Synthetix Founder: Re-evaluating Synthetix's Multi-chain Vision and Liquidity Sharing
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Synthetix Founder: Re-evaluating Synthetix's Multi-chain Vision and Liquidity Sharing
This article will focus on the SNX token and its role within the ecosystem.
Navigating Web3 tides with focused insightsWritten by: Kain.eth
Compiled by: TechFlow
With the official launch of Synthetix V3, now is the ideal time to question past assumptions and ensure the community remains aligned with the long-term vision. This article will focus on the SNX token and its role within the ecosystem.
Multi-Chain
Synthetix has an ambitious vision. Deploying the Synthetix protocol across multiple chains is significantly more difficult than for most other DeFi protocols. Most protocols deploy independent instances on each chain—an approach that introduces operational complexity but is the simplest way to maintain presence across multiple networks. Many then unify governance to control these separate instances. While this adds further complexity, governance typically operates off-chain or on a single network. Some protocols go even further, enabling actions on one chain to affect all others—via cross-chain bridges, liquidity management, or shared liquidations. Protocols can also support interoperability of cross-chain assets through wrappers or bridges. Back in early 2020, the Synthetix community envisioned something grander: a single protocol spanning multiple networks, where system behavior mimics every action occurring on a unified chain regardless of the underlying network. We are closer to that goal than three years ago, yet it remains elusive. Numerous unresolved technical challenges persist. Given how crypto has evolved over recent years, it's worth reconsidering whether this multi-chain approach is still optimal.
Why Share Liquidity?
Imagine deploying Synthetix across five different EVM networks. The SNX token could move seamlessly between them and be used as liquidity (SNX LP) on each network to support trading. Complexity arises when these SNX LP positions also support liquidity on other networks. If Alice only trusts Mainnet, she could provide SNX liquidity there while supporting the other four networks. But here lies a potential contradiction: if she only trusts Mainnet, why would she support liquidity elsewhere? Bob might provide SNX liquidity on Optimism and support Mainnet, Optimism, and Base. Carol could provide liquidity on Avalanche and support only that network. In theory, the market should resolve this—liquidity flowing to where trading demand is highest. This design assumes each network has a distinct set of users who trade exclusively on that chain and nowhere else. Without the ability to provide LP and trade on their preferred network, they'd be entirely excluded from Synthetix. We can question this assumption later; for now, let’s examine what it takes to implement such a system.
Implementing Shared Liquidity
The complex approach involves deploying separate markets and pools on each network, allowing liquidity providers (LPs) to supply cross-chain liquidity from any network. In Synthetix V3, a market represents a single asset, like sBTC, while a pool allows LPs to deposit liquidity into a market aggregator that delegates across multiple markets. The main pool will be the Spartan Pool, containing all “officially supported” markets. In Synthetix V2x, there was only one pool encompassing all supported markets, forcing all LPs to delegate liquidity into it.
Alright, let’s consider a specific trader to understand the implications. Suppose this trader only trades on Base and enjoys ETH swing trading. To ensure continuous position openings, sufficient liquidity must be delegated to the Base Spartan Pool and/or the Base ETH pool. Crucially, in this setup, no one needs to provide liquidity directly on Base—all of it could come from Mainnet or other chains. This works well for Base traders because demand for sETH on Base would incentivize LPs on other networks to delegate liquidity directly to that Base market via a single market pool or a pool containing the ETH market.
Making this work requires extensive cross-chain communication—a massive undertaking, especially as the number of supported networks grows. It could be achieved using CCIP and upcoming Chainlink infrastructure. But our real question shouldn’t be “Can we do it?” but rather “Should we do it?”
What Are We Trying to Achieve?
Ultimately, we want an efficient liquidity market where demand on any chain is met with supply on that same chain. The assumption is that liquidity is limited, so we must share it across networks to avoid fragmentation—where trading is possible everywhere, but thin liquidity across all chains leads to poor depth. This creates a cold-start problem: insufficient liquidity on any given network suppresses demand, reducing incentives to provide more liquidity. Now, liquidity is indeed limited—but some sources are more constrained than others. Part of this multi-chain complexity stems from the community recognizing that, in the short term, SNX liquidity likely won’t suffice to meet demand across all networks. To avoid introducing alternative collateral, we contort ourselves into complex architectures to achieve cross-chain liquidity and prevent fragmenting scarce SNX liquidity. My point here is this: I believe that in the long run, if demand exists, the SNX token will expand to support required liquidity levels. The issue is that during bear markets, this process lags—demand doesn’t increase SNX staking enough. So we’re forced into a trade-off: increase system complexity to preserve SNX as primary collateral, or find a compromise.
