Author: Kain Warwick, Founder of Synthetix

Translation: Babywhale, Foresight News

My previous article discussed the future of Synthetix at length. This article will take a different approach, serving as a simple and practical guide to help the community understand the experiments we must undertake in the coming months. Without the more flexible new V3 architecture, none of the envisioned experiments below would be possible. It took us a long time to get to this point, but now we are ready for rapid testing and iteration.

Questions that need to be considered now include:

• How to launch V3 and Perps V3?
• How to expand the scale of collateral?
• What are the limiting factors for expanding collateral?
• Should we enable non-SNX collateral?
• What is the best strategy to maximize value for SNX holders?
• How to convert fees into returns for SNX holders?
• Are there still untapped traders on other chains?
• How can we effectively reach these traders?

Current status of the protocol:

• Synthetix V2x has been launched on Ethereum;
• Synthetix V2x is live on Optimism;
• Synthetix V3 has been deployed to Optimism but has not been activated to date;
• Synthetix V3 has been deployed to Ethereum but has not been activated to date;
• Perps V3 and Synthetix V3 have been deployed to the Base testnet;
• Most liquidity is in the V2x system on Optimism;
• We can also deploy to 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.

The naming conventions for the project are currently somewhat confusing. We have Synthetix V2x and V3, as well as Perps V2 and Perps V3; this is difficult for those outside the community to understand. I suggest that we create names that help distinguish these versions. We can use astronomical names previously used and assign them to these versions. Instead of using different versions, we can combine them; therefore, Perps V3 on Synthetix V3 can be called Andromeda. Although we have deployed some features of V3, it cannot be called the Andromeda version until we have deployed all features.

Experiment 1: Deploying Andromeda to Base

This 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 fee allocation between SNX and non-SNX collateral. This will help us determine whether to support collateralized minting of sUSD on Base. I believe we should enable USDC and ETH (initially deferring the use of LSD) as collateral. My reasoning is that this is a different deployment, and we will be able to determine the demand balance between ETH and USDC as collateral. Another reason to deploy only ETH and USDC is that this means we will not put any pressure on liquidity on Optimism. If we enable SNX collateral on Base, there may be a significant LP migration, which will reduce liquidity on Optimism. Andromeda will allow users to collateralize ETH or USDC and mint sUSD; these sUSD will be used by traders on Base and cannot be swapped with sUSD on Optimism and Ethereum. We also need to incentivize USDC/sUSD liquidity on Base. Additionally, we should also enable a USDC/sUSD wrapper so that traders with USDC can easily obtain sUSD without needing to swap into sUSD.

I believe initially we should allocate 50% of the fees to LPs and 50% to SNX stakers. In terms of paying fees to SNX holders, I believe we should buy back and burn SNX on Base. This will require creating a wrapped SNX token that can be cross-chain to Ethereum on Base, and fortunately, there is a SIP to achieve this, unfortunately, I have voted against it.

One key factor is to formalize the fee split between SNX stakers, LPs, and integrators. The community is discussing some proposals, but there seems to be some consensus that integrators should receive 20% of the fees. This would result in a split of 20/40/40 between integrators, LPs, and SNX stakers.

What are we considering?

We are considering many aspects simultaneously, and while this is complicated, we have to start somewhere:

• Demand for collateralizing ETH on Base;
• Demand for collateralizing USDC on Base;
• Sensitivity to fee share;
• Sensitivity to liquidity incentives;
• Demand for trading Perps on Base;
• Demand for traders to convert USDC to sUSD.

What would be considered a success?

Collateralization of over $10 million in ETH and/or USDC (with a 50% fee split), daily trading volume of over $20 million, or reaching 25% of the trading volume on Optimism.

What if it fails?

Fortunately, points 1-4 are quite different from point 5; as long as we have enough liquidity, trading will not be affected. If there is no demand for collateralized assets to mint sUSD, then trading will not be possible, and we will need to retest with SNX as collateral or higher incentive measures. If there is low demand from LPs, we can adjust fee allocation or LP incentives to test if demand increases. If the experiment fails, we need to test several possible conclusions in subsequent experiments. One is that there is very low demand for collateralized assets to mint sUSD on Base; we can test this on other networks such as Arbitrum.

What if it succeeds?

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

Experiment 2: Deploying Andromeda to Optimism

If the experiment is successful, I am inclined to deploy Andromeda to Optimism; specifically, including Perps V3 + V3 + USDC and ETH as collateral. This is a significant shift in our mechanism, as it means SNX will no longer be used as collateral. However, traditional Perps will still be running, so we will be testing the demand for Perps supported by SNX versus Perps supported by ETH/USDC. While the upgrade of Perps is valuable, it may not necessarily bring incremental demand. This new deployment should incentivize users and traders to mint sUSD in the form of OP/SNX.

What are we considering?

• Demand for collateralizing ETH to mint sUSD on Optimism;
• Demand for collateralizing USDC to mint sUSD on Optimism.

