Author: THOR HARTVIGSEN; Compiler: Vernacular Blockchain

Synthetix has grown significantly recently. This article aims to dissect what makes Synthetix unique today, how it has performed recently, and why V3 is a major innovation in DeFi.

Table of contents

1. Current status of Synthetix

2. Synthetix V2 indicators

3. Synthetic V3

4. The road to V3

5. Final Thoughts

1. Current status of Synthetix

Synthetix was launched in 2017 by Kain Warwick and Justin MosesKain Warwick. Originally called Havven, the project offers a stablecoin (nUSD) overcollateralized by crypto assets. The protocol has come a long way since then, especially in the combined performance of assets on Ethereum mainnet and Optimism.

Today, Synthetix acts as a liquidity layer for a large number of DeFi protocols. Users on Synthetix stake native SNX tokens, which are used as collateral (synthetic USD) to mint sUSD (synthetic USD). **Therefore, sUSD is Synthetix's native stablecoin, over-collateralized by SNX, representing users' debt on the protocol.

Therefore, the total available liquidity that a protocol built on top of Synthetix can use is a function of the amount of collateral (i.e. SNX) staked on the protocol. Why should users stake SNX to achieve this synthetic liquidity? Because stakers are rewarded with native SNX token issuance and fees incurred by protocols that leverage this synthetic debt (currently APY = 40%). **If the amount of SNX staked is below a certain threshold, SNX emissions will increase, thereby attracting more users to stake SNX and deepen liquidity. **

**Liquidity on Synthetix supports two different types of assets: spot and futures. ** Spot synthetics track various assets such as cryptocurrencies, commodities, forex and more. This is a way for users to receive investments without actually holding the underlying asset. Synthetic futures allow users to trade leveraged futures on various assets. Liquidity on Synthetix acts as the counterparty to these trades. **Therefore, it is worth noting that SNX stakers bear counterparty risk. **This means that if a trader on a trading protocol leverages liquidity on Synthetix (e.g. Kwenta) to make a lot of profit, then the staker's debt increases, and vice versa. However, there are mechanisms to mitigate this risk, including providing traders with arbitrage opportunities (funding rates) when trading activity deviates.

1. Math

As of now, Synthetix has a TVL of $375 million, which means $375 million worth of SNX has been staked. **Kwenta is an example of a protocol built on top of Synthetix and utilizing protocol liquidity. **Kwenta is a perpetual futures trading protocol on Optimism with no native liquidity as they inherit from Synthetix. All trading pairs on Kwenta are denominated in sUSD, so in order to trade these synthetic assets, users must mint sUSD by staking SNX (or buying sUSD on the market).

Trade in Kwenta

All transaction fees incurred on Kwenta are paid to SNX stakers. On average, Kwenta accounts for approximately 60-70% of all fees incurred by protocols utilizing Synthetix's liquidity. Protocols/front-end applications built on top of Synthetix are:

1）Lyra

2）Thales

3. Count

4. dHedge

5）Polynomial

2.Infinex Not long ago, the Synthetix team announced that it will use the Synthetix liquidity layer to build its own front-end (protocol). Infinex is an on-chain perpetual trading platform designed to mimic the trading experience of a centralized trading platform, but on-chain in a decentralized manner. Since the user interface and experience is at the heart of the protocol, there will be "Easy" and "Pro" modes to make it easier for new traders to get started.

**There will be no new native tokens, but the protocol will be governed by SNX governance. Additionally, all revenue will be used to deepen Synthetix's liquidity by purchasing and staking SNX. **The greater the trading volume, the greater the buying pressure on SNX and the deeper the liquidity. A flywheel may be forming.

2. Synthetix V2 indicators

Below is a chart from Token Terminal showing the price of SNX and the volume of trades on the protocol utilizing Synthetix liquidity. As the chart shows, there is a large divergence between SNX's recent activity and its current price.

Synthetix volume and SNX price

Synthetix's recent slew of product releases, with the Perps V2 upgrade introducing multiple synthetic assets that can be used in protocols like Kwenta, have played a major role in the increased activity. **However, it is worth mentioning that Synthetix has acquired a large amount of OP tokens from Optimism, which are being used in protocols such as Kwenta to incentivize users to use the product. **In addition, Kwenta will further distribute KWENTA tokens to obtain higher incentives.

Below is a graph of TVL, which is unique to Synthetix as it is directly correlated to the price of SNX, as shown below. As mentioned earlier, this is the case because SNX is the only asset that can be staked on the protocol.

Prices for Synthetix TVL and SNX

Synthetix is a core part of the DeFi infrastructure, and liquidity is used by multiple protocols, as shown in the diagram above. The current liquidity or TVL limitation is that only SNX can be staked on Synthetix. This will change in V3.