Why Not Just Stay on Optimism?
A key assumption behind this exploration is that markets must exist on every chain. I consider this reasonable—but worth questioning. Consider if Coinbase had a separate exchange for each operating system, so you could trade regardless of your OS preference. How much liquidity would you expect on Debian? That analogy isn’t perfect. A better one: what if Coinbase ran separate markets for each database engine to match user preferences? Do users have strong enough database preferences to influence which trading platform they use? Yet this is exactly the situation we face in crypto today. Some strongly back specific chains and refuse to acknowledge or trade on others. Why does this tribalism exist in smart contract platforms but not databases? In this analogy, databases are CeFi’s state storage layer, while L1/L2 networks are DeFi’s execution and/or state storage layers. The answer is simple: tokens. While database engine enthusiasts may be annoying, there’s no mechanism to pass this technological tribalism down to end users. In crypto, we’ve built powerful incentives to drive such user preferences. This phase may eventually pass, but for now, I think it’s reasonable to assume distinct user bases exist across most networks.
Permanent Fragmentation?
Well, user fragmentation at the execution layer isn’t surprising, and we seem stuck with it—for now. Though users ultimately want utility, they’re highly incentivized for that utility to exist only on their preferred network. Even if we built the most optimized exchange ever, existing on just one chain would isolate it and deprive it of deserved attention. This is especially evident when competitors—centralized exchanges—can choose any tech stack and consolidate all users into a single database, and nobody cares. Their entire liquidity sits on one island—an enormous advantage cross-chain DEXs can’t match. Incidentally, one way to solve this is abstracting away the network and acting more like a centralized exchange—that’s exactly the experiment Infinex aims to try. From Synthetix’s perspective, this is a valuable experiment. But Synthetix must optimize for the reality that Infinex might fail—which means, as a protocol, meeting users on every chain where they want to trade or provide liquidity.
What Are Our Options?
If we accept that Synthetix needs to be where users are, how does it get there? In my view, three paths exist:
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Deploy forked versions of Synthetix on each chain;
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Implement a unified cross-chain protocol where state changes must propagate to all chains;
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Deploy independent instances on each new chain and minimize cross-chain messaging and liquidity fragmentation by using non-SNX collateral.
Option One: Fork Forever
This isn’t viable, though it might be fun. The main blocker is reliance on SNX as collateral. Ten SNX fork tokens would likely all devalue, drastically reducing liquidity per fork—and defeating the purpose of avoiding fragmentation. Most protocols simply deploy new contract instances and let liquidity follow; Aave and Uniswap are good examples. For Synthetix, we need substantial SNX collateral on each network, plus significant governance overhead. We’d likely need to fork SNX on each network. You could test this on Base: deploy a fresh Synthetix instance with SNX, prefixing all tokens with 'b'—bSNX, bsUSD, bsBTC. Interesting? Sure. But I don’t think it’s our best path forward. That said, it’s worth considering. Compared to years ago, deployment is easier today. Back then, deploying Synthetix to even one network could take days—making multi-network rollouts infeasible, even with independent instances.
Option Two: Unified Liquidity Theory
This approach requires solving all technical hurdles and building a robust cross-chain messaging network to sustain the protocol. Then we could continue relying solely on SNX collateral. Theoretically sound—and we’re moving toward it—but what if our earlier assumptions are wrong? What if there aren’t enough independent users across these chains to generate incremental volume? What if we spend too long building supporting infrastructure, while another protocol launches a far superior single-network solution and users migrate en masse? Precedent exists: dYdX. They built a powerful enough trading engine to attract traders. If their new Cosmos-based engine vastly outperforms all other DEXs, would EVM users migrate at scale? I believe we should focus most effort on core product functionality—not supporting infrastructure. Still, we should run small experiments to verify whether other chains have enough trading volume to justify cross-chain solutions.
Option Three: Exploring Forbidden Waters
I, like many OGs, once held dogmatic faith in pure SNX collateral. Anyone challenging its sanctity would be burned at the stake—or tied up and thrown into a lake (metaphorically). Even the noble duo Fifa and ha-oN wouldn’t escape such fate if tempted by the impurity of ETH-based collateral. Yet we now have a golden opportunity to test network demand assumptions without cross-chaining SNX. We could deploy perpetuals on Base using ETH as the sole collateral. This reduces the risk of draining SNX liquidity from Optimism and requires minimal cross-chain communication. The main challenge would be migrating fees to Optimism for burning. But there’s another option: use fees generated on that network to buy back and burn SNX. This lets us test two novel approaches with relatively low risk. If either fails, we’ll still have established a foothold on the new network and can later upgrade to replace ETH with SNX collateral. We could also switch back to burning debt on that network instead of buybacks. This raises a final issue: the optimal incentive for liquidity provision may be burning debt only on the network where liquidity is provided—not globally. Otherwise, we create a “free-rider” problem: camping on the “safest” network might be profitable—even if it’s not where demand is highest.
