Synthetix Founder Proposal: Opportunities I Spotted and What’s Next for Synthetix

Few people have the time to sit down and make crazy plans for Synthetix. This post will list the opportunities I found, some as a rough description of the problem with some options, and some as a detailed plan.

Written by: Kain Warwick, Founder of Synthetix

** Compilation: Joy**

As I reintegrated into the community over the past few months, the question I asked myself was "what is missing from this project?". I've come to the conclusion that people are hesitant to pursue high-risk, non-obvious paths. This makes sense, since incentives are closely tied to everyone's work on the critical path.

Core contributors have become more effective over the past year, facilitated by the introduction of the Core Contributors Council, but also hired a lot of incredible people to replace those who were exhausted in the 2018/19 death march OGs. This led to a lot of progress on the core program; wrapping up V2x, designing V3 and reimplementing Perps (derivatives). The latter two were open issues in early 2022, and now a little over a year later Perps continues to scale, with the initial components of V3 deployed to mainnet.

Few people have the time to sit down and make crazy plans for Synthetix. This post will list the opportunities I found, some as a rough description of the problem with some options, and some as a detailed plan. The Finance Committee is also developing a new proposal template for the initiatives listed below. This will ensure more transparent communication of future changes.

Core Contributor Alliance

I know this might delve into the equity distribution philosophy of a startup or token distribution in a DAO, but I think it's a key point. The early community either grasped it intuitively, or I imposed it on the community, I can't remember which. In my experience, many people who work at startups have multiple motivations, but financial freedom is often an important one. Working at a startup is already a risky job, and working at a DAO can be even riskier. In Synthetix, alignment is critical because there is little hierarchy. Self-motivated people are more likely to be attracted to this vibe. However, we also have to make sure we maintain financial consistency. I recommend setting aside SNX every quarter for bonuses. Bonuses will be distributed at the discretion of the TC (Finance Committee), combined with feedback from the CC (Core Contributors) about their peers' impact on the protocol. This will ensure fair distribution based on merit. The exact amount of SNX allocated is yet to be determined, but ideally it should be in the millions.

Transaction Incentives

Despite the success of OP incentives in increasing trading volume, SNX incentives may have a more impactful feedback loop, especially since incentives will be in escrowed SNX (eSNX), which should introduce traders to SNX staking. Ideally, 5-10 million SNX should be allocated to this 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 processes such as the implementation of dHedge strategies. Even though understanding why these hedging services are needed is a hurdle, it is difficult to quantify how many potential stakeholders are lost in the ecosystem due to complexity, but I think we can safely assume 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 out staking without facing too many challenges and gain 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 yields, we might attract more stakeholders. This benefit should initially be paid by the Treasury, possibly in SNX, but preferably in sUSD. This reward should also be calculated dynamically based on the ratio between active and passive stakers, with passive stakes capped at approximately 10% of the fee. Again, this is a very rough conceptual outline and the specifics are open to debate. A three-month trial capped at $1-2 million in sUSD or equivalent payouts in SNX would be sufficient to determine if this would increase the percentage of SNX staked, either passively or actively.

Integration Incentives

As Synthetix transitions to a liquidity layer, our reliance on integrators becomes even more important. Of course, there is nothing stopping the community from funding a new internal Synthetix transaction front end. But hopefully watching the challenges integrators encounter shows that this is no small feat. So it's critical that we align the incentives for integrators in the long run. How to achieve this has been debated at length in Discord, so I'll quickly review two sides of the debate.

Purists say no fees should be misappropriated from SNX stakers, all we need is for integrators to be able to add a fee on top of the base protocol fee. This has the benefit of reducing complexity for integrators while still allowing them to charge fees. Integrators are against this because they think it will make them less competitive, but this approach is the status quo.

The other side argues that a certain percentage of fees (like 10%) should be allocated to aggregators, meaning that all aggregators earn the same fee, and there is no competition between aggregators for zero fees to provide better services to traders. Cheap to execute.

There is an intermediate option that guarantees a certain percentage, but there is also an optional incremental fee that integrators can charge, which can provide base incentives for integrators, with the added benefit of providing them with significant differentiation in the market. This will mean that all integrators earn the same fees and there will be zero competition among integrators to provide traders with cheaper execution. There is an intermediate option that guarantees a certain percentage, but there is also an optional incremental fee that integrators can charge, which can provide base incentives for integrators, with the added benefit of providing them with significant differentiation in the market. This will mean that all integrators earn the same fee, and there will be no zero-fee competition among integrators to provide traders with cheaper execution. There is an intermediate option that guarantees a certain percentage, but there is also an optional incremental fee that integrators can charge, which can provide base incentives for integrators, with the added benefit of providing them with significant differentiation in the market. SIP-2002 takes us away from the pure point of view, but it will not affect the fees incurred for stakeholders, the problem is that if the fees continue to grow, this will not be a sustainable mechanism, although it is a step in the right direction .

I propose implementing integrator fees by splitting a percentage of SNX held by the Treasury, say 10 million SNX and staking on behalf of the integrator, which would incur a base fee of 3-5% depending on the percentage of SNX staked. This has the added benefit of not increasing the number of SNX in circulation to cover these fees. If this incentive is successful, it can be incorporated into the protocol without staking SNX on behalf of the integrator.

