Kain Warwick: Synthetix – Bringing the World’s Assets Into DeFi (#325)

Transcript

this is epicenter episode 325 with guest Cain Warwick hi welcome to epicenter my name is Sebastian Fujio today our guest is Cain Warwick Cain is the founder of synthetics a project which went from relative obscurity just a few months ago to becoming the second largest dphi project in aetherium after maker and the largest derivatives platform so what is synthetics and why is it grown so much well before we dive into the project I

think it's helpful to briefly recap what synthetic assets are so a synthetic asset is a financial instrument and it gives you exposure to the price of an asset without holding the underlying asset so essentially there are assets that simulate other assets and there are several synthetics in dphi of course dye is the biggest one when you lock collateral in a CDP you mint this synthetic asset die which is pegged to USD so dye holders are exposed the price of USD through this synthetic without actually holding dollars so that's essentially how they work and you'll remember we've talked about this on the podcast before with Dan Robinson in May

of last year when he came on to talk about the rainbow Network which is an off chain synthetics exchange so the synthetics project is an issuance platform that allows people to mint a range of synthetics and they call these since which is kind of cool name and just like maker when you lock up collateral you create a synthetic asset and then you need to repay that loan if you want to claim your collateral it also has an exchange which allows people to trade one asset for another although here there isn't really any counterparty to the exchange they just reprice the collateral so essentially you convert one synth into another and the value of each synth is taken from the exchange

rate at the time of the transaction and so synthetics has a built in price Oracle to figure with that exchange rate is Brian and fettle a cat did this interview and there are a number of interesting things they pointed out that I'd like to talk about one is just the number of assets available on the platform there are several Fiat synthetics which basically act like stable coins so they have USD euro the pound and many others they have crypto currencies like Bitcoin B&B ether but also the inverse of those currencies so you can effectively take a short position they have commodities like gold and they plan to add all kinds of assets like stocks and equities so the possibilities are kind of endless and they're also adding some interesting ones like this defy synthetic which is a

basket of d5 projects so it's kind of like an index of the defy space one interesting thing that Brian pointed out was that when users put up collateral they get rewards from fees so as periodically users earn exchange fees based on the pro rata proportion of tokens that they lock in the system so when you think about it they're putting up collateral to mint this asset but in a way they're also receiving like staking rewards for putting up that collateral so it creates this interesting hybrid incentive model Frederika pointed out that like maker synthetics is quite collateral heavy to run currently the system requires seven hundred fifty percent collateralization to receive fees and Kane gave his

thoughts on how defy could shift into an under collateralized model as more assets come into the space so it was interesting to get his vision on where the defy space could be heading in the future so what about the growth of synthetics I mean before q4 of last year the project was relatively unknown well after listening to this interview it seems like it was such a needed part of the dphi infrastructure if dphi is gonna continue to grow in fina it needs to have exposure to most of the assets that people are used to in traditional finance and even though it's still it's early days synthetics makes that possible and the other thing that this opened my mind to is the idea that maker could and probably will at some point allow for the creation of many different

kinds of synthetics and it'll be interesting to see how much network effects play in the success of each of these platforms as they continue to grow and include all kinds of new and exotic assets before I go to the interview I'd like to tell you about our sponsors for today's episode starting with a new sponsor that I'm very excited to tell you about the nervous ecosystem Grants Program so you might have heard of nervosa it went live recently and if you're thinking hmmm here's a new blockchain I'd like to explore ideas on this platform or maybe contribute to building the infrastructure around it you might want to check out the nervous grants program they're funding innovative ideas and people that are looking to contribute to

building the nervous infrastructure and they have a total of thirty million dollars in funding available Neuros is really unique because it's a proof-of-work blockchain in a crowd of proof of stake networks and they stand firmly behind Nakamoto consensus and they've made some adjustments to it that allow it to have much much more throughput so it combines the simplicity and security of Bitcoin at the base layer so that's layer one is the common knowledge base or CKB with the flexibility of aetherium at layer two so all the computation and scalability will take place on a second layer and they have a low-level risk 5 VM architecture so you can write really robust smart contracts in any programming language so

we recently did an interview with one of the founders of nerve O's Kevin Wang and that interview will come out next week so check it out if you want to learn more about how it works because we went deep into the architecture and the vision for the project so to connect with the team and learn more about the grants program how you can apply and what kind of grants are available go to nervosa org slash grants we'd like to thank the nervous ecosystem Grants Program for their support of epicenter we're also brought to you by status and their building tools and blockchain infrastructure at every layer of the tech stack to give people monetary independence voice and sovereignty the status messenger is out and it's available in the Android and Apple app stores once you've installed it you can

enjoy private secure communications status is a multi-purpose communication tool that has a peer-to-peer messenger a secure crypto wallet and a web 3 browser messages are truly private status leverages rooms whisper protocol for pure pure chats and all messages are end-to-end encrypted by default there's no servers and the account creation is simple and privacy preserving this is one of the things I love about status when you create an account they'll never ask you for an email they'll never ask you for a phone number your account is protected by a private key it's protected by math so to learn more about status and all the infrastructure they're building for the ecosystem go to status network comm and to download the app go to status a.m.

and once you're in there come and join us in the hash tag epicenter public Channel come and say hi and we'll give you some free s and T tokens to play around with and do things like create your own status ENS name we'd like to thank the status Network for their support of epicenter we're also brought to you by Peppa where the crypto community comes together with short video updates and tokens of appreciation so whether your crypto developer a podcaster an analyst a blogger or just an enthusiast there's never been an easier way to showcase your work earn appreciation and connect with the community so if you're still on the fence about going to each Denver listen up because I can get you a free ticket east Denver starts on February 14th that's just under two weeks from

now and Peppo is giving away a free VIP ticket worth over a thousand bucks so to enter and maybe win this thousand-dollar ticket it's super easy all you got to do is download the Peppo app and create a 30 second video explaining why you want to go to East Enver and when you send the video tag me in the description at sub 2 P o I and T 0 same username as on Twitter and yet you could maybe win and I think your odds are pretty high so we'd like to thank Peppo for the support of epicenter and with that here's our interview with Kane Warwick hi we're here today with Kane Warwick who's the founder of synthetics synthetics

