Synthetix looks to unskew itself
Plus UMA's new governance plan and a busy week for Maker
|Chris Powers||May 2, 2020|
Synthetix adjusts liquidity incentives
Synthetix has one of the most active governance approaches in the space with aggressive liquidity incentives and anti-front running measures. Although the foundation and core team retain control over protocol upgrades, Synthetix released a plan in December to transition to a DAO, and they have been debating issues with the community in their lively Discord for more than a year.
It relies on two types of protocol upgrades, a Synthetix Improvement Proposal (SIP) or a Synthetix Configuration Change Proposal (SCCP). SIPs are modeled off of Ethereum Improvement Protocols (EIP) and are design documents about proposals to the Synthetix system. The SIP process starts in the Discord and ends with a pull request. SCCPs, meanwhile, are proposals for a single variable change, say the collateralization ratio or reward issuance.
Growth from good governance
The most significant SIP is likely SIP 8, which was implemented in August of last year and directed a portion of SNX inflation rewards to ETH addresses with deposits in the sETH/ETH Uniswap liquidity pool. As an exchange, Synthetix needs an on- and off-ramp and maintaining a liquid 1:1 market between sETH/ETH allows any trader to easily enter and exit the system.
The sETH/ETH incentive program was successful almost immediately; users minted sETH and deposited it along with ETH into Uniswap in droves. The pool quickly became the largest on Uniswap and facilitated easy onboarding to Synthetix Exchange for traders. A similar model was adopted by Bancor and bootstrapping liquidity on-chain continues to see more ideation and development.
More than 6 months after it rolled out the initial sETH/ETH LP program, Synthetix is reevaluating its usefulness and long-term affect on the system. The Archenar release in February, moved the user UI for sETH/ETH LP incentives to Synthetix’s Mintr dashboard and required users to stake their LP tokens in order to receive the rewards.
More significantly, the Archenar upgrade promised to address an unforeseen consequence of the sETH/ETH incentive pool: a debt pool that is heavily long ETH.
Finding a debt equilibrium
All synths on Synthetix are debt that is held by SNX stakers; synth holders gains are SNX stakers’ losses and vice versa. You would expect a skew towards long ETH, given that most Synthetix users are probably bullish on ETH, but the sETH/ETH incentive program incentivized an even higher level exposure for the system.
Many large SNX minters have been aware of the incongruity and have been hedging their debt pool exposure, but Synthetix sees a skewed debt pool as a long-term threat to protocol sustainability. It plans to implement two fixes:
Incentivize sUSD liquidity - SIP 51, which was implemented on April 8/9, distributes the 64,000 weekly SNX rewards evenly between sETH/ETH liquidity providers AND sUSD Curve liquidity providers. This should reduce the incentive to hold sETH and also provide another stable and liquid entry point into the system for those not interested in holding ETH.
Distribute SNX rewards to iETH holders – Synthetix is conducting a trial incentive to hold iETH, the short synth on Synthetix, in order to more “unskew” the debt pool from its long ETH. There is no SIP yet as the trial is being funded by the foundation, but SCCP 18 proposes to increase iETH limits in order to allow for an iETH staking pool.
Here’s what was on the Synthetix docket this week:
Here’s what was in the Synthetix forums this week:
Discussions around launching futures on Synthetix, but it will need more established markets and price feeds.
Discussion on the UMA Uniswap listing. UMA is a competitor to Synthetix and the listing and price increase puts its market cap around the same size. Discussion concentrated on the listing process and how Uniswap may have overlooked the repercussions of using an AMM; Synthetix Founder Kain Warwick said, “My only frustration is the virtue signalling of like ICO's are bad we are doing this weird fair launch thing”. Kain later tweeted a more in-depth take on UMA’s Uniswap listing.
UMA launches governance portal
Concurrent to its Uniswap listing, UMA also unveiled details on how UMA token holders will govern the system. Some highlights:
Token voting from cold storage – UMA’s two-key contract allows a token holder store its private keys in cold storage, while delegating voting rights to a hot wallet with more accessibility.
Here’s what was on the UMA docket this week:
UMIP 2 – proposal to add ETH-BTC feed to the DVM. ETH-BTC price will come from the median ETH-BTC price from the public APIs of Coinbase, Binance and Bitstamp. The proposal specifically excludes any ETH-USD or BTC-USD price information.
UMIP 3 (passed) – the first proposal that was voted and passed on-chain on Tuesday of this week. The proposal is a number of technical fixes to the DVM, many of which were identified in an Open Zeppelin audit of UMA that was also released this week.
