In-depth Understanding of Synthetix V3: Features, Advantages, and Future Plans
Synthetix V3 represents an important milestone for the protocol, aiming to become a permissionless derivatives liquidity platform for the next generation of on-chain financial products.Original Title: 《What is Synthetix V3?》
Author: Matt Losquadro, Synthetix
Compiled by: Kxp, BlockBeats
Synthetix V3 represents a significant milestone for the protocol as it undergoes a complete overhaul to become a permissionless derivatives liquidity platform for the next generation of on-chain financial products.
In this article, we will take a deeper look at Synthetix V3 and how it differs from the current system, including its goal of becoming a liquidity layer upon which any derivatives market can be built. We will also explore the features and advantages of Synthetix V3, as well as its phased rollout plan. This article will serve as a foundational piece for building further content, so let’s dive into the main content.
What is Synthetix?
Synthetix is a decentralized liquidity layer built on Ethereum and Optimism, providing liquidity backend support for some of the most exciting protocols in DeFi.
Stakers provide liquidity to back a range of synthetic assets and earn rewards and market returns in return. This liquidity guarantees oracle prices for trading synthetic assets and perpetual futures, eliminating the need for traditional order books and counterparties. As a result, liquidity becomes composable and interchangeable across markets, and traditional slippage is eliminated.
Synthetix liquidity currently supports two main types of synthetic assets: spot synths and perpetual futures:
Spot synths track the value of real-world assets (such as crypto, fiat currencies, and commodities), allowing users to gain exposure to a variety of assets without holding the underlying assets.
Perp is a decentralized perpetual futures trading platform that utilizes Synthetix liquidity as counterparties for traders, providing deep liquidity and low fees. Stakers (Perp LPs) take on the risk of the aggregate performance of all traders while earning trading fees.
Off-chain oracles reduce fees to 5-10 basis points, and risk management tools ensure long-term market neutrality.
Funding rates and premium/discount mechanisms incentivize traders to balance the market to achieve delta neutrality.
With Synthetix supporting robust liquidity and derivatives, some of the most innovative and interesting DeFi protocols have been built on Synthetix: Kwenta, Lyra, Decentrex, Polynomial, dHEDGE / Toros Finance, and Curve/1inch for atomic swaps, among others, with more protocols being developed based on Synthetix liquidity.
A Brief History of Synthetix
Synthetix has gone through many iterations and changes to become what it is today. This journey began with Havven, a protocol similar to MakerDAO (before MKR introduced multi-collateral DAI). Havven was a stablecoin protocol backed by the Havven Token, which was later rebranded to Synthetix as a spot synth trading protocol. In the early days of DeFi, the protocol recognized the need for deep liquidity and low fees. Subsequently, Synthetix gradually evolved from a user-facing derivatives protocol to one focused on providing and growing liquidity and derivatives.
Notably, it did not discard smart contracts during its iterations. The protocol improved the contracts and used them to create a new architecture. Synthetix has been built on its previous architecture for five years, which means it is in urgent need of a rebuild, and this rebuild is Synthetix V3.
What is Synthetix V3?
Synthetix V3 is a comprehensive reform of the protocol from the ground up. It achieves the goals that Synthetix set long ago: a permissionless derivatives liquidity platform that powers the next generation of on-chain financial products. With the launch of V3, Synthetix will become a liquidity layer upon which any derivatives market can be built.
Synthetix V3 benefits from years of research and development, aiming to become the most powerful and composable derivatives liquidity protocol. It establishes a new foundation for the next generation of on-chain financial products, becoming the most versatile and modular approach. The following diagram provides a high-level overview of the Synthetix V3 architecture:
The Long-Term Vision of Synthetix V3
Synthetix, as a liquidity layer, has two key value propositions:
For stakers: A range of pools/vaults available for deposit, connected to a variety of derivatives markets, allowing for the selection of market exposure levels and types, as well as expected returns.
For the protocol: A series of pools/vaults used to provide collateral for new derivatives markets or tools to create pools and attract collateral, with rewards.
V3 focuses on four key areas:
A liquidity layer for DeFi derivatives: Driving the next generation of permissionless derivatives.
Multi-collateral staking that empowers stakers.
A composable, developer-friendly system.
A future that belongs to cross-chain.
Liquidity Layer for DeFi Derivatives: Driving the Next Generation of Permissionless Derivatives
V3 realizes Synthetix's long-term vision of becoming a permissionless liquidity supply platform, providing builders with tools to easily create new financial derivatives.
Launching a derivatives protocol can be challenging, often facing the cold start problem of needing to attract collateral. With Synthetix, developers can create new markets and seamlessly connect to existing collateral pools. This way, almost any derivatives protocol can be built on Synthetix V3 instead of starting from scratch.
The creation of Pools / Vaults / Markets will initially be managed by Synthetix governance and will transition to fully permissionless deployment over time. One could even say that Synthetix provides liquidity as a service, as new protocols seeking to add liquidity to on-chain derivatives can easily and efficiently build on Synthetix.
V3 will transform Synthetix into a multi-market ecosystem, including perpetual futures, spot, options, insurance, exotic options, etc., all supported by multiple debt pools.
Synthetix welcomes builders to leverage its protocol and cultivate their communities for success, which is exciting for both Synthetix and the Ethereum ecosystem.
Empowering Stakers with Multi-Collateral Staking
V3 creates a universal vault system that is not limited by collateral types. Each vault supports a single collateral asset, but vaults can be combined into pools connected to one or more markets. All external collateral will be incorporated into the protocol through Synthetix governance.
The new pool and vault system has three main advantages:
Better risk management: Pools are connected to specific markets, thus having specific exposures.
Better hedging capabilities: Pools are connected to specific markets for precise hedging.
