2023 was an incredible year for Synthetix, as it was able to come out of the grueling bear market and create and scale a brand new offering to find product market fit in a short amount of time. This was of course Synthetix’s Perps V2 product, which saw ~$43B in total volume and ~$36.5M in fees generated in 2023. These fees were directly beneficial to SNX stakers as they were used to burn sUSD and eliminate an equal portion of the debt across all stakers.

Synthetix was also a primary driver in the success of Optimism, as it was a significant portion of the chain’s TVL, activity, and revenue. Synthetix finished the year at $316M in TVL, ~34% of all TVL on Optimism Mainnet. In addition, Optimism Mainnet transactions related to Synthetix, which includes any spot and perps trades as well as SNX staking, drove around 1460 ETH (~$3.5M) in transaction fees in 2023, which made up roughly 7.3% of the entire chain’s revenue.  

While some attributed this rise in activity to the 5.9M OP in incentives, ~$9M at the time, Synthetix and its front ends were using as fee rebates to traders on the platform, the volume remained relatively high after the incentive period concluded. Synthetix still saw $151M in average daily volume versus $155M during the incentive period, and even saw its largest weekly volume during the week of Oct 23 at $1.6B. This means there was some element of stickiness to the users and volume created from these incentives.

While volume and fees were clearly significant, one important aspect for SNX stakers is the ability to dampen the exposure to market moves. This was achieved through Perps V2’s dynamic funding rate. Rather than only taking into account skew, or the difference between longs and shorts, the dynamic funding rate also takes into account velocity. This means if there is a persistent long skew over time, the funding rate continues to increase over time. This system heavily incentivizes traders to arbitrage these funding rates and keep open interest even. While early 2023 saw big swings in open interest due to the very small open interest caps, most the year remained very stable with small spikes here and there.

Other competitors, like GMX, are now incorporating the dynamic funding rate in their products due to their proven success in reducing market exposure for liquidity providers.

On the back of a perps product that has found clear product-market fit, Synthetix heads into 2024 with ambitious deployments to upgrade their product line, expand perps trading across chains other than Optimism Mainnet, add new collateral types to maximize liquidity and capital efficiency, and incentivize front ends to create enhanced user experiences that rival centralized exchanges.  

Synthetix V3 and Perps V3

Synthetix is currently in the process of migrating to the current V2x system to their new products: Synthetix V3 and Perps V3.

At its core, Synthetix is a liquidity layer for financial markets. In V2, SNX stakers borrow against their SNX and take on a debt position. This debt is then represented by their respective share of the system’s total debt across all stakers. Synthetic asset markets are created using this debt, as traders are utilizing the value created by this global debt pool. As positions are entered and exited, the debt system is updated to reflect the change in balance. As referenced earlier, this makes SNX stakers the temporary counterparty to traders in the case of perps, as the dynamic funding rate has shown to keep open interest even.

In V3, Synthetix takes this concept of a liquidity layer to a new level by creating a system that is much more modular. This gives developers and users the flexibility to experiment across different layers of this liquidity stack.

The core of V3 begins at the level of the Pools. Each pool represents a separate source of debt and liquidity that is then used to provide liquidity to markets. The debt and liquidity comes from Vaults, where liquidity providers deposit their assets and delegate their collateral to a pool. Every Pool has one Vault for each of their accepted collateral types, and Pools can take any collateral assets they desire. Pools can then collateralize Markets of their choice. While these can be the spot or perps Synthetix already has available, developers also have a chance to build brand new markets.

This design allows for experimentation across different markets while allowing liquidity providers to choose the amount of risk they take on. The primary pool will be the Spartan Pool, whose configuration, collateral assets, and markets will be decided by the Spartan Council. Most liquidity providers stakers will choose to provide this safer system, but if someone wants to build a permissionless perpetual futures market with higher risk but potentially higher rewards, the ability to collateralize this market is now available.

So far, several teams have indicated the desire to build products using the V3 infrastructure. The first of these is Overtime Markets, a sports betting platform built on Thales, which is currently in the process of migrating its current infrastructure onto V3. It’s likely that this market will be absorbed by the Spartan Pool shortly after launch, given that LPs have earned over 70% APR in just under a year. Other protocols that have signaled interest in building on V3 include Betswirl, a CasinoFi project, and TLX, which is creating tokenized versions of Synthetix perps positions. Other market types, like options markets, insurance markets, and prediction markets, have also been suggested.

While most of the focus of this year will be around the proliferation of the perps product with enhanced user experience and portability across many chains, V3 will be available for experimentation to allow for new markets to emerge.

