After re-engaging with the community over recent months, I asked myself a critical question: "What is this project missing?" My conclusion is that there is a hesitancy to pursue high-risk, non-obvious paths. This is understandable, as individual incentives are closely tied to working on the critical path.
Over the past year, core contributors have become increasingly efficient. The introduction of the Core Contributor Committee has helped, and many incredible people have been hired to replace the OGs who were burnt out from the 2018/19 death march. This has led to significant progress on core initiatives: retiring V2x, designing V3, and re-implementing Perps (derivatives). The latter two were unresolved issues in early 2022, yet just over a year later, Perps continues to scale, and initial V3 components are deployed on mainnet.
Few have had the time to sit down and develop ambitious plans for Synthetix. This article outlines the opportunities I've identified. Some are rough sketches of problems with potential solutions, while others are more detailed proposals. The Treasury Council is also developing a new proposal template for initiatives like those listed below, ensuring more transparent communication of future changes.
Core Contributor Alignment
I understand this delves into startup equity philosophy or token distribution in DAOs, but I believe it's a crucial point. The early community either grasped it intuitively, or I imposed it on them—I can't recall which. In my experience, many people working in startups have multiple motivations, but financial freedom is often a significant one. Working for a startup is already risky; working for a DAO can be even riskier.
Alignment is critical in Synthetix because there is almost no hierarchy. Ambitious people are more likely to be attracted to this environment. However, we must also ensure we maintain financial alignment. I propose setting aside SNX each quarter for bonuses. These would be distributed at the discretion of the Treasury Council (TC), incorporating feedback from Core Contributors (CCs) about their peers' impact on the protocol. This ensures a performance-based, fair distribution. The exact amount of SNX to allocate is yet to be determined, but ideally, it should be in the millions.
Trading Incentives
Although OP incentives have successfully increased trading volume, SNX incentives could create a more impactful feedback loop. This is especially true if incentives are issued in escrowed SNX (eSNA), which would introduce traders to SNX staking. Ideally, 5-10 million SNX should be allocated to this incentive program over time.
Passive SNX Staking
The difficulty of staking SNX makes it challenging to attract new participants to the ecosystem. Efforts have been made to simplify the process, such as implementing dHedge strategies. However, even understanding why these hedging services are needed is a hurdle.
It's hard to quantify how many potential stakers are lost due to complexity, but we can safely assume it's a multiple of the current number. To make staking easier, we could create a passive staking pool that works alongside active SNX staking. New stakers could try staking without facing significant challenges and better understand Synthetix. Think of it as a freemium model where the "price" is risk and complexity. If we reduce these while offering lower yields, we might attract more stakers.
The yield should initially be paid by the treasury, possibly in SNX, but preferably in sUSD. It should also be dynamically calculated based on the ratio between active and passive stakers, with a cap of around 10% of fees allocated to passive staking. This is a rough conceptual outline, and specifics are open for discussion. A three-month trial with a cap of $1-2 million worth of sUSD or its SNX equivalent should be sufficient to determine if this increases the percentage of staked SNX, either passively or actively.
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Integrator Incentives
As Synthetix transitions to a liquidity layer, our reliance on integrators becomes more critical. Nothing prevents the community from funding new internal Synthetix trading frontends. However, observing the challenges integrators face shows this is no small feat. Therefore, aligning integrator incentives for the long term is essential.
This has been debated at length in Discord, so I'll quickly recap the two sides.
Purists argue that no fees should be diverted from SNX stakers. They believe integrators should simply add a fee on top of the base protocol fees. This reduces complexity for integrators while still allowing them to charge. Integrators have opposed this, arguing it makes them less competitive, but this is the current state.
The other side argues that a percentage of fees (e.g., 10%) should be allocated to integrators. This would mean all integrators earn the same fees, preventing a race to zero fees to offer cheaper execution for traders.
A middle option guarantees a base percentage but allows integrators to charge an optional incremental fee. This provides a basic incentive for all integrators and additional benefits for those achieving significant differentiation in the market. SIP-2002 moves us away from the pure view, but it doesn't affect the fees generated for stakers. The problem is that if fees continue to grow, this may not be a sustainable mechanism, though it's a step in the right direction.
