Synthetix Q4 2023 Brief

Key Insights

• Synthetix Perps had its best quarter by volume traded. Without any incentives, it powered over $13 billion for the second consecutive quarter.
• SNX stakers earned record fees in Q4’23, taking in nearly $10 million in the quarter. Over 95% of fees come from the Synthetix Optimism deployment.
• After SIP-2043 passed in the first week of December, SNX no longers offer inflation rewards to stakers, ending SNX inflation. Previous rewards will continue to vest for the next year, but no more SNX will be minted.
• The Andromeda release on Base begins the first significant test for Synthetix V3, featuring a new architecture, updated Perps design, a new tokenomics experiment, and more.

Primer

Synthetix (SNX) is a decentralized synthetic asset issuance and liquidity protocol that allows users to trade synthetic cryptocurrencies. Each synthetic asset tracks the price of an external asset through the use of Chainlink, Pyth, or Uniswap V3 TWAP oracles. Users can either trade in spot or in perpetual futures markets for synthetic assets. SNX is the native protocol token, responsible for governance as well as the primary collateral that backs the liquidity of the network. SNX can be staked as collateral for sUSD, the Synthetix stablecoin, which can be traded on Synthetix for any other synth (sAsset). Synthetix V2x is live on Ethereum and Optimism, and V3 launched on Base in Q4 2023. Synthetix Perps is the protocol’s leading product. The DAO uses a novel V3 Governance Module (V3GM), which has councils of appointees voted on by SNX holders.

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Key Metrics

Performance Analysis

Perps Volume and DAUs

The return of the bull market brought demand for perps trading, even without incentives. Synthetix Perps had its best quarter by volume traded, powering over $13 billion for the second consecutive quarter. The number of users also grew to its highest point since Optimism Quest attracted a rush of new addresses and new stakers grew as trading fees increased. October 23 was the highest volume day in the quarter, with nearly $500 million traded.

Fees to Stakers

SNX stakers earned record fees in Q4’23, raking in over $10 million in the quarter. Over 95% of the fees came from the Synthetix Optimism deployment. Stakers were paid an average 5.5% APY (assuming daily compounding and maintaining a 500% collateral ratio) from trading fees in the quarter. Trading fees are not paid as a dividend but rather by burning sUSD, which reduces debt for stakers. Despite over $10 million in debt burned, the debt pool grew by 50% QoQ as SNX price nearly doubled, enabling stakers to take out more debt.

OI and Staker Perp Exposure

The first year of Synthetix Perps V2 has been a successful proof of concept for the design. A key feature of the design empowers market makers to collect the spread created by takers buying or selling against LP collateral (staked SNX). This design keeps LP exposure near zero (though certainly not risk free). However, instead of collecting spread, LPs collect fees on increased volumes (the initial trade and the market maker) and have significantly reduced exposure to trader’s directional preference. That said, the design has scaled even as open interest (OI) surpassed $200 million.

Final Year of SNX Inflation

SNX rewards paid to stakers must be escrowed for at least one year (though they can be staked during that time). After SIP-2043 passed the first week of December, SNX no longer offers inflation rewards to stakers, ending SNX inflation. The rewards paid to stakers in 2023 will at most lead to a 6.13% increase in circulating supply in 2024. With the launch of Andromeda on Base, fees from that deployment will go to burning SNX. In other words, the net inflation will almost certainly be less than 6.13%.

Key Developments

Andromeda on Base

• Synthetix V3 Explainer
• Perps V3 relieves the key constraint of sUSD supply by enabling USDC collateral. This should improve capital efficiency for LPs and should remove the friction of acquiring sUSD to trade on Perps V2.
  • Note: the first deployment will wrap the USDC and convert it to sUSD because the underlying contracts still require sUSD. The team plans to amend those and make them compatible for non-wrapped USDC (i.e., sUSD).
• Introduces cross margining for traders.
• MEV-resistant liquidation process.
• Expanded collateral options.
• Isolated deployment: Currently the debt pool for SNX stakers is aggregated across Ethereum and Optimism. The Andromeda release on Base will be an isolated debt pool backed by USDC stakers (also called LPs), not SNX stakers.
• Buyback and burn: 50% of fees will be used to buyback and burn SNX on Base.
• Andromeda is meant to be an experiment, a “testing ground for new deployments.”
  • The launch will likely be conservative, starting with LP caps, fewer markets, and small OIs.

End SNX Inflation

• In December 2024, the last of SNX inflation will mint. SNX inflation was used to incentivize stakers and increase the staking ratio. With the success of Perps V2, fees should support staking, and limiting the token supply should help clarify the value accrual mechanism of the protocol.
• Inflation was previously a penalty to passive SNX holders in the form of dilution. Although passive holders still won’t earn fees that pay stakers for their service, the combination of ending inflation and the V3 launch allows them to benefit from the falling supply of SNX.
  

Oracle Integrations and Multi-Chain Trading

• ERC-7412 (inspired by ERC-3668) could enable cross-chain deployments. The Synthetix V3 protocol can use data from a verifier contract deployed on the chain. Similar to cross-chain pool synthesis on V2, this feature could enable synthesizing liquidity across any chains with a verifier contract.
  • Note: This is still in draft, but V3 is built to be compatible with it.

Infinex launches on December 22

• The newest Synthetix front-end, Infinex is a highly anticipated launch that is aimed at winning the end user with a best-in-class UX. The project uses Synthetix Perps on the back-end and for liquidity/execution.

Closing Summary

Synthetix closed out a breakout year for its Perps product with an exciting launch into 2024. Perps had a full quarter of strong volumes with no incentives, while LPs maintained profitability and minimal exposure to user market preference. The end of inflation marks an important change in the narrative for Synthetix, as investors and stakers can shift their focus to usage and trading fees. The Andromeda launch on Base is a key testing ground to determine the future of Synthetix: V3 architecture gets its first test; Perps V3 begins; and a new tokenomic design experiment is launched. Synthetix continues to rank among the top perp DEXs by volume, but the competition is strong and growing. Execution and the outcome of launches like Andromeda and Infinex will likely determine the future success of the protocol.

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This report was commissioned by Synthetix. All content was produced independently by the author(s) and does not necessarily reflect the opinions of Messari, Inc. or the organization that requested the report. The commissioning organization does not influence editorial decision or content. Author(s) may hold cryptocurrencies named in this report. This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. Past performance of any asset is not indicative of future results. Please see our Terms of Service for more information.

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