probably most of you and many of you have heard of it it kind of came from nowhere - so that the forefront of defiant if I the attention space and it's now become second largest protocol in terms of you know assets locked on that after maker so we're really excited today to talk of Cain about you know how it works how he got to it and sort of the intricacies in vision of synthetic so thanks so much for joining us yeah absolutely thanks guys thanks for having me okay I often start by browsing and the guests LinkedIn page and uses absolutely fascinating so your

background is really eclectic so from from your LinkedIn page I got that you studied genetics at the University of New South Wales you're a United States professional tennis association certified professional tennis instructor and you were the vocalist and guitarist and keyboardist of an emo punk rock band named the lie Society which performed in Victorian area outfits and true at the East Coast for a couple of years he wrote a sci-fi book named bending metal about in AI taking over which can still be bought on Amazon and I think we can link to that in the show notes and and you found it a number of companies two of which yester the CEO of so who are you and what makes you tick so my first

like real job out of like university was working in a start-up so I had a good friend of mine we were up together playing tennis together my dad was a professional tennis player so that's you know where the tennis background comes from so you know my brothers and I all play tennis and one of my closest friend was I was a tennis player as well he went to the US and somehow it got it you know caught up in this startup thing he was like hey you should come to Seattle and work at the startup so in like 2004 2001 like late late 2000 or 2001 turned up in Seattle to like work at this startup and you know it was right before the dot-com crash they were raising some money and and anyway it didn't work out

so but I think that kind of got me into the idea of startup so then you know I was involved in a couple of other startups after that but I took a bit of a break again the same friend of mine who like we also used to play guitar together moved to Boston he's a psych professor so he moved Boston to get his ph.d and was like hey why don't you come to Boston and we'll like finally start this band and so moved to Boston started a band was there for like five years and then I think you know I'd been out of Australia for about ten years at that time and started to kind of get the itch to come home and and decided to come back and did another couple of startups so you know yeah I've had a pretty kind of diverse background

I suppose and one company that you still involved with them curious about this thing called blue shift what's like how did you start blue shift so I've been running an online retail business and I shut that down and a friend of mine was working at a large consultancy and you know I was just looking for a job to kind of get out of the startup scene for a little while take a break and go and just get a paycheck and so I started working this consultancy and about like 6 or 7 months in mentor of mine said hey I've got this guy he's trying to you know launch this startup he needs a CEO for it they've got funding but you know they don't have any I want to drive it it's basically going to you know take this

network of independent owner operators and turn it into like a national retail network to provide services to a bunch of you know large national and multinational corporations and I was like ok that sounds interesting but like no get away from me like I have no interest in doing a start-up right now and you kept pestering me and pestering me and like I think it took about four or five months but eventually I came and met the guy who was starting and his name is Matt ham Bri who was actually Rupert Murdoch's nephew and he was like I really want to do this thing you know I've got the funding let's you know I want you to do it and so eventually I started it and one of the reasons why I started it was I saw the value in what you know we were trying to do which was

cash payments over the counter for cryptocurrency so in my online retail business in the past I'd hooked up with a guy called Asher 10 who runs coin jar and we started accepting Bitcoin for online retail purchases there was a much demand because this is going back to like 2012 but I really saw value in you know being able to accept cash it's because of the chargeback issue for for Bitcoin and another crypto and so I I reached out to Asher and I was like hey would you be interested in doing this and eventually you know Asher came on a couple of other Bitcoin businesses that were you know looking for a payment mechanism to get money into crypto and so that kind of you know took off we've

got some other services that we offer but you know especially during like the 2017 bull run we at one point we're processing like 30 million dollars a month in crypto deposits in Australia so yeah it was it was pretty crazy pretty crazy ride during that time so that was basically people would go to some convenience store or something and they would give cash and then it would get credited to an exchange bounced yeah yeah exactly that's superin we just had that Charlie Shrem on a few weeks ago and I don't know if you remember his bid instant business which was doing exactly the same thing yeah exactly yeah it was like an Australian version of that and and you know obviously back then and even

now but really especially back then these strong banks were really adversarial and like aggressively shutting down any crypto business showing down their bank accounts and so you know like we were the cat and mouse games over being played like all the crypto brokerages would like set up ten different entities and be cycling through them and different banks and stuff so for us I think you know we provided kind of a stable on-ramp for them that was you know always there because the bank's you know we had 1,500 different locations right and the individual operator would deposit into their own bank account so it was kind of this way of obfuscating the payment flow I suppose to a certain extent so you know we were lucky we were able to kind of avoid being shut down or shut out by the banks and this is still operational

yes yeah it's still still working so you know we've we've got we've still got about 1,500 sites and you know we process a big chunk of the volume for most of the domestic exchanges and some of the overseas one so finance for example uses us there's a couple of other international exchanges that use us as well quick so when did you move on from the payments use of blockchain we always saw ourselves I guess it's like a facilitator right like just a you know a Fiat on-ramp we weren't you know handling crypto payments we weren't dealing with you know any of the sort of challenging side of crypto I guess you know we weren't doing with with wallet security or you know custody or anything

like that it was literally just very standard kind of API integrations to allow you know cash payments to be accepted I think when I saw the opportunity for Haven you know back in like 2016-2017 was when we really started to see the spreads in some of the smaller crypto markets like Korea Australia etc grow you know cuz what was happening is there was no real mining business in Australia right so all Kryptos being it was net imported right and we you know the more demand there was it just wasn't enough supply to support that and so spreads just kept creeping up you couldn't get Fiat out of Australia fast enough to bring it back in and and it just created this arbitrage opportunity I think you know

looking at at the time there was really only tether was was kind of the only viable option and people had concerns about that obviously and you know dye hadn't launched and so we looked at and said what you really need is like a crypto payment network like a closed-loop Ayman network like a PayPal or an Amex of something like that and that would be able to kind of close the loop on this problem and that was where the Haven idea came from so the idea was basically to have east stable coins that I mean it can explain actually in the example of you know there being a big discrepancy in the crypto price in Australia versus maybe maybe a US or Europe or like larger markets like how would that project have solved that

issue I think the idea was that you would have you know an alternative payment rail right that people could could use to you know offset the the potential Fiat limitations right so even with tether fiat still needs to move around right like you still need to get via into you know noble Bank or whichever bank they were using so the idea of having like a fully crypto native payment network that was collateralized by crypto could potentially offset that right because you could from anywhere you had crypto get the crypto in voted into these stable coins and you didn't need to necessarily get the the fear out of it it could become just a closed-loop payment network to close

those obstacles I mean we never really got the to the point of being able to test that out in market so you know it it's not even clear that it would have necessarily worked and mainly because you know one of the I guess assumptions it was built in that model was that regulated stable coins wouldn't be a thing right which obviously is proven not to be the case you know you've got us CC and trio ste impacts us and you know a whole bunch of regulated stable coins that have launched in the last you know two years that sort of invalidated this use case of like a crypto native solution to this problem so you are meant at the scope of your project to the extent that I would actually call it a pivot so basically it's no longer just a mistake mccoy's but all kinds of

synthetic assets right yeah yeah I mean essentially we were building a synthetic US dollar right that was crypto collateralized and that was self collateralized so you know demand for access to this network would create more value and would capture more value and create more supply and it was very sort of self referential and self-contained which is you know the I guess one of the positives and one of the negatives right because there's risk there but you know the advantage is that it is self-contained and then I think once we realize that this synthetic u.s. dollar was you know very much marginalized in terms of the the market potential by you know regulated stable coins and even maker you know when dye launched and and

really got a lot of adoption it kind of pushed us in this very narrow niche and you know so we had to do something and the the solution was at the time you know let's add more fiat currencies right we had this idea that well okay you know if you've got this network that can move between different fiat currencies sort of natively within the payment network that might be more viable it turned out that wasn't the case at all that was another really kind of dumb assumption you know and it was it was not until we really launched gold and Bitcoin and other more volatile assets that there was any demand people really didn't want to trade it synthetic heroes from what we could gather so but the fundamental system was it kind of the same back then already I mean yet

it was a token already called as an X and and due to be used to sort of over collateralize the issuance of these deferred fiat stable coins it was called Haven the the token but yet fundamentally it was the same thing it was just that the the debt that you were issuing against the collateral was only a synthetic dollar that was the only thing you could issue so now you can issue you know twenty different types of synthetic debt but they're all backed by this token that you know accrues value through activity within the network's through transaction fees essentially let's do a deep dive into the protocol in a little bit but um I would like to talk about your company setup first so you have a Swiss Foundation right we've actually gone Australian Foundation so

we did look into the Swiss Foundation but we we decided to domicile in Australia which is you know fairly a fairly stable regulatory environment maybe not as stable as Switzerland but you know not too bad but yeah it's a it's an Australian foundation and you know set up as a not-for-profit essentially and what are your takeaways from the organisational structure that you guys chose and sort of the learning in terms of how you approach that and maybe how you'd approach it today yeah I mean you know I think a lot of things in crypto are very path dependent right and you know back in 2017 2018 when we were doing our token sale if you would come out and said you know this is

a pure Dow there's no legal entity you know there's no documentation or anything like that you know it's all done by smart contracts I think that it would've been very difficult to get much traction but you know if I could get in a time machine and do it all over again I probably would push more aggressively on that and try and avoid some of these you know more traditional legal structures I suppose so at the time in 2017 you also didn't tokens they're correct yes yeah it was early 2018 so Feb of 2018 well and you collected thirty million is that correct yeah about 30 million US dollars it was it was like thirty thousand eight thirty two thousand eighth and a few hundred BTC tell us a little bit like what kind

of people participated you know what this isn't that excommunicated like yeah so so I mean back in back in those days it was about you know ninety percent of the sale came from institutional fund like entities you know there were there were some syndicates and some other things around but you know funds like blocked our you know block asset some of the asian funds went in and then about ten percent of it was sort of more retail people I suppose so you know the that structure I guess of you know a large presale and then a small kind of open public sale was the thing at the time again you know in

hindsight I think we probably could have had a better distribution and you know the the impact on that distribution and what happened throughout 2018 as the price kind of went from you know 65 cents down to 3 cents was somewhat a reflection of that you know poor distribution I suppose the tokens mmm interesting how have those original investors you know how did they deal with their kind of pivots and strategy changes that I mean even now of course synthetics is found quite a lot of traction and success but I guess there's a lot things in between where it didn't look so good like I was it deal with your investing yeah yeah I mean you know we one of the mistakes that I think we made

which was definitely a mistake but somewhat helped us was the fact that there was very little awareness of the project because we were you know often the hinterlands in Australia right so you know there weren't too many people in San Francisco and even in Europe or other places that were aware of the project until really like a few weeks before the sale and so you know what happened there was this mad rush for people who kind of then you know stable corns becoming a huge thing basis had done a big sale and and you know there are a few other you know projects that were doing quite well maker was becoming a you know a pretty hot project and we ended up in situation where everyone essentially got D allocated so you know no one really got a large allocation of tokens no not the institutional

investors that went in you know I think the maximum that anyone got was like one and a half million dollars out of that sale which is pretty unusual at the time you know back back then oftentimes you know a single institution might take you know 10% or 20% or 30% of the tokens and what that meant is that we were never that relevant to anyone and so even as the token price went down and as we failed to get traction and you know kept launching things and doing things but not really having any meaningful impact I don't think many people cared that much to be honest right and I think we got to a point in sort of December of 2018 after we launched multi-currency and started to think about launching these alternative assets and also changing the monetary policy where we

went out and kind of canvassed the investors and like they've pretty much all just sort of said do whatever you want right like I don't really mind the token price is four cents like what how much worse could it get right and so you know I think that that's one thing where you know it was it was somewhat lucky that we were backs to the wall and we were in a position where you know we had to take a pretty big swing at something and you know throw a bit of a Hail Mary to have the room to kind of do what we did I think if we'd been in a better position it would have been much harder to get people to go along with such a huge pivot and and change to a whole bunch of things about project thank you for those super candid

insights um i think throwing things at the wall and seeing what sticks this is a lot what a sad of life is about so let's deep dive into the protocol I think we alluded to this earlier so synthetics is a product of protocol for creating tokens that track the value of another asset how exactly does it work so essentially we've got a single form of collateral and this will change but we can go into it later because we're adding ether in the next few weeks as a form of collateral but at the moment you've got this collateral token called s and X and s and X is a governance token and it's a value accrual token so whenever any activity happens within the network the people who are staking s and

