Founder’s account: What will be the future of Synthetix?

Written by Kain Warwick, Synthetix founder. Translated by Frank, Foresight News.

After reconnecting with the community over the past few months, I have often asked myself, “What does Synthetix lack?”

My conclusion is that people often hesitate to pursue high-risk, non-obvious paths. This makes sense because the incentive mechanism is closely related to everyone’s work on the critical path, which also means that few people have the time to sit down and make crazy plans for Synthetix.

In the past year, Synthetix’s core contributors have become more efficient, thanks in part to the introduction of the core contributors committee and the hiring of many outstanding talents to replace the exhausted OGs during the “death march” period in 2018 and 2019. This has helped Synthetix make significant progress in core planning, including ending V2x, designing V3, and re-implementing Perps.

Designing V3 and re-implementing Perps were both in their early stages at the beginning of 2022. Now, just over a year later, Perps continues to expand its market coverage, and the initial components of V3 have been deployed to the mainnet.

In summary, Synthetix has undergone some changes in the past year, some of which have been very effective, but there is still room for improvement. This article will list the opportunities I have found, some of which will provide an overview of the issue and options, while others will provide detailed plans.

The Synthetix Treasury Committee is also developing new proposal templates to propose the following initiatives to ensure more transparent communication of Synthetix’s changes and avoid misunderstandings. It should be emphasized that everything listed below is conceptual and has not been confirmed by the Treasury Committee’s vote, but many aspects of these proposals have received the Treasury Committee’s support:

Core contributor positioning
Transaction incentives
SNX passive staking
Incentive integration
3:1 ratio of SNX split and repurchase
Distribution of SNX to staking users
Working groups funded by the Treasury Committee
Synthetix Ecosystem Foundation
Subsidizing keeper fees
Perpetual contract recommendation plan
Treasury Committee proposal template
Disband the Treasury Committee

Core Contributor Positioning

I know this may delve into the philosophy of equity distribution in startups or token distribution in DAOs, but I think this is a critical point. Either the early Synthetix community understood this intuitively, or I imposed my understanding of this on them.

Based on my experience, many people working in startups have multiple motivations, but economic freedom is often a significant factor, while working in a startup itself is already a gamble, and working in a DAO is even riskier.

Because there is almost no hierarchy in Synthetix, self-motivated people are more likely to be attracted to this atmosphere, but we must also ensure alignment with financial incentives.

I suggest setting aside a portion of SNX as a bonus each quarter, to be decided by the Treasury Committee, taking into account feedback from CCs (Core Contributors), and fairly distributed based on the different extent to which each colleague has an impact on the Synthetix protocol, to recognize everyone’s performance. The exact amount of SNX to be allocated for distribution is yet to be determined, but it should ideally be in the millions.

Trading Incentives

Although OP incentives have been successful in increasing trading volume, SNX-based incentives may produce a more impactful feedback loop, especially since this incentive will be provided in the form of staked SNX, which will help more traders understand and participate in SNX staking. Ideally, 500k to 1m SNX should be allocated to this incentive program over time.

Passive SNX Staking

Despite Synthetix implementing a series of measures to simplify the staking process, such as implementing hedging (dHedge) strategies, the difficulty of participating in SNX staking is still a significant barrier to entry for new participants in the Synthetix ecosystem.

Even just getting users to understand why these hedging strategies are necessary is a challenge, as it’s difficult to quantify. It’s this complexity that has caused Synthetix’s ecosystem to lose too many potential stakers, and I believe it’s conservative to assume that potential stakers are several times the actual number of stakers.

In order to make the staking process easier, we can create a passive staking pool that works in conjunction with active SNX staking so that new staking users can try staking without facing too many complex processes and better understand Synthetix.

We can think of it as a business model with free value-added, where “price” represents risk and complexity. If we reduce risk and complexity while paying lower returns, we may attract more investors. This return should initially be paid by the Synthetix Treasury, possibly in the form of SNX or sUSD, but it is preferable to use sUSD.

This return should also be dynamically calculated based on the proportion between active and passive staking users, and a maximum fee of about 10% should be set for passive staking users. Of course, this is only a very rough concept outline, and specific details need to be discussed. I think we can conduct a three-month trial with an expenditure limit of 1 to 2 million sUSD (or equivalent value of SNX), which should be enough to determine whether this will increase the percentage of SNX passive staking and active staking.

Incentive Integration

As Synthetix shifts to the liquidity layer, our dependence on integrators has become a life-and-death issue. Of course, the community can fund new Synthetix internal trading front-ends.

In the long run, we must adjust the incentive measures for integrators, which is crucial. We have had lengthy debates on how to achieve this on Discord, so I will quickly review the perspectives of each party:

Purists believe that no fees should be charged from SNX staking users. What we need to do is to enable integrators to add an additional fee to the basic protocol fee. The benefit of doing so is that it reduces the complexity of integrators, while still allowing them to capture revenue. Integrators, on the other hand, oppose this approach because they believe it will make them less competitive, but this method is still the status quo;
Other members of the community believe that a certain percentage (e.g. 10%) of the fee should be allocated to integrators as a subsidy. In this case, all integrators can earn the same fee, and there will be no price war among them;
There is also a compromise solution, which guarantees a certain percentage of fee subsidies, but integrators can also charge optional additional fees, which provides basic incentives for integrators, and if they achieve differential competition in the market, there is also additional income growth space;

The SIP-2002 proposal takes us away from the purist view, but it does not affect the income generated by SNX staking users. The problem is that if the cost continues to increase, although it is a step in the right direction, it will not be a sustainable mechanism.

I propose to subsidize the integration fees by allocating a certain percentage (such as 10 million SNX) of SNX from the treasury, which can be staked on behalf of them, generating a basic fee income of 3-5% (depending on the percentage of SNX staked). The advantage of doing this is that it does not require an increase in the number of SNX in circulation to pay these fees.

If this incentive measure is successful, it can be incorporated into the protocol without representing the integration staker SNX; if it fails, it can gradually reduce the measure and allocate it to other incentive measures or distribute it to SNX staking users.

3:1 split of SNX + buyback

Last year, I tried to terminate inflation before Synthetix reached 300 million SNX. Fortunately, this proposal failed because we have not reached the point of sustainable zero inflation.

Today, the issue of SNX inflation is equally important. In V2x, I believe we can terminate inflation with minimal impact. Unfortunately, we are now planning to transition to V3, and the issue of whether inflation incentives are needed has become a topic of debate again.

The main reason for retaining inflation in V3 is to ensure that there is a mechanism to trigger permissionless liquidity pools. There are already several proposals on how to achieve this goal, such as using the veCRV voting model. Even if inflation is the only solution to this problem, I believe that the offset effect of buybacks and destruction cannot be ignored.

If we split this 3:1, we will have about 90 million SNX that can be bought back and burned at a market price of $60 million.

Where does the funding for burning these tokens come from? Treasury revenue, according to recent revenue, the treasury committee earns about $5 million per year, and if 100% is used for buybacks, it will take about ten years to complete. If trading volume increases in the next few years, the timetable will be significantly shortened.

You may wonder why not just destroy the over 30 million tokens in the Treasury Committee’s wallet? These tokens are effectively locked up, so the impact would be small; but once this buyback is complete, it makes sense to consider distributing remaining SNX proportionally to stakers.

Distributing SNX to Stakers

The question is why not just burn this portion of SNX instead?

The reason is that these SNX can be used for incentives, and if distributed entirely, this is equivalent to a 3% inflation rate over three years, which will enable Synthetix to test if there is a need for monetary inflation without actually increasing token supply. However, these tokens are currently heavily burdened with debt, so if they are to be distributed, the debt needs to be transferred or repaid accordingly.

So if the cost-benefit is used to buy back and burn SNX, the debt will not be repaid until after the buyback is complete, but one option is to sell SNX off-market to repay the debt, although this offsets the burning effect, so any distribution of SNX will need to wait until after the buyback, which could take many years.