Synthetix is also looking to release the next iteration of their perps product that will sit as a market under the V3 infrastructure: Perps V3. This upgrade will include improvements to the underlying architecture of perps to allow for enhanced user experience overall. This means improvements in latency for traders, a native cross-margining system, expanded collateral options to include opening trades with synths like sETH and sBTC, gradual liquidations that reduce the risk of sandwiched liquidations from MEV searchers, and NFT based accounts. This improved user experience works very nicely with Synthetix’s plans to scale up the perps activity in 2024. 

2024 Roadmap

Synthetix is entering a pivotal stage in its development. While the Perps V2 product saw clear product market fit, there are limits to the user experience that inhibited potential growth and activity. Perps V3 is improving the perps trading experience, but there is still a long way to go to create parity between the trading experience onchain and one presented by centralized exchanges. In 2024, Synthetix and its ecosystem are hoping to close this gap as much as possible.

One of the limitations of the current perps system is that users can only trade on Optimism Mainnet. While the chain has provided a good enough user experience on its own, porting to other chains with different sets of users opens up the ability for Synthetix to generate more activity and more revenue and establish its brand across different communities.

The experimentation and process of migration to other chains will begin with a package of products Synthetix is calling Andromeda, which will include Synthetix V3, Perps V3, and USDC as the only collateral type. This environment helps test out the new products themselves while also seeing the extent to which there is demand to use USDC to provide liquidity rather than the SNX native token.

Synthetix is testing USDC in particular because of the potential for better liquidity. Since USDC is a stablecoin, it allows for a much lower required LTV for liquidity providers, and therefore increases capital efficiency and does not require LPs to have significant market exposure. This therefore increases the expected APR for liquidity providers. For example, if we assume SNX stakers are earning 3% APR at a 500% CR, USDC at a 110% CR would be earning 13.6% all else equal. There are also plans, barring a governance vote, to onboard yield-bearing stable collateral like sDAI to additionally fuel this potential yield. This is in addition to the ability to take sUSD debt and farm additional yield elsewhere, making it extremely attractive to yield farmers and yield-maximizing vaults which in turn attracts immense liquidity to Synthetix.

The first deployment of Andromeda is currently being rolled out on Base. This will be the first testing ground for Perps V3 and USDC as the primary collateral. There will be a slow ramp up of total USDC allowed as liquidity and open interest allowed to be traded across the perps market. There has also been indication from Kwenta, the largest Synthetix frontend, that they will be “aggressively pushing” users to V3 using incentives once the ramp ups have concluded and there is sufficient liquidity to match trader demand.

With the deployment on Base will also come Infinex, a new frontend focused on facilitating an enhanced user experience for traders and creating a liquidity flywheel for perps trading. Infinex was started by Kain Warwick, the founder of Synthetix, and is using SNX as its governance token. They will also be taking the front end fee share, 20% of fees generated on Perps V3, to buy back the SNX token and stake it to facilitate a flywheel of further liquidity. Highlights of features included within Infinex will be the ability to use a username and password login, multi-factor authentication, and cross-chain deposits. To the user it feels just like using an exchange, but the backend is facilitated by decentralized and permissionless liquidity.

After a successful deployment on Base, Synthetix will look to deploy Andromeda to Optimism Mainnet, with potential of adding ETH as an additional collateral asset. This would run in parallel with the current Perps V2 system, and would get a gauge as to the preferences to provide liquidity with SNX versus USDC and ETH. Then, Synthetix will look to expand across other EVM chains and rollups to see where they can generate more users and liquidity. While the next destination is not set in stone, the community seems to prefer Arbitrum at this stage.

In addition to the proliferation of Andromeda, Synthetix is also working on a specific deployment of the perps product on Ethereum mainnet, which they are calling Carina. While using Ethereum is obviously much more expensive and far slower than a deployment on a rollup, this is specifically designed for protocols leveraging Synthetix perps or a specific set of traders that have their infrastructure on mainnet. For these entities, the function of bridging to a rollup increases their risk. The first protocol explicitly building on Carina will be Ethena, a stablecoin project that uses delta neutral positions by holding stETH and shorting perps to back their stablecoin USDe. Ethena has already secured over $130M in TVL during their closed alpha, some of which will be hedged via perps on Carina when it is officially live. With stETH being native to Ethereum, this kind of product works perfectly for reducing risk and maximizing composability.