A wider range of collateral: Stakers can stake any asset accepted by the pool.
Stakers can allocate their capital to an increasing number of pools, giving them more control over credit, as the V3 system provides more options for liquidity and hedging.
A Simpler, Cleaner Developer Experience
The core goal of V3 is to make the Synthetix system more efficient and simpler by optimizing and cleaning up the old schemes, providing a more optimized user experience.
Developers no longer need to be Synthetix experts to understand how to build on Synthetix. Instead, a rich set of developer tools, sandboxes, and guides make building on V3 simpler than ever, allowing them to focus on which market they want to build.
A Future That Belongs to Cross-Chain
Synthetix V3 will be able to deploy on any EVM-compatible chain to support synthetic assets on any chain.
Some of the most exciting features of V3 will be based on cross-chain capabilities, such as transferring assets from one chain to another without requiring the protocol to do any extra work.
The Road to Synthetix V3
Synthetix V3 will be rolled out in phases over the coming months, with users gradually transitioning from the existing V2 X system to V3. The features discussed in the next section, 【Deep Dive into Synthetix V3 Features】, will not be available to the public at the initial release. The V3 system is optimized for modularity, so the scope and order of its features are being optimized and will rely on Synthetix governance. Nevertheless, it is still very important to understand the various work being done internally on Synthetix V3.
Initial Phase ------ The core contracts of Synthetix V3 have been launched on the mainnet, although this is just the beginning of the road to V3. Many features are not yet available in this upgrade, but the foundation has been laid. The current functionality is borrowing the new stablecoin snxUSD as collateral for snx, which will be used for market integration in the future.
Multi-Collateral Compatible System ------ V3 creates a universal collateral vault system that can accommodate multiple types of collateral. Synthetix governance will decide which assets, in addition to the current SNX and ETH, will be supported as collateral.
V3 Spot Market ------ The first market expected to launch on V3 is the spot market. These markets allow for the creation and trading of spot synths entirely on Synthetix V3. Wrappers and spot market incentives will work together to enable delta-neutral markets that can support any ERC-20 wrapable synthetic asset.
Order types: atomic orders, asynchronous orders, wrapping and unwrapping (wrappers). To learn more about the V3 spot market, please visit Spot Documentation.
- Perps V3 ------ Building Synthetix perpetual contracts on V3 infrastructure.
New features: native cross-margining, expanded margin collateral types, reduced gas fees based on new infrastructure, high compatibility oracle integration, etc. All of these heavily rely on governance, although these are all R&D projects from CC/community.
Traditional Markets Running on V3 ------ "Traditional markets" include all synthetic assets and liquidity within the V2 X system. Migrating them to Synthetix V3 requires introducing a "traditional market" within Synthetix V3, which V3 stakers can collateralize. The use of this market is a transitional solution until all synthetic assets are fully transitioned to native V3 markets. Once the traditional market is live, stakers will be able to migrate their positions to Synthetix V3.
Cross-Chain and Synthetic Asset Transmitter ------ Since V3 is fully EVM-compatible, it can be deployed on any EVM-compatible chain. Liquidity can be provided cross-chain, while synthetic assets/markets will not be limited to a single chain.
Permissionless Market/Asset Creation ------ The creation of pools/vaults/markets will start with governance approval and then transition to a permissionless model.
Deep Dive into Synthetix V3 Features
- Market Creation: The V3 system is built around markets, where markets are a generic abstract concept that allows products to be built on the protocol. Markets determine the pricing logic for the relevant assets.
Market examples: spot markets, futures markets, options, loans, etc.
- Asset Creation: New synthetic assets can be deployed using market pricing logic and price data streams. In V2 X, these assets required governance approval, but soon they will only need to rely on the necessary market logic and price data support.
Asset examples: spot BTC, spot ETH, ETH Perp, BTC Perp, ETH options, etc.
- Cross-Chain Synthetix: The V3 system is compatible with any EVM-compatible chain. It has been built for cross-chain interoperability, featuring cross-chain liquidity and fee sharing, synthetic asset transmitters, and many other important functional improvements.
Synthetic asset transmitters are more efficient than AMM-based cross-chain bridging solutions, as there is no slippage due to liquidity shortages on the target chain. Synthetic assets are simply destroyed on one chain and minted on another.
Multi-Collateral Staking: V3 does not discriminate against collateral types, allowing governance to use any collateral to support synthetic assets. This will increase the liquidity of sUSD and the markets supported by Synthetix. Collateral options will have adjustable variables, such as collateral requirements and rewards, which can be adjusted by governance.
Synthetix Loans: Users can now provide collateral to the system to generate sUSD without taking on the risks of the debt pool, nor do they have to pay any interest or issuance fees.
Differentiated Liquidity Debt Pools: Users can choose the pools in which they want to provide collateral and then decide which markets and assets to support within those pools, rather than delegating collateral to the entire debt pool as in V2 X. This gives stakers more control over their credit and allows them to support markets that may be deemed too risky by governance due to all liquidity being in a single debt pool.
Example: Risk-averse stakers can delegate their credit to pools that only support ETH and BTC Perp markets, rather than long-tail Perp markets.
- Oracle Management for Markets: Market creators can choose from multiple oracle solutions and set custom aggregations, giving them more control over the oracles that power their markets. Oracle managers provide new opportunities for supporting new markets and assets.
Example: Selecting the lowest price for spot Bitcoin based on Chainlink, Pyth, and Uniswap's time-weighted average price (TWAP).
- Reward Manager: Pool creators can attach reward distribution tools to vaults, incentivizing liquidity providers for specific collateral types. Rewards can come from market fees, token distributions, or anything else.
Here are some ongoing SIPs, and you can learn more about the current status of Synthetix V3 and how it will evolve through the links below:
