Original title: “What is Synthetix V3?”
Original post by Matt Losquadro, Synthetix
Original compilation: Kxp, BlockBeats
Synthetix V3 represents a major milestone for the protocol as it undergoes a complete overhaul to become a permissionless derivatives liquidity platform for the next generation of on-chain financial products.
In this post, we’ll take a deeper look at Synthetix V3, and how it differs from the current system, including its goal of being the liquidity layer any derivatives market can build upon. We’ll also explore the features and benefits of Synthetix V3, as well as the phased rollout plan for its release. This article will serve as a foundational article on which to build the rest of the content, so let’s get to the main content.
What is Synthetix?
Synthetix is a decentralized liquidity layer, built on Ethereum and Optimism, powering some of the most exciting protocols in DeFi with liquidity backends.
Stakers provide liquidity to back a range of synthetic assets and earn rewards and market returns as a result. This liquidity provides oracle price guarantees for trading synthetic assets and perpetual futures, eliminating the need for traditional order books and counterparties. As a result, liquidity becomes composable and fungible between markets, and traditional slippage is eliminated.
Synthetix liquidity currently supports two main synthetic assets, spot synthetics and perpetual futures:
· Spot synthetics track the value of real assets such as Crypto, fiat currencies, and commodities, allowing users to gain exposure to multiple assets without needing to hold the underlying asset
· Perp is a decentralized perpetual futures trading platform that uses Synthetix liquidity as a counterparty to traders, providing deep liquidity and low handling fees. Stakers (Perp LP) will bear the risk of the combined performance of all traders, while also earning transaction fees.
· The off-chain oracle machine reduces the handling fee to 5-10 basis points, and the risk management tool ensures long-term market neutrality.
· Funding rates and premium/discount mechanisms incentivize traders to balance the market to achieve delta neutrality.
Since Synthetix supports strong liquidity and derivatives, some of the most innovative and interesting DeFi protocols have been built on top of Synthetix: Kwenta, Lyra, Decentrex, Polynomial, dHEDGE/Toros Finance, and Curve/1inch for atomic swaps, etc., Many more protocols are being developed on top of Synthetix Liquidity.
A Brief History of Synthetix
Synthetix has gone through many iterations and changes to become what it is today. This journey started with Havven, a protocol similar to MakerDAO (before MKR introduced multi-collateral DAI). Havven is a stablecoin protocol supported by Havven Token, which was later renamed Synthetix as a spot synthetic trading protocol. In the early days of DeFi, the protocol recognized the need for deep liquidity and low fees. After that, Synthetix gradually developed from a user-oriented derivatives agreement to an agreement focusing on the provision and growth of liquidity and derivatives.
Notably, it did not discard smart contracts during the iteration process. The protocol improves contracts and uses them to create new architectures. Synthetix had been building on top of its previous architecture for five years, which meant it was in dire need of a rebuild, and that rebuild was Synthetix V3.
What is Synthetix V3
Synthetix V3 is a complete overhaul of the protocol from the ground up. It achieves a goal that Synthetix set long ago: a permissionless derivatives liquidity platform to power the next generation of on-chain financial products. With the launch of V3, Synthetix will be the liquidity layer on which any derivatives market can be built.
Synthetix V3 benefits from years of research and development, aiming to be the most powerful and composable derivatives liquidity protocol. It establishes a new foundation for the next generation of on-chain financial products, becoming the most versatile and modular approach. This diagram provides a high-level overview of the Synthetix V3 architecture:
Long term vision for Synthetix V3
Synthetix has two key value propositions as a liquidity layer:
· For stakers: Offers a range of pools/vaults to deposit into, linked to a range of derivatives markets, so the level and type of market exposure and expected returns can be chosen
· To the protocol: a series of capital pools/vaults used to provide collateral for new derivatives markets, or provide tools to create capital pools and attract collateral, and give rewards.