3. Synthesis V3

Synthetix V3 contains a number of upgrades that take Synthetix to the next level in general: a cross-chain liquidity layer for all DeFi. V3 is currently in alpha stage, and different features will be rolled out gradually after completion.

Here are the key takeaways about the V3 introduction:

1. Multi-collateral pledge instead of SNX only

2) Permissionless Liquidity Layer

3) Developer friendly ecosystem

4) Seamless cross-chain implementation

1. Multi-collateral staking

Multi-collateral staking is one of the core tenets of the Synthetix V3 vision. As of now, only SNX can be staked for liquidity used in synthetic spot and perpetual markets. V3 introduces a vault design where each vault is represented by a type of collateral (token). One vault could be ETH, another SNX, and a third wBTC. The types of collateral that make up these vaults are added through governance. Additionally, treasuries can be added to pools for use by protocols looking to leverage their market-specific liquidity. An example would be a pool of ETH vaults and DAI vaults, which could then be used on an on-chain derivatives market such as Kwenta. Some benefits:

1. As a staker, you can more freely choose the assets you want to provide as collateral and earn income.

2. Since the mining pool is connected to a specific market, risks are isolated, which is transparent to stakeholders. Risk-averse investors may only provide liquidity to the pools used by the BTC and ETH markets, rather than to riskier assets.

3. Since the pool of funds is linked to a specific market, it can be better hedged, thereby reducing counterparty risk

2. Permissionless Liquidity Layer

With V3, developers can leverage liquidity pools on Synthetix to create new markets in a permissionless manner. A big hurdle for DeFi is the early bootstrapping of liquidity, which is often achieved through strong incentives for token emission.

In addition to being able to choose which liquidity pools a marketplace should integrate, marketplace creators can also choose which oracles their products should use and create custom reward structures for liquidity providers. Listing new synthetic assets will also no longer be done through governance, but can be easily enforced. These assets can be anything from spot OPs to ETH options.

Synthetix will eventually be a liquidity-as-a-service platform that can be easily integrated with new products.

3. Seamless cross-chain implementation

The ultimate goal of Synthetix V3 is to be usable on any EVM chain. So-called transmitters will enable liquidity on one chain to be available on other chains. If a user provides liquidity to a pool like Optimism, the marketplace on Arbitrum can use that liquidity for its platform.

Here is an overview of the Synthetix V3 spot market structure: Users deposit assets into vaults, which are added to specific pools. These pools can be used by protocols that create markets on top of Synthetix liquidity pools. These marketplaces are where users interact on dapps (such as Kwenta) built on Synthetix.

4. The road to V3 On July 3rd, an article titled "Entering the Synthetix v3 Final Game" was published, which details the preparations for the full release of Synthetix V3. Here is the summary:

1. Stablecoin Migration - V3 introduces a new synthetic stablecoin to replace the current V2 sUSD. A name has yet to be decided, but one suggestion is to keep the "sUSD" of the new stablecoin, and then rename the current V2 version to "oldUSD" or "legacyUSD". Over time, as new V3 stablecoins and synthetic assets gain liquidity and utility, users will need to migrate their assets from V2 to V3 (via the Curve pool).

2. Perps V3- Perps V3 will introduce the aforementioned multi-collateral staking. The implication for traders of protocols like Kwenta, Polynomial, etc. is that all synthetic assets (not just sUSD) can be used as collateral for transactions. For traders, the UI/UX will also be simpler and more intuitive. Most of the core code is finalized and close to review. The testnet will likely go live later in July.

3. Upgrade V2 SNX stakers to V3 LP - This feature allows current SNX stakers to migrate to V3 without paying debts and closing positions.

4.Teleporters - Teleporters are an important part of the cross-chain functionality provided by V3. To allow liquidity to be used across chains, they essentially burn sUSD on one chain and mint it on another chain, thus eliminating slippage and the need for bridges. Teleporter is currently under development and running on several testnets.

5. Cross-chain pool synthesis å- This is another core aspect required for the full-chain liquidity vision. It enables markets and mining pools to understand the state of other on-chain collateral. This way, new perpetual markets can be launched on one chain and use another chain’s liquidity. Currently on testnet.

These are some of the core mechanics of V3 that are currently being built and will unlock the full vision of V3.

5. Final Thoughts

At the end of the day, Synthetix is very exciting, but it's all about creating demand and attracting developers to build solutions utilizing Synthetix as a liquidity layer. The more protocols (like Kwenta) built on top of Synthetix, the more liquidity providers (stakers on Synthetix) earn. The higher the yield, the more liquidity, and the deeper the liquidity, the more protocols will seek to build on top of Synthetix. This is a reflexive flywheel.

As mentioned earlier, 60-70% of the fees earned by SNX stakers come from traders on Kwenta alone. Transactions on Kwenta are strongly incentivized by the emission of large amounts of OP and KWENTA tokens, so it is difficult to estimate how organic the recent user growth has been.