As a long-time admirer, and on-and-off user of the Synthetix protocol, I’ve found the reboot initiative interesting to watch unfold. In all humility, here are some hot takes:
“Innovation is saying no to a thousand things”
There are too many Synthetix products. Synthetix v3? Perps v2x? The ‘Andromeda Release’? ‘Carina’? Teleporters? SNaXchain? The USDC Spartan Liquidity Pool on Arbitrum? sUSD, USDx and snxUSD all under one roof? All for a protocol that is struggling for PMF and attention. A newcomer who is trying to keep up will struggle. And maintaining all of this is a huge lift in itself.
The rise of FTX then and Hyperliquid showed us that the features, and simply these features, that make any derivatives exchange compelling are always the same. Everything else should come later:
- Deep and unified liquidity
- Universal, unified collateral and margining system
- Expansive multi-collateral support
Minimal, infrastructure-like protocols are in (cf Morpho), with an ecosystem of curators and meta-protocols building on top. But too much expressiveness becomes hard to navigate (cf the ‘V3 Core System’) if there is not from the get-go an end-to-end product that just works.
The Oracle-based Perp Dex crown is there for the taking, and it’s a big crown
GMX is the current leader, and is so limited: No multi-collateral support. No multi-chain access. No cross-collateralization. A long ETH and a short BTC position have to be kept individually solvent. Ongoing position costs change abruptly as the borrow rate toggles between long and shorts. PnL can never be realised and withdrawn even if a trade is deeply in the money.
Oracle-based DEXes will always be a thing. Where else can a retail trader confidently execute eg $500k in one transaction, with deterministic transaction costs, and know he is not remunerating along the way a whole set of market-makers and/or an MEV pipeline with latency, technology and capital advantages along the way?
CLOB exchanges purport to take part in the price-discovery process for a given asset. And need a whole host of specialist market-makers to function. The CLOB Dex landscape is filled with serious, credible teams with pedigree and momentum: Hyperliquid, dYdX, Vertex, etc. And they all require centralisation tradeoffs and/or high-performance app-chains.
The Oracle-based landscape is a much easier one to dominate. And pull-based oracles, cross-chain messaging etc have become so good that the lift now is less of a technical one and more of a product-development and attention one: how to become the Schelling point. Where speculators, hedgers and liquidity providers come together, attracted by a storied Defi brand that they trust to give them what they want in a solvent, trust-minimized system.
Structured Products for community engagement and user acquisition
Hyperliquid have generated huge goodwill and attention with their professional-grade market-making-for-the-masses HLP Vault (+$45m of community PnL and counting). And trust-minimised on-chain asset management has come a long way (cf Karpatkey, Zodiac Safe modifiers/guards and ERC-4626).
Users come to a Derivatives exchange to fulfill some precise objectives: Going levered long? Arbing funding-rates? Earning a market-neutral return by providing liquidity? Structured products can be the key entryway for an entire side of the market. Morpho is an interesting inspiration here: as a new lending protocol, the dApp doesn’t even allow individual depositors to come and lend to a given market. That activity is meant to be completely intermediated by ‘Curators’.
Skating to where the puck is going: Defi becoming useful
At its best, finance (and decentralized finance), is infrastructure: there to enable other things. There to enable borrowers to build something with the capital they are extended. There for savers to earn a return on their investment. There for hedgers and speculators to exchange risk with each other.
Defi is still too circular, as a few thousand Very Online Young Men (VOYMstm) borrow from and trade with each other. And most opportunities are negative expected-value: the return does not justify the risk.
Single digit APYs to use some newish protocol, powered by a newish oracle, denominated in a newish stablecoin, on a newish blockchain, anyone?
This keeps the TAM small, and means it’s hardly worth fighting for category dominance: Being anything less than a category leader (Uniswap, Aave, Hyperliquid) is a hand-to-mouth existence.
The bigger, more exciting opportunity lies in being the financial layer to bigger, and more sustainable on-chain financial activity: SocialFi, Depin, RWAs, Prediction markets, etc. Over time, in each of these categories, it can be expected that natural hedgers will benefit from a risk-management tool, and that speculators will take interest. Building the general-purpose derivatives infrastructure that can be ready to support them at a moment’s notice is a healthier, long-term objective:
“If the world is increasingly software and advertising and online social networking and, good Lord, the metaverse, then the crypto financial system doesn’t have to build all the way back down to the real world to be valuable. The world can come to crypto.”
Matt Levine - Bloomberg Magazine