V3 focuses on four key areas:
1. The Liquidity Layer for DeFi Derivatives: Driving the Next Generation of Permissionless Derivatives
2. Multi-collateral staking for empowering stakers
3. Composable, developer-friendly system
4. Belongs to the future of cross-chain
A Liquidity Layer for DeFi Derivatives: Powering the Next Generation of Permissionless Derivatives
V3 realizes Synthetix’s long-term vision to be a permissionless liquidity provisioning platform, providing builders with the tools to easily create new financial derivatives.
Launching a derivatives protocol can be challenging, often facing the cold start problem of needing to attract collateral. With Synthetix, developers can create new markets and seamlessly connect with existing collateral pools. This way, virtually any derivatives protocol can be built on top of Synthetix V3 instead of starting from scratch.
The creation of Pools/Vaults/Markets will initially be managed by Synthetix governance and transition to a fully permissionless deployment over time. One could even say that Synthetix provides liquidity as a service, as new protocols looking to add liquidity to on-chain derivatives can be easily and efficiently built on top of Synthetix.
V3 will transform Synthetix into a multi-market ecosystem including perpetual futures, spot, options, insurance, exotic options, and more, all backed by multiple debt pools
Synthetix welcomes builders to leverage its protocol and cultivate their communities for success, which is exciting for both the Synthetix and Ethereum ecosystems.
Multi-Collateral Staking Empowering Stakers
V3 creates a universal treasury system that is not limited by collateral type. Each vault supports a separate collateral asset, but vaults can be combined into pools linked to one or more markets. All external collateral will be incorporated into the protocol through Synthetix governance.
The new pool and treasury system has three main advantages:
1. Better risk management: pools of funds are linked to specific markets and therefore have specific exposures
2. Better hedging capabilities: the fund pool is connected to a specific market for precise hedging
3. Greater range of collateral: stakers can stake any asset the pool chooses to accept
Stakers can allocate their capital to more and more pools, which gives stakers more control over credit as the V3 system provides more options for liquidity and hedging.
A simpler, cleaner developer experience
The core goal of V3 is to make the Synthetix system more efficient, simpler, and provide a more optimized user experience by optimizing and cleaning up old solutions.
Developers no longer need to be Synthetix experts to understand how to build on Synthetix. Instead, a wealth of developer tools, sandboxes, and guides make it easier than ever to build on V3, and they only need to think about which marketplace they want to build on.
Belongs to the future of cross-chain
Synthetix V3 will be able to be deployed on any EVM-compatible chain to support synthetic assets on any chain.
Some of the most exciting features of V3 will be based on cross-chain capabilities, such as transferring assets from one chain to another, without the protocol having to do any extra work.
Road to Synthetix V3
Synthetix V3 will be rolled out in phases over the next few months, with users slowly transitioning from existing V2 X systems to V3. The features discussed in the next section[Synthetix V3 Features Deep Dive]will not be available to the public during the initial release. The V3 system is optimized for modularity, so the scope and order of its functions are being optimized and will rely on Synthetix governance. Still, it’s important to understand the various work going on inside Synthetix V3.
· Initial stage – Synthetix V3 core contract has been launched on the mainnet, although this is only the beginning of the road to V3. In this upgrade, many functions are not yet available, but the foundation has been established. The current function is to borrow the new stablecoin snxUSD as snx collateral, which will be used in the integrated market in the future.
Multi-Collateral Compatible System – V3 creates a general-purpose collateral vault system that is compatible with multiple collateral types. Synthetix governance will decide which assets to back as collateral in addition to the current SNX and ETH.
· V3 Spot Market – The first market expected to launch in V3 is the Spot Market. These marketplaces allow the creation and trading of spot synths to be done entirely on Synthetix V3. Together, the wrapper and spot market incentives will enable a delta-neutral marketplace that can support any ERC-20 wrapperable synthetic asset.
Order Types: Atomic Orders, Asynchronous Orders, Packing & Unpacking (Wrappers), for more information on the V3 spot market, visit Spot Description.
Perps V3 – Building Synthetix perpetual contracts on V3 infrastructure.
