Synthetix V3: The Future of Decentralized Derivatives

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TLDR;

• The recent release of Synthetix V3 is a major upgrade to the protocol that makes it a more decentralized, secure, and user-friendly platform for trading synthetic assets.

• Synthetix V3 has a number of benefits, such as reduced gas fees, on-chain price fees, and improved liquidity.

• The upgrade moves the protocol towards a liquidity-as-a-service model, and its unique architecture allows it to offer these services to new protocols seeking liquidity for on-chain derivatives.

• The steady increase in usage of the Synthetix protocol since the release of Synthetix V3 is a testament to the new features and improvements that have made the protocol more user-friendly and more attractive to users.

Introduction

Synthetix is a decentralized finance (DeFi) protocol that allows users to mint synthetic assets, also known as Synths. Synths are tokens that track the price of an underlying asset, such as a cryptocurrency, fiat currency, commodity, or indices - giving holders exposure to an asset without having to actually own it.

The protocol has undergone several upgrades since its launch. Synthetix V3, is the most recent and exciting to date and introduces several new features and improvements that make it a more decentralized, secure, and user-friendly platform for trading synthetic assets.

History of Synthetix

The protocol was originally launched in 2018 under the name Havven. Havven was a decentralized stablecoin protocol that used a basket of assets to maintain its peg to the US dollar. However, the project was rebranded to Synthetix in 2019, as its focus shifted to the minting and trading of synthetic assets.

The protocol is built on Ethereum and uses the Synthetix Network Token (SNX) as its native currency. SNX holders can stake their tokens to mint Synths and earn rewards.

In 2020, the protocol was upgraded to Synthetix V2, which introduced a few new features, such as differentiated debt pools and cross-chain liquidity. Earlier this year, the v3 roll-out began, which introduced even more new features, such as on-chain price feeds and reduced gas fees.

The Synthetix protocol is still under development, but it has the potential to be a major player in the future of DeFi. Synthetix has been praised for its innovation and its potential to revolutionize the way people access financial markets. It is already being used by a wide range of users and is expected to grow in popularity. The most recent release of Synthetix V3 will undoubtedly aid this growth.

Synthetix V3

Synthetix V3 is a complete overhaul of the protocol, designed to be a permissionless liquidity platform for derivatives. It gives builders the tools they need to easily create novel financial instruments, without having to worry about the cold-start problem of attracting collateral. The initial roll-out of V3 began in February 2023, although functionality was limited to borrowing its native stablecoin snxUSD against SNX collateral.

As we write in September 2023, v3 is in the middle of a phased rollout. The next stage of full implementation will be creating a collateral agnostic system, before launching the first spot and perpetual markets.

The creation of pools, vaults, and markets will initially be managed by Synthetix governance, but the goal is to transition toward fully permissionless deployments over time. This will allow developers to be able to create new markets and seamlessly connect to existing collateral vaults - meaning almost any derivative protocol can be built on top of Synthetix V3, instead of from the ground up.

In essence - Synthetix V3 moves the protocol towards a liquidity-as-a-service model, and its unique architecture allows it to offer these services to new protocols seeking liquidity for on-chain derivatives:

The overall goal of this upgrade is to transform Synthetix into a multi-market ecosystem, encompassing perpetual futures, spot, options, insurance, exotics, and more, all backed by multiple debt pools.

The benefits of Synthetix V3:

• For builders: A permissionless platform to easily create novel financial derivatives, without having to worry about the cold-start problem of attracting collateral.

• For users: A wide range of derivative markets to choose from, with deep liquidity and competitive pricing.

• For the Ethereum ecosystem: A more robust and diverse financial landscape, with new and innovative products being brought to market.

Token model

The Synthetix V3 protocol uses a two-token model, consisting of the Synthetix Network Token (SNX) and synthetic assets (Synths).

• SNX is the native token of the Synthetix protocol. It is used to mint Synths, stake for rewards, and vote on protocol governance.

• Synths are tokens that track the price of an underlying asset, such as a cryptocurrency, fiat currency, commodity, or index. They are minted by burning SNX tokens.

This token model has several benefits:

Burning mechanism: The Synthetix protocol uses a burning mechanism to reduce the supply of SNX tokens. When Synths are minted, SNX tokens are burned. This burning mechanism helps to keep the value of SNX tokens stable.

Staking rewards: SNX holders can stake their tokens to earn rewards. The rewards are paid out in SNX tokens and are based on the amount of SNX tokens staked and the amount of trading activity on the Synthetix protocol.

Protocol Governance: SNX holders can also vote on protocol governance. The Synthetix protocol is governed by a DAO, which is a decentralized autonomous organization. SNX holders can vote on proposals to change the protocol or to add new features.

Wide range of Synthetic Assets: The Synthetix V3 token model is designed to incentivize users to stake SNX tokens and to participate in protocol governance. The burning mechanism helps to keep the value of SNX tokens stable, and the rewards paid out to SNX holders help to offset the inflation caused by the minting of Synths.

The Synthetix V3 token model is a unique and innovative approach to tokenomics. It is designed to create a sustainable and decentralized protocol that can provide users with access to a wide range of financial instruments.

Usage Statistics

Fee Revenue

In August 2023, Synthetix earned $3.92 million in fees, according to DeFi Llama, making it the second-highest year for fees for the protocol, despite wider market weakness. Over the last 12 months, total protocol revenue is over $28m - up 99% in the last 6 months, and only second to dYdx on a comparable basis. This fee growth can be attributed to a number of factors, including the increased popularity of DeFi and the growing demand for synthetic assets.

The protocol has seen steady growth in recent months, with over 90,400 users interacting with the protocol through minting and trading Synths, or staking SNX tokens. This usage has resulted in daily trading volumes of $65.3 million.

Total Value Locked (TVL)

The total value locked (TVL) is an important metric to look at for the usage of a protocol. It shows how much money has been deposited into a protocol. The amount deposited in the Synthetix protocol to mint synths currently stands at $401.63 million.

Overall, the growth of the Synthetix protocol is a positive sign for the future of DeFi as a whole. It shows that there is a demand for decentralized protocols that allow users to access a wide range of financial instruments. Synthetix is well-positioned to capitalize on this demand and become a major player in the DeFi ecosystem.

Potential risks and challenges

While Synthetix V3 is a major improvement over previous versions of the protocol, there are still some potential risks and challenges that need to be addressed. These include:

• Security: The Synthetix protocol is still under development, and there is a potential for security risks.

• User experience: The Synthetix dApp is complex and difficult to use. This could make it difficult for new users to get started with the protocol.

• Regulation: Synthetix is a cross-border protocol, and it is subject to regulation in different jurisdictions. The protocol will need to ensure that it complies with all applicable regulations.

Wrapping Up

The recent release of Synthetix V3 is a major upgrade to the protocol that makes it a more decentralized, secure, and user-friendly platform for trading synthetic assets. Synthetix V3 has a number of benefits, such as reduced gas fees, on-chain price fees, and improved liquidity. The token model incentivizes users to stake SNX tokens and to participate in protocol governance. The burning mechanism helps to keep the value of SNX tokens stable, and the rewards paid out to SNX holders help to offset the inflation caused by the minting of Synths. There are still some potential risks and challenges that need to be addressed. These include security, user experience, and regulation. However, the steady increase in usage of the Synthetix protocol since the release of Synthetix V3 is a testament to the new features and improvements that have made the protocol more user-friendly and more attractive to users.

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