Treasury Committee-Funded Working Group

This is one of my favorite proposals. As we enter a new era of the Synthetix protocol, we have a need for sales and support functions. While outsourcing these functions to integrators is possible, there is still potential for a gap, which I think is akin to Salesforce.

Salesforce is a platform that relies on a network of integrators, but it still needs an internal team to work with integrators on large customer transactions and to ensure support for the integrators themselves. To date, Synthetix has been able to support market makers and large traders on the platform, providing them with sufficient liquidity and trading functionality.

It is necessary to maintain a team focused on engaging with large traders and integrators to ensure that new users are smoothly onboarded and adopt Synthetix. Previously, our method was simply to hire new core contributors to fill this role.

However, I believe that by funding an independent working group to perform these functions and reporting directly to the Spartan Council, we can increase transparency and accountability. The Treasury Committee will provide funding directly to enable us to test this new form of coordination, and to attract the right people to join this working group, some continuity is needed, so I propose that this experiment be conducted for 6 to 12 months, and if the protocol decides not to adopt this approach after the experiment ends, I will pay a cancellation fee in the form of SNX.

I propose another working group, an analytics team, responsible for ensuring that all data regarding the protocol is available and up-to-date and that we provide real-time dashboards for all key metrics. Historically, this approach has failed due to low priority and technical complexity.

Synthetix Ecosystem Foundation

Early in the protocol, the Synthetix DAO decided not to invest outside the protocol due to the risk of such investments and concerns about diverting focus from the core mission of funding protocol development. While it could be argued that Synthetix might have received better funding support if we had used our position for early trades in the past five years, this can also put pressure on funding protocol development, particularly as liquidity assets become scarcer in late 2019.

Given the plan to gradually reduce the treasury funds and the opportunity to provide funding support for ecosystem projects through the remaining bear market time, it now makes more sense than ever to allocate a portion of the treasury to the ecosystem fund, especially since we anticipate a significant increase in new projects built on Synthetix over the next few years, and this ecosystem fund will be proportionately owned by SNX stakers and ultimately may be used for specific distributions or even further SNX token buybacks.

Subsidize Keeper Fees

Due to the lack of potential order flow payments in Synthetix protocol design, Synthetix has struggled to achieve zero-fee trading. However, we should strive to eliminate any fixed fees associated with trading, and the treasury committee should subsidize keeper fees to ensure that low-volume traders are not priced out of the market.

Ideally, direct subsidization of keepers should be done, but given the complexity of this approach, initial rebates paid directly to traders for keeper fees may be better, and the specific implementation remains to be discussed, which can be achieved through SNX or sUSD.

Perpetual Contract Referral Program

Theoretically, this is another initiative that integrators can handle, and a protocol-level referral program makes it more powerful than any additional referral.

Referral programs have been very effective in the history of crypto trading, but a viable product is needed, and given that Perps is already ready, promoting the protocol on a larger scale through a referral program has great potential. These referrals should be paid in staked SNX, which will ensure that there is no immediate impact on the price, and the SNX is best staked (passively or actively) as it is locked up anyway.

With the improvement of the trading experience and the release of more markets, this will create a flywheel where traders can be exposed to the stakers of SNX, and large referrers will become important stakeholders in the ecosystem.

Treasury Committee Proposal Template

The Treasury Committee is currently creating a proposal template to increase transparency of current and future Treasury Committee initiatives. This template will be based on the SIP template, but may be adjusted over time. While community feedback is not always necessary and can even be harmful in some cases, having a single document to outline each initiative and explain its rationale will be very helpful for community members to reference.

Disbanding the Treasury Committee

In my view, the Treasury Committee must be disbanded at some point, and there are various ways to do this, but the main idea is to split the Treasury Committee into smaller parts and allocate them to new or existing governing bodies to avoid becoming a single point of failure in the protocol if it is functioning normally.

While the Treasury Committee has made some progress since sDAO, there is still room for improvement, and it has been too long since it has been kept as a governing body.

Summary

As stated at the beginning, these are just suggestions, and I am just one of the four voters in the Synthetix committee. This article aims to spark discussion and ensure the community is aware of possible directions forward, and I am happy to debate and discuss all of these proposals on Discord.

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