3:1 SNX split plus buyback

Last year I tried to shut down the inflation before we hit 300 million SNX. Fortunately, this proposal failed because we are not yet at a point where zero inflation is sustainable. Inflation is just as important today, and in V2x I believe we can turn inflation off with minimal impact. Unfortunately, we are now planning the transition to V3, and the question of whether we need inflation incentives is again being debated. The main reason for maintaining inflation in V3 is to ensure that there is a mechanism to channel liquidity for permissionless pools. There are several proposals on how to achieve this, such as veCRV-style voting. Even if inflation is the only solution here, I don't think it negates the offsetting power of buybacks and burns. If we do a 3:1 split, we will have about 90 million extra tokens that can be bought back and burned at a market price of $60 million.

Where does the money to burn these tokens come from? Treasury Fee Yield. Based on recent yields, the treasury generates about $5 million a year, and if 100% of that was allocated to buybacks, it would take about ten years to complete. This timeline will be significantly shortened if transaction volumes increase in the coming years. You may ask, why not just burn the 30 million+ tokens in the treasury wallet? These tokens are effectively locked up, so the impact is minimal, but once the buyback is complete, it makes sense to consider pro-rata distribution of the remaining SNX to stakers. If 100% of that was allocated to repo, it would take about ten years to complete. This timeline will be significantly shortened if transaction volumes increase in the coming years. You may ask, why not just burn the 30 million+ tokens in the treasury wallet? These tokens are effectively locked up, so the impact is minimal, but once the buyback is complete, it makes sense to consider pro-rata distribution of the remaining SNX to stakers.

Distribute SNX to stakers

The same question is why not burn SNX directly? The reason is that this SNX can be used for incentives, and if fully distributed, can be equivalent to a three-year inflation rate of 3%. This will allow us to test the need for inflation without actually inflating the token supply. The problem is that these tokens are currently carrying huge amounts of debt, so for them to be distributed, the debt also needs to be transferred or paid off. There are competing forces here because if the fee proceeds are used to buy back and burn SNX, the debt will not be paid off until the buyback is complete. One option would be to sell SNX in an OTC trade to pay off the debt, but that offsets the losses, so if the buyback starts, it appears that any distribution of SNX will need to wait until the buyback is complete. This could be between many years.

Treasury funded working groups

This is one of my favorite proposals. As we enter this new era of the protocol, we have developed a need for features such as sales and support. While it is possible to outsource these functions to an integrator, there is still an underlying gap, which I see as a bit like Salesforce. Salesforce is a platform, but it doesn't directly facilitate implementation, instead they rely on a network of integrators. However, Salesforce still required internal teams to work with integrators on large account deals and ensure that the integrators themselves were supported.

As of today, Synthetix can support market makers and large traders on the platform, with enough liquidity and functionality to make an entity like this worth trading. Integrators should interact with these types of users, however, a dedicated group that works with large traders and integrators to ensure a smooth usage process would be very beneficial. The past practice was to only hire new core contributors to fill this role. However, I see an opportunity to increase transparency and accountability of these functions by funding independent working groups to perform them and reporting directly to the Spartan Council. The treasury will directly fund this, allowing us to test this new type of coordination. Some continuity is needed to attract the right people to this working group, so I recommend running at least a 6-12 month trial, with a termination fee in SNX if the protocol decides not to take this approach after the trial.

Another working group I'm proposing is an analysis group that would be responsible for ensuring that all data on the protocol is available and up to date. And a real-time dashboard to make sure we have all the 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 risks of such investments and the fear of losing focus on its core mission of funding protocol development. While arguably the project could have been better funded if we had used our position over the past five years to do early-stage deals, this could also at times put pressure on the development of funding agreements, especially at the end of 2019 when liquidity When assets are getting lower and lower. Given the intent to reduce funding and the opportunity to fund ecosystem projects for the remainder of the bear market, it makes more sense now than ever to dedicate a percentage of funds to ecosystem funding. In particular we expect a significant growth in the number of new projects based on Synthetix in the next few years. This fund will be owned proportionally by SNX holders and can eventually be allocated or even used to fund further buybacks of SNX tokens.

Subsidize Keeper fees

Synthetix is unlikely to implement free transactions due to the lack of potential to pay for order flow in the protocol design. However, we should strive to remove any fixed fees associated with transactions. The treasury should subsidize the keeper fee to ensure low volume traders are not priced out, ideally by subsidizing the keeper directly, but given the complexity of this approach, it is best to pay the rebate of the keeper fee directly to the transaction first business. The specific method, whether to use SNX or sUSD, remains to be discussed.

Perps Referral Program

In theory, this is another move that the integrator can handle; however, the protocol-level referral procedure makes any other referrals provided by the integrator more powerful. Referral programs have historically worked very well for crypto exchanges; however, they require a working product. Given that Perps is finally ready, the potential to drive adoption through referrals is very strong. These referrals should be paid in escrowed SNX, which will ensure that there is no immediate price impact, and that SNX is preferably staked (passive or active) as it is locked anyway. As the trading experience improves and more markets are released, this will create a flywheel where traders can gain access to SNX stakers and large referrers will become important stakeholders in the ecosystem.

Finance Committee Proposal Template

A proposal template is being created to increase transparency of 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 in some cases may even be harmful, having a document outlining the plan and explaining its rationale would be helpful for community members to refer to.

Dismiss Finance Committee

In my opinion, the treasury will be dismantled at some point. There are various ways to do this, but the main idea is that if the protocol is functioning properly, the treasury committee can be split into smaller pieces and assigned to new or existing governing bodies to avoid 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 treasury committee has been the governing body for far too long.

These are just proposals, and I'm only one of four votes on the council. The purpose of this post is to start a discussion and ensure the community understands the potential path forward. I'm eager to debate and discuss all of these proposals in Discord.