Synthetix is also exploring the possibility of creating an OP Stack rollup called Synthetix Chain. The purpose of this would be to create a central place for governance, for SNX stakers to borrow against their collateral and take their sUSD to the chain of their choice, and to distribute fees generated across the different deployments. The debt from the current V2x system will be entirely migrated to this Synthetix Chain along with the SNX stakers.

SNX Tokenomics Improvements

On Dec 17, the Spartan Council voted to decrease SNX inflation to zero. Inflation had been a huge deterrent for users and investors to hold SNX in its past given previously extremely high inflation that diluted holders and caused immense sell pressure on the token. While inflation fell to roughly 5% throughout the last year, many of those who were previously jarred by SNX inflation could now take a second look.

Another improvement to the tokenomics comes from the Andromeda deployment on Base. The Spartan Council approved SIP-345 which facilitates 50% of fees generated by the protocol, following an integrator fee share, will be used to buy back and burn SNX. The other 50% of net protocol fees will burn sUSD as it is currently implemented. While not official via governance, the projected integrator fee share will be 20%, and will be paid directly in sUSD from the V3 rewards manager contract.

This integrator fee share will be beneficial in creating competition for users at the front end level, which will contribute to more volume and, in theory, revenue ultimately making its way back to the protocol. As mentioned previously, In addition to the SNX buy pressure from the buy back and burn, Infinex will also be using their integrator share to buy back SNX and stake it, increasing this buy pressure and additional liquidity. 

Risks

While Synthetix has a lot to be excited about in 2024, it’s important to understand some of the potential risks associated with its design and implementation. The first of these major risks comes from using the native token as the primary collateral token. This has the potential reflexivity if prices fall quickly, as a lower SNX price could lead to cascading liquidations and as a result reduced market liquidity. However, the current minimum collateralization ratio of 500% is very conservative and should help alleviate any of these concerns, an addition to the movement to use alternative assets for liquidity provision like USDC.

The second major risk comes from the assets listed through Synthetix perps product. First, if an asset is too illiquid or is at risk of price manipulation, this could lead to malicious actors taking advantage of SNX liquidity. This was seen in particular with TRB, which saw immense market manipulation on Dec 31, 2023 where the token pumped 200% and back down 80% in under 36 hours. This event left SNX stakers with a total of $3M in losses, which equates to around 10% of the fees generated in 2024. These types of risks are usually managed by either the Spartan Council deciding not to list assets whose risk profile is too high, or if a riskier asset is listed to have tight OI parameters set by CCs. SIP-2048 is also a temporary measure to give select CCs the ability to close markets in the case of an emergency, but there has also been discussions to include a Risk Council to help provide guidance on listing assets.

Other non-technical risks include the reliance on EVM equivalence for the deployment of V3, in a world where other virtual machines with parallel processing or more secure programming languages begin to become the norm. However, Solidity and the EVM have a large lead in terms of developer tooling, the pool of talent, and battle testing over many years across significantly more projects than any other VM. In addition, perps DEXs using central limit order books (CLOBs) have started to grow in popularity, with platforms like Aevo and Hyperliquid among others have gained market share. While they have certainly grown in popularity, most of the newer platforms are benefitting from airdrop hunters and wash trading, so we have yet to see whether traders truly prefer CLOBs to oracle-based perps trading or if this is the hot ball of farmers trying to play their hand at the next big airdrop. 

Final Thoughts

Synthetix is looking to capitalize on the success of 2023 by using new chains to test Synthetix V3 and Perps V3 products, new collateral types, and user behavior. More deployments across different chains will help battle test the new products, highlight the collateral types that bring the most liquidity, and show which communities and deployment attract the most users and capital. The perps product itself will also see a huge improvement in user experience, both with respect to the Perps V3 offering and front ends like Infinex that are focused explicitly on recreating the CEX experience onchain. With the rise of order book DEXs in recent history, Synthetix is certainly proving that oracle-based perps DEXs are still holding their weight, and we will see if these deployments shift attention and liquidity back in their direction. 

 

This research report has been funded by Synthetix DAO. By providing this disclosure, we aim to ensure that the research reported in this document is conducted with objectivity and transparency.  Blockworks Research makes the following disclosures: 1) Research Funding: The research reported in this document has been funded by Synthetix DAO. The sponsor may have input on the content of the report, but Blockworks Research maintains editorial control over the final report to retain data accuracy and objectivity. All published reports by Blockworks Research are reviewed by internal independent parties to prevent bias. 2) Researchers submit financial conflict of interest (FCOI) disclosures a monthly basis that are reviewed by appropriate internal parties. Researchers may participate on Synthetix DAO governance council.