X are paid fees so whenever an exchange happens on synthetics exchange B is collected and it's paid to the token holders and the token holders who are staking essentially Locke s and X into something akin to like a CDP and maker and mint these synthetic assets synthetic debt and the synthetic debt can be priced in you know essentially any supported mere price feed so you know we've got six or seven different fiat currencies we've got commodities like gold and silver we've got a bunch of different crypto assets we've got some crypto indexes like centralized exchange token index and the defy index and you know you're really only limited

by having a stable price feed that you can use to price this debt that people are issuing so these synthetic assets that are created are they just regular ERC 20 tokens they are at the moment so at the moment all of them are you know freely tradable fungible ERC 20 tokens so if you get you know synthetic bitcoin for example the the ticker is s BTC you know you can go on either scan you can see that contract you can see the you know total issued amount of SB if you see the holders all all the normal things you get with any RC 20 token okay quick so just to make me fully understand how it actually works so I I have a xanax and I stake them and I create these synthetic assets who's

actually the counterparty to that creation the cents so what I guess probably the most novel / crazy depending on your perspective you know aspect of this system is that it's a pooled counterparty model so all of the snx holders are essentially a pooled counterparty to all of these this outstanding debt right so if you are holding debt irrespective of whether you've minted this if you've just bought it off market synthetics gives you the right to repress that debt using any one of the Oracles into anything you want so let's say you turn up and you go on to uni swap when you buy some synthetic US dollars for dye maybe now you've got some debt EQs dollars and just by

holding that those synthetic u.s. dollars you have the right to turn up at synthetics exchange and convert at the current spot rate in to say synthetic Bitcoin or synthetic ether or you know any one of the the supported acid synthetic gold so the counterparties to these repricing Zoar are strangers are the pool of S&X holders who have minted they essentially take the other side of all these positions and it's somewhat similar in you know a traditional finance paradigm I guess to a clearinghouse you know so a clearinghouse within a bank or or you know a similar structure where anyone can come and trade against that Clearing House and the Clearing House absorbs all of that flow and then externally hedges

that flow as they're sort of taking on those trades so you know it's something that I guess is that's the probably closest analogy to what's happening mm-hmm so who curates the list of these supported assets do the as a next oldest do they have some sort of governance yeah so we still use a form of rough consensus so don't use on chain voting or anything like that just because we we believe in the early days it's far safer to avoid things like plutocracy and what have you from token voting so we have fairly vigorous debates within our discord community about which asset should be listed and

even you know for example there was an incident recently where we listed maker so we listed maker maybe going back almost six month ago and when we listed it we did a review of the liquidity the number of exchange venues it was trading on the average liquidity across those venues you know total trading volume a whole bunch of things right you know asset distribution how concentrated and centralized was it and that was all well and good and you know it passed our test in hindsight it probably shouldn't have had but but it did you know we might not have been a stringent as we could have been but over the last six months liquidity and maker has declined significantly and some of those venues that were you know had significant volume have dried up and

what's actually happened is the vast majority of price discovery is happening on uni swap and uni swap is interesting for a number of reasons I mean I'm a huge fan of uni swap myself so this is not necessarily criticism of uni swap but it is one of I guess the idiosyncratic things about having price discovery happen on you swap is that a trade on you swap is very deterministic you know as opposed to a trade in you know a normal counterparty matching you know Venu right if you turn up at you know finance for example and try and dump a whole bunch of something into the market market makers are gonna move away from you some people might you know try and counter trade you a whole bunch of things could happen uni swap you have none of that

you literally turn up and you say I'm going to dump this many tokens and you can predict exactly what the price is going to be and someone did exactly that and started manipulating the spot market and taking the opposite position in synthetics exchange and profiting from essentially manipulating the spot market into this derivatives market which you know it's interesting in a permissionless setting because in the normal financial world that would be illegal and you know it's it's market manipulation but in defy you know there's not much you can do and so we got to a point where we sort of monitor you know the community was looking at it interestingly people did start counter trading this person on uni swap and so it did become significantly less profitable but it was still very high

risk and and so the community collectively after some debate decided that we would deal list-maker or at least paul's maker until we could sort of review it and so you know it's it's very much a moving target in terms of which asset should be listed and the risk profile cetera okay interesting I mean this is less light maybe slightly to earth like the side but do you know why makers volume is right up so much I think it's a number of factors I think the the transition to MCD you know caused some people to pull maker off exchanges the float was very low to begin with on exchanges it was you know I think going

back maybe six months or a year ago was like three percent or something like that it's now less than one percent if I remember correctly there's a really cool site called view base where you can view all of the IRC 20 token floats on all of the centralized exchanges and even decentralized exchanges and so you know if you look at the graph of the maker float it's just really kind of you know declined so so to be totally honest I'm not a hundred percent sure and this is something that I think you know in the future we need to have much better handle of an hour sort of continuous risk framework just monitoring these things and being aware of it but yeah and so what this person did was that they basically manipulated or you know they kind of traded on unit swap and

then synthetics would use unit swap as a sort of price Oracle and then they could serve do something care and benefit from it on synthetics and kind of gain the system that way yeah well I you know it's kind of interesting there wasn't I think a little bit of misunderstanding in that people thought we were only relying on uni swap the issue was that so much of the price discovery had accrued to uni swaps for maker that it was somewhat irrelevant what was happening in other trading venues like literally a trade would happen on uni swap and it would get our but there was the markets were so thin on all the other venues that if the odd was you know really inefficient and it would just move the price so effectively even though you're looking at ten different

trading venues you're really just looking at one tell us a little bit about sort of assets you can you can trade I mean I think they are right you mentioned before like different fiat saver coins right then there are some crypto assets is also kind of the inverse of crypto assets right where you can basically go short on it so why does assets like and what what kind of other plans for other classes you have yeah so you know the idea was that we essentially you know being a clearinghouse right what you don't want is you know things like adverse selection and you know you don't want to have a highly skewed market because we want something that's as

