As V3 Approaches, Can Veteran DeFi Protocol Synthetix Make a Comeback?
Author: Babywhale, Foresight News With the launch of Kwenta's token on the Synthetix ecosystem trading platform, projects within the Synthetix ecosystem have essentially completed their decentralization process. Synthetix itself mints sUSD and Synths, while Kwenta's spot and perpetual contracts along with Lyra's futures market have formed a complete Synthetix synthetic asset ecosystem.
Author: Babywhale, Foresight News
With the launch of Kwenta's token on the Synthetix ecosystem trading platform, projects within the Synthetix ecosystem have essentially completed their decentralization process. Synthetix itself mints sUSD and Synths, while Kwenta's spot and perpetual contracts along with Lyra's futures market have formed a complete Synthetix synthetic asset ecosystem. Today, as the synthetic asset concept that "peaked upon debut" in the last bull market has nearly disappeared, Synthetix—this veteran project born in the DeFi genesis year—has almost become the "final glory" of this sector.
**Atomic Swaps and 'Liquidity Relay'**
With the improvement of atomic swap functionality in May this year (allowing users to price synthetic asset trades through a combination of Chainlink and DEX oracle feeds for automated asset swapping at reasonable fees) and integration with 1inch, Synthetix opened up a "zero slippage" narrative for the synthetic asset track. Users can significantly reduce slippage that would occur from directly trading assets like WBTC and WETH for stablecoins by first trading them for sBTC and sETH, then redeeming them for sUSD on Synthetix and trading sUSD for other stablecoins through Curve and similar platforms.
However, the liquidity of sBTC and sETH is actually not high, with total values of only $7.82 million and $17.6 million respectively at the time of writing. When using 1inch to trade 1,000 ETH for sUSD, only a small portion is actually conducted through atomic swaps.
This functionality is possible because sBTC and sETH in the Synthetix ecosystem are not backed by actual Bitcoin and Ethereum assets, but are merely synthetic assets representing their prices. Simply put, these assets are essentially "created out of thin air" by Synthetix, previously circulating only within the Synthetix ecosystem, but now serving as optimal tools for reducing trading slippage.
Facing skepticism that "trading synthetic assets is inferior to trading the underlying assets directly," when high APY can no longer be recognized by users, zero-slippage trading between Synths (sTokens) and sUSD generated solely through oracle feeds has found a reasonable justification for the existence of synthetic assets.
According to Synthetix official data, in the month following the improvement of atomic swaps, Synths spot trading volume on Ethereum mainnet surged to a peak of $255 million. This year alone, total Synths spot trading volume on Ethereum mainnet from Kwenta and 1inch combined exceeded $1 billion, and SNX price also experienced a notable rally mid-year.
Having finally discovered this "lifeline" for synthetic assets, the upcoming Synthetix V3 plans to continue charging ahead on the liquidity path.
**Key Updates in Synthetix V3**
Several days ago, Synthetix team member Noah Litvin announced that Synthetix V3 code has entered the audit phase and migration is expected to begin in January next year.
According to an article published by Synthetix in July, V3 updates focus on three main areas:
Permissionless asset creation — Any financial derivative can be built on top of Synthetix V3;
Better credit control — Stakers can choose which assets they want to collateralize, improving the hedging experience and allowing new assets to add liquidity without Spartan Council approval;
"Liquidity as a Service" — Synthetix will not only be a protocol for trading through its debt pool and asset ratios, but can also help users quickly add liquidity to any on-chain financial derivatives.
Simply understood, V3's main direction actually boils down to two points: first, adding collateral assets beyond SNX, and second, using atomic swaps' zero-slippage characteristics to help more assets improve liquidity.
The token appreciation logic for SNX in the past mainly relied on increased Synths trading volume boosting SNX staking rewards, thereby attracting more users to buy and stake SNX, generating more sUSD and other sToken liquidity, creating a positive cycle.
However, due to the excessively high c-Ratio (currently 400%) required to earn rewards when staking SNX to mint sUSD, users lack strong staking incentives due to concerns about SNX price drops preventing them from earning SNX inflation and fee rewards. After adding other collateral assets, SNX would no longer be the primary source of sUSD but merely serve as a yield-earning mechanism, potentially increasing user interest in SNX.
But whether it's necessary to use wrapped Bitcoin and Ethereum assets as collateral to mint sUSD, then use sUSD to mint sBTC and sETH to add zero-slippage liquidity, and whether the so-called "Liquidity as a Service" is truly needed by assets other than Bitcoin and Ethereum, remains unclear.
SNX's market cap is limited, and to support potentially huge future markets, Synthetix must support more collateral assets to increase sUSD issuance, even gradually making SNX minting of sUSD obsolete, allowing SNX to better represent Synthetix's project value without being constrained by other factors.
Previously, Synthetix founder Kain Warwick published proposal SIP-276, suggesting capping SNX issuance at 300 million tokens and stopping additional issuance once this number is reached. This proposal sparked extensive community discussion and, while reasonable in the long term, still faced opposition from many current stakers. With V3's arrival, fees generated from atomic swaps will further increase, and the fixed supply could enhance SNX's appreciation potential. SNX may ultimately exist more as a Synthetix governance token, fundamentally changing Synthetix and further developing the narrative of using synthetic assets as "liquidity relay."