alternative of mainnet. Sadly, this introduces varied complexities pertaining not solely to consumer expertise and safety, but additionally liquidity provisioning.
Synthetix is deployed to Ethereum’s mainnet and Optimism. The protocol presently solves the issue of fractured liquidity with the debt pool synthesis, an oracle that that successfully reviews the aggregated credit score and debt from each networks to each networks, such that collateral on one community can again the debt on one other. That is the one main DeFi protocol with such an answer so far as I do know.
Cross-chain plans are underneath growth for Synthetix V3, which is able to develop into a high precedence after the migration is underway. The present draft proposal entails a system that may depend on Chainlink’s CCIP (which is de facto “CCIP Write”) to synchronize configuration throughout chains. It additionally proposes a system that closely depends on EIP-3668 (CCIP Learn) to learn cross-chain information on-demand, much like the oracle system referenced above. This won’t solely enable completely different units of swimming pools to be synthesized throughout chains, but additionally resolve some scalability points pertaining to fuel utilization.
For finish customers, this may unlock a brand new paradigm for UX. Dashboards can show aggregated values throughout chains to customers, utterly abstracting cross-chain issues. When a consumer decides to take an motion (e.g. provisioning liquidity to a pool), a separate dialog can queue the required transactions on varied chains to attain the specified end result, much like an order router.
Additional, the flexibility to scale the protocol is carefully coupled with the flexibility to quickly iterate. Synthetix was a really early DeFi protocol which has been extremely progressive. Whereas main the best way with some points of sensible contract growth (e.g. many contemplate the Staking Rewards contract to be some of the forked sensible contracts in existence), the complexity of the challenge and infancy of current tooling early on has led to some non-trivial technical debt.
The Core Contributors are taking V3 as a chance to begin contemporary. The proxy structure and deployment device we’ve developed ought to enable iteration orders of magnitude sooner than earlier than and make it seamless for ecosystem companions to develop integrations as nicely. Between the tough work concerned with enhancing the present V2 codebase and the innovation occurring within the V3 codebase, I’m continually impressed by the standard and tempo of the engineering work being accomplished by fellow Core Contributors (particularly given how decentralized the group is itself).
Wanting Ahead
In gentle of latest occasions, it has develop into obvious that the one critical path ahead for shopper safety—in a world the place monetary establishments can merely function underneath essentially the most permissive political jurisdictions—is to construct actually decentralized and clear monetary infrastructure. Adoption might be pushed by options to the engineering issues that allow a consumer expertise rivaling that of centralized providers. This gained’t occur in a single day, however it’ll occur.
Pockets and buying and selling apps are largely there. Essentially the most crucial layer of the stack is a scalable, actually decentralized derivatives liquidity protocol that allows publicity to off-chain property. It will enable DeFi to have actual utility.
Try the Synthetix V3 prototype and supply suggestions within the #synthetix-v3 channel on Discord. For extra particulars, try this Twitter Area and assessment the (incessantly up to date) draft 300-series SIPs.
Onwards. ✌️
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