close to market neutral as possible we do have significant adverse selection now because most of the people who are trading on synthetics exchange are snx holders and snx holders like a lot of people in dphi tend to be fairly bullish on you know the overall prospects of defy and crypto and etherium and all those things so we have a very very high skew towards a long bias I suppose even you know in I guess the the decline from you know July we were still extremely long even while the rest of the market was fairly next short so you know this is something that we introduced I guess as a way to balance the market these inverse cents but the adoption hasn't

been as as good as we would like mainly because we don't have a very good organic cohort of traders who you know are more representative of the overall market which is a reflection on just where the project is we haven't put as much focus on you know building out you know marketing and awarenesses as we will this year so for all of your assets how do you maintain your peg so basically if you look at s USD it often trades for significantly less than $1 why is that so you know again it's it's somewhat about price discovery I suppose right so the only I guess a it depends on where you're looking at that price so

if you're looking at coin market cap coin market cap only takes into account COO coin which is the only centralized exchange that s USD trades on and the volume daily on s USD through COO coin is you know a few thousand dollars so the the vast majority of the volumes occurring on uni swap but CMC doesn't take into account uni swap which isn't to say that the peg is perfect it tends to be somewhere between two half and 1% off you know and this is something that obviously we're working on we've got similar issues to what maker had last year where there was an oversupply and we need to kind of correct that so we're working on that but oftentimes you'll see on CMC it might be trading it like 93 cents or something but you know $50 of trades happened at that price right so it is a

little bit of a reflection of kind of poor information I guess that's contained on some of these some of these sites but I think the best place is probably to look at something like uni swap card info for example where you sort of see the effective rate the real rate so what kind of levers do you have that you can pull in order to stay closer to the real peg probably the strongest one is the collateralization ratio so we made a decision you know last year I'm sort of mid last year because the price of s and X had risen so quickly there was Nova supply of of synthetic assets and you know the market really wasn't absorbing them quickly and so we made a decision to raise the the

ratio from 500 to 750 which essentially had the impact of people needing to buy back debt in order to be able to be fully collateralized and be able to claim fees and do all of the stuff we wanted them to do which worked fairly effectively it brought the peg back up obviously the price has kind of continued to rise even through that point I think the price was 30 cents or something like that you know when we raise the C ratio so that's a big lever that we could still pull but I think you alluded to maybe when we were doing the introduction you know the capital and efficiency of that and you know there is kind of a psychological threshold where you know you raise the the C ratio up to a thousand percent of something and you know people start looking at it as as a

super inefficient system so there's a bit of tension between those things okay let's look at the underlying mechanics first so basically Yuri talked about the collateral is a ssin ratio being 750 percent meaning you actually have to deposit 750 percent in collateral for any sins that are created so what happens if the value of s and X Falls or the value of s and X Rises rising is not that big make a problem I guess but basically saying it and you're under Colette right so you're way below 750 percent so we don't currently have liquidation built into the system and and that's mainly because the the collateralization ratio is so high you know so the likelihood that we

go from 750 to you know a hundred percent or become under collateralized is pretty low during 2018 we got down to I think at the absolute worst was about a hundred and fifty percent collateralized from five hundred percent you know which was a 70 percent drawdown in price I think across the entire network from where people had minted and part of the reason for that is that the incentives to restore your C ratio were not strong enough because there was only based on the exchange fees which were quite low or the traitor the the transfer fees which quite low so people were basically just sitting there and not fixing their ratios and and you know the price continued to decline so I guess the the incentive is much stronger

now because we have the inflationary supply so people tend to respond fairly quickly there's still a bit of a lag there's like a two-week lag because we do have two weeks where you can claim your fees and if you're under collateralized for more than two weeks you'll start to lose fees let's go back a little bit so you can't be liquidated but you do face some consequences in that you don't collect fees so we haven't actually spoken about the fees yet so tell us about how when you're not under collateralized what kind of fees are actually issued and what you need to do to actually get them and then basically yeah what extent are they taken away as soon as you are under collateralized yeah so so when you are staking you are eligible for fees and

those fees just accrue across each fee period which is a one-week period and we'll paste them so whether the fees come from yes and the fees come from two places one is from inflation which is part of our monetary policy to to pay inflation to people who remain collateralized and and maintain the network and then this the second sort of incentive is coming from exchange fees so every time people convert one synthetic asset to another they pay 50 basis point fee we just put into a and depending on your proportion of the network that you represent you get your pro rata share of those feeds each week yeah and I guess the the thing worth

pointing out here right is that just to clarify is that what you're doing what we need when you talk about staking what that means is you're putting up SN X as collateral and you take out one of those assets correct yep all right so in a way it's it's almost it's like hybrid form of you minting an asset and your staking and then you're getting rewarded for that right but it also means that actually if you if your next annex holder and you want to kind of benefit from the future potential of SN X from the trading piece and all that you actually have to go and you have to mint

an asset right at least to do it fully right so that you get the inflationary wasn't the staking piece off a whole is just in design and you know really nice in terms of sort of you know forcing people to actually engage with the system yeah yeah I mean that was that was the intent right so you know I come from Bitcoin land back in the day and you know I I used to run mining software on my home theater PC at home and you know went through all the pain of trying to get that up and running and and I think you know Bitcoin did a very good job of incentivizing people to understand how the network worked by getting people to install mining software and try to mine and do all those things and I think you know one of

the the flaws I suppose in the token boom on the theory am you know the ico boom was that you know the ERC 20 standard has a default of a fixed supply of tokens right it's like okay we're gonna mint a million tokens ten million a billion 100 billion whatever crazy number you want but you just mint that number of tokens and they just magically appear and scarcity is supposed to take care of all the rest of the problems right the reality is that I think if a protocol in the early days can't incentivize people to understand how to use it then it's very very hard for get it option and get people to do the thing that you want so that's the reason why we change the monetary policy to sort of as you say force people to learn how the system works and then they can

make a decision if they like it or not I think that's a super smart move can you put some numbers on this so how many as an ex oaken's were initially created and what does the inflation look like currently there were 100 million created and then in March of 2019 we went out to a lot of stakeholders and said this isn't working we're not incentivizing this properly we want to change the policy and over the next four years we want to go from a hundred million to 250 million with initially 75 million in the first year additional tokens minted so you know by the end of the first year we'd be at 175 million and then having each year after that that was kind of the the initial intent was to go from 100 million to 250

