In the earliest days of Synthetix, aka the Havven era, there was a debate about whether debt issuance should be discretionary. Could we trust a bunch of degens to mint Nomins against Curits. I’m unsure why I chose these nonsensical names in the white paper. I may have been channelling @Runekek.

The original Havven design let people deposit HAV tokens in a pool, and the protocol issued sUSD, i.e., stablecoins. We felt it would be safer to remove the ability for people to mint debt and walk away. This was (and still is in the more retarded parts of the community) a significant mechanism design concern. Now, it turns out this is not a thing; not only do people not abandon their SNX tokens at the pico bottom, but they beg and plead with the world to help them avoid this. The intuition of the midcurvers is that at a certain point, it is +EV to let your tokens go. This is abject idiocy. It ignores the emotional bond that develops between a degen and their tokens. The bond forged with staked SNX tokens is often unbreakable. Thankfully, we decided to go with discretionary issuance because inbuilt leverage allowed the network to scale quickly in 2019. But that was five years ago, and much has changed. Today, we have Ethena yielding 25%+ APY.

Non-discretionary issuance had we pursued it, would have been the precursor to Protocol owned Liquidity. It is worth rethinking this aspect of the Synthetix mechanism design, given how different the world is today compared with 2017.

I have always tried to observe the crypto landscape and attempt to find a place for Synthetix within it. This is pretty gruelling as it requires attention to the ecosystem, consisting of 18-hour days and seven-day weeks. There is no other way to stay connected to everything. Staying connected is critical because a gap in understanding can prevent an insight that synthesises new trends and strategies.

Due to Infinex and the bull market, I once again work crazy hours, so I’m back in a position where I can assess the ecosystem and identify where Synthetix fits. I have been drip-feeding this to the new council as I come across small opportunities, but this week, several things clicked into place for me. This essay is the result.

Discretion has had a good run, but it is likely time to hand over debt issuance to the protocol. There are economies of scale, and debt issuance is far less dangerous. The debt pool is no longer skewed. This was one of the reasons why discretionary issuance was so crucial, as it allowed market forces to hedge the debt pool. It was essential as almost every attempt to hedge at the protocol level ended in disaster.

But these terms are unclear, so let’s clarify what I mean. We are talking about delegated staking and solo staking. In the Synthetix protocol today everyone must solo stake. This is super dumb, imagine if we expected everyone to solo stake Ethereum. Lido is the largest staking pool (and a systemic risk to Ethereum, amirite) for a reason, because it is easy and efficient. We need to allow for delegated staking in parallel to solo staking. We can then decide whether to completely deprecate solo staking.

People talk about the potential death spiral of Synthetix, which got close last year. But the only reason for this was the incredible amount of debt inflation. Essentially, 100% of the current debt in the system is debt that was not minted; what that means is that without this debt inflation, every single staker would have been…

COMPLETELY FUCKING FINE, YOU STUPID FUCKING IDIOTS.

Most people hedged their debt effectively and maintained healthy ratios, yet some were overwhelmed by debt inflation. This inflation came from many sources, including frontrunners, debt pool skew, and one-off events. Empirical data demonstrates that stakers are relatively efficient at managing their debt. The narrative that they are profligate fools who pushed the network to near bankruptcy for fun and profit is a fiction pushed by the retarded wing of the protocol to justify their existence. Because in the minds of these Eurocrats, only they are smart enough to protect the protocol from the bad stakers and their debt. In reality, these people have done more harm than good and are holding back the protocol.

We ought to do something for those that were rekt by inflation, and this proposal handles that. However, it also removes the need to manage a personal debt position because the debt pool is delta-neutral, which is a highly inefficient use of stakers time. We should not do this immediately; instead, we should remove solo staking slowly over time. There is even a world where we keep it as an option for enthusiasts.

I propose creating a protocol-owned debt pool, i.e., delegated staking. SNX holders can contribute their existing debt positions to this pool. We can be far more aggressive on the issuance ratio in this pool because we will no longer have to worry about bad debtors. This proposal sidesteps the arguments about abandoned positions.

As a staker, you can contribute your debt position to the pool at the current c-ratio. This serves two purposes: if you lock for X months, the protocol will absorb the debt you transferred. This is the debt jubilee everyone has been waiting for. Still, it will be sustainable because you must commit to delegated staking for a minimum period to get the debt relief. The Pool can mint sUSD up to 200% of the SNX staked, meaning the pool can double the existing debt. This should result in the immediate issuance of ~$150m in PoL sUSD.

This sUSD will be provided to Ethena to mint USDe. Some of this liquidity may also collateralise SNX perps. This should yield around 15%+ or ~$20m yearly and significantly increase open interest on SNX ETH perps.

The yield generated by this pool will be used to buy back SNX via TWAP and to stake this SNX to increase the PoL pool, resulting in increased yield. In theory, we should be able to acquire $500m-$750m in yield-bearing assets in the short term.

This will also remove one of the main impediments to SNX adoption: the complexity of staking and managing debt. SNX may move to a wholly delegated staking model over time. There are some issues and potential objections to this. As a long-time SNX staker, I don't love losing my discretionary leverage; however, for a debt jubilee, I will accept this trade, especially if I can go back to solo staking a portion of my SNX later.

There are other considerations, such as ensuring enough liquidity between sUSD and USDe. Increasing the incentives in the sUSD curve pools paid in CVX/SNX will help to solve this. These incentives can come from the treasury.

Synthetix token holders own the treasury, and this proposal will help reinforce this with a tangible proposal. The treasury will stake the majority of its SNX, and the ownership of this position will transition to token holders over time. Doing this over 2-3 years is a reasonable timeframe. In addition, some linear vesting may be implemented to ensure this SNX does not get farmed by mercenaries.

I would be remiss to throw out this proposal and hope it gets implemented. While there has been progress towards accountability at the contributor level with the referendum passage, I’m still not confident this proposal can be implemented promptly if it is delivered as a blog post. So I will follow this up with a SIP, and more importantly, I will rejoin the SNX discord and present the proposal to make sure it gets passed and then implemented, and any that oppose end up with their heads on pikes outside the SNX citadel.

Let’s walk through the implementation steps. Expediency is the key here. We have fucked around for too long and let the world pass us by.

The status quo is that we have three implementations of Synthetix across multiple networks and SNAXchain. A significant majority of the volume is coming from Perps V2 on Optimism, which is fucking weird and pretty bearish. But we should not fuck with this volume. Base and Arb are running V3, and it is not going well. Also, SNAXchain doesn’t currently do anything except support governance.

Staking is available on OP and Mainnet.

Phase 0

Ideally, we would implement the Delegated Staking contract on mainnet and OP, but it might slow things down significantly. A good hedge would be to implement this contract on mainnet first and test demand. What is this contract? Again, we don’t have time to fuck around. We need to implement something off the shelf for the first implementation. The lowest effort solution is a Safe controlled by the current council. The contribution of liquidity will initially not be tracked by a contract, but it can be done after the fact. A new NFT position can be minted once the contract is upgraded, and a merklised distribution contract can be deployed.

If we do this within V3, we can change the issuance ratio to 200%. Still, we will need a mechanism to block other v3 stakeholders from minting, or we could create an exception for the Delegated Pool.

Phase 1

If there is demand for this scheme on mainnet, we can implement a mechanism to migrate staking positions from OP to mainnet. This will require some contract work and auditing. However, since the V3 migration contracts already exist, these contracts could be leveraged with minimal reworking to allow an OP staker to migrate to PoL rather than v3. Once all stakers can participate, we can begin the snapshot process, and all debt transitioned to the protocol will be absorbed over an agreed-upon period. This means that after this period (to be specified in the SIP) a staker who contributes at launch will have no debt. There will most likely need to be a cool-down period to ensure withdrawals are staggered. It might even be prudent to impose linear vesting after the debt jubilee. This is especially true if we also transition ownership of the treasury to SNX stakers.

