Proposal from Synthetix Founder: Opportunities I’ve Discovered and Synthetix’s Next Plans

Synthetix Founder's Proposal: Next Steps and Opportunities

Author: Kain Warwick, Synthetix founder

Translation: Joy, BlockingNews

As I’ve re-immersed myself in the community over the past few months, I’ve asked myself the question “what is missing from this project?” The conclusion I’ve come to is that people are hesitant to pursue high-risk, non-obvious paths. This makes sense, as incentive mechanisms are closely tied to everyone’s work on the critical path.

In the past year, the efficiency of core contributors has increased, aided by the introduction of the Core Contributors Committee, but also by the hiring of many incredible people to replace the OGs who were exhausted from the 2018/19 death march. This has resulted in significant progress for the core roadmap; ending V2x, designing V3, and re-implementing Perps (derivatives). The latter two are still outstanding issues in early 2022, with Perps continuing to expand and initial components of V3 deployed on mainnet.

• Complete Guide to On-chain Wallet Tracking: Practical Tools and Wallet Trackers
• Interpretation of Hong Kong’s “Virtual Asset Consultation Conclusion”: Can mainland retail investors enter the market?
• Discussion on ZK Mining and ZKR Performance

Very few people have the time to sit down and devise crazy plans for Synthetix. This post will list the opportunities I’ve identified, some of which are rough descriptions of problems with some options, and some of which are detailed plans. The Treasury Committee is also devising a new proposal template to present initiatives like the ones listed below. This will ensure greater transparency in communicating future changes.

Core Contributors Alliance

I know this may delve into discussions of equity distribution philosophy at startups or token allocation in DAOs, but I believe it’s a key point. The early community either intuitively grasped it or I imposed it on the community, I can’t remember which. Based on my experience, many people working at startups have multiple motivations, but financial freedom is often an important one. Working at a startup is already an adventure, and working at a DAO may entail even greater risk. Alignment is critical in Synthetix, as there’s almost no hierarchy. Driven people are more likely to be attracted to this kind of atmosphere. But we also need to ensure that we maintain financial consistency. I propose setting aside SNX for bonuses every quarter. The bonuses will be determined by the TC (Treasury Committee) for distribution based on feedback from the CCs (Core Contributors) on the impact of their peers on the protocol. This will ensure performance-based fair distribution. The exact amount of SNX to be allocated is still to be determined, but ideally should be in the millions.

Transaction Incentives

Although OP incentives have been successful in increasing transaction volume, SNX incentives may create a more impactful feedback loop, especially since the incentives will be conducted within escrowed SNX (eSNX), which should introduce traders to SNX staking. Ideally, 5-10 million SNX should be allocated to the incentive program over time.

Passive SNX Staking

The difficulty of staking SNX makes it challenging to attract new participants to the ecosystem. Although efforts have been made to simplify the process, such as the implementation of dHedge strategies, even understanding why these hedging services are necessary is a barrier, and it is difficult to quantify how many potential stakeholders have been lost in the ecosystem due to complexity, but I think we can safely assume that it is a multiple of the actual number of stakeholders. To make staking easier, we can create a passive staking pool that works alongside active SNX staking. New stakers can try staking without facing too many challenges and get a better understanding of Synthetix. Think of it as a freemium model, where the “price” is risk and complexity, and if we reduce these while paying lower returns, we may attract more stakeholders. The revenue should initially be paid by the treasury, possibly in SNX but preferably in sUSD. The revenue should also be dynamically calculated based on the ratio between active and passive stakers, with a cap on passive staking of approximately 10% of the fee. Again, this is a very rough concept outline, and specific details need to be discussed. A three-month trial with a spending limit of sUSD or equivalent in SNX of 1-2 million dollars would be sufficient to determine whether this increases the percentage of SNX staked, whether passively or actively.

Integration Incentives

As Synthetix transitions to the liquidity layer, our dependence on integrators becomes more critical. Of course, nothing prevents the community from funding new internal Synthetix trading frontends. But the hope is that observing the challenges faced by integrators suggests that this is not a small matter. Therefore, in the long run, we must adjust the incentives for integrators, which is crucial. How to achieve this has been a long-standing debate in Discord, so I will quickly review the two aspects of the debate.

