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bankless_Synthetix_A_New_Hope_with_Kain_Warwick

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Masa Foundation 7

A

Welcome to Bankless, where we explore the frontier of Internet money and Internet finance. And today on bankless we are exploring the frontier of the multi chain Ethereum roadmap. The roll up centric roadmap has always been about producing many, many new layer twos, each of their own flavor, construction and type, in pursuit of allowing diversity of chains to all exist under the same ecosystem that we call Ethereum. Synthetix, an application has been leading the charge into exploring what does this mean for the application layer of Ethereum? And today on the show we're bringing in Kane Warwick actually, inside of my apartment. This is an in person conversation, so you'll be able to pick up on the speed and lack of latency there is between me and Kane. I would say he was in New York for Mainnet and so we wanted to do a show about his recent blog post that he wrote called Synthetics a new hope about the next stage for synthetics in this multi layer two ecosystem, and how he is thinking about some of the complexities and challenges that the Ethereum roll up centric roadmap presents for the application. Like I said, since he was in town for Mainnet, I was like, hey, just come on over and we'll do the conversation in person. So that was pretty fun. It's always nice to have in person conversations. I don't do them as much even though I have the setup ready to go anytime there is a conference in New York, however, I will try and get one done. So in this episode, you're going to watch us navigate the complexities, the challenges of Ethereum's roll up centric roadmap as it relates to applications that desire to exist across multiple layer twos across multiple chains. Depending on the layer two application, the application construction itself, different challenges can arise in various levels of complexity. Kane and I walk through the three different levels of cross chain complexity that an application can have that is determined by what that application is trying to do. For example, just mere independent instances like Uniswap deployments across chains is the easiest way to navigate the multi chain world. Doesn't really matter if different Uniswap instances are deployed across chain, but as soon as there's unified governance, all of a sudden there is complexity because we need to start to weave these chains together. And then there's the next phase, the synthetics phase, which is not just unified governance, but unified liquidity and unified state. Synthetix has always been at the frontier of navigating the hard problems in Ethereum. After Unipig the Uniswap demo on optimism's optimistic roll up. The first optimistic roll up that had a live in production demo of an application. We called it Unipig. Back then, synthetix was the number two. And so they have always been pushing the frontier of what is possible in the world of crypto. And now Kane is leading the charge into doing the same thing once again with Synthetix and the multi chain ecosystem. So if you are curious about the super chain idea for optimism or just simply the shared state of layer twos, they re recomposing all the fractured composability of layer twos. This conversation is for you. And it's also just a fun conversation. Kane is a great conversationalist and he's of course, wicked smart. So let's go ahead and get right into that conversation with Kane Warwick of Synthetix. But first, a moment to talk about some of these fantastic sponsors that make this show possible, especially big list nation. We are here in person in my apartment here in Brooklyn with Kane Warwick, the co founder of Infinix, semi benevolent dictator of Synthetix, house collector and possibly, possibly the best hair in Ethereum. Kane, welcome to my apartment.

B

Yeah, thanks for having me. I was hanging out downstairs for a little while. I couldn't figure out what channel to get you on.

A

So yeah, just like the problem that we're going to discuss in this episode, how do you reach me? Telegram, discord, email, Twitter, text.

B

We need some kind of aggregator.

A

Yeah, we need one single shared way of getting in contact with each other. You're in town in New York here for Mainnet. How's that been? Gone?

B

Yeah, it's been good. Yeah. So Mainnet and EthNew York Pragma, I guess the ethereum hackathon conference. So yeah, it's been pretty good. Vibes are pretty good.

A

Lovely, lovely. Do you go in and out of Australia or do you do a circuit before you go back home?

B

This time I did because I went from Togo, 2049, landed in Sydney, and then 24 hours later hopped back on a plane to come over here. I had to pick up my kids on the way through, so I couldn't go directly from Singapore to New York, unfortunately.

A

Man, the life of juggling being a dad and going to conferences and also being an app founder, I cannot imagine.

B

Yeah, it's pretty hectic, but yeah, my kids are pretty good travelers now.

A

Okay, so as I alluded to, there is a problem arising in the world of ethereum, the roll up centric roadmap, as great as it is for producing natural emergent solutions across the different modules that make up a chain. It also fragments composability. And this is like, kind of how I alluded to with like, how does, how do you reach me with all the different apps that we use? The illusion here is that there's so many different networks. How many networks currently is synthetix deployed on really two?

B

Main net and optimism are the only two?

A

Okay. And why not more?

B

Good question. I think we obviously were the first project to deploy to optimism. We worked really closely with the team. I did try to warn people about this and say, like, hey, guys, why don't we coordinate around optimism rather than having 100 roll ups? But that ship has sailed now, I think. So we are in an environment where we're seeing even l one's convert into l two s, which I think is great. I think people who previously thought it was a good idea to launch an l one, realizing that being connected to the ethereum ecosystem is a more viable pathway. That's amazing. In the end of the day, I think we'll accept that that's just the direction that things are going. But for us, the challenge has been cross chain communication with Synthetix. Because we're a liquidity protocol, we need to be able to ensure that on whichever network a user is interacting, that information about those interactions are passing through to the other networks. That just creates cross chain communication demands that are much higher than bridging a token, for example, where it's a one shot thing, and then the token's on the other network and you can let it do what it needs to do over there.

A

I would imagine with the demands that Synthetix has, the growing number of chains produces probably an exponential growing amount of complexity for managing those chains.

B

Yeah, if you do it the right way. Unfortunately, we're not uniswap. Where Uniswap can just deploy their immutable code onto a new network. There isn't even the complexity of moving fees around. Fees sit on that network, they go to LP's, you flick a fee switch on, and all of a sudden the complexity goes up significantly because now it's like, okay, well, where do the fees go? Uni token holders on that network. You need token holders on Mainnet, uni token holders anywhere. Do we burn the fees? Do we transfer them? Do we convert them? What about if it's on avalanche? How do you deal with that? So as soon as you start to have any contemplation of cross chain communication, the complexity grows significantly. So if you can just deploy your code and let it sit there and interact only on that one network, it's much easier. Unfortunately for synthetix, it's just not possible.

A

Right. And so what you're starting to allude to is that there are different types of apps out there that have different cross chain needs. Yes, maybe there's a few categories of this in your blog post, which is going to be the basis of this conversation. You kind of start to progress through the different kinds of apps that have different levels of demands for complexity when it comes to cross chain. And I think synthetix would be at like, the highest order of a cross chain. A many multi layer two world is the most complex for synthetics than it would be for, like, Uniswap. Uniswap is deployed on like, 13 different chains, and that's just a property of the nature of what Uniswap is. Like you alluded to, there's this one thing called the fee switch, that if we turn that on, all of a sudden uniswap goes from like, well, it's pretty simple to deploy Uniswap across chain to like, okay, now we are elevating in complexity. Could you kind of walk us through the phases of complexity that an app, the properties of an app might be like, what properties are simple to deploy across any chain? Like the roll up centric roadmap of Ethereum. 10,000 roll ups. That doesn't matter for some apps. What kind of categories of apps are those? And then what things make things more complex?

B

Yeah. So I think on the spectrum, the simplest thing is a Uniswap style deployment. It's immutable code, so you don't need to govern it, you don't need to upgrade it, you just deploy the code and it sits there. There's no need for fees or anything like that to go outside of the protocol. So there's sort of endogenous to the protocol. LP's put liquidity in and LP's earn the fees. That's it. And so each instance is really distinct. As soon as you start adding things like governance, if there's any upgradeability, then it's a question of where does the governance come from? Is it governance is just on that network? Or is it governance that is anywhere? Because most of the time the governance comes from token holders and token holders are spread across all these different roll ups. So it's like, well, how do we coordinate the governance? Do we want someone who is holding aave on Mainnet to be governing the deployment on arbitrum?

A

Right?

B

Does that even make sense? Are they the same kind of stakeholder, or is it only the aave token holders who are staked in the security module or whatever on arbitrum should govern the arbitrum deployment? And then there's another area of complexity, which is fee sharing. So, okay, if there's fees that are being earned on one network, who do they go to? Do they go to all token holders? Do they go to just token holders on that network? How do we distribute them? Are they paid out as a dividend? Do we do buybacks and burns, et cetera? There's solutions to all of these things, but they all add complexity. The governance side of things, I think, adds the most complexity. Then there's some other stuff like bridging. Do you want all your tokens on all of these different networks to be fungible? So I gave an example a long time ago, even before this was a real thing of maker. If you have Dai on one network that is mainly backed by USDC, let's say, then you have a different instance of maker that's deployed on, let's say, arbitrum. And maybe the majority of the issuance of Dai is backed by ARb, the ArB token. Now that's crazy, and that's not the case, but in a future state, maybe that might be the case. You look at those two things and you say, okay, we've got one network where it's all backed by USDC, another network where it's backed by treasuries, and then a third network where it's backed by an illiquid shitcoin. Let's use SNX as the example rather than Arb. I don't want to trigger Arb. Maxis, we've got a synthetix app chain where you've got Dai that's being backed by SNX, it's illiquid, or whatever, is that Dai that's being issued, um, against those, you know, collateralized positions. Fungible. Do you want it to be fungible? You know, does it even make sense? Is it, you know, on some fundamental level, is it fungible?

A

Right?

B

And if it is, how do you then enforce that fungibility? Right? So you need bridges, you need cross chain communication. You need to know if the DAI is moved onto a different network and it needs to be liquidated, how does that liquidation happen? And so all of that stuff just adds complexity.

A

Is this both, uh, if I'm understanding this correctly, is this both like a kind of a more higher level philosophical question of is the die fungible from, like, the social layer, do we perceive these things to be equivalent? And then the other problem is like, okay, maybe even if we do get to that point where, yes, everyone agrees that these things, the risks of one implementation of Dai on one chain, we do agree that that should be equivalent with the risks of a different DaI implementation of a different chain. If we can cross that barrier, there's still the technical barrier of getting it to be fungible at the technical level, like the contract address and equivalency. So, like, there's two problems here, I.

B

Think there's kind of three. There is the social problem, which is if I'm using Dai, what is the perception of a user of dai? Do they expect fungibility? Like, what is my expectation as a user of Dai? Then there's the financial layer of, okay, if my expectation is they're fungible, are they really financially fungible assets? Right. Like if one's backed by nonsense and the other one's backed by eth, is that even the same? Right. And how do we reconcile that? Is there a way that we can set up the financial incentives such that one has a really low LTV and one has a high LTV and the liquidation means that actually they're both as safe, they've just got different parameterization. And then assuming we get to that point, then the next thing is, how do we even do that? What's the mechanism? What's the technical mechanism by which we implement that?