The PoL pool will continuously provide sUSD to Ethena to mint USDe, with a target of 500m in PoL by Q1 2025. Buying and restaking SNX will occur manually and require implementing an onchain TWAP process or utilising an intents-based platform to tap into CEX liquidity.

Phase 2

Automated contracts must be written and deployed once the initial iteration is working in production. These contracts will be deployed to SNAXchain; at this time, all staking inside V2 will be deprecated and transitioned to V3. Whether to continue to permit discretionary issuance within V3 must be decided. I believe we will be better off ending solo staking and moving to a pure PoL model, but it will depend on demand.

It is also likely that depending on the yield generated, acquiring ETH and BTC and borrowing against these assets might be prudent to generate additional yield.

Phase 3

The final phase is to divert some of the PoL pool towards scaling perps v4. Many upgrades are coming to the perps engine, but significant liquidity will still be required to scale this new protocol version. Nine to ten figures of PoL liquidity will allow for much more rapid scaling than we have previously had. This new perps engine should only be deployed to SNAXchain, and the other perps implementations should be deprecated. This will allow Synthetix Exchange to defragment all existing liquidity and for Infinex to tap into this new perps engine. The combination of Infinex and Synthetix.exchange should allow for one of the best perps trading experiences, centralised or decentralised.

One of the critical aspects of this proposal is time to market. A powerful incentive should be implemented for the core contributors executing this plan should it pass governance. The incentives should be paid only if the aggressive timelines of early Q1 deployment are met. It is time for some grinding. It is time for a new death march.

This transition from solo staking to delegated staking is somewhat obvious in hindsight; it should have probably happened a long time ago. Unfortunately, I slept on the PoL narrative after getting rekt by OHM. It is time to revive this narrative alongside the DeFi renaissance.

In the earliest days of Synthetix, aka the Havven era, there was a debate about whether debt issuance should be discretionary. Could we trust a bunch of degens to mint Nomins against Curits. I’m unsure why I chose these nonsensical names in the white paper. I may have been channelling @Runekek.

The original Havven design let people deposit HAV tokens in a pool, and the protocol issued sUSD, i.e., stablecoins. We felt it would be safer to remove the ability for people to mint debt and walk away. This was (and still is in the more retarded parts of the community) a significant mechanism design concern. Now, it turns out this is not a thing; not only do people not abandon their SNX tokens at the pico bottom, but they beg and plead with the world to help them avoid this. The intuition of the midcurvers is that at a certain point, it is +EV to let your tokens go. This is abject idiocy. It ignores the emotional bond that develops between a degen and their tokens. The bond forged with staked SNX tokens is often unbreakable. Thankfully, we decided to go with discretionary issuance because inbuilt leverage allowed the network to scale quickly in 2019. But that was five years ago, and much has changed. Today, we have Ethena yielding 25%+ APY.

Non-discretionary issuance had we pursued it, would have been the precursor to Protocol owned Liquidity. It is worth rethinking this aspect of the Synthetix mechanism design, given how different the world is today compared with 2017.

I have always tried to observe the crypto landscape and attempt to find a place for Synthetix within it. This is pretty gruelling as it requires attention to the ecosystem, consisting of 18-hour days and seven-day weeks. There is no other way to stay connected to everything. Staying connected is critical because a gap in understanding can prevent an insight that synthesises new trends and strategies.

Due to Infinex and the bull market, I once again work crazy hours, so I’m back in a position where I can assess the ecosystem and identify where Synthetix fits. I have been drip-feeding this to the new council as I come across small opportunities, but this week, several things clicked into place for me. This essay is the result.

Discretion has had a good run, but it is likely time to hand over debt issuance to the protocol. There are economies of scale, and debt issuance is far less dangerous. The debt pool is no longer skewed. This was one of the reasons why discretionary issuance was so crucial, as it allowed market forces to hedge the debt pool. It was essential as almost every attempt to hedge at the protocol level ended in disaster.

But these terms are unclear, so let’s clarify what I mean. We are talking about delegated staking and solo staking. In the Synthetix protocol today everyone must solo stake. This is super dumb, imagine if we expected everyone to solo stake Ethereum. Lido is the largest staking pool (and a systemic risk to Ethereum, amirite) for a reason, because it is easy and efficient. We need to allow for delegated staking in parallel to solo staking. We can then decide whether to completely deprecate solo staking.

People talk about the potential death spiral of Synthetix, which got close last year. But the only reason for this was the incredible amount of debt inflation. Essentially, 100% of the current debt in the system is debt that was not minted; what that means is that without this debt inflation, every single staker would have been…

COMPLETELY FUCKING FINE, YOU STUPID FUCKING IDIOTS.

Most people hedged their debt effectively and maintained healthy ratios, yet some were overwhelmed by debt inflation. This inflation came from many sources, including frontrunners, debt pool skew, and one-off events. Empirical data demonstrates that stakers are relatively efficient at managing their debt. The narrative that they are profligate fools who pushed the network to near bankruptcy for fun and profit is a fiction pushed by the retarded wing of the protocol to justify their existence. Because in the minds of these Eurocrats, only they are smart enough to protect the protocol from the bad stakers and their debt. In reality, these people have done more harm than good and are holding back the protocol.

We ought to do something for those that were rekt by inflation, and this proposal handles that. However, it also removes the need to manage a personal debt position because the debt pool is delta-neutral, which is a highly inefficient use of stakers time. We should not do this immediately; instead, we should remove solo staking slowly over time. There is even a world where we keep it as an option for enthusiasts.

I propose creating a protocol-owned debt pool, i.e., delegated staking. SNX holders can contribute their existing debt positions to this pool. We can be far more aggressive on the issuance ratio in this pool because we will no longer have to worry about bad debtors. This proposal sidesteps the arguments about abandoned positions.

As a staker, you can contribute your debt position to the pool at the current c-ratio. This serves two purposes: if you lock for X months, the protocol will absorb the debt you transferred. This is the debt jubilee everyone has been waiting for. Still, it will be sustainable because you must commit to delegated staking for a minimum period to get the debt relief. The Pool can mint sUSD up to 200% of the SNX staked, meaning the pool can double the existing debt. This should result in the immediate issuance of ~$150m in PoL sUSD.

This sUSD will be provided to Ethena to mint USDe. Some of this liquidity may also collateralise SNX perps. This should yield around 15%+ or ~$20m yearly and significantly increase open interest on SNX ETH perps.

The yield generated by this pool will be used to buy back SNX via TWAP and to stake this SNX to increase the PoL pool, resulting in increased yield. In theory, we should be able to acquire $500m-$750m in yield-bearing assets in the short term.

This will also remove one of the main impediments to SNX adoption: the complexity of staking and managing debt. SNX may move to a wholly delegated staking model over time. There are some issues and potential objections to this. As a long-time SNX staker, I don't love losing my discretionary leverage; however, for a debt jubilee, I will accept this trade, especially if I can go back to solo staking a portion of my SNX later.

There are other considerations, such as ensuring enough liquidity between sUSD and USDe. Increasing the incentives in the sUSD curve pools paid in CVX/SNX will help to solve this. These incentives can come from the treasury.

Synthetix token holders own the treasury, and this proposal will help reinforce this with a tangible proposal. The treasury will stake the majority of its SNX, and the ownership of this position will transition to token holders over time. Doing this over 2-3 years is a reasonable timeframe. In addition, some linear vesting may be implemented to ensure this SNX does not get farmed by mercenaries.

