Founder of Synthetix: Why Optimistic Ethereum? How the Decentalized Derivatives Market Will explode? | EDCON 2021 Interview
As one of the most popular DeFi applications, Synthetix has provided users with the option of issuing and trading synthetic of any asset, whether the asset exist on blockchain or in the real world, which means synthetic assets (i.e., Synths) allow users to trade a certain asset (such as BTC, ETH, etc) without actually holding them. Users issue Synths by staking SNX, the platform’s native token. However, Ethereum’s high gas fees make trading synths on Synthetix expensive and reduce SNX staking returns. Luckily, Optimism Ethereum (OE) will reduce gas fees by orders of magnitude as Synthetix moves to Ethereum’s Layer 2.
EDCON 2021, the global Community Ethereum Development Conference sponsored by Unitimes, is coming soon! We are glad to interview Kain Warwick, founder of Synthetix, who share with us the latest developments on Synthetix, opportunities for decentralized derivatives market, and his thoughts on some of the challenges facing the current Ethereum ecosystem. The following is the interview:
1) Please briefly introduce yourself and Synthetix.
Kain Warwick: I’m Kain Warwick and I’m the founder of Synthetix, which is a derivatives liquidity protocol on Ethereum. Since launching in December 2018, Synthetix has supported billions of dollars of trading volume. Synthetix is also the first project to launch on Optimism a layer two scaling solution for Ethereum.
2) As the leading derivative project in DeFi, Synthetix provides users with the option of issuing and trading synthetics of any asset, be it on the blockchain or in the real world. So how does Synthetix create market demand for its derivatives?
Kain Warwick: Synthetix has pioneered the concept of using financial incentives to concentrate liquidity where it’s needed (later popularized as “yield farming”), and this strategy has generally been pretty effective in bootstrapping demand for staking within Synthetix. One of the main advantages of Synthetix compared to traditional derivatives ties in with this concept of “money Legos”.
In traditional finance, financial applications are siloed off from one another. In DeFi, though, developers can permissionlessly pick and choose features from different applications to create exciting new applications. A good example of this can be seen in Curve’s cross-asset swaps feature, which combines Curve liquidity with Synthetix derivatives to offer traders large swaps with extremely low price impact.
3) Synthetix has been faced with front-running problem for a long time. Can you briefly explain why Synthetix has to deal with this challenge? How does this problem affect Synthetix? What are the solutions?
Kain Warwick: Prices for trades on Synthetix are offered at the market price, which is reported on-chain by an oracle (Chainlink). Constraints on the Ethereum L1 limit the frequency at which these feeds can be updated, creating an opportunity for frontrunners to trade before the next price update for risk-free profit at the expense of SNX stakers.
An easy solution to this problem is to increase trading fees to the point that frontrunning oracle updates is no longer profitable. Since this creates a poor user experience for honest users, another solution known as fee reclamation was implemented last year. Fee reclamation fulfills orders at the next price update but is accompanied by its own UX challenges.
In the longer term, moving to layer 2 will ameliorate most of these issues. As oracle latency improves, frontrunning will diminish significantly, likely to the point where reasonable exchange fees will be sufficient to thwart oracle frontrunning.
4) Ethereum Layer 1 has been plagued by low TPS and high Gas costs. Many Layer 2 solutions have been or are being deployed, and Rollups are currently the most notable. Currently, Synthetix has chosen Optimistic Ethereum as the option for its L2 deployment. What opportunities and challenges does Optimistic Rollup bring to Synthetix? Do you think L2 will be the next breakthrough in the explosion of the decentralized derivatives market and the development of the whole DeFi field?
Kain Warwick: OΞ will bring a number of significant performance benefits to the Synthetix platform in the form of improved throughput and latency. As mentioned above, OΞ will enable oracles to operate at much lower latency, which will significantly reduce/eliminate frontrunning opportunities in addition to facilitating a much better user experience. It will also unlock the ability for Synthetix to provide leveraged trading via the upcoming Synthetic Futures launch.
Beyond Synthetix, migration to L2 in general is likely to supercharge the capabilities of DeFi applications and bring their user experience closer to parity with centralized services.
5) As with public chain networks, the governance of DeFi protocols is a very important aspect for their development in a decentralized way. What is the governance mechanism of Synthetix? And what are the significant changes or achievements from its governance?