A

Really just to drive this one point home, the way that you describe this in your article is Alice has trust preferences. That maybe Alice is very conservative, and so she only wants to use, uh, you know, a very low LTV inside of synthetix on Mainnet, uh, with very good strong collateral because these are her trust preferences. Maybe a more adventurous Bob is out on some op stack fork that just got deployed. And if there's a synthetix instance on that network that for some reason allows for, you know, shitcoin collateral to back s USD, that's great. If these instances are firewalled, kind of like how uniswap deployments would be, then like Alice's preferences. Don't get commingled with Bob's preferences. You know, conservative Alice is safe from Degen Bob. And so long as there's actually like separation of instances, why I think the articulation of synthetics is such an ambitious project about shared composability is that the unified version of synthetix would mean that Alice's preferences and Bob's preferences are actually commingled and those conflict and so that's where we get into, like, okay, so is s USD on, you know, op stack shit shit op stack, fork with shit, op with shit, collateral. Sorry for the language. Just like, you know, all the risk, all the risk on one. Maximize risk, maximize risk and then maximize conservatism. How do we even square these things?

B

Yeah. And is there, you know, this is the financial layer, right? Like, is there a way that you can parameterize this to allow both of these people to interact with one another and feel comfortable, right? And. Or if not, is there a way for you to sort of cauterize the risk and segment and silo the risk so that, you know, the user gets fungibility, but on the LP side, the LP's are protected from one another, right? And, you know, you don't have this like, cascading failure or, you know, or whatever. And so, you know, these are hard problems, right? But then it begs the question of, even if you can get to that point, the technical implementation, there is no way to implement this. And this is where synthetix unfortunately has a bad habit of being, like, on the bleeding edge. Like, the vision is very bad habit. Yeah, very bad habit. You know, it's like this kind of very aspirational vision of, like, what if we could do this? You know, what if this is the future state and the reality is that the tech is just not there yet, right? Maybe this is solved with like, you know, at some point, like an opcode, you know, like level of solution, right? Where, like, we actually realize that cross chain communication is necessary. And, you know, we have this reliance on, like, ethereum as a state layer where we're storing state there, and somehow we have a way of communicating that back out or something, maybe there's a more long term solution. In the interim, we've got a bunch of solutions which are fairly novel and none of them are really yet in a position to be able to actually do this. Like, anything. We do it and then we go, oh, wow, this doesn't scale. Or here's a solution that handles the problem today, right? Ethereum mainnet back in 2018, totally fine. Enough bandwidth, right? Like, just barely enough bandwidth, right, back.

A

In the days of one great gas.

B

Exactly. And then like 20 minutes later, it's March 2020, and you're like, oh, wow, this does not work at all. Like, it just is not possible for this to function, right? And so even if we have cross chain communication and we've got these kind of rudimentary solutions or whatever, do they scale to something that is across 100 chains, like, at the moment, no. Can they get there? It's a technical problem to solve. Right.

A

And just to, again, really just hammer on the definition of the problem statement. The many app ecosystem. If you have uniswap without governance, just raw instances of uniswap deployed everywhere, that's like problem level one, not too much of a problem. Problem two is when, okay, we have central uniswap governance and decentral Uniswap deployments. How do we cohere, how does this one app cohere into this one unified system when we're across, when Uniswap itself, itself is across many different states, that's, like, not a crazy problem, but still a hard problem and still some things to suss out. And then the final problem is what synthetic wants to do, which is shared liquidity. Shared liquidity across states. And liquidity is finite if you have many chains. We're starting to fracture liquidity. And so the golden solution here is that when you add liquidity to one network, one implementation, you are also increasing the liquidity on a different network. And that's like the hardest level problem, right?

B

It's the hardest level problem that we've thought of today so far. And this is, you know, like, it would not surprise me at all if synthetix or other protocols eventually come up with even harder problems that are harder problems that have to do with cross chain communication. There's some, you know, demand or some functionality that requires something. But at the moment, that's kind of the, you know, the most challenging thing is, like, to treat these distinct networks as one network requires a level of cross chain communication that we just can't quite support yet.

A

Right? Yeah. And of course, just to throw a bone to the Solana camp out there, this is why they are like, layer one, one chain maximalists. Like, they get to be the composable chain because they only want to have one monolithic chain. So they're listening to this and be like, yeah, that's why Solana, of course.

B

Yeah, don't fragment your liquidity, of course. And there's something to be said for that, but there's definitely a counterargument of like, okay, fine. I. But at some point, the l one monolithic thing breaks, right?

A

And then they just kick the can down.

B

Yeah, they'll get there, too. Great. You got ten x, more growth, right. But eventually you're going to be like, oh, this doesn't really work.

A

Okay, without asking about the technical details, what's the vibe check on this problem becoming solved in the fullness of time.

