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 gives a extra dynamic and modular strategy to onchain by-product creation, liquidity progress, and infrastructure administration, increasing the chances of what could be constructed atop the protocol.
Synthetix stands on the cusp of making a DeFi revolution with its upcoming V3 launch. It will 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, the whole Synthetix V3 system is a Collateralized Debt Place (CDP) protocol. Just 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 that you could as an alternative delegate your whole CDP, collateral and all, to a bigger basket of collateral known as a Pool.
Swimming pools could be thought-about a collective CDP, with baskets of collateral used to generate sUSD and allocate liquidity to by-product markets for merchants to make the most of. Pool homeowners are the deciders of how liquidity is allotted. Due to this, though anybody can create and handle a pool, most stakers will doubtless direct their collateral to extra ‘trusted’ swimming pools. For instance, the Spartan Council Pool, whose homeowners are immediately elected by SNX token holders.
Swimming pools then use this collateral and allocate it to by-product Markets. Markets are arguably a very powerful piece of the whole protocol, as they’re the logic that turns LP liquidity into onchain monetary devices. Effectively-designed markets hope to generate delta-neutral charges for LPs – which, on this case, implies that the charges earned by liquidity suppliers are unaffected by perps dealer revenue and losses, making certain secure returns no matter volatility. A latest instance of a ‘well-designed market’ is Synthetix Perps, which has returned $24m+ in charges to Synthetix Stakers. Synthetix Perps has built-in threat 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 rapidly break down the stream of liquidity within the Synthetix V3 system.
Liquidity Supplier –> Swimming pools –> Markets –> Merchants
That is the whole 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 offer 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 other 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 Homeowners can create a rewards distributor. This distributor can siphon off a proportion 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 embody token rewards, inflationary rewards, and so on.
A rewards distributor, managed by the pool proprietor, might resolve 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 available in the market – an instance is inflationary SNX, which might be distributed by 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 the whole 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 Growth & Potential Markets
Some further markets being developed proper now embody 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 by-product utilizing any obtainable onchain Oracle. Here is a non-exhaustive record of potential markets from Synthetix Core Contributor Cavalier’s latest weblog put up on Synthetix V3:
Perpetual Futures / Choices / Structured Merchandise: buying and selling utilizing artificial belongings to symbolize leveraged positions for perpetual futures, together with foundation buying and selling, and funding price arbitrage vaults. Instance – GMX may very well 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 may very well be constructed on Synthetix v3Insurance markets: Customers should purchase insurance coverage contracts for numerous dangers, collateralized by Swimming pools and ruled by sensible contracts. Eg. Nexus Mutual may very well be constructed on Synthetix v3.Prediction markets / Binary Choices / Sports activities Bettings: Customers can commerce shares based mostly on the result of occasions, resembling election outcomes or sports activities video games. Eg. Time beyond regulation Markets may very well be constructed on Synthetix v3.Video games: any sport might leverage Synthetix collateral, to offer aggressive prizes. Eg. a lottery (or no-loss lottery, like PoolTogether) is simple to implement on Synthetix v3.Offchain / RWA Markets: Markets may very well be developed for real-world belongings resembling artwork, carbon credit or different offchain belongings or devices. With enough oracles and trusted entity verification, this “belief” might generate capital on chain, backed by Synthetix and snxUSD.
The alternatives are countless. Now, whereas these market potentialities are intriguing, the important thing part 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 plenty of protocols have died.
The most important drawback plaguing by-product protocols is usually known as the hen and egg drawback. New by-product protocols cannot onboard merchants as a result of they don’t have any liquidity, and so they cannot usher in liquidity as a result of they don’t have merchants. It would not matter how novel or bespoke your protocol is; when you’ve got no liquidity, you are lifeless 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 by-product markets. As an alternative of getting to reinvent the wheel, you will as an alternative be throughout the Synthetix ecosystem, a protocol with a historical past of supporting revolutionary concepts and new protocols.
I think about most protocols will use a combination of old-school liquidity progress by 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’ll be able to collect liquidity your self and work by governance to collect liquidity to your new concept. However Synthetix doesn’t simply cease at offering liquidity. It gives an answer to builders by managing backend infrastructure complexities as effectively.
Infrastructure as a service
Builders need not handle infrastructure particular to liquidity provisioning, leaving them to give attention to the 2 most essential components of their protocols – by-product 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 would’ve been spent on creating a greater product. Synthetix V3 will quickly summary all of that ache away.
Synthetix V3 handles all the things, and also you need not rebuild liquidity administration, and reward distributors, for each market you construct.
Go Deeper
Right here’s a non-exhaustive record of different assets for studying extra about Synthetix V3:
