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Synthetix 2021 New Plan: Transition to Optimistic Ethereum and Synthetix V3

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The transition to Optimistic Ethereum as a Layer2 expansion solution will alleviate many of the issues encountered by the project in 2020, and Synthetix V3 represents a complete reconfiguration of the Synthetix contract

On January 12, Synthetix founder Kain Warwick posted a list of important issues that Synthetix will address in 2021 and an overview of the new features that Synthetix V3 is likely to bring.

Rhythm Blockbeats translates the relevant content as follows.

Important things for 2021

Optimistic Ethereum

The transition to Optimistic Ethereum, a Layer2 scaling solution, will alleviate many of the issues encountered by the project in 2020. There are two main reasons for this: lower gas costs and higher throughput. Lower gas rates are a big benefit to all users and can make the system more efficient. The higher throughput will allow Synthetix to work with ChainLink to reduce the latency of the predictor, allow leverage through "synthetic asset futures," and other protocol enhancements.

The exact sequence of transition to Optimistic Ethereum has yet to be determined, but there are two conflicting goals that must be reconciled. The first is that a single set of Synths must be maintained and the conflict between USD of L1 and USD of L2 should be avoided. The second is that a separate pool of liabilities should be used to reduce the risk and complexity of Layer1 implementation. These two points can be balanced by a multi-stage phasing out.

Synthetix V3

Synthetix V3 represents a complete refactoring of the Synthetix contract (for the first time since the end of 2018) and provides an opportunity to rethink the possibilities. Synthetix uses an upgradable broker model so token holders can upgrade without having to migrate. While this approach makes for a great user experience, it also means that legacy code and contracts can become difficult to remove. Synthetix V3 solves this problem by requiring each token holder to migrate from the old contract to the new one, enabling us to abandon backward compatibility and redesign everything from scratch.

Governance improvement

Governance improvements are one of Synthetix's bright spots for 2020, but there are still many issues to be addressed. Improving the Spartan Council election process, reducing the power of the Protocol DAO, continuing to decentralize the power of SynthetixDAO, and restarting a leaner, more motivational and compatible GrantsDAO were all key results this year.

In addition, there is a proposal to add a new category of governance that focuses solely on coordinating Synthetix community participation in external protocol governance, known as Synthetix Ambassadors. These representatives will have governance tokens that the community has delegated to other protocols, such as Curve and Uniswap, to ensure mutually beneficial participation in the ecosystem outside Synthetix in an incentivized manner. The ambassador would then be elected by the community in a manner similar to that of the Spartan council. There are many governance and priorities that affect the Synthetix network, and the Ambassador will be responsible for helping to facilitate communication between these communities, as well as representing the Synthetix community.

Synthetic asset futures

As mentioned above, in 2020, it is clear that the prophetic latency and Layer1 limitations will significantly reduce Synthetix's ability to provide joint leverage. Synthetic futures are expected to provide at least 10 times leverage to provide an experience comparable to existing futures markets, which will only be possible after the transition from the current Prophetor architecture to Layer2. The combination of Synthetix and Optimistic Ethereum will enable Synthetix to compete with and ultimately surpass the user experience of a centralized futures market.

Assets expansion

If Synthetix is really going to be a place where you can exchange any assets, you have to expand the range of assets on offer. This includes expanding crypto assets and commodities, but most importantly it needs to expand to equities. Needless to say, this adds many challenges, including market closings, dividends and regulatory oversight. However, Synthetix is now well positioned to tackle all of these challenges, as it has evolved from an early project that was centralized in many ways to one of the more decentralized projects on Ethereum.

DApp upgrade

In 2020, Synthetix put a lot of effort into improving the way users interact with various dApps. Synthetix now has a modern and powerful platform that can be expanded upon. At The same time, The core contributors working on these dApps have been decentralizing The key components to ensure that they work across The Graph and IPFS. This process needs to continue, including changing the way the dApp team is coordinated to further isolate it from protocol contributors. This could take the form of separating the dApp repo from the protocol and opening it up to more contributors. It may also include incentives for a restart of GDAO to deploy alternative front ends for various aspects of the protocol. Much of this work will be coordinated by the dApp team and the community.

Options DAO

The initiative aims to launch the binary options market in 2020 and expand trading functions to ensure more liquidity for binary options. The current plan is to spin off the option DAO as a separate protocol, and several teams have approached SynthetixDAO to undertake this task. SDAO will provide up-front funding subject to certain conditions, including future value capture for SNX holders. The Option DAO will make a number of improvements to the existing implementation of Binary Options. First, it will support any binary result by leveraging the option DAO itself to solve the market problem. Second, it will deploy a powerful trading platform on Layer2 to trade binary options in a more user-friendly way, thus improving liquidity and market efficiency. It could also adopt some of the other architectural improvements discussed in Discord, such as new issuance mechanisms, liquidity pools, and price discovery.