B

It's a really good question, and there's some ways to route around it. We've at the moment got these conflicting drives within the synthetix community. One drive is maintain s and x as the primary collateral in the protocol. Maintain the value prop of the SNX token as effectively as possible, do not devalue the token in any way. And then the counter to that is, okay, what if we don't need to fragment the liquidity as much by going and finding a more liquid, more prevalent collateral like eth? Right? And the assumption is that there's going to be a lot more eth collateral available and Eth liquidity available on all of these networks than you could ever really have in S and X. The market caps are, I think at the moment, a couple of orders of magnitude different. So there's a lot more liquidity out there. So use a more liquid thing and then use SNX for something different. And these are just conflicting goals, because if we use eth, then it becomes much easier. Then you're actually back to more like the uniswap style thing, Uniswap plus V switch, where it's like you got these distinct things. You use collateral on that network, you don't need to spread your collateral out, you don't need to communicate between them. You can maintain fungibility because they are fundamentally all the same instance. So you can bridge tokens back and forth, and they're fungible because they're all backed by ETH, they all earn fees, and the fees are paid in the stablecoin. And then you just figure out a way to distribute those fees across the different networks. And there's a whole bunch of solutions. I've been very against buybacks and burns as being inefficient in the past. If you're doing a buyback and burn that it means all token holders, whether they're participating in the network or not, get a benefit. It's inefficient from an incentive perspective, but in a cross chain environment, it actually flips and becomes more efficient, because by doing a buyback and burn, the benefits accrue to everyone equally. And again, there's some potential issues with that, where maybe everyone just wants to camp out on mainnet, the safest place, even if the highest field is over here, you're not creating the right incentives. But if you have sufficient fees on the network where you want the activity to happen, that goes to LP's, and then some other protocol level fee that flows back to everyone, no matter where they are. Then I think you can strike a balance.

A

Yeah. In that model, you're kind of letting the free market. You're really leaning into the free market to solve a lot of problems, which I generally agree with. And like, as a design principle, the free market's powerful. Let it do its work. Okay. One thing I will give credit towards synthetics with is its seemingly egolessness about being willing to experiment across all different. Being very pragmatic about. Do we want to enshrine SNX first and foremost? Well, let's consider the scenarios in which the answer is yes and no. And let's pick the best of both worlds. In your blog post, you talk about three different paths, three different options. Some make more sense than others to solve some of this fragmented liquidity solutions. And one of them is, like you said, it's like, well, we can bootstrap with ether instead of bootstrapping with SNX. That's, I think, the first path of three. You want to take us further into the second one.

B

Yeah. So I think it's worth calling out, though, that synthetix. We are very pragmatic, but we're also extremely dogmatic. And it's a weird mix. Right. So there's certain dogma within the community where it's like, you can't touch that. So for a long time, it was like, you cannot siphon off fees away from the s and X token. It doesn't matter how good of an idea you think this is. And I'll give you a silly example. Right? If we thought that, like, putting 2% of the total fees towards, like, funding bankless. Right. Was gonna be a really beneficial thing, right. And everyone agrees that this is a beneficial thing, it would be amazing. Like, bankless is a super amazing public good that we want to fund or whatever.

A

I'm liking this.

B

Yeah. Okay. Zero chance that will ever happen, right? You know, back in the day, because we just said the instant you. It was almost like the uniswap fee switch. The instant you divert fee. Like, we had a fee switch that was on and welded shut.

A

Right.

B

You couldn't actually turn it off. Right. The opposite of uniswap. Right. It's like we basically, you know, jammed it to, like, full v switch on. All of the fees ever generated go to the token holders. Zero goes to LP's because the token holders are the same. And then we're like, let's make sure that no one can ever touch this thing. And, you know, we broke the switch off and welded it shut. Right.

A

Well, this is just a good lesson in incredible neutrality that a similar EIP was put forth. Shout out, Kevin Aki Eip. I can't remember what it was, but it wanted to siphon off Ethereum, block rewards for public goods or something. We were going to take this, what was ideally this credibly neutral protocol, Ethereum, and we wanted to fund public goods with it. Who doesn't want to fund.

B

Sounds like a great idea.

A

It's a great idea, but the community was super divided over this and over just like, the corruption that that might instill. Like, it starts off as a good idea, but what if bankless starts making content about XRP and how apps are dumb? That is not something that can be imagined in the short term, but then it might happen in the long term.

B

Agreed.

A

A small little divergence there.

B

Yeah, but this is the same problem, right, that you really are trying to avoid. I trusting anyone, right? Like, you know, if there's no proper incentive mechanism to ensure that the alignment's there, then, you know, it becomes very risky, right? And so, you know, the same, by the same token, right, as soon as we're like, oh, but what if we just, it's just a little, just a little tiny bit of fees just given them, like, come on, we need this thing, right? And people were like, as soon as you do that, the floodgates open, right? And you don't know. And, you know, there's, it is a bit of a slippery slope argument, but like, it is definitely like a qualitative change, right? You don't just going from like, oh, let's send another 1% of fees to this thing, which we're already doing. You're actually saying 0% of fees go anywhere but token holders and now it's 2%. What's to stop it from going to 4%? What's to stop it from being wasted? The problem is that we're now at a point where we have actually started diverting fees. We finally said we have to pay integrators. We don't have our own front end. There's no synthetix front end. There are three, four different integrators and we need to pay them. And how you pay integrators to come and do this is a hard problem to solve. There's a whole bunch of different conflicting motivations from different parties. This is how interesting it is. There was a bit of a debate and I'm on one hand building a new front end. So I'm doing an integration. You could make an argument that for me, I'd love. If half the fees went to integrators, it's a very self serving argument. Let's make it 80%. Actually, the protocol should get some fees.

A

But if 80% goes really, it's the front end.