million which is pretty high inflation but our argument was we needed strong incentives to kind of turn things around we can go into briefly now so you mentioned other types of collateral like ie will also be supported in the future what's that gonna look like and how this is gonna differ from the usage of snx as collateral I because I guess in the case of eath being used as collateral do you still consider that people staking or that's something different it's kind of a hybrid lending staking what it means is that some of the sins that are in circulation so some of the synthetic assets are backed by ether but the people who have minted those eath back

since still have the right like any other sin to trade those sins into any other asset they can reprice them the risk or you know the counterparties to those trades are only the S&X takers if you turn up and you lock eath and you get synthetic keys and you start trading and you are in profit the cost of those profits are borne by all the s next acres and the trade-off there is that the s next acres get all of the fees from all of the trades and they get all of the inflation rewards from everything that the system is generating the people who have minted synthetic eath would either get nothing all they get is the ability to trade so it's a different way to get an assistant that's lower risk but hopefully we'll generate more training

activity so how do you hope to compete with this against makeup because currently I mean you can say Ethan also other assets with Megan you also if you produce dye you can also collect a savings right which I believe is around 6% or so currently how do you think synthetics can compete with this it's sort of appealing to two different categories of people the people who are locking earth and getting synthetic heat and eventually trading on synthetic exchange may be trading 10 50 100 X leveraged Bitcoin contracts that's a very different prospect to maker where it's you know the idea is to lock some Eve and get a stable yield maybe you're getting some eat leverage but they're very different risk profiles for the

different groups of people I think that we're targeting I guess that ties into a little bit a few previous thing around this you know inverse and of lack of interest in going short if you talk almost the obvious consequence right I mean if you have to have a long snx exposure in order to meet one of those assets so like who is going to have you know long ass next exposure but like you know short Eve like the intersection might be small so how do you think that's gonna be addressed in the future it's a very good point right so at the moment it's this very sort of self-contained system right where the

you know 95% the trading activity is people that already minting the intent was never for that to be the case the intent is that mentors are providing a service so the people are staking us an X and providing this debt are taking a risk and taking playing a role in providing this service it should be totally separate people that have no idea necessarily how minting and staking and risk management and hedging and any of those things work all they know is they can turn up to this place and they can get some s USD or whatever and they can open up a leveraged long position trading Bitcoin on a totally non custodial decks you know in a similar way to say--but max but they don't need to be stagers in order to do that they just need to have acquired

synthetic assets somewhere you know on Eunice WAP or wherever but the stagers still have to worry about like the assets the issuing because of course even if they're selling it after it's because if that asset let's say goes up then they have to put a more collateral so that they have this kind of interest they're a hundred percent our expectation is that snx stay kurz are likely to be net long like their net long snx to your point things are highly correlated they're probably going to be net long eath or BTC or whatever but someone who's coming on to synthetics exchange who wants to say short tron doesn't have any interest in necessarily you know what the thus takers position

is right they can just go on and start trading and we should have a much more representative sample i suppose as the organic trading activity happens of what the regular market is doing so even if you look at the last six months the market has been net short there's been a lot more you know price has been going down and yet we've been net super net long that entire time right and which is just representative of that we don't have organic trading activity going on yet and that's to be totally honest been a purposeful exercise we haven't wanted to bring external sort of organic traders from other trading venues onto synthetics exchange because experience is terrible right now it's a really bad experience so it would be extremely

porous funnel for us to try any or bring people into this exchange the only people who are willing to kind of put up with how bad the experience is our the synthetics Minter's themselves right now so it's it's kind of a consequence of just the structure and where we are as a project I suppose so the way that the project is currently set up the total amount of synthetic assets that can be minted it has to be smaller than the market cap of SN X I mean that's going to change as soon as you allow eath as collateral how did you see this working so basically what kind of share of synthetic assets do you expect to be backed by ether sure what was the thought process behind creating it this

way the core assumption behind that is that you're gonna have a fairly high of law of the synthetic assets and you know we've seen this even just today we crossed a billion dollars worth of trading activity the maximum synthetic assets that we've ever had on issue over the last year was like 35 million or 40 million or something like that so the velocity has been something like 25 or 30 times of last year and to be honest I think that's very low in a trading venue like this if you look at something like bit max the total deposits versus the trading activity daily you know it could be a hundred or two hundred times higher particularly when you factor in leverage

we sort of look at this as not a huge constraint I suppose because it's really the velocity of those assets within the exchange rather than the total supply that's available obviously bigger supply means you can have more trading activity we don't see it as a short-term constraint certainly so with regards to trading and exchanging right so you're talking about like a synthetics as an exchange you know when you try out the synthetic exchange right the product there you also send to uni swap like at various times so can you explain a little bit like sort of how does the synthetic sea change work where does unit swap coming and how did it to play together when yoona swap is

launched because we have this need for an on-ramp we need a way to onboard people into the synth ecosystem you know they need to be able to get access to synthetic assets once they've got synthetic assets then they can do all the cool stuff they can reprice them they can trade them etc you need a deep liquidity pool between the regular Edco system and the synth ecosystem otherwise people going to have high slippage and high friction to get in and out we alongside the community came up with this idea of incentivizing a large and deep liquidity pool in uni swamp to ensure that there was a very liquid on ramp and off ramp between synthetics and the water if your own ecosystem if you turn up and you've got eath right and

you want to avail yourself of this ability to you know trade synthetic Bitcoin you need to get that eat into synthetic eath or synthetic USD somehow as we stand now where the deepest pool in uni swap I think about 40% of the total liquidity and uni swap is in the synthetic eath pool and so you can trade 10 or 15 or $20,000 worth of each with a pretty minimal slippage into synthetic eath and then start trading on synthetics exchange so it's kind of the deposit mechanism into the exchange if you are so let's talk about the price Oracle for bit so Yuri alluded to this previously so it's a mix of different exchanges that you're using for the price Oracle can you go a bit into how exactly it

works when we launched this we needed a price article obviously and you know there really wasn't anything on the earth here main that that was a price article those pre minimal solutions maker had their you know Evo SD Oracle which is pretty slow fairly robust and and fairly decentralized but very slow and not really going to be kind of suitable for what we were doing which needed sort of five-minute ly updates at the worst case and so we had to build our own Oracle because there wasn't anything those available we you know obviously after building that realise the amount of effort and upkeep and issues that are entailed by running your own centralized Oracle it's a massive attack vector and I think you know we'll maybe talk about that attack vector in a

second but we made a decision sort of mid last year to really try and find a solution that would allow us to offload this Oracle responsibility onto another project that was focused on that and after a bunch of research we landed with chain link and so late last year we moved all of our fiat currencies onto chain link you know fiat currencies obviously fairly a lot less volatile than crypto so it was a safe first step and then over the next probably month or two we'll migrate the rest of our assets on the chain link I mean there was this history right after being an issue with the price Oracle and to tell us what happened back then we've had front-running bots and you know people here front running and I think ok front

running I know what that is in the context of a pooled liquidity model it's a bit different to a counterparty matching situation where you know bids and orders are getting sniped sold like 0 X for example you know front running is a bit different to outrun running in our case what people were doing is front running the article so they would look in the men pool see when a price article update was happening they would trade into that asset and then they would trade out of it and provided the Delta between you know the prices was above the fees or being charged they could profit from it we've had this cat-and-mouse game and this arms race to kind of improve the system to mitigate that and reduce that but before we had implemented a lot of those solutions

there was an arc lavage one evening I think Australia time was like two in the morning we had had an issue the previous day of one of the api's for Forex had gone down and then another api also started failing and we had this issue where we use a media Nizer but the media neiser didn't understand that this price was an outlier because it was essentially the price was kind of going up and down so it was publishing a price and then it was changing the price and the difference between the two prices was like a thousand times on the Korean Won we basically had this situation where one of the front runners said oh okay I noticed a discrepancy right it didn't care or even know that the discrepancy was a thousand x right it

was just looking for any discrepancy above you know 30 basis points right so traded into Korean won from synthetic Heath and then when the price change back 20 minutes later trade it back in and over the course of I think four or five trades generated something like 10 billion dollars worth of synthetic 8 through these trades at the time our CTO was overseas who's in Madagascar on like dial-up internet or something and we were alerted to this through some monitoring in the community and a few other people started talking about it unfortunately I was asleep and so I got woken up at 6:30 in the morning or whatever and we had this kind of catastrophe luckily our CTO and a couple of other team members were able to pause the system we have the ability to kind

of halt the system and then we started this essentially hostage negotiation with the person who had done this who was you know looking for some cash to get essentially paid out to roll the trades back and so we had a tense negotiation to kind of work out a way to roll the trades back so we didn't have to fork the system and you have some kind of catastrophic roll and thankfully we were able to negotiate with the person and sort it out it subsequently kind of degenerated and there was a lot of you know acrimonious finger-pointing back and forth about you know how it was handled and what-have-you but luckily you know for the system's sake we were able to resolve it so that's the risk of Oracles that are not robust enough I suppose yeah I think that's a valuable lesson to

learn and in retrospect it actually it's quite an entertaining story I'm sure it was absolutely nerve-wracking at the time I mean being in a hostage negotiation like that while we're on the topic I'd like to speak about a second attack vector a way to exploit this is a which is not quite how we wouldn't bring it down but you currently requires have 150% collateralization but seeing that the only thing that is actually done to you if you don't comply with it is that you don't get fees as soon as you get below the 100% mark you in you in essence have a free option of actually defaulting on your debt paying it in the future of the price of s and X goes up or the price of the asset goes down was

this uh of was this done as a deliberate design choice it was done I suppose as like an expedient design choice in the sense that you know we had a view that the incentives as they stood combined with the high collateralization ratio were probably sufficient to avoid a scenario where we got close enough that liquidation was even going to kick in we also had internally especially in the early days when we were riding the white paper and discussing some of these mechanism designs significant dispute between a couple of the team members about how liquidation should be handled and even how asset issuance should be handled so we decided at the time to kind of kick the can down the road and

say okay let's see in practice how it works with this high collateralization ratio we'll observe it and you know then we can make a decision as to how to implement liquidation based on what we sort of observed empirically in a way that was good it was high risk like a lot of things that we do you know we tend to take a fairly high risk approach to let's gather empirical data even if that empirical data might kill us we're sitting here x-raying ourselves right and not realizing time's the impact of it but you know the end result is we do gather like much more viable and important data I think at times then we would if we attempted to kind of constrain the system more so I think we now have a fairly robust liquidation mechanism that's been

proposed that will be implemented in the next sort of month or two and what that really unlocks for us is it removes the black swan optical risk which we've absorbed now 250 plus percent Corrections over the course of you know a pretty small amount of time without the system blowing up but what it also does is allows us in the future you know not in the short-term but in the future to reduce the collateralization ratio from say 750 down to maybe something more like 250 or 200 percent over time and that's only possible if you have liquidation it just allows the system to kind of grow but at the moment we've been able to survive without it thankfully but yet it's definitely an issue that I think people see as a risk factor about this proposed liquidation

sum how will it work so essentially what someone will be able to do is if you fall below a threshold which is yet to be determined but let's for the sake of argument call it 200% if your position falls below 200% collateralization ratio anyone in the system will be able to send the since so we'll be able to essentially pay your debt back for you and they will be able to collect the equivalent amount of s and X plus a penalty that was backing that in the case of 200% let's say you'd be able to send your $10,000 worth of s USD you'd get $10,000 worth of s and X plus you know 10% penalty so this is very close to the maker mechanism right it's very similar

anyone can essentially just turn up and pay your debt for you the difference to the maker system is that the entire CDP doesn't get unwound so it's sort of proportionally unwound right so we fixed the C ratio and then you still have the chance to come back and fix it you can get it again etc it doesn't unwind the entire thing it just unwinds it by little slices oh that sounds super promising I'm looking forward to that synthetics is Nova collateralized system and yeah maker and in generally D Phi has kind of relied on this you know collateralization for its security if you traditional finance world there's a lot of like under collateralization and it seems like it's something that

starting to get explored a little bit in the blockchain world as well what are your faults on that do you think define the long run and synthetics will rely on over collateralization or Deeping like what's gonna be the role of under collateralized systems I mean I used to have a view that under collateralized permissionless systems were somewhat of a contradiction in terms right you need some trust there over the last few months I've spoken to several different teams and I've come across near several different other projects that are working on systems that rely on some kind of you know web of trust type model where you know I know you and therefore I'll lend to you all vouch for you and I take some kind of risk on your behalf

which ultimately under collateralized loans resolve to some kind of legal enforcement right you know people with guns turn up in your house eventually you know let's say you pay this back or throw you into debtors jail or whatever traditional system has been reliant on that to the point of not needing to solve that problem if you've got people with guns they're pretty good solution to you know people who aren't paying their debts right it seems like there are some potential design patterns and mechanism designs that could allow for this to happen and I think particularly once you get fully on chained assets that could potentially be used but confiscated all right so like let's say for example someone wants to get some

kind of NFT or some kind of like game card right that like gods Unchained or something like that and they want to buy it and it's ten thousand dollars to buy this item in the game it would be possible to create some kind of wrapper contract whereby if they don't pay back that loan over time then eventually the assets confiscated right in the same way that your house would be confiscated if you didn't pay your mortgage provided that asset is fully natively on the blockchain right it's when you get off chain stuff that it becomes kind of more interesting but I'm much more hopeful than I was six months ago that makes sense totally so carries also with synthetics what is your very long-term vision like what do you hope this system will look like in five

or ten years and will impact on the world it will have and valued it will deliver for its users I mean synthetics is kind of interesting right now because people are very excited about the potential the way I sort of see synthetics the analogy that I use is it's really just giant hole in the ground and if you want to build a skyscraper or a big building or whatever you got to dig a really deep hole first and so you know the certain people who turn up and go wow that's a really big hole I can see what's coming and there's so people will turn up and just go that's giant hole what are you talking about we haven't yet even come close I don't think too demonstrating the effectiveness in the reality we've got a very theoretical value that we've

created and and your some people can see that the next year for us is going to be all about kind of finding genuine product market fit bringing in those organic traders and seeing will someone come and trade on this trading venue in given the alternatives they have like a by Nance or a bit mix or a dare a bid or FTX or whatever that's kind of the first step we can get that right and we can prove that Dex's work and that derivatives decks or you know a futures decks or whatever can gain significant traction which I personally believe then I think the next step from there is how do we extend that and that's where we start talking about some of the other asset classes that that we could add

equities indices etc and that's where I think it gets really exciting because now you're making available these asset classes that are maybe not as accessible to someone in a lot of places in the world right they don't need a bank account all they need is some kind of Fiat on-ramp some way to get fee it into the etherium ecosystem and they can get access to ETFs and equities and bonds and you know all kinds of money markets all kinds of assets that you know we take for granted and vice versa so the first stage is let's prove that this is viable and that it's self-sustaining that it can actually generate enough activity and enough users that it can work and then we can start building from

there so you've come out pretty strongly in favor of decentralization also as a means of sidestepping compliance to a certain extent and I mean even when you were talking just now you were kind of pitting Texas against centralized exchanges so how do you think that's going to develop in the future Bitcoin proved that you can build something that is unregulated and that's sort of phase shift in a lot of people's minds right and I think that's what got people very excited about Bitcoin all of the touch points in the real world with Bitcoin that allow it to kind of be functional the exchanges and fiat on ramps and all that sort of stuff all of

that infrastructure is regulated centralized exchanges and you know TCS and all of that stuff that we've kind of built up to make Bitcoin work the thing that I think is most exciting about a theorem is all of that infrastructure is being absorbed into the chain itself and you don't need as much infrastructure on the outside to support the functionality of the system and as more and more of that's absorbed into a theorem you have this fully unregulated all infrastructure that anyone can build on and for me the most I guess exciting thing about that is when you lower barriers to entry and you create a highly competitive environment you get much much faster innovation and

iteration and get some really cool stuff and I think we've just kind of crossed a tipping point with that in the theorem over the last six to 12 months where you just can't even keep up with the crazy stuff that people are building now like on an hourly basis right someone's like hey there's this thing and this thing and this thing and you know a lot of that stuff is not going to work and no one's gonna care and they're not gonna want it but if even one out of 50 of those things becomes hugely valuable to a large group of people we're just in a different reality so for me that's the most exciting thing about this oh yeah I mean I think it's definitely a clear vision as well like I have this exchange I guess down the line where you can trade you know all kinds of asset so you

see this being you know tens of thousands hundreds of thousands of assets at some point and just a gigantic market the challenge that we have in this iteration right of this model of synthetics exchange is that we're somewhat constrained in the assets that we can list because of the counterparty risk that all the stagers take on as opposed to say something like um a where um a is a purely counterparty driven system they've got liquidity challenges potentially but they don't have the counterparty risk challenge that we have so we've made a different set of trade-offs if you look at how something like um a and something like synthetics could fuse down the line and

composability could enable that then you could actually have an ecosystem where people could borrow some liquidity from synthetics exchange to create these highly exotic things like you know the coin index that they were talking about for San Francisco and some really cool assets that track different price feeds for example I think as these things kind of coalesce you've got a whole bunch of products that make a dy/dx market protocol you may ask all these different synthetic asset the issuance platforms I think there will be some kind of convergence that will enable us to have every asset that exists on a theorem and then a whole bunch of assets that have never existed on the theory well okay thanks so much for coming on it's great to learn and

matthan thetic super excited exciting what you guys are building and and what's coming up so look forward to following and seeing how it develops awesome thanks so much guys who's yeah had a great time thank you for joining us on this week's episode we released new episodes every week you can find and subscribe to the show on iTunes Spotify YouTube SoundCloud or wherever you listen to podcasts and if you have a Google home or Alexa device you can tell if to listen to the latest episode of the epicenter podcast go to epicenter TV slash subscribe for a full list of places where you can watch and listen while you there be sure to sign up for the newsletter so you get new episodes in your inbox as they're released if you want to interact with us guests or other podcast listeners you can follow us on

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