Unchained - How Synthetix Became the Second-Largest DeFi Platform - Ep.148

Episode Date: December 3, 2019

Kain Warwick, founder of Synthetix, talks about synthetic asset issuance platform, which enables people to create tokens that track the price of assets in traditional and crypto finance. We discuss the various types of assets available, why changing the monetary policy helped the ecosystem take off, why people would buy synthetic Bitcoin over Bitcoin itself, and why Uniswap has been pivotal to Synthetix's success. He covers the role the SNX token plays, why people minting synths must be over-collateralized by about 700%, and some of the changes coming down the pike, including futures, tweaks to the inflation rate, and a new oracle system. He also explains what happened when a trader made the system insolvent — and how they negotiated with the trader to keep it alive — how he thinks about decentralization and why the system's governance might one day be handled by a DAO. Thank you to our sponsors!  GiveWell: http://givewell.org/unchained Kraken: https://kraken.com/ CipherTrace: http://ciphertrace.com/unchained Crypto.com: http://crypto.com/ Episode links:  Synthetix: https://www.synthetix.io/ Synthetix on Twitter: https://twitter.com/synthetix_io Kain Warwick: https://twitter.com/kaiynne Havven transforming into Synthetix: https://blog.havven.io/havven-is-transforming-into-synthetix-2fdf727b8892 Synthetix overview: https://blog.havven.io/synthetix-overview-f4a5a6c41210 How Synthetix works: https://www.synthetix.io/how-it-works/ Synthetix lite paper: https://www.synthetix.io/uploads/synthetix_litepaper.pdf Changing monetary policy: https://blog.synthetix.io/synthetix-monetary-policy-changes/ Oracle hack: https://www.coindesk.com/synthetix-trader-rolls-back-broken-trades-that-netted-1-billion-profit Synthetix response to oracle incident: https://blog.synthetix.io/response-to-oracle-incident/ How staking works on Synthetix:  https://www.stakingrewards.com/asset/synthetix-network-token https://help.synthetix.io/hc/en-us/articles/360020245314-How-can-I-earn-Synth-exchange-rewards- Reddit complaint by trader who initially made the system insolvent: https://www.reddit.com/r/ethereum/comments/d4edxm/the_synthetix_dapp_deleted_my_balance/ Efforts to resolve the front running problem: https://sips.synthetix.io/sips/sip-6 Synthetix and Chainlink: https://blog.synthetix.io/synthetix-and-chainlink/ Kain’s tweets on the censorship vector stack: https://twitter.com/kaiynne/status/1197265019169169409?s=20 https://twitter.com/kaiynne/status/1197265044204998656?s=20 Unconfirmed episode on Uniswap: https://unchainedpodcast.com/how-uniswap-quickly-became-one-of-the-most-popular-dexes/ Defiant interview: https://thedefiant.substack.com/p/theres-a-pipeline-of-etf-like-tokens Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone. Welcome to Unchained. You're a no-hype resource for all things, crypto. I'm your host, Laura Shin. If you enjoy Unchained or Unconfirmed to my other podcast, which now features a weekly news recap after every interview, please give us a top rating our review in Apple Podcasts or wherever you listen to the show. This holiday season, how can your donation do the most good in the world? Give Loll spends 20,000 hours each year researching charity, looking for the places where your donation will save or improve lives the most. They provide a free list of the most impactful charities they've found. You can find out more or make a donation at givewell.org slash unchained. First time donors using that link will have their donations matched up to $1,000. They accept traditional payment methods, Bitcoin, Ethereum, and several other cryptocurrencies. Keep this in mind while you make your end-of-year tax moves. Again, that's givewell.org slash unchained. Crypto.com. Get their app and buy crypto at true cost with no fees or markups. Get a metal MCO visa card with up to 5% back on all your spending.

Want more? Download the crypto.com app today. Cracken is the best exchange in the world for buying and selling digital assets. It has the tightest security, deep liquidity, and a great fee structure with no minimum or hidden fees. Whether you're looking for a simple fiat on-ramp or futures trading, Cracken is the place for you. CipherT trace cutting-edge cryptocurrency, intelligence powers anti-money laundering, blockchain analytics, and threat Intel. Leading exchanges, virtual currency businesses, banks, and regulators themselves use ciphertrace to comply with regulation and to monitor compliance. Today's guest is Kane Warwick, founder of

synthetics. Welcome, Kane. Hey, Laura. Thanks very much for having me. Let's start with a basic question. What is synthetics? Synthetics is a, essentially, essentially a synthetic asset issuance platform on Ethereum. So we create tokens that track assets, track the price of assets in traditional finance and in crypto finance to allow people to have price exposure. And Sabrina, talk a little bit more about what all that means. But first, let's talk a little bit about your background. How did you come to found synthetics?

So I was actually running a payment startup back in 2014, 2015, and we worked with a lot of the crypto exchanges in Australia. And as it kind of got closer to the bull market in 2016, 2017, like a lot of markets like Korea, we saw that there was a pretty big spike in the spread between crypto prices in Australia and other markets like the US and Europe. And so we had this idea that if we were able to build, a stable coin, we would be able to kind of arbitrage those price spreads and more efficiently move money around. And so we started doing some research. This is before Maker obviously

launched. And really the only option out there was tether. And so, yeah, we essentially, you know, decided to launch this new protocol to enable people to transfer value in a stable token. So that was kind of how the project started, which was called Haven back then. And how did you make the transition of synthetics? So one of the, I guess, ideas that I had when we launched this was that regulated stable coins were not going to be very likely, or at least we're going to take a long time to launch. And, you know, that turned out to not be very accurate. In 2018, you had Paxos and True USD and USDC and a lot of the regulated stable coins that launched. And that just meant that the kind of market for a decentralized stablecoin was much smaller than it had been.

