Synthetix is putting over $40,000 in crypto on the line to entice users to try out the faster beta of its decentralized exchange (DEX).
"While DEXs offer significant improvements over CEXs [centralized exchanges] in terms of safety of funds and transparency, there is typically a painful trade-off on transaction speed," Synthetix CEO Kain Warwick told CoinDesk in an email.
It doesn't cost anything more than a tweet to participate in the demo DEX, but users need to act fast because they only have till Tuesday to place in the top 20 and win a piece of the 50,000 SNX the company has put up in prizes.
But the real reason traders might be interested over time is because this project could demo a world where DEXs become feasible at scale.
Everyone knows the main use case for crypto is trading, which has led to a massive and glaring irony for crypto users. As much as they might like the decentralized nature of these assets, in order to trade efficiently they rely on centralized crypto exchanges, which tend to be vulnerable to cybercriminals. On a DEX, users trade straight from their own wallets.
A long-held dream for crypto has been to create DEX software that allows users to custody their own crypto until the moment of trade and then trade directly with counterparties. That's why even one of the biggest CEXs, Binance, has built a DEX. But many DEXs have proven more centralized than they admit.
Synthetix's beta relies on a deployment of the Optimistic Virtual Machine (OVM) from Optimism, the company behind the latest scaling and usability solution for Ethereum.
"I think optimistic rollup is the first Ethereum layer 2 solution that checks all the boxes for DeFi," Hayden Adams of Uniswap told CoinDesk, explaining that effectively replicating the Ethereum virtual machine on the second layer takes a lot of headaches out of putting different applications together for developers, making the so-called "money legos" much more viable.
How Synthetix works
Synthetix is a platform for making synthetic assets. That is, users don't trade ETH for USD, they trade sETH for sUSD, where the underlying asset is actually the SNX token, used to create synthetic versions of the asset.
This is ultimately much like how MakerDAO works. Users put up a crypto asset (ETH, BAT, USDC) and they are allowed to mint a new asset (the stablecoin dai). For both MakerDAO and Synthetix, there is a pre-set collateralization ratio (150% and 800%, respectively). In both cases, those staking the crypto asset are creating a debt when they mint the new asset, one that can be repaid by returning it.
The synthetic asset holds its peg because that's the value the smart contract enforces. Imagine a user putting in $8 in SNX to mint one sUSD. She couldn't mint any more. But then imagine the value of SNX doubled. The smart contract would then allow her to mint one more sUSD, because the value of her staked SNX allowed it under the smart contract's parameters.
Synthetix – currently the second-largest DeFi protocol, according to DeFi Pulse, with $119.3 million in locked-in value – already runs a DEX and it's already able to add some efficiency to trading by removing the order book (where actual people post offers for trades they want to make). All trades made on Synthetix are effectively traded with the platform itself.
"The other side of the trade is just the pooled debt that is Synthetix," Justin Moses, Synthetix CTO, told CoinDesk. SNX stakers collateralizing the system get rewarded by a 0.3% trading fee levied on every trade.
The five most popular tokens (or "synths") held on the platform right now are sBTC, sETH, sLINK, iBTC and iTRX, in that order. The "i" in those last two stands for "inverse," because they are short positions, going up in value when the synthesized asset goes down.
Synthetix teamed with Optimism to create a DEX that could be competitive in terms of speed with traditional crypto exchanges, and that's what the two teams are testing now with this contest. As of 3:00 UTC on Monday, 1,156 wallets had been created and daily volume was listed at $11.3 million.
The contest runs till 14:00 UTC on Tuesday, May 19. Right now, a user would have to break 32% in gains to break the top 20, but this is crypto and prices move fast.
The case for Optimism
"In Synthetix the thing for us is, if people can see the price of an asset in the real world, and they can tell it hasn't gotten on-chain yet, they can try to take advantage of that," Moses said. That's the problem of front-running, which has always plagued DEX makers.
Synthetix has a complicated set of smart contracts, all of which are very interrelated. "What's important for us is not having different versions of things in different places," Moses said.
The OVM allows a team to write smart contracts off Ethereum basically as if they are writing on Ethereum itself. "It supports theoretically any Ethereum smart contract," Optimism CEO Jinglan Wang told CoinDesk.
The crux of the OVM's speed improvement can be explained simply: It is designed so users don't have to wait for transactions to get validated by nodes all over the network to keep doing new transactions.
"You don't force everyone to do the computation in order to progress the state," Wang said. "With optimistic rollup you assume all the transactions are valid."
That's why they call it "optimistic."
It's optimistic but it's not gullible. Underlying the system is an anti-fraud measure. Each node entering transactions on the OVM has a bond. If it processes a fraudulent transaction its bond gets slashed. Not only that, though, but every node that adds a block to that fraudulent block also gets slashed. This gives everyone in the system an incentive to, first of all, not commit fraud and, second, to keep an eye on their peers (because the sooner fraud gets spotted, the less it costs the whole system).
The shorthand for this approach is a "rollup" and Optimism specializes in "optimistic rollups." It's a blockchain that works off Ethereum, while still relying on the mothership to provide security. If that sounds a lot like a "sidechain" to those who have followed this space for a while, you can be forgiven for struggling to see the difference.
There is another iteration out there, zk-rollups, that offer additional security guarantees, but a developer familiar with Ethereum's Solidity language might not be able to hop right into those, according to Wang.
"The superior thing in my mind is something you can use today," she said. "I would also argue that the security of optimistic rollups is pretty good."
Sidebar
As a minor aside, both Optimism and Synthetix are re-invented projects. Optimism was born out of the Plasma group, an Ethereum scaling project. Synthetix used to be a stablecoin, Havven, funded by a $30 million initial coin offering.
Similarly, some of tech's greatest giants, like Twitter and Slack, were born out of pivots, and it will be interesting to see if two pivots combined can show crypto's decentralized coins a path out of the centralized casinos that are today's exchanges.
Because when a crypto user trusts someone else's keys, they are betting on more than an investment thesis.