Interpretation of Synthetix V3's Five Major Proposals: What Does This Upgrade Mean?

Original Author: Westie, Blockworks Research Researcher

Original Compilation: Deep Tide TechFlow

The Synthetix v3 proposal has been approved by the governance committee, what does this upgrade mean for Synthetix?

Currently, there are 5 active votes related to the Synthetix V3 upgrade:

• SIP-300 Synthetix V3

• SIP-302 Pools (V3)

• SIP-303 Markets (V3)

• SIP-304 Liquidation (V3)

• SIP-305 Rewards (V3)

I will introduce these one by one.

• SIP-300 Synthetix V3, simply put, this SIP outlines the transition from V2 x to a more modular architecture, which alleviates the pain points of previous versions, such as lack of customizability and accumulated technical debt.

• SIP-302 Pools, this SIP proposes the creation of different debt pools. Synthetix currently operates through a unified debt pool, which consolidates liquidity but increases the risk and complexity for SNX stakers. V3 allows for funding pools based on different market types, each with its own collateral and debt positions. Therefore, stakers can choose to engage only with certain markets, enabling any user to create custom synthetic assets, at the cost of liquidity fragmentation.

• SIP-303 Markets (V3) proposal suggests allowing different products (such as spot or futures markets) established on Synthetix to be modularized by splitting them according to funding pools. Similar to their current operation, markets are expected to accept snxUSD, generate derivatives, and use the liquidity of their pools to track traders' balances.

• SIP-304 Liquidation (V3) proposal includes an improvement by establishing a liquidation buffer, giving users a certain amount of time to adjust when the C-Ratio falls below a minimum threshold. Synthetix currently uses a socialized liquidation mechanism, which will be reused in V3 after some improvements. This means that participants being liquidated will distribute their collateral and debt to other participants in their pool.

• SIP-305 Rewards (V3) will introduce a "Rewards Manager" for staking rewards to help distribute rewards. This system is universal and can customize other elements, such as the assets used (e.g., not just ERC-20) and the reward programs.

So what does this mean for Synthetix?

First, this leads to more modularity in the protocol, allowing for easier future upgrades, the ability to create assets and their own markets permissionlessly, and the opportunity for better scalability of snxUSD.

Now, if you want to create your own synthetic assets and pools, you have to go through the entire governance process. More permissionless creation of these markets will allow for greater creativity and experimentation without exposing all SNX stakers to this risk.

Additionally, V3 should allow more assets beyond SNX to be used as collateral (e.g., ETH), thereby opening the door for more potential liquidity and enabling customization of collateral assets based on pools and their target/risk parameters.

Regarding the timeline for actual implementation, the team is currently addressing audit feedback, and it may still take a few weeks until the team is ready to deploy on the ETH mainnet and Optimism.

As for the next steps after the vote, SIP-306 outlines the actual migration, allowing stakers on V2 X to transfer their collateral to V3 to support "legacy markets" for a smooth transition. One cool SIP I’m keeping an eye on is 312, which allows funding pools to support markets on any chain.