In this article, we discuss Synthetix V3 - what it is and why it is crucial. Our focus will be on understanding the distinctions between the current system and Synthetix V3, highlighting its aim to serve as a foundational layer of liquidity for the development of diverse derivatives markets.
From Havven to Synthetix: Tracing the Evolution
Synthetix's journey began as Havven in 2017, offering a stablecoin protocol backed by Havven tokens. Recognizing the demand for deep liquidity and low fees in the nascent DeFi landscape, Havven evolved into Synthetix and made a strategic shift from being a user-facing derivatives platform to focusing on liquidity provision and derivative growth. Synthetix has built upon previous smart contract architectures throughout its evolution, constantly improving and expanding its capabilities.
Synthetix V3 marks a complete overhaul, positioning itself as a permissionless derivatives liquidity platform with the goal to build a universal liquidity layer for DeFi.
“A new architecture, new premise and a fundamentally new offering: the liquidity layer for defi.” - cavalier.eth
Synthetix - as we know it
Synthetix stands as a decentralized liquidity layer built on Ethereum and Optimism, providing a vital backend for several protocols in DeFi.
Stakers collateralize synthetic assets using the Synthetix Network Token (SNX) to enable the issuance of synths.
- Stake SNXMint sUSD (synthetic USD- native stablecoin)
- SNX serves as the collateralsUSD represents the debt
This pooled collateral model eliminates the need for intermediaries and allows direct conversions between synths. The result is composable and fungible liquidity across markets, eliminating conventional slippage barriers.
*Synthetic assets, or synths, bridge the gap between real-world assets and digital assets. With synths, users can track the price movements of assets without needing to possess them.
Synthetix's liquidity encompasses two types of assets: spot synths, which mirror real-world assets, and Perps, a decentralized perpetual futures exchange utilizing Synthetix’s deep liquidity and low fees.
Off-chain oracles are utilized to reduce fees, and risk management tools ensure market neutrality. Traders are incentivized to maintain delta neutrality through funding rates and premium/discount mechanisms.
The strength of Synthetix's liquidity and support for derivatives has attracted innovative DeFi protocols such as Kwenta, Lyra, Polynomial, and Curve/1inch for Atomic Swaps, with several other projects capitalizing on Synthetix's liquidity layer.
Synthetix V3 - a complete rebuild of the protocol
For the past two years, V2 (discussed above) has been the active protocol while V3 has been under development.
V3 seeks to achieve Synthetix’s long-standing goal of becoming a permissionless derivatives liquidity platform. It provides the foundation (a protocol for protocols) for other derivative protocols to harness, solidifying its position as a pivotal infrastructure for developing the next generation of on-chain financial products.
V3 Focus areas
Synthetix V3 introduces multi-collateral staking, expanding beyond SNX as the sole collateral option. It essentially provides users with better control of credit as V3 separates out different assets with different risk profiles.
It paves the way for a permissionless liquidity layer (liquidity as a service), empowering developers to create markets and integrate with Synthetix in a seamless and decentralized manner.
V3 fosters a developer-friendly ecosystem, offering custom reward structures and oracle choices to market creators, eliminating the need for governance-based asset listings.
Seamless cross-chain implementation becomes a reality with V3, allowing liquidity to flow effortlessly across multiple EVM chains through teleporters
The focus areas help address key issues in the derivatives trading landscape, particularly the challenge of attracting initial liquidity.
When launching a derivatives protocol, attracting collateral can be an arduous task. Synthetix solves this by allowing developers to create new markets and easily connect to existing collateral vaults. This means that derivative protocols can be built on top of Synthetix V3, eliminating the need to start from scratch.
V3 for StakersIn Synthetix V3, staking will be simplified, allowing users to easily stake SNX like any other protocol. Additionally, there will be differentiated debt pools, enabling stakers to supply collateral and receive fees from specific asset pools without being exposed to every asset supported by the Spartan Council. The veSNX gauges will introduce inflation weighting, providing incentives for staking and offering greater rewards for locking SNX. These improvements aim to create a more user-friendly staking experience, particularly for new users who wish to hedge specific assets.
*Spartan Council is the central governing body of the protocol that votes on overall improvement proposals and parameter changes.
V3 for Builders (Protocols)
With Synthetix V3, developers will have the ability to create pools that support a wide range of financial derivatives, from traditional markets to more unique offerings like no-loss lotteries or separate protocols. This opens up endless possibilities and allows for increased liquidity in previously untapped markets. In theory, even existing competitors can leverage Synthetix to enhance their market availability.
For a deep dive into the V3 features, click
The Journey to Synthetix V3
Here’s what stakers/builders can expect from the complete version of Synthetix V3.
Stablecoin Migration: A new synthetic stablecoin will replace the current V2 sUSD. Over time, users will migrate their assets from V2 to V3 via a Curve pool, ensuring a seamless transition.
Perps v3: An upgrade to the existing Perps v2, Perps v3 will offer multi-collateral support and native cross-margin functionality, providing more flexibility for users and integrators.
Incentives shifting to v3: Once Perps v3 starts earning fees for the v3 system, inflation incentives will gradually shift from v2 to v3, encouraging collateral migration and the adoption of the newer Perps version.
Upgrade v2 stakers to v3 LPs: To facilitate the migration of SNX stakers from v2 to v3, a Legacy Market will be created in the v3 system. This will allow stakers to migrate without unstaking and maintain liquidity on v2.
: A vital component of V3's cross-chain functionality, teleporters eliminate slippage and the need for bridges by burning sUSD on one chain and minting it on another. Teleporters are currently in development and already live on several testnets.
Cross-chain Pool Synthesis: SIP-312 enables Perps markets on different chains to leverage collateral from existing SNX Pools on other chains. This allows for the deployment of Perps markets on new chains with access to existing liquidity. Currently in the testnet phase, this development promises an interconnected DeFi ecosystem.
Permissionless Pools and Markets: Currently, the creation and administration of Pools and Markets are limited to the Spartan Council. However, the long-term vision is to enable permissionless access and governance, which will mark the completion of the v3 End Game.
*Please note that these milestones are subject to dependencies and ongoing governance decisions.
The End or The Beginning?
Hello Infinex, a Synthetix frontend designed to rival centralized exchanges.
On July 14, Warwick published a blog post stressing the importance of creating a dedicated front end to provide a user experience akin to centralized exchanges, while still maintaining self-custody principles.
Warwick identified key issues with their current platform, Kwenta. Traders face inconvenience bridging assets to the layer-2 rollup and exchanging them for sUSD before trading. Each order or cancellation requires the trader's wallet signature, incurring fees. The goal is to make decentralized Perps rival centralized exchanges.
Infinex, the planned DEX, will offer easy access through a username and password, remaining non-custodial. Unique public-private key pairs for each user will be stored in their browser for signing trade orders, not fund withdrawals.
Infinex addresses three obstacles:
- migration to Optimism
- acquiring sUSD
- reducing the need for multiple signatures
Warwick's approach for Infinex is straightforward: prioritizing the user experience.
“Synthetix v3 is setting the stage for anyone to simply add Synthetix to a blockchain, integrate oracles, and instantly create a thriving DeFi ecosystem.” - cavalier.eth
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The information provided through this work is intended solely for educational purposes and must not be treated as investment advice. Any lapses in presenting any of the information correctly are ours alone. We disclaim any liability associated with the use of this content.