I propose implementing integrator fees by allocating a portion of the treasury's SNX—say, 10 million SNX—to be staked on behalf of integrators. This would generate a 3-5% base fee, depending on the percentage of staked SNX. The added benefit is that it doesn't increase the circulating supply of SNX to pay these fees. If this incentive succeeds, it could be baked into the protocol without needing to stake SNX on behalf of integrators.
3:1 SNX Split Plus Buyback
Last year, I attempted to turn off inflation before we reached 300 million SNX. Fortunately, that proposal failed because we weren't at a point where zero inflation was sustainable. Today, inflation is equally pertinent. In V2x, I believe we could have turned it off with minimal impact. Unfortunately, we are now planning the transition to V3, and the question of whether we need inflationary incentives is being debated again.
The primary reason to maintain inflation in V3 is to ensure a mechanism for bootstrapping liquidity in permissionless pools. There are several suggestions on how to achieve this, such as veCRV-style voting. Even if inflation is the only solution here, I don't believe it negates the countervailing force of buybacks and burns.
If we do a 3:1 split, we would have approximately 90 million additional tokens to buy back and burn at a market price of around $60 million. Where would the money to burn these tokens come from? Treasury fee yield. Based on recent yields, the treasury earns approximately $5 million annually. If 100% of this were allocated to buybacks, it would take about a decade to complete. This timeline would shorten significantly if trading volume increases in the coming years.
You might ask, why not just burn the 30+ million tokens in the treasury wallet? These tokens are effectively locked, so the impact would be minimal. However, once the buyback is complete, it would make sense to consider distributing the remaining SNX pro-rata to stakers.
Distributing SNX to Stakers
The same question arises: why not just burn the SNX? The reason is that this SNX could be used for incentives. If distributed in full, it would be equivalent to a 3% inflation rate over three years. This would allow us to test the demand for inflation without actually inflating the token supply.
The problem is that these tokens currently carry a significant debt burden. To distribute them, the debt would also need to be transferred or repaid. There are competing forces here because if fee yield is used to buy back and burn SNX, the debt won't be repaid until the buyback is complete. One option is to sell SNX OTC to repay the debt, but this offsets the loss. Therefore, if a buyback begins, any distribution of SNX would likely need to wait until the buyback is finished, which could be many years away.
Treasury-Funded Working Groups
This is one of my favorite proposals. As we enter this new era for the protocol, we've developed a need for functions like sales and support. While it's possible to outsource these to integrators, a potential gap remains. I see this as somewhat analogous to Salesforce. Salesforce is a platform, but it doesn't directly facilitate implementations; instead, it relies on a network of integrators. However, Salesforce still needs internal teams to work with integrators on large client deals and ensure the integrators themselves are supported.
As of today, Synthetix can support market makers and large traders on the platform. There's sufficient liquidity and functionality to make it worthwhile for such entities to trade. Integrators should engage with these types of users. However, a dedicated group working with large traders and integrators to ensure smooth onboarding would be highly beneficial.
The past approach was to simply hire new core contributors to fill this role. But I believe there's an opportunity to increase transparency and accountability by funding independent working groups to perform these functions, reporting directly to the Spartan Council. The treasury would fund this directly, allowing us to test this new form of coordination. To attract the right people to this working group, some continuity is needed. I therefore propose a trial of at least 6-12 months, with a termination fee paid in SNX if the protocol decides not to adopt this approach after the trial.
Another working group I propose is an analytics group. This group would be responsible for ensuring all data concerning the protocol is available and up-to-date, and for maintaining real-time dashboards for all key metrics. Historically, this has failed due to low priority and technical complexity.
Synthetix Ecosystem Fund
In the early days of the protocol, the SynthetixDAO decided against making investments outside the protocol. This was due to the risks of such investments and a fear of losing focus on the core mission of funding protocol development. While one could argue the project might be better funded if we had leveraged our position for early deals over the past five years, it could also have put pressure on funding protocol development, especially in late 2019 when liquid assets were running low.