New Hope
If we unleash ETH collateral on a new network, I believe Base is the best candidate. It would allow increased trading volume without threatening Optimism’s revenue. It’s also less risky than Arbitrum. This should be a win for SNX liquidity providers. The counterargument: if we let people migrate SNX to Base and provide liquidity there, SNX would capture 100% of fees on both networks instead of sharing them. True—but the risk to SNX LPs is minimal since we control governance. We can run this controlled experiment and, based on data, decide what’s best for SNX holders. This test isn’t one-way: if we have excess SNX collateral on Optimism, we can allow migration to Base and use it as collateral. This would dilute ETH’s yield and reach a new equilibrium. We could even cap or fully remove ETH as collateral. This is precisely why governance must remain fully in the hands of SNX liquidity providers. Crucially, this experiment would validate whether incremental trading volume exists on a new network without cannibalizing Optimism’s existing volume. As long as the fee share for SNX is sufficiently high, we’ll gain clear insight into potential incremental revenue. I suggest starting modestly and adjusting as we learn. Capturing 40% of SNX LP fees is a solid starting point. We must ensure ETH LPs are willing to join—if the SNX fee cut is too high, we won’t properly test willingness to provide ETH liquidity.
What If This Works?
If we run this experiment and see strong demand for ETH LPs and trading on the new chain, will we destroy the SNX token? I don’t think so. If successful, we can expand the experiment to other chains—Arbitrum and Polygon being the most obvious candidates. By then, we may already have enough data to realize that Optimism trading is also constrained by SNX liquidity. If so, we could allow ETH as collateral on Optimism too. Further, if demand for ETH-backed liquidity vastly exceeds SNX-backed liquidity, we might even disable SNX liquidity on Optimism. But if we do, I believe we’d need additional safeguards.
Our Own Chain
If, after these experiments, market demand for ETH-backed trading far exceeds SNX-backed trading, we must accept and leverage that reality. The next step would be creating an AppChain on the Optimism Superchain. This would allow us to move governance to a chain we control—and become the place where you can get leveraged sUSD loans against SNX. That remains a key function of the Synthetix network and one of the primary benefits of staking SNX. I don’t think we’d even need to enable trading on this network due to minimal ETH liquidity there. This would be the network housing all SNX backend functions. If, in the future, we believe we can efficiently build a cross-chain shared liquidity system, this is where that liquidity would reside and be delegated outward.
Open Network
SNX liquidity provision has always been challenging and highly risky due to hedging requirements. Combined with high inflation, this has deterred most integrators from building staking solutions for SNX. By migrating to an AppChain, we could reduce the risks of staking SNX and eliminate inflation entirely. This could enable broader integration of SNX staking across platforms and open access to a wider user base. Currently, LPs’ risk-adjusted yields are much lower due to hedging demands. Perhaps SNX could still serve as the network’s insurance fund, but without active maintenance—and far less risky than continuous hedging.
What About Cross-Chain Swaps?
They can still be supported under this new design—they’d require CCIP, but in principle, even with isolated liquidity per chain, we could maintain Synth interoperability across chains. This does involve cross-chain messaging, but it’s far less burdensome than supporting cross-chain liquidity. Cross-chain remains a highly profitable and emerging market. While focusing on perpetuals is optimal now, we should absolutely keep experimenting with Synth Teleporters and other novel mechanisms.
Summary
To summarize, we face several technical challenges—we can sidestep them to test a core assumption: Is there latent demand for trading on other networks? We can do this by leveraging ETH collateral with minimal risk. If it works, we can extend the experiment to other chains. If this path proves viable, we can migrate to our own AppChain, collect fees from multiple networks using ETH collateral, and reserve SNX solely for protocol coordination and governance. We give up a portion of total fees, but gain rapid scalability and avoid being overtaken by a dominant competitor. We can always test exclusive SNX collateral on any network and restrict ETH or other collaterals as needed. This enables rapid expansion across multiple chains with minimal technical overhead. There’s plenty of data to gather along the way—we should test each step incrementally, as we’ve always done in Synthetix.
My final key question: Are we willing to capture a portion of the addressable fee pool now, or wait longer to potentially capture 100% of future fees when a true cross-chain implementation is ready? The good news is we might have both. And if the former proves more profitable, we’ll end up with a more accessible network—where anyone can easily stake and join, with dramatically lower barriers to entry.
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