Purists argue that no fees should be taken from SNX stakers, and all we need to do is allow integrators to add a fee on top of the base protocol fee. This reduces complexity for integrators while still allowing them to charge a fee. Integrators are opposed to this because they feel it would reduce their competitiveness, but this is the current state of affairs.

The other side argues that a certain percentage of fees (e.g. 10%) should be allocated to integrators, meaning all integrators earn the same fee and there is no zero-fee competition among integrators to provide cheaper execution for traders.

There is a middle option which guarantees a certain percentage, but integrators can also charge an optional incremental fee, which provides a base incentive for integrators and additional benefits if they achieve significant differentiation in the market. This would mean all integrators earn the same fee and there is no zero-fee competition among integrators to provide cheaper execution for traders. There is a middle option which guarantees a certain percentage, but integrators can also charge an optional incremental fee, which provides a base incentive for integrators and additional benefits if they achieve significant differentiation in the market. This would mean all integrators earn the same fee and there is no zero-fee competition among integrators to provide cheaper execution for traders. SIP-2002 takes us away from the purest view, but it does not affect the fees generated for stakeholders, and the issue is that if fees continue to grow, this will not be a sustainable mechanism, though it is a step in the right direction.

I propose implementing integrator fees by splitting a certain percentage of SNX held by the Treasury, e.g. 10 million SNX and represented by integrators staking, which would generate a 3-5% base fee depending on the percentage of SNX staked. An additional benefit of doing this is it does not increase the circulating supply of SNX to pay for these fees. If this incentive is successful, it can be incorporated into the protocol without requiring integrators to stake SNX on behalf of themselves.

3:1 SNX Split and Buyback

Last year, I attempted to shut down inflation before we reached 300 million SNX. Fortunately, that proposal failed because we weren’t yet at a sustainable level of zero inflation. Today, the inflation issue is just as important, and in V2x, I believe we can shut down inflation with minimal impact. Unfortunately, we’re now planning to transition to V3, and the question of whether we need inflation incentives is once again up for debate. The primary reason for keeping inflation in V3 is to ensure there’s a mechanism for guiding liquidity to permissionless pools. There are several proposals for how to achieve this, such as veCRV-style voting. Even if inflation is the only solution here, I don’t believe it would negate the countervailing forces of buyback and burn. If we did a 3:1 split, we would have approximately 90 million extra tokens to buy back and burn at a market price of $60 million.

Where does the money to burn these tokens come from? Treasury fees revenue. Based on recent yields, the Treasury generates approximately $5 million per year, and if 100% of that were allocated to buybacks, it would take about a decade to complete. If trading volume increases in the coming years, that timeline will be significantly shortened. You might ask, why not just burn the 30+ million tokens in the Treasury wallet directly? These tokens are effectively locked up, so the impact would be small, but it makes sense to consider distributing the remaining SNX proportionally to stakers once the buyback is complete. If 100% of that were allocated to buybacks, it would take about a decade to complete. If trading volume increases in the coming years, that timeline will be significantly shortened. You might ask, why not just burn the 30+ million tokens in the Treasury wallet directly? These tokens are effectively locked up, so the impact would be small, but it makes sense to consider distributing the remaining SNX proportionally to stakers once the buyback is complete.

Distributing SNX to Stakers

The same question arises of why not just burn SNX directly? The reason is that this SNX can be used for incentives and, if fully distributed, would be equivalent to a 3% inflation rate over three years. This would allow us to test demand for inflation without actually inflating the token supply. The problem is that these tokens currently carry a large debt burden, so distributing them requires the transfer or repayment of that debt as well. There are competing forces at play here, as using fee revenue for SNX buybacks and burns means debt won’t be repaid until after the buyback is complete. One option is to sell SNX in over-the-counter trades to repay debt, but this offsets the loss, so it seems like any SNX distribution would need to wait until after the buyback is complete. This could be many years.