And so we looked at the model and we said, okay, what can we do with our model to kind of create some differentiation? And one of the things that we saw was this ability to reprise debt and move between different synthetic assets. So we had a synthetic U.S. dollar token, but we were able to launch a synthetic gold token, synthetic silver token, and people were able to move between those tokens with zero slippage, which was kind of the advantage. And so at that point, we decided to focus on, you know, synthetic exchange and that ability to trade synthetic assets. Yeah, and I think what's remarkable is that you've gained quite a bit of traction in a short amount of time. So let's talk a little bit more about kind of like what that journey was after you started creating some of these. How did you become one of the biggest projects in Defi?

You know, kind of gradually and then all at once, I guess. So, you know, we have the second most value locked. And, you know, the way that that kind of evolved, I guess, is we, as we launched more synthetic assets, like Bitcoin, synthetic gold, synthetic silver, the awareness and interest in the project grew really rapidly. But in addition to, I guess, pivoting towards synthetics, we also made a decision to change. the monetary policy of the protocol. So previously, like most EFC20 tokens that launched in 2017 and 2018, we had a fixed supply of $100 million. And we decided that we weren't really seeing high staking rates.

We weren't getting people participating in the protocol and kind of doing what we needed them to do. And so we changed the monetary policy and essentially started paying inflation to the people who were staking, who were actively participating in the network. and that immediately had a very powerful kind of feedback loop that are created where people, you know, got more excited. They started, you know, to understand the project more and dive in. And, you know, the growth kind of accelerated from there. Great.

So, yeah, let's talk a little bit more about what people are doing on the platform. What are some of the most popular since? So we actually just launched a bunch of new synths this week, including a defy an index token. And so this Defi Index token is essentially like a basket of tokens in the DeFi space. So there's Maker, there obviously Link, S&X is in there, we've got ZeroX, et cetera. So what you can essentially do is hold this token and get exposure to kind of the entire DeFi space, or at least all the tokenized projects within Defi. And so that's, I think, a pretty novel and interesting asset that doesn't really exist anywhere else.

But in addition to that, we've got things like synthetic Bitcoin, synthetic ether, where a lot of the volume happens. But we're starting to see definitely demand grow for things like synthetic maker and some of the inverse tokens. So during the transition to multilateral dye over the last few weeks, the demand for synthetic maker and inverse maker has really increased. And there's a lot of organic volume happening there, which is kind of good to see. this is super interesting yeah there's so much to unpack um i guess why don't we just start with the antifai token first in a way you know it's it's sort of like i guess it's like an index um how do you decide like what the weightings and stuff should be yeah so we wanted it to be kind of representative of the space and and obviously you know we can only uh track the things that have tokens

so we can't track something like compound right now for example But we took the weightings by market cap and then tried to kind of normalize it. It was actually one of our Discord participants, one of the synthetics members who kind of normalized the weightings and proposed it, Arthur ZeroX, who I'm sure a lot of people follow on Twitter as well. And the community then voted and reviewed that waiting and they were happy with it. We also did some polls to work out what people wanted to include in the index. So it was kind of an open governance mechanism to determine the weighting and constituents of the basket. And then for a synth like the Bitcoin synth, why is it that they wouldn't just buy Bitcoin? Yeah, it's a really good question.

I think, you know, the advantage that we have with something like synthetic Bitcoin is if you want to just hold Bitcoin and you're a long-term holder, makes sense to just go and buy Bitcoin in the spot market. But like most derivatives, the advantage is in kind of access, right? So if you're holding Bitcoin and, you know, you've got it in your own wallet, going from Bitcoin into ETH or into USD or something like that, you know, there's friction there. Whereas if all you want is the price exposure and, you know, you're not necessarily a long-term holder, your ability to go from Bitcoin into, say, gold and then back in the US dollars within synthetics exchange with zero slippage is quite powerful. And so that's why I think we're seeing a lot of people who want that price exposure, but also want the flexibility of being able to move out

into a different asset fairly quickly. And is there anything that they're doing with the Bitcoin in the synth Bitcoin that they couldn't do with BTC as well, aside just from being able to trade in and out of it without slippage? No, that's basically it. It's just people looking for price exposure. So, you know, think about it as kind of the difference between, you know, gold futures versus the gold spot market. You know, people who don't necessarily want physical delivery of gold, they just want price exposure to gold. This is sort of a similar, you know, mechanism. You just get the price exposure to Bitcoin, but without, you know, having custody of the asset or a right to the asset or anything like that. And then I was also wondering about some of these synths that are similar to stable coins, like this, the SEPA. us d so i don't know if this would technically be called a stable coin but i did happen to see that the amount of value in it is ahead of for instance jemini usd which is an actual stable coin but then since the synthetic usd is backed by s and x is that essentially just like a riskier

version of a stable coin and so it has kind of like different properties from a stable coin or like how would you compare this to a right now stable coin? So I think, you know, in 2017, 2018, we kind of saw three different types of stable coins emerge. There was, you know, the Fiat backed, put money in a bank. It's a right to kind to convert that token into the Fiat style stable coin. So, you know, that's your Paxos and Gem and Trioste, et cetera, and tether, ostensibly. And then we had crypto collateral backed. So obviously, Maker and Dye is the kind of biggest example of that. So using Ether as collateral to issue a stable, you know, USD asset.

And that