What would be considered a success?

• Liquidity reaching 20% of V2x;
• Trading volume reaching 50% of V2x.

What if it fails?

If there is minimal demand from users (LP) or traders to collateralize and mint sUSD compared to traditional systems, this will provide valuable information. If there is little demand from LPs for ETH or USDC, we can adjust fee allocation to see if it's an incentive mechanism issue. If demand remains low, we can conclude that expanding the protocol may likely require SNX collateral. If there are many LPs but relatively low trading volume compared to traditional systems, the issue is not as clear, but this scenario seems unlikely. In either case, after adjusting fee allocation, the next step should be to reintroduce SNX collateral. This new three-token collateral system (SNX/ETH/USDC) would be best given a new name (Barnard) to distinguish it from the system deployed on Base.

What if it succeeds?

If successful, the next step would be to shut down the traditional perps market and instead adopt one with USDC/ETH as collateral on Optimism. This means traders, LPs, and integrators will receive more incentives. I must point out that each of these experiments will require a SIP and can be modified through SCCP, so this will be an ongoing process as we try to fine-tune the optimal parameters.

Experiment 3: Deploying Carina on Ethereum

If non-SNX collateral is successful on Optimism and Base, the next experiment would be to deploy the optimized version of perps, Carina, on the mainnet. It will be purely supported by Ethereum (ETH and LSD) and designed to support stablecoin design through delta-neutral strategies; projects like Ethena have already started deploying this technology, and we need an Ethereum-based perps market to support it. This experiment is independent of the others, so its success or failure will not have a significant impact on the roadmap.

Experiment 4: Deploying Andromeda on Arbitrum

The reason for waiting to deploy on Arbitrum until more data is obtained is that it is one of the most popular networks we have not yet deployed to. There is a large active DeFi user base on Arbitrum, and we hope to maximize the protocol's impact there. It is worth noting again that the reason for not using SNX collateral on multiple networks is to ensure that we do not dilute existing SNX liquidity, thus affecting the trading experience on all networks.

Experiment 5: Deploying SNX Chain (Project Draco) using OP Stack

If the first two experiments are successful and stable, the next step is to deploy the Synthetix Chain. The chain serves several purposes: first, it is the "venue" for Synthetix governance; second, it allows SNX holders to borrow against their SNX to issue sUSD, which can be traded on any supported network. The third purpose of the network is to provide a unified venue for fee allocation. However, if burning SNX on each network is the preferred fee allocation method, this aspect may not be necessary. Additionally, sUSD issued on the SNX Chain may also be used as collateral on other networks in the future. As part of Project Draco, the debt of the V2x system will be migrated to V3 on the SNX Chain in 2024.

Synthetix in 2024

If all these experiments are successful, the protocol's state in early 2024 will be Synthetix Andromeda running on three Ethereum L2s: Optimism, Base, and Arbitrum. Andromeda includes the latest version of Perps, using ETH and USDC as collateral, and comes with a USDC wrapper for easy access to sUSD. Synthetix Carina will also be running on Ethereum, which is an optimized version of perps using ETH (and LSD) as collateral. The Draco project is in development and plans to migrate all governance functions to the Synthetix Appchain in 2024. sUSD issued on the Synthetix Chain may serve as a form of collateral in the future, alongside ETH/USDC and other forms of collateral. This will allow SNX holders to borrow against their SNX and increase collateral and liquidity on other networks.

Finally, I would like to discuss some thoughts on this significant strategic shift. Eliminating reliance on SNX collateral through these experiments is a major change for Synthetix. As early as 2018, many people thought using SNX tokens as collateral was crazy, and in fact, many still do. Some believe that tweaking the concept slightly is a good idea, as with LUNA. But regardless of your stance on SNX collateral, it is undeniable that it has been effective up to now and is likely to continue to be effective for a long time to come. Before DeFi Summer, SNX collateral allowed the project to survive and thrive, but now it's time to test whether SNX collateral has hindered the project's development in the near term.

It may not be feasible to eliminate SNX collateral altogether, as SNX is too critical to the network's operation. This would be very valuable information, and we can use it to plan expansion to multiple networks in 2024. However, I have noticed a noticeable change in the conversations I have had about Synthetix, and I think many in our community who insist on SNX as the sole collateral may underestimate its impact on protocol participation. Regardless of how confident we have been historically in SNX collateral being the right approach, there is a strong skepticism in the DeFi community. I am beginning to realize that behind every vocal skeptic, there are many more silent skeptics who choose not to openly criticize Synthetix but simply do not participate. One of the greatest outcomes of these experiments will be to see how much additional enthusiasm we can generate when introducing non-SNX collateral.

Making decisions in uncertain circumstances is not easy, and it requires us to be willing to take risks and be willing to make mistakes. Over the years, this openness and epistemic humility have been key factors in the success of the Synthetix community, but now is the time for us to challenge some core beliefs.

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