TL;DR: Not only is Synthetix V3 a groundbreaking revolution for derivative protocols but it's also set to be a dominant player in onchain borrowing, with zero interest or fees charged to borrowers. Users can deposit collateral to generate sUSD without interest or other fees.
Synthetix V3 has been touted as a protocol for protocols that will power countless derivatives. However, the lesser-known secret of V3 is that Synthetix will become a powerhouse in onchain borrowing.
The core of the entire protocol, as explained in my prior post on V3, is a CDP protocol. Users deposit governance-approved collateral and generate sUSD. The differentiator with Synthetix V3 is that liquidity providers (LPs) can delegate this collateral and sUSD to provide liquidity to derivative markets and earn fees.
Users can also simultaneously engage in CDP lending and market LP positions, delegating liquidity generated from CDPs to derivative markets and earning fees that automatically repay sUSD loans.
What about users who want to use Synthetix as a pure lending protocol? They can do so, and it's encouraged by allowing users to borrow sUSD at 0% interest and 0 fees.
Why is it encouraged? Onchain derivatives will require LARGE amounts of liquid sUSD available for traders to utilize, making it beneficial for the protocol to incentivize users to increase the supply of sUSD available for traders.
The goal of the Synthetix protocol isn't to generate interest or fees when sUSD is generated by users; instead, it's focused on allowing for the creation of onchain derivatives. sUSD liquidity is a necessity.
Synthetix V3 introduces a new approach to liquidity and borrowing. Instead of being required to choose between borrowing sUSD or being a liquidity provider, Synthetix V3 allows you to do both. Users can deposit collateral, delegate liquidity to markets, and generate an sUSD loan. This loan is automatically paid off by fees paid out from perps traders. You can think of the loan as a prepayment for future fees, similar to Alchemix.
Here’s an in-depth look at the three ways you can utilize Synthetix V3:
1. Pure CDP Protocol: Like traditional lending protocols, deposit your approved collateral and generate sUSD. No gimmicks, interest, or fees. Straightforward, simple, and highly efficient.
2. Pure LP Protocol: Dive into the world of liquidity provisioning, without generating sUSD. By depositing your collateral, you can delegate it to derivative markets such as perps. The reward? You earn fees from traders by using your collateral to underwrite derivative markets.
3. Both CDP and LP Protocol: Combine the power of both worlds. Deposit your collateral, generate sUSD, and simultaneously delegate to derivative markets like perps. Here's the kicker – the fees you earn from traders will automatically pay down your sUSD loan.
There's no current use case for v3-generated sUSD. This is an experimental tutorial for Synthetix V3. Any incentives (including voting power) are exclusively determined based on participation in Synthetix V2.
If Synthetix V3 were fully operational with LPs (Liquidity Providers) transitioned from V2X to V3, here's how you would use SNX as a lending protocol. This tutorial is merely for educational purposes (b/c V3 sUSD does not serve a purpose yet), so you can see how simple this process is.
1. Head to V3 liquidity app or any other user interface for interacting with the Synthetix V3 protocol.
2. Deposit collateral to the Zero Pool, which backs no markets and never can (because it has no owner). The only functionality for this pool is minting and burning sUSD.
3. Borrow stablecoins up to your preferred collateralization ratio.
4. Monitor your collateralization ratio to ensure your account is healthy.
5. That's it. You're done.
Learn more about Synthetix V3 by visiting the following links:
- Synthetix V3 Development Progress
- Where Synthetix V3 could take us - CC Cavalier
- Getting to the Synthetix v3 End Game - CC Cavalier
- $500m is waiting for you to #BuildOnSynthetix - CC Cavalier
- Synthetix V3 is on Mainnet - CC Noah
- Perps V3 Testnet Competition
Matthew Losquadro