I would be remiss to throw out this proposal and hope it gets implemented. While there has been progress towards accountability at the contributor level with the referendum passage, I’m still not confident this proposal can be implemented promptly if it is delivered as a blog post. So I will follow this up with a SIP, and more importantly, I will rejoin the SNX discord and present the proposal to make sure it gets passed and then implemented, and any that oppose end up with their heads on pikes outside the SNX citadel.

Let’s walk through the implementation steps. Expediency is the key here. We have fucked around for too long and let the world pass us by.

The status quo is that we have three implementations of Synthetix across multiple networks and SNAXchain. A significant majority of the volume is coming from Perps V2 on Optimism, which is fucking weird and pretty bearish. But we should not fuck with this volume. Base and Arb are running V3, and it is not going well. Also, SNAXchain doesn’t currently do anything except support governance.

Staking is available on OP and Mainnet.

Phase 0

Ideally, we would implement the Delegated Staking contract on mainnet and OP, but it might slow things down significantly. A good hedge would be to implement this contract on mainnet first and test demand. What is this contract? Again, we don’t have time to fuck around. We need to implement something off the shelf for the first implementation. The lowest effort solution is a Safe controlled by the current council. The contribution of liquidity will initially not be tracked by a contract, but it can be done after the fact. A new NFT position can be minted once the contract is upgraded, and a merklised distribution contract can be deployed.

If we do this within V3, we can change the issuance ratio to 200%. Still, we will need a mechanism to block other v3 stakeholders from minting, or we could create an exception for the Delegated Pool.

Phase 1

If there is demand for this scheme on mainnet, we can implement a mechanism to migrate staking positions from OP to mainnet. This will require some contract work and auditing. However, since the V3 migration contracts already exist, these contracts could be leveraged with minimal reworking to allow an OP staker to migrate to PoL rather than v3. Once all stakers can participate, we can begin the snapshot process, and all debt transitioned to the protocol will be absorbed over an agreed-upon period. This means that after this period (to be specified in the SIP) a staker who contributes at launch will have no debt. There will most likely need to be a cool-down period to ensure withdrawals are staggered. It might even be prudent to impose linear vesting after the debt jubilee. This is especially true if we also transition ownership of the treasury to SNX stakers.

The PoL pool will continuously provide sUSD to Ethena to mint USDe, with a target of 500m in PoL by Q1 2025. Buying and restaking SNX will occur manually and require implementing an onchain TWAP process or utilising an intents-based platform to tap into CEX liquidity.

Phase 2

Automated contracts must be written and deployed once the initial iteration is working in production. These contracts will be deployed to SNAXchain; at this time, all staking inside V2 will be deprecated and transitioned to V3. Whether to continue to permit discretionary issuance within V3 must be decided. I believe we will be better off ending solo staking and moving to a pure PoL model, but it will depend on demand.

It is also likely that depending on the yield generated, acquiring ETH and BTC and borrowing against these assets might be prudent to generate additional yield.

Phase 3

The final phase is to divert some of the PoL pool towards scaling perps v4. Many upgrades are coming to the perps engine, but significant liquidity will still be required to scale this new protocol version. Nine to ten figures of PoL liquidity will allow for much more rapid scaling than we have previously had. This new perps engine should only be deployed to SNAXchain, and the other perps implementations should be deprecated. This will allow Synthetix Exchange to defragment all existing liquidity and for Infinex to tap into this new perps engine. The combination of Infinex and Synthetix.exchange should allow for one of the best perps trading experiences, centralised or decentralised.

One of the critical aspects of this proposal is time to market. A powerful incentive should be implemented for the core contributors executing this plan should it pass governance. The incentives should be paid only if the aggressive timelines of early Q1 deployment are met. It is time for some grinding. It is time for a new death march.

This transition from solo staking to delegated staking is somewhat obvious in hindsight; it should have probably happened a long time ago. Unfortunately, I slept on the PoL narrative after getting rekt by OHM. It is time to revive this narrative alongside the DeFi renaissance.