Acquisition and expansion

In traditional finance, one company usually acquires scarce resources by buying another. This could include new intellectual property, certain skills and experience, manufacturing capabilities, existing customers, or any number of things. But ultimately, acquisitions are about cost-benefit analysis. Buying something often makes sense if it saves you time or provides access to a scarce resource, even if it means paying a premium. Now that SDAO is well capitalized and the Synthetix protocol is one of the largest by market capitalization in the crypto space, this provides an opportunity to strategically acquire other protocols or teams in the space and transform them into a core Synthetix contributor, allowing for rapid expansion of development resources that contribute to the protocol. Synthetix's scale now requires further scaling up its core contributors, but that process is expensive, time-consuming, and eats up existing resources. It is possible to circumvent some of these problems through strategic acquisitions. Yearn has demonstrated that it is possible for the two DAOs to form a mutually beneficial partnership or merge. The Synthetix community should be open to similar opportunities.

These are Synthetix's high-level priorities for 2021, and ultimately all of the above projects will have to go through a rigorous governance process, with each project currently prioritized by the core contributors. Over the past few months, this has begun to change, with the Spartan Council taking a more active role in setting priorities. This makes sense, as they are the most legitimate institutions to represent the interests and wishes of token holders. Expect this process to continue this year, especially with the many functional improvements under Synthetix V3, which are described below. Many of the topics discussed in the V3 section are still in the development stage, and some have been discussed by the community, but most still need to be presented in SIP format.

Synthetix V3 overview

New SNX Pledge Mechanism

The current SNX pledge mechanism violates some conventions in the crypto world, which may cause some confusion for SNX punters. The pledged SNX is still in the user's wallet, which poses a problem because it is not transferable. It also introduces a great deal of complexity into tokens that could have been avoided if pledges were handled through contracts. Such a mechanism would require users to send SNXs to a contract for pledge, and SNXs outside of that contract would always be free to transfer money.

eSNX

The inflation rate for SNX payments is locked in for one year from the start of the application. This change would create ESNX, which would be paid directly to the wallet but would not be immediately pledged as it is now. Instead, the Pledger will be able to destroy it and receive the hosted SNX, which will be unlocked after a year, creating more flexibility for the Pledger. This will also allow the protocol to pay extrinsic incentives in ESNX rather than SNX, creating better long-term adjustments. Note that a market for ESNX is likely to emerge and trade at a lower price than SNX.

Tokenize debt

This change requires the new pledge mechanism mentioned above, which will provide a togenized representation of the SNX locked in the pledge contract, and it will be transferable, so the pledger can easily transfer the pledged SNX between wallets without the need for de-pledge and destruction. This works in a similar way to many lending agreements, and was pioneered by Compound with its CToken model.

Continuous Pledge Reward

Current pledges are inefficient and subject to many attacks and manipulations. By moving to a continuous pledge system, users will be compensated only on the basis of their contribution to the debt pool over a period of time rather than on a specific "snapshot," which encourages more aggressive position management and rewards users who consistently post collateral for agreements.

Continue to unlock

Continuous unlock will change the way the unlock schedule works, so that any SNGX earned will be added to a continuous unlock pool, rather than to a discrete snapshot one year after each claim. This will significantly reduce the complexity of requesting data storage and improve the user experience by adhering to existing practices adopted by most protocols.

Maximum open interest

This will introduce a cap on the supply per Synth to prevent various attacks on the protocol, including flash lending.

Order matching (exceeding open position limit)

The changes, if introduced, would probably require a system for placing limit orders if they hit the ceiling and then matching them between counterparties.

Separate pools of debt

The current pool of debt is undifferentiated, making it difficult to hedge between asset classes. If the debt pool is divided into different asset classes, investors will be able to choose which pool to participate in and the market will adjust the yield for each pool accordingly.

Price threshold

Currently, there is no mechanism for users to specify a price for a transaction, and all orders within Synthetix are essentially zero-slippage market orders. This is important because in the case of fee recovery, users may be able to get a deal at a price different from the one they intended to trade at. Price thresholds provide users with security that sudden changes in price will not adversely affect them because orders will be rejected if the price changes by more than a certain percentage.

Order matching (during market break)

As new asset classes were introduced, many traded on traditional markets that were closed on weekends and holidays. When the market closes, it is possible that the agreement will automatically switch to counterparty mode, allowing traders to match their limit orders with other orders, rather than matching a pool of debt through a prognosticator. This would allow 24-hour trading of stocks and other asset classes.

The implementation of Keep3r

There is a growing need for an open guardian network to maintain functionality in Synthetix, and we have been working with ChainLink and Keep3r to implement these tasks.

Prophet threshold signature

While predictor delays are not expected to be as much of an issue on Layer2, it is likely that switching will still be required for some time on Layer1, and changing the predictor architecture to an out-of-chain signature-based pull system will reduce the attack vector currently derived from Layer1 predictor delays.

Protocol migrator

The contract is intended to operate in a manner similar to some other on-chain governance systems. However, it will be linked to our existing governance process, which relies on a combination of ProtocolDAO and the Spartan Council to implement protocol changes. It will also likely include a tokenholder veto as a further security measure for tokenholders. Ideally, such a mechanism would strike a balance between direct voting by token holders and centralised governance. Provides security without trust protocol escalation under the supervision of out-of-chain governance.