Governing Synthetix's competing factions
Plus COMP distribution plan for users
I’m moderating a panel on Wednesday with Zooko from Zcash, Peter Van Valkenburgh from CoinCenter and placeholder’s Mario Laul at Mainnet by Messari discussing Zcash’s governance process in its upcoming protocol upgrade. Panel starts at 11:20am ET on June 3. Tickets and more info here.
Synthetix’s delicate balance
It’s funny because it’s true, even though it’s less sinister than at first glance. Risk management requires discretion as to which risks to take when you are the “house”.
Synthetix, like Goldman Sachs, runs a casino of sorts. The customers are traders, the products are synthetic assets (long and short) and the owner of the casino – those bearing the risk of the slot machines – are minters.
Minters stake SNX and then mint a synthetic asset that tracks the price of the underlying asset. Typically, a minter will then sell these to traders (hopefully on the Synthetix Exchange), which incurs a debt on the minter. A minter must must repay the debt (denominated in sUSD) to claim SNX weekly inflation rewards and its share of the trading fees pool or to unstake the locked SNX.
Casino owners must let the customer win some of the time or else they won’t have any customers, but with the odds stacked in their favor and enough customers playing, casinos can make a consistent profit.
Synthetix is different from a casino because it charges a transaction fee on each trade, so it can still be profitable without the odds stacked in their favor, but they must create products that customers want to trade.
The Synthetix community decides what products or synths to list, which give traders unlimited liquidity to enter and exit in their position. The unlimited liquidity is provided by a reliable price feed and minters to take the other side of the trade. Providing synthetic short exposure can be risky, because the potential loss is theoretically unlimited.
In an ideal world, Synthetix is just a matchmaking service for shorts and longs who balance out each other risk profiles, but in reality, its trader set is skewed and it has already taken governance actions to unskew the debt pool by incentivizing iETH holders, which I wrote about a couple weeks ago.
These dynamics are leading to two distinct factions in the Synthetix community,
Those who favor actions that increase trade volume
Those concerned about managing the risk of the debt pool
These distinctions emerged in discussion on the listing of two new synths: iOMG and sOil. OMG skyrocketed last week when it was announced it would be listed on Coinbase Pro. Several Synthetix community members felt this was a great opportunity to launch iOMG, which would provide short exposure and attract traders that are skeptical of the Coinbase pump.
Others were concerned with the risk to the system if the Coinbase pump skeptics were proven right. Minters would be on the hook because the Synthetix debt pool was indirectly long OMG, and many were concerned because there wasn’t sufficient liquidity on secondary markets, which could lead to price manipulation.
sOil, meanwhile, was considered by the community after the price of oil went negative during the 20 minutes that broke the U.S. Oil market in April. A community member named Samantha posted this image of the price of USO (a popular retail oil ETF) and Robinhood accounts that own the ETF:
Robinhood’s legion of day traders saw a market crash and pounced. Of course, it’s not clear that they knew they were not purchasing barrels of oil but just oil futures that need to be rolled over.
Asset Listing Governance: The Synthetix community has been moving towards a more standarized approach to add synths, working with Delphi Digital, which produced a report on listed assets’ risk to the system.
Still, this tension between popular products for traders on Synthetix Exchange and the risk to minters will persist, but it is likely to change when SNX inflation rewards decrease and minter’s rewards come exclusively from trading fees.
Speaking of Coinbase Pro pumps, Coinbase announced today that MKR would be listed on its pro platform, leading to a 40% jump in MKR price unjust a few hours. And now, some in the Synthetix discord are wondering when MKR synths will be available (again).
sMKR and iMKR were previously on the Synthetix Exchange but were delisted after someone manipulated the price of MKR on centralized exchanges and then would front run the sMKR & iMKR before the Synthetix price oracle adjusted the price to reflect the manipulation. The exploit reportedly costs minters $2.5m dollars, so it’s understandable that many have gotten cold feet with listing new assets.
But Synthetix wants to be a casino (synthetic asset platform), it’s going to have to come up with governance solutions to balance the risks to the different stakeholders in the system.