Kain Warwick: Over the last year, governance of the Synthetix protocol has undergone significant decentralization. Last summer, the Synthetix Foundation was decommissioned and control of the protocol was handed over to three distinct DAO’s charged with managing protocol upgrades, developing public goods for the Synthetix ecosystem, and funding important contributors to the protocol.
Towards the end of 2020, the community also supported the formation of a “Spartan Council” consisting of stakeholder-elected community members who guide development and vote on protocol changes. Synthetix will continue to explore new governance frameworks that balance decentralization and speed of iteration.
6) Compared with DeFi markets of lending and DEX, the decentralized derivatives market still has a certain gap in terms of trading volume. What do you think are the main bottlenecks facing the decentralized derivatives market at present? How can these bottlenecks be addressed to get more DeFi users engaged?
Kain Warwick: In general, on-chain interactions with derivatives contracts tend to be more complex than simple borrow or swap transactions. For this reason, gas costs can be much higher for transactions like these, making them less attractive to users. Migration to L2 will also bring about significant performance improvements which should make decentralized derivative protocols more competitive in the marketplace.
7) At present, many CEXs have also set up derivatives market, such as cryptocurrency futures and options, and other DeFi derivatives protocols are also on the rise. How do you see the competition between the decentralized derivatives market and the traditional derivatives market? And what are your expectations for the future of decentralized derivatives?
Kain Warwick: As with other products, decentralized derivatives benefit from being non-custodial and composable with other DeFi applications. An example of the power of these properties can be seen in dHEDGE, which is a non-custodial platform that enables investors to mirror trades made by portfolio managers of their choosing. As the Synthetix protocol continues to evolve and add new features, we are likely to see even more collaborative applications like this offering services that cannot be matched by centralized counterparts.
8) Given the current challenges facing Ethereum L1, some Ethereum DeFi applications have expanded/migrated or are planning to expand/migrate to other L1 chains, such as Binance Smart Chain. What do you think of this trend? What impact do you think this competitive landscape will have on the Ethereum ecosystem? Does Synthetix have similar plans?
Kain Warwick: The general consensus in the community is that rollups are likely to provide more sustainable scaling than what is currently offered by other L1 chains without having to sacrifice Ethereum’s network effects. The Synthetix community does not currently have any plans to migrate to another L1 chain.
9) The recent NFT mania and the listing of Coinbase have attracted more attention and access to the crypto market, which has also made the world see the greater potential of the crypto market. What do you think of the current NFT mania and the the long-term impact of Coinbase going public?
Kain Warwick: This is a fast moving innovative industry, so you don’t typically have to look too far into the future for an exciting growth catalyst. Coinbase is a company that has had an enormous impact on the mainstream adoption of the cryptocurrency, so naturally its direct listing generated a lot of interest.
But every disruptive technology is susceptible to boom/bust cycles, and NFT’s are no exception. NFT-enabled applications have the potential to revolutionize a long list of industries including digital art & collectibles, gaming, and digital rights management; that potential is reflected in recent market performance to some extent.
10) Currently, the Ethereum’s MEV (Miner Extractable Value) is getting more and more attention, and the front-running is one of the big factors contributing to MEV. To some extent, the value extracted by MEV is likely to be paid by ordinary traders. What do you think of MEV and its impact on Ethereum and DeFi space? Do you think Ethereum’s upcoming implementation of EIP-1559 will be able to mitigate MEV?
Kain Warwick: The general ethos of the crypto industry is that there’s no problem that can’t be solved with cryptography or cryptoeconomics. MEV is a problem for users now, but there are lots of good solutions in the works. One that’s been in the news a lot lately is Flashbots, which essentially moves MEV bidding wars off-chain to bring down gas costs for users (and has already been pretty successful). In the long term, there are lots of tools under development (e.g. Chainlink’s fair sequencing services) that are taking aim at this problem.
There is also some more fundamental research into things like verifiable delay functions, which essentially force miners to commit to the inclusion of a transaction without knowing anything about it. With all the amazing talent this industry attracts, it’s hard to bet against a good solution to this (or really or any other) technical hurdle.
The above is the main content of this interview. Thanks Kain Warwick for the sharing. We will realease more EDCON 2021 interviews in the near future. Stay tuned!