Working group funded by the Treasury

This is one of my favorite proposals. As we enter this new era of the protocol, we have developed a need for sales and support functionalities. While outsourcing these functions to integrators is possible, there is still a potential gap, similar to Salesforce. Salesforce is a platform, but it does not directly facilitate implementation; instead, it relies on the integrator network. However, Salesforce still needs an internal team to work with integrators to handle large customer transactions and ensure that the integrators themselves are supported.

So far, Synthetix has been able to support market makers and large traders on the platform, with enough liquidity and functionality to make entities like these worthwhile to trade. Integrators should interact with these types of users, but a dedicated team working with large traders and integrators to ensure smooth onboarding processes would be very helpful. The past approach has been to only hire new core contributors to fill this role. However, I believe there’s an opportunity to increase transparency and accountability for these functions by sponsoring an independent working group to report directly to the Spartan Council. The Treasury will provide direct funding for this, allowing us to test this new coordination. To attract the right people to join this working group, some continuity is needed, so I propose a trial period of at least 6-12 months, with an SNX payout termination fee if the protocol decides not to adopt this approach after the trial.

Another working group I propose is an analytics group, which will be responsible for ensuring that all data about the protocol is available and up to date, as well as making sure we have real-time dashboards for all key metrics. Historically, this has failed due to low priority and technical complexity.

Synthetix Ecosystem Fund

In the early days of the protocol, SynthetixDAO decided not to invest outside of the protocol due to the risk of such investments and concerns about losing focus on the core task of funding protocol development. While it can be argued that the project might have received better funding if we had leveraged our position for early trades over the past five years, sometimes this could also put pressure on protocol development funding, especially towards the end of 2019 when liquidity was becoming increasingly low. Given the intent to reduce funding and the opportunity to fund ecosystem projects with remaining bear market time, it now makes more sense than ever to allocate a certain percentage of funds to the ecosystem fund, especially as we expect the number of new projects based on Synthetix to significantly increase in the coming years. This fund will be proportionally owned by SNX holders and can eventually be distributed or even used for further SNX token buybacks.

Subsidize Keeper Fees

Synthetix is unlikely to achieve free trading as there is little potential for payment order flow in the protocol design. However, we should strive to eliminate any fixed fees associated with trading. The treasury should subsidize keeper fees to ensure that low volume traders are not priced out, ideally through directly subsidizing the keeper, but given the complexity of such an approach, it is best to start with rebates paid directly to traders for keeper fees. The specifics of whether this is done in SNX or sUSD are up for debate.

Perps Referral Program

In theory, this is another initiative that integrators can handle; however, a protocol-level referral program makes any other referral functionality that integrators provide much more powerful. Referral programs have been highly effective in crypto trading historically; however, they need an effective product. Given that Perps is finally ready, there is significant potential to drive adoption through referrals. These referrals should be paid out in staked SNX, which will ensure that there is no immediate impact on price, and this SNX is best collateralized (passively or actively) as it is locked up regardless. This will create a flywheel as trading experience improves and more markets are released, with traders being exposed to the staking side of SNX and large referral partners becoming important stakeholders in the ecosystem.

Treasury Proposal Template

A proposal template is being created to increase transparency around current and future treasury plans. This template will be based on the SIP template but may be adjusted over time. While community feedback is not always necessary and may even be harmful in some cases, having a document that outlines the plan and explains its underlying principles will be useful for community members to reference.

Dismantling the Treasury Committee

In my view, the treasury will be dismantled at some point. There are various ways this could be done, but the main idea is that if the protocol is functioning as intended, the treasury committee can be broken up into smaller parts and allocated to new or existing governance bodies to avoid it being a single point of failure for the protocol. While progress has been made since the sDAO, there is still room for improvement, and the time as a governing body for the treasury committee has been too long.

These are just proposals and I am only one of four council members. The purpose of this post is to kick off discussion and ensure the community is aware of potential paths forward. I look forward to debating and discussing all of these proposals in Discord.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!