Given the intention to reduce funding and the opportunity to fund ecosystem projects throughout the remainder of the bear market, it now makes more sense than ever to allocate a percentage of funds to an ecosystem fund. We anticipate the number of new projects building on Synthetix will grow significantly in the coming years. This fund would be owned pro-rata by SNX holders and could eventually be distributed or even used to fund further buybacks of the SNX token.
Subsidizing Keeper Costs
Synthetix is unlikely to achieve free trading due to the lack of potential for payment for order flow in the protocol design. However, we should strive to remove any fixed costs associated with trading. The treasury should subsidize keeper costs to ensure low-volume traders aren't priced out. Ideally, this should be done by directly subsidizing keepers, but given the complexity of that approach, it's better to start by directly paying rebates on keeper fees to traders. The specific method, whether via SNX or sUSD, is open for discussion.
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Perps Referral Program
In theory, this is another initiative integrators could handle. However, a protocol-level referral program supercharges any additional referral functionality integrators provide. Referral programs have historically been very effective for crypto trading, but they require a working product.
Given that Perps is finally ready, driving adoption through referrals has strong potential. These referrals should be paid in escrowed SNX, which would ensure no immediate sell pressure on the price. This SNX would ideally be staked (passively or actively) since it is locked anyway. As the trading experience improves and more markets are released, this will create a flywheel: traders are exposed to SNX staking, and large referrers become significant stakeholders in the ecosystem.
Treasury Council Proposal Template
A proposal template is being created to improve transparency for current and future treasury initiatives. This template will be based on the SIP template but may be adapted over time. Although community feedback isn't always necessary and can sometimes even be counterproductive, having a document outlining the initiative and explaining its rationale will be helpful for community members to reference.
Dissolving the Treasury Council
In my opinion, the treasury will be dismantled at some point. There are multiple ways to do this, but the main idea is that if the protocol is functioning normally, the Treasury Council could be broken into smaller parts and allocated to new or existing governing bodies to avoid being a single point of failure for the protocol. While progress has been made since the sDAO, there is still room for improvement, and the Treasury Council has been a governing body for too long.
These are just proposals. I am only one of four votes on the council. The purpose of this article is to start a discussion and ensure the community is aware of potential paths forward. I look forward to debating and discussing all these proposals in Discord.
Frequently Asked Questions
What is the main goal of the Core Contributor bonus proposal?
The goal is to better align the financial incentives of core contributors with the long-term success of the protocol. By distributing SNX bonuses based on peer-assessed impact, it rewards performance and helps attract and retain top talent in a competitive environment.
How would Passive SNX Staking work in practice?
New users could deposit SNX into a designated pool and earn a yield without actively managing debt or engaging in complex hedging strategies. The yield would be subsidized by the treasury and dynamically adjusted based on the ratio of active to passive stakers, making entry into the ecosystem much simpler.
Why is aligning integrator incentives so important for Synthetix?
As Synthetix evolves into a liquidity layer, third-party integrators are essential for providing user access and trading interfaces. Properly aligned incentives ensure integrators are rewarded for contributing to network growth, rather than competing solely on fee reduction, which leads to a healthier and more sustainable ecosystem.
What is the purpose of the proposed 3:1 SNX split?
The split itself is a neutral event to increase the token count, but its primary purpose is to create a large pool of tokens that can be systematically bought back and burned using treasury fee yield. This mechanism aims to counter inflation and potentially create deflationary pressure over the long term.
What role would a Treasury-Funded Working Group play?
These groups would handle crucial but non-core functions like large trader support and advanced analytics. By funding them separately and having them report directly to the Spartan Council, the protocol can increase transparency and accountability for these functions without bloating the core development team.
How does the Ecosystem Fund benefit SNX holders?
The fund would invest in early-stage projects building on Synthetix. Its success would directly benefit the entire ecosystem by increasing utility and demand for SNX. Furthermore, the fund's assets, owned pro-rata by SNX holders, could later be used for further token buybacks or distributions.