B

The front ends are doing the work. Let's pay the front ends. We need them. They're critical to the ecosystem. There's an argument to try and maximize that. For my own personal benefit, I said, no, I don't want to be advocating for high fees. I don't think that we should be looking at the cost of running a front end today and setting the fees fee split based on that. We should set the fee split as conservative as possible. And if it's not working, then we can increase it. And some of the front ends have come back and said, well, that's not fair because your front end is being bootstrapped by you and you've got enough money to pay for it, so you don't need money. You can actually run at a loss. By that argument, the most self serving thing for me to say, no fees for any integrators. Let's make it 0%. Let's go back to the old days. Of all the money goes to SNX.

A

Holders, I get, I can find acquisition.

B

Exactly. Yeah. You know, then I can choke off all of these other guys. And I was like, wow, I hadn't even thought about that. And so now it's a situation where like, it doesn't matter what I advocate for. Like, it's bad in both cases. So I kind of have to recuse myself and let it play out in the community. But, you know, it's, again, just kind of speaks to, it's a challenging problem working out. How do you split up fees? Where do the incentives go? What are you trying to optimize for? You know, all of this stuff, it's really hard. And, you know, that's just talking about one network, right? Like, we haven't even gone to a multi chain network where now you have the arbitrum network and the optimism network fighting, saying, well, hang on, we're generating more fees. Why don't we get more, right? Why is it equally distributed? Why? You know, like, we've got more users, got more activity. Let's just keep the fees over here in arbitrum land. And then the optimism people saying, you know, and we've had a little bit of this between Mainnet and optimism where people are like, this isn't fair. We want more fees for optimism or more fees for mainnet or less fees. Here or whatever. So these are all very challenging governance problems.

A

Okay, so as we're going down the rabbit hole, the idea maze of, like, trying to discover how synthetix has this, like, unified vision for itself. Where are, where are. We talked about the three phases of difficulty. We started to define the differences in composability of governance. What's next in this conversation?

B

So, you know, the liquidity conversation is, can you get people across the line to let go of their dogma? Really? That's the question. We were very dogmatic for a long time about no fees to anyone other than SNX holders and no external collateral. We've had some wrappers and some other things, like little experiments, but fundamentally, the s and x token is the collateral that backs s USD. It's like, okay, how do we test this out in a way that maybe is not a one way door and doesn't open the floodgates and risk the position of the SNX token? And how do we negotiate that amongst the community and be pragmatic about it? To your point, how do we balance the dogmatic? If we open this door, we flip this switch, we might not be able to unflip it. We have a genuine problem that needs a solution, and we don't have a clear solution, and so we need to experiment. And that has been, honestly, the challenge of synthetics from the beginning, is balancing those two kind of competing drives.

A

One of the tools in the tool belt for solving this cross chain liquidity issue is just cross chain bridges. I think Chainlink CCIp comes into play here. How does that help solve the cross chain problem? Can you talk about its involvement here?

B

Yeah. So it helps in the sense that you can start to pass messages about the state of the different instances, back to the main instance. So, very good for, like, managing governance, managing deployments so you can have a unified governance framework that exists on optimism, let's say, that can pass messages to the other networks, to change parameters, to make new deployments, to do a whole bunch of things. That's super valuable. What it probably can't do at the moment, or what it's not yet ready to do, and Chainlink have some other solutions out there that are coming online that will be able to do this, is to manage a shared cross chain.

A

Liquidity profile, which is the golden standard.

B

That's the problem that we want to get to. Yeah.

A

Right? Yeah. Okay, so maybe one metaphor that's helpful for people to understand. This synthetix, a long time ago, has chosen optimism. You guys have been working with the optimism team since Unipig. Right. I think after you swap, it was synthetix. That was the second app that was using the OPD tech stack. This is synthetix brain. This is the home base where parameters get changed and then hopefully it spans out from there. And so if the optimism version of synthetix is the canon, the home, the brain, then you use chainlink CCIP to send messages down the neurons to other instances of synthetics, synthesis, arbitrum, wherever it's deployed. And that's passing governance messages. Yes, passing protocol updates and changes and pulling fees back. And then how we talked about earlier, you're allowing some of the margins, the edges of the free market to balance pools, balance liquidity, and do this kind of immersion stuff where there is no one single shared state. But things do get balanced relatively quickly according to the free market hypothesis.

B

Yeah, if you've got eth sitting on arbitrary, more optimism, there's a bunch more demand on arbitrum. There's just a strong incentive to move over there and capture the fees. There are some fees that are only going to LP's. So eth stakers in this case, if you're staking eth on optimism and there's less activity there, you're going to get paid less. So you're going to move over to arbitrum absent some very strong ideological reasoning. Same thing with avalanche or whatever. You pick where you're willing to deploy liquidity and you're going to get fees there. But then there's going to be a cut of the total fees that flow back to some place. And that some place then becomes an interesting question, because, okay, we've been on optimism for a long time. We had to move to optimism because we needed scaling. We couldn't deploy our perps solution on mainnet. It's just not possible. The latency is too high. A whole bunch of reasons. Cost is too high, et cetera. So we had to do that. But now we've got the op stack and the super chain, and it's like, is it weird to have all of the governance on synthetix happening in this arbitrary chain? Right? Because let's say in two years time, there's five or ten chains where synthetix is deployed. And let's say we do get to a point where it's all eth collateral. There's eth collateral in all these different l two chains. And maybe optimism is number eight in terms of volume. It feels a bit weird for the number eight chain. Maybe base is number one. It's like, well, hang on a second. Why are we sending all our fees back there? That seems weird. And so this towards the end of the article is where I sort of propose this idea of having a credibly neutral place for governance and fee share and all of that stuff to happen. And it might be an op stack chain, but it'll be like a synthetix app chain where stakers live there, governance lives there, fee sharing and other kinds of liquidity around SNX and various things live there. And then all the other chains have a deployed instance of perps and spot and whatever.