Here’s what was in the UMA forums this week:
Following the Uniswap listing, UMA co-founder Allison Lu published a draft on future token distribution to community members and is seeking public feedback on their initial plans. It outlines the activities in the UMA ecosystem to incentivize with community distribution, but primarily focuses on encouraging the use of UMA’s “priceless financial contracts” or synthetic tokens. Specifically, the doc proposes setting aside 30% of UMA’s overall token supply into an “activity mining” pool that will reward users of UMA’s synthetic tokens over the next 5 years. It will be interesting to see how UMA’s incentive programs differ from those Synthetix has implemented.
Maker’s busy week in governance
Maker’s governance structure is one of the oldest on chain and continues to develop a robust system of community calls, forums, on-chain polls and other engagement. Maker is trying to address immediate issues of restoring the peg and adding collateral types, while also implementing a more robust, long-term governance processes.
Here’s what was on the Maker docket this week:
Raise the ETH debt ceiling (passed) – The debt ceiling had been lowered after Black Thursday because outstanding Dai decreased and there is a risk to the system if there is a large gap between outstanding Dai and the debt ceiling. Dai actually hit the debt ceiling before, which supports Vishesh’s call for a more programmatic lifting of the debt ceiling in the future.
Lower USDC Stability Fee, Add WBTC as collateral, Ratify Initial MIPs and Subproposals – Lots going on. The USDC stability fee would be lowered to 0%, which would allow someone to deposit USDC, mint Dai, sell Dai for USDC, mint Dai and repeat until the peg returns. When USDC was initially added as collateral, the stability fee was 20%, which is a pretty costly way to short Dai. Clearly, this was not enough with the peg staying stubbornly high despite an ETH surge. I’ll discuss WBTC more in depth below, but most interesting is that the proposal to add as collateral is not going through the new collateral onboarding system, so some would call this an “emergency” collateral addition. In a mid-week on-chain poll, over 96% of MKR voted in support of WBTC. The 13 initial MIPs and Subproposals are uncontroversial and formally establish the governance system that Maker has laid out. The vote was put up today (Friday) and if the executive passes, the first formal Maker governance cycle will begin on Star Wars Day (May 4th).
Here’s what was in the Maker forums and on the community call this week:
Black Thursday Vault Liquidation report – an extensive report from Maker Man on failed liquidation auctions during the March 12’s ETH price crash. Almost half of Thursday’s call was spent on the report and there is an extensive thread on the forums. There seems to be widespread support for some type of compensation for Vault owners who’s collateral was lost thanks to 0 Dai bids. The question is how much, given that their collateral was supposed to be liquidated and debt repaid, but only a “13% penalty”. The report tries to identify what a fair percentage of collateral should have returned given the volatility of Black Thursday. According to the report, ~11% of collateral should have been returned to Vault owners, instead of the ~24% that many UI’s promised and the 0% they actually got. Whatever happens will set a strong precedent for the future.
WBTC Collateral Request for Comment – As mentioned above and last week, WBTC appears to be on fast track for inclusion and the thread tried to pin down the parameters (stability fee, liquidation ratio, debt ceiling, etc) of the addition. But on Thursday, Matt Luongo, founder of tBTC, chimed in opposition of WBTC as collateral. Given his position, this isn’t too surprising, but it does present an option to Maker as to which BTC synthetic to use. Philosophically, most MKR holders are probably more in line with tBTC’s design, which eliminates centralization risk, but tBTC’s timing is not ideal. In terms of risk, Maker’s biggest concern is collateral auction liquidity – especially after black Thursday – and tBTC has none right now as it won’t launch on Mainnet on May 11 (using Maker as an oracle for ETHBTC feed), not to mention WBTC’s increased liquidity with its CoinList partnership. Further, while custodianship is anathema to many in the Maker and DeFi community, Maker already crossed the Rubicon with the addition of USDC, so additional custody risk is limited. tBTC will likely get included eventually, but it won’t be able to use MakerDAO as a go-to market strategy. It would have had a much better shot at that without Black Thursday and the subsequent demand for liquidity and additional collateral.
Change the Stability Fee Structure – a discussion on changing how stability fees for various collateral are voted on. The current system was mostly designed for ETH and then USDC’s emergency inclusion and this would give a new system, giving asset-specific stability fee adjustments.
Other Governing Things
Compound’s USDT proposal passes and was executed after two days in the time lock. Among others, Gauntlet signaled support for USDT inclusion because of its deep penetration in the market. Dharma also proposed a change to Compound’s Dai interest rate calculation.
The Twilight of Neoliberalism DAOs and the Global Economic Order [Pat Rawson/Curve Labs]
Meet the SAFG: DeFi’s Emergent Framework for Participatory Investing and Protocol Development [Gavin McDermott/IDEO CoLab Ventures]
That’s it! Feedback definitely appreciated. Just hit reply. Written in Brooklyn where it it doesn’t feel like May but the sun is shining. Euchre today, and everyday.
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.