New features: Native cross-margin, expanded margin collateral types, lower gas fees based on new infrastructure, highly compatible oracle integration, etc. All of these are highly dependent on governance, although these are R&D projects from CC/Community.
· Traditional Markets running on V3 – “Traditional Markets” include all synthetic assets and liquidity within the V2 X system. Migrating it to Synthetix V3 required introducing a “traditional market” within Synthetix V3 where V3 stakers could stake. The use of this marketplace is an interim solution until all synthetic assets are fully transitioned to the native V3 marketplace. Stakers will be able to migrate their positions to Synthetix V3 once the traditional market goes live.
· Cross-chain and synthetic asset transmitters – Since V3 is fully EVM-compatible, it can be deployed on any EVM-compatible chain. Liquidity can be provided across chains, while synthetic assets/markets are not restricted to one chain.
Permissionless Marketplace/Asset Creation – The creation of pools/vaults/marketplaces will begin with governance approval and transition to a permissionless model.
In-depth analysis of Synthetix V3 functions
Market creation: The V3 system is built around markets, which here are a general abstraction that allows products to be built on top of the protocol. The market dictates the pricing logic used for the underlying asset.
Examples of markets: spot market, futures market, options, loans, etc.
Asset Creation: New synthetic assets can be deployed using market pricing logic and price data streams. In V2X, these assets require governance approval, but soon they will only need to rely on the necessary market logic and price data support.
Examples of assets: Spot BTC, Spot ETH, ETH Perp, BTC Perp, ETH Options, etc.
· Cross-chain Synthetix: The V3 system is compatible with any EVM compatible chain. It has been built as a cross-chain interconnect, with cross-chain liquidity and fee sharing, a synthetic asset transmitter, and many other important functional improvements.
Synthetic asset transmitters are more efficient than AMM-based cross-chain bridging solutions because there is no slippage caused by illiquidity on the target chain. Synthetic assets are only burned on one chain and minted on the other.
Multi-collateral staking: V3 is collateral indiscriminate, allowing governance to use any collateral to back synthetic assets. This will increase the liquidity of sUSD and the markets supported by Synthetix. Collateral options will have adjustable variables such as collateral requirements and rewards that can be adjusted by governance.
Synthetix Lending: Users can now provide collateral to the system to generate sUSD without risking the debt pool and without paying any interest or issuance fees.
Differentiated Liquidity Debt Pools: Instead of delegating collateral to entire debt pools as in V2X, users can choose the pools they want to provide collateral to and then decide which markets and assets within those pools to back. This gives stakers more control over their credit and allows them to support markets that may be deemed too risky by governance due to the fact that all liquidity is a single pool of debt.
Example: Risk-averse stakers could delegate their credit to pools that only support ETH and BTC Perp markets, rather than the long-tail Perp market.
Oracle Management for Marketplaces: Marketplace creators can choose from multiple oracle solutions and set up custom aggregations, giving them more control over the oracles that power their marketplaces. Oracle managers provide new opportunities to support new markets and assets.
Example: Selecting the lowest price for spot Bitcoin based on the time-weighted average price (TWAP) of Chainlink, Pyth, and Uniswap.
Reward Manager: Pool creators can attach reward distribution tools to vaults to incentivize liquidity providers for specific collateral types. Rewards can come from market fees, token distribution, or anything else.
Here are some of the SIPs in progress, you can follow the links below to learn more about the current state of Synthetix V3 and how it will develop:
· SIP-300: Synthetix V3
· SIP-301: Accounts (V3)
· SIP-302: Funds (V3)
· SIP-303: Markets (V3)
· SIP-304: Liquidations (V3)
· SIP-305: Staking Incentives (V3)
· SIP-306: Collateral Migration (V3)
· SIP-307: Proxy Router Architecture (V3)
· SIP-308: Market-provided Collateral (V3)
· SIP-309: Market-locked Collateral (V3)
· SIP-310: Feature Flags (V3)