A

This starts to feel like a little bit what Roon was going after with his maker Dao app chain. That is what he was calling the backend management of the DAO. And one specific chain that's custom built for Makerdao. And then just instances of makerdao splattered across the cross roll up ecosystem. Sounds a little bit harmonious.

B

Similar, except minus the crazy LLM salon neural tokenomics thing. Still haven't got my head around that yet. We didn't do our cage fight in Singapore, unfortunately. Maybe a permissionless next year we can put a sumo suit on or something and battle it out or have a boxing match.

A

Yeah, the permissionless games, which is a meme I'm trying to incept. Okay, so that would be the synthetix app chain. Not that there is one instance of synthetix. That is the large central instance, like Dy.

B

There's.

A

That's a DyDX model where dy DX is like f chain. F. All the chains, just the Dy DX.

B

We're going to go to the best place and we're going to. Yeah, we're going to deploy, you know, on the best ghost chain that we can find. Right.

A

Why not do the dy DX model of building your own, like Cosmos IBC, or your own one single central, like even role app on Ethereum and say, hey, no, no arbitrum deployment, no optimism deployment. Just this one place where you come to us. Like, why not do that?

B

It's a good question. And this is, I think, one of the unsolved or unanswered questions, right? And, you know, I had a debate that was moderated by Dan from Paradigm with Antonio. I think it's a couple years ago now, maybe almost three years ago, right? And I was like, this is crazy. Like, you're crazy. Composability is the thing, right? If you go and build your own siloed chain at that point on starkware, right, then the only people who can interact with it. Are people that bridge there like, that's crazy. We want to be on a composable chain. That's the benefit of defi. And turns out I was wrong, at least in the short term. In the short term, I was wrong, because what they got out of having their own chain, where they controlled everything, is they were able to concentrate all the liquidity there. They were able to get a much better user experience, they were able to scale faster, sooner, and they got a significant lead over the other Dexs. There is an argument for an exchange to live on a very specific place and to concentrate all the liquidity there. The problem that I see with that is this liquidity fragmentation and user fragmentation that we have today. The thesis is that there are distinct users on arbitrum, on avalanche, on solana, on Mainnet, on optimism, et cetera, et cetera.

A

We can go on, we can be.

B

Here all day, and those people are not going anywhere else. Maybe there's people that are on main net and arbitrum, or Mainnet and optimism. But if you're on only optimism or only arbitram, there are users you cannot access. So that thesis is still kind of unproven. And this is where the base experiment of, okay, lets deploy an instance of synthetics, let people deposit eth. Lets see if any activity happens there. If theres no activity there, that is a really important piece of information. Now, why do it on base versus arbitrum? My reasoning is that arbitrum is more valuable. Base is very new, and its a low stakes experiment. If you do it on arbitrum and you get it wrong, and you launch this eth thing, and people don't want to use eth or liquidity is bad, you kind of get one shot at it. We waited a long time to go to arbitrum, and I want us to get it right when we go there. And so let's do it on base. Let's see if it works. If it kind of works, then okay, let's do it on arbitrum.

A

Arbitrum is production. Base is an experiment.

B

100%. Exactly. Yeah. And so, again, it's like, if there are distinct users on these chains, then you need to be on every chain, right? If you believe, as Dydx does, that it doesn't matter what chain people prefer, they will come to your chain. If you are the best solution, then that's another approach. And that has been the approach that DyDx has taken, and it's gone very well for them so far. There is a third option.

A

Though.

B

And this is the Infinix option, which is abstract away the chains completely. Use an execution environment, but you don't even need to talk to users about it. But go multiple steps further than DyDx, where you're abstracting away the fact that there is even a chain. You're just giving people an application, a trading application, and you're giving them what they're used to, to using on centralized exchanges, usernames, passwords, no bridging. USDT. USDC is collateral, not signing transactions. A database like performant environment where it feels like you're inside the app and every time you move or touch something, something happens. It's not this slow, clunky, high latency thing. If that works, then you can be on whichever execution environment you want. All of your users are just going to be signing into front end with a username and password and not caring. You can switch execution environments out arbitrarily.

A

And you're using execution environments as blockchains. Blockchain environment, op stack as an execution arbitrary. Exactly.

B

For example, yeah, so like if Invadex is working, let's say, right, there's obviously, there's the demand side and the supply side. Okay, so at the moment, the supply side of liquidity is coming from optimism, right? And the demand side is coming from people on optimism. You build Infinix and you abstract that away. The demand side's coming from centralized exchanges, exchanges. Its coming from binance and bybit and Okex and all of those guys. Now youve solved the demand side by building something that is feature parity with centralized exchanges. Maybe on the supply side the liquidity is not actually there. Maybe theres not enough liquidity on optimism, and maybe there would be more liquidity on arbitrum. You can actually switch out those execution environments and just move or combine them, but youre abstracting it away. The user does not care or even know that. Sometimes their order is routed to arbitrum, sometimes it's routed to optimism, sometimes it's routed to Solana. It's irrelevant to them. They just want to know that they get fast execution and deep liquidity. That's it.

A

The pattern that I'm picking up here is just like again, allowing players, sophisticated players in the free market, to do a lot of the big lift because it's profitable for them. And just allowing simplicity to go into the actual end users. Who's supplying the orders. It reminds me a little bit of the whole Uniswap X intent model where people are just come to uniswap Xdev or cowswap and say, hey, I have this desire, I have this intent. And then the free market bids for that. The model I'm seeing with Infinix is that people are just coming in, signing in, depositing their collateral, and say, hey, I want to do these things. And then more sophisticated backend providers do the best to optimize their route between arbitrum, whatever deployment of synthetics, arbitrum optimism, wherever base. Then they just serve the best price possible to the user and they take the cut. This sounds like a design pattern that I think is going to be important for producing composability for all chains. It is another tool in the tool belt, if you will.

B

Yeah, absolutely. And again, it might be that something like Infinix ends up routing to multiple different liquidity pools and that there are multiple instances of synthetics where that goes. The thing that I think is interesting is my sense is that liquidity providers are a different group of people to end users or even traders. I believe in this thesis that there are traders on arbitrum that don't trade or won't trade on optimism. I don't think the same thing is necessarily true of liquidity providers. I think liquidity providers are a bit more mercenary. They just want yield. They'll move arbitrarily between different chains to get the best yield on the supply side. I think if Infinix is routing orders to avalanche and it's working, and as a liquidity provider, it's really high yield, I think people will move there and they'll just be like, well, I'm a liquidity provider. I'm just looking for the best yield. That's all I care about. I'm not ideological, I'm fine.

A

Well, because if nine liquidity providers, like, I'm not touching avalanche, well, then it just increases the yield for the one that does.

B

Exactly. And if for some reason it makes sense that that is the place to route the orders, right, then it's this forcing function where everyone kind of has to go there, right? And so on the user side, you just abstract away network. You know, binance doesn't tell you which database engine it's using, right? It doesn't tell you which cloud computing. You know, if you really love GCP and you hate AWS, like, there's no binance option for you to choose that, right? Like you just turn up to binance username password, they could switch out, you know, the computing provider, and you would never even know.

A

So there's some other tools in the tool belt that I want to bring up optimism's idea about their super chain and homogenous block space is their strategy. It's a little bit of hand waviness, there's a little bit of unknowns, but I will accept on faith that once we get to homogeneous block space, we have some other things that we can then access. And it's an iterative process, so maybe there's some solutions there. Then there's also this concept of shared sequencing and shared execution. Espresso systems. Then you mix that with a roll up as a service provider, like conduit, for example. So conduit runs op stack chains. They just opened up their support for arbitrum, and all of a sudden, say, for example, conduit or espresso, shared sequencing, they just work together that transactions on arbitrum can be matched and balanced with transactions on optimism before settling down to the Ethereum layer one. All of a sudden we get even more composability cross chain than what we had previously. Maybe that's too far down the line for what synthetix is putting in practice today, for solving the problems today. But are these solutions on your radar and what do you think about them?

B

They are, they're on our radar. And there's, if I put my infinix hat on or I put my synthetix hat on, there's two kind of different approaches or thought processes, I guess, that are going on here with my infidex hat on. I sort of say it doesn't really matter. It really doesn't matter about any of these things, because the allegiance of a user in web two world is not to the execution environment or the network, right? It is to the brand of the application that they like to use. They feel comfortable with it or whatever. If someone likes Robinhood, they don't care if the order is. I mean, they care a little bit that it's being routed to Citadel.

A

We care.

B

Now there's a payment for order flow issue. Like fundamentally, the average Robinhood user does not care whether it's Ken Griffin getting their orders routed to them or some other guy, right? They don't really care. They just want to make sure that they don't pay anything to trade and that the execution price is reasonable ish, right? And even that, they don't care about that much. They care about the Robin Hood app. They care about the features if you change the color of the confetti when you go, and that they're going to care about, they're like, whoa, don't change it or why. So what users actually care about is the user experience. And it's the allegiance to the brand, it's the allegiance to the look and feel of the app and all of that stuff, the execution environment or where the orders are routed or whatever, is not that relevant. When I put my Infinix hat on, I say all of this stuff that we're getting caught up in, arbitrum versus optimism versus whatever, may get abstracted away. And the question is, well, why have we not gotten there before? Why now? I think that there's a couple of reasons. One, we didn't have the infrastructure in place. The infrastructure was not good enough to compete with CeFi, whether it's on the lending front or OTC desks, or spot trading, whatever it is. We've always had this competition between decentralized and centralized, and centralized has always dominated, because centralized has just been better and easier and simpler and not safer. But all of those other things, and unfortunately, safeness is on the low end of the stack. If we get to a point where we have an aggregator or this defi super app like Infinix, where it's just choosing to integrate the best liquidity pools and the user doesn't care, they just care that they're getting the best experience, then all of this other stuff may disappear. Then I put my head.

A

But it is solving it with centralization though?

B

Yeah, to an extent.

A

Minimum centralization?

B

Yeah, to an extent. How is it solving it? It's saying we're creating a brand that will overlay itself over all of these different things, and that brand will have users that will have some level of allegiance to the brand, and they will be used to the flows, they'll have an account there, all their assets will be there, and they will just want to be able to use whatever is there. Now there is a problem with that. If you take that to a logical conclusion, all of a sudden the market power that even. Forget about Infinix. If any app were to have that level of market power, wherever it is, more powerful than the underlying execution environments, then you get into a situation where, what if that app decides to route orders here, over there because of some.

A

Weird preference or synthetix competitor, all of that stuff. Suddenly there's calls, not even a synthetix competitor, but Infinix just forks synthetix with this new token. And it's like, hey, we're doing this thing.

B

So here's a great example. Let's say we get into a situation where we want to use a lending protocol, margining, right? Rather than building our own margining. System, right? So Infinix says, okay, binance spent two years building their, I mean, FTX, but spent, you know, a few years building their margin system. And, you know, by all accounts it was a good margin system. It had some fatal flaws, you know, at a deep level. But, like, the margin system was good. People liked it. Users liked it, right? You could margin with a bunch of different things. You had cross margin. It was, it was pretty good, but they had to build it bespoke. What if we just use compound or abe now, okay, let's say we have a lot of market power in the sense that we can route a lot of borrow into one or both of those protocols. We say, okay, well, if we want to route orders to aave, we need to get some kind of fee cut from this the same way that you would expect in any. So who's going to give us the most fees? And then the next step is, okay, we're still not getting enough fees. What if we just fork it? If there's enough market power there, you could get to a point like, and I've always been so anti this, like, fear of forks, right? Like, oh, don't do open source because, you know, people will fork you because we've never had anything with that much market power. But it could very well get to a point where, given the state that we're in now for next cycle, if, you know, a defi aggregator of some kind has enough power. I mean, one inch kind of got there for a while where like, if one inch decided to route things to your private pools, like, you remember they had those private pools, right? I. You would make a lot of money if it didn't. You wouldn't. And so you have to imagine that that needs to be controlled. That's a very dangerous thing in terms of concentration of market power.

A

Yeah. The centralized front end should not be top heavy with the power and strength of the foundation of the underlying protocol.

B

But that's the reality in most of the world, right. The front end is the valuable thing. And this conversation happened, you know, I can't remember what the specific phrasing was. I think it was like Chris Berniski, you know, talking about fat protocols or something like that. Yeah, the fat protocol thesis, right. You know, well, maybe that could flip it on its head, right? Where it's. It's actually the fat UI thesis, right? Like the UI fat protocol.

A

So ethereum. Yep. Not like it didn't make a statement about the app layer and then, like, who knows about the centralization layer.

B

Yeah. So there's a whole bunch of things that could play out. Like, we're still so early and these things are still so unsolved. And so it's really not clear what happens there. But we're already seeing things that I hadn't even contemplated in terms of this UI layer, because it had never been important in synthetix. Synthetix was always infrastructure. We had too many infrastructure problems to worry about the UI layer. It was an afterthought. All of a sudden we're now thinking about this and thinking, there's a lot of leverage here if you can get this right. All of a sudden it's like, well, let's just for carve a we've got. Because it's always been the demand side, right? We like the supply side. We've been so focused on it, we haven't been able to get the demand side. If you control the demand, right, you have a lot of power over the.

A

Supply, especially in crypto. My God, whoever's got demand has it all.

B

Exactly.

A

Yeah, yeah. Well, okay, so thinking about this, like, idea of like a top heavy, powerful asset, the kind of the solutions I was talking about, cross change execution via shared sequencing is a check on that power. One of the goals I think we should all aspire to in crypto is we want to get everyone on chain. We want a billion people on chain. Infinix, sorry, Kane doesn't actually solve that problem. It actually is intercepting that problem. Putting on your synthetics cap and your on chain maxi cap. Then we should be hopeful about the power of cross chain shared execution, because that is a powerful tool of making synthetics. Instance one, composable with synthetix, instance two.

B

Yeah. So I think where the disaggregation potentially happens, right? So we might have an aggregation period where these like, ui layer solutions that are abstracting away complexity and making the user experience and onboarding experience better aggregate a lot of power. The disaggregation comes from us. Learning the lesson of this abstraction of complexity is really powerful. At the moment. It's just an idea. People might not even care. Being able to sign in with a username and password might not be that beneficial. We're seeing in friendtech that it's beneficial. That's a good early indicator that this is actually useful because there's a whole bunch of other things that are horrendous about that app. And yet the onboarding process, I love it. I'm on there, but it fucking barely works. And yet people are onboarding. There's some things that are working and some things that are not. So the interesting thing for me is, okay, waves of aggregation and disaggregation. And so if it turns out that this idea of the onboarding process being streamlined and abstracting the signing process away and all of this stuff becomes very powerful, it's easy for people to replicate that, right? Like, Infinix is still going to be open source. You can fork Infinix and go and do it a different way. Right? And so, like, yes, the aggregation could be problematic for a while, but if there's too much power aggregated in a too concentrated group of, whatever controllers, token holders, whatever the governance process is, the market will kind of disaggregate it. Right. At least in crypto, because everything's open source and it's like, oh, that's the tactic that you need to use. You need to remove the signing and you need to have account recovery and you need to do all this stuff, and then that'll become table stakes and everyone will start doing it and then it'll kind of spread back out again.

A

Okay. All right. So I feel like we've done a pretty good job, like laying the landscape of the problem statement and talking about potential solutions, where to look for solutions. Where are you focused, what kind of solution area are you focused on the most that you're most optimistic about to solving some of these problems, or where is synthetix specifically going towards?

B

Yeah, so I think synthetix is looking at how do we do kind of one and two, right, as we talked about.