On the Synthetix Docket
SIP 15: Liquidation Mechanism [passed poll] - a long-awaited SIP that was first proposed last August. This would allow anyone with a synth to liquidate any SNX staker who’s undercollateralized. Currently, the only method of managing under-collateralization is by forcing a 800%+ collateralization ratio to claim rewards. This change would put a Maker-style liquidation mechanism in Synthetix. When an account goes below 200% collateralization ratio, any one can flag the account and the account has 2 weeks to pay off its debt. If after two weeks, the account is still underwater, the user that flagged the account can repay the accounts debt and redeem the underlying collateral, plus a 10% fee. The delay is an interesting trick, but the bigger picture is that this mechanism will likely lead to a closer sUSD peg.
SIP: Add sOMG and iOMG synths [Poll failed 17-38]
SIP 52: Add Next Price to Fee Reclamation [Poll Passed 48-2]
In the Synthetix forums
Discord tip bot launched to allow SNX tips to Discord accounts to reward community engagement
Kain wants to switch to a Discourse server to have better governance documentation, using the system that ethresear.ch and Maker
Process discussion on SIPs
Compound announces COMP distribution plan
After unveiling the initial distribution to team members, shareholders and founders last month, which I wrote about here, Compound announced this week how COMP will get into the hands of the community:
4,229,949 COMP will be placed into a Reservoir contract, which transfers 0.50 COMP per Ethereum block (~2,880 per day) into the protocol for distribution
The distribution is allocated to each market (ETH, USDC, DAI…), proportional to the interest being accrued in the market; as market conditions evolve, the allocation between assets does too
Within each market, 50% of the distribution is earned by suppliers, and 50% by borrowers; in real-time, users earn COMP proportionate to their balance; this is separate from the natural interest rates in the market
Once an address has earned 0.001 COMP, any Compound transaction (e.g. supplying an asset) will automatically transfer COMP to their wallet; for smaller balances, an address can manually collect all earned COMP
Compound’s distribution is a sustainable, sybil-resistant way to distribute COMP for the next four years. A predictable issuance schedule is important to any valuation that COMP may eventually accrue. A couple other thoughts:
Not backwards looking – Perhaps the biggest surprise is that the rewards will only go to future Compound users. Those that have lent or borrowed assets on Compound v1 or v2 will not be retroactively compensated. CEO Robert Leshner said that it “wasn’t technically feasible, since the data required to distribute COMP is being added to the protocol”. Additionally, as PoolTogether’s Leighton Cusack said, “[since] distribution is fixed at 0.5 COMP per block. Right now you're splitting that 0.5 COMP with a tiny number of other people (thousands) in 4 years that same 0.5 COMP per block will be split between millions of people.”
No “decentralization” in announcement – in Compound’s original post announcing COMP, “decentralization” appeared 8 times, but it didn’t appear at all in Wednesday’s post. In past communication, Compound has emphasized the importance of decentralizing and removing the team as a central-point of failure, and it has already executed on that vision when it added Tether earlier this month. The question is how token distribution affects decentralization. Compound’s token distribution will not be too different than Makers, but much different than Ethereum’s.
3rd party developers – In the future, most transactions with Compound will likely be from other smart contracts. Argent, Coinbase Wallet and several dApps integrated directly into Compound to enable lending and borrowing. This either represents an opportunity to share rewards and governance with their users or help pay for the service that they are providing. Expect this to be a place where dApps and wallets distinguish themselves from each other.
Other Governing things:
Exploring DAOs as a New Kind of Institution [Joshua Tan/Commons Stack]
Committees: an application to delegate certain operations of DAOs [Paulo Colombo/P2P Models]
DAO: A Decentralized Governance Layer for the Internet of Value [George Samman/David Freuden]
Introducing the pNetwork & PNT: Architecture, governance and tokenomics
That’s it! Feedback definitely appreciated. No Maker coverage this week, but will be back next week. Let me know if you prefer depth or breadth and analysis or forum/call/legislation summary. Just hit reply. Written in Brooklyn.
Govern This is written by Chris Powers. Opinions expressed are my own. All content is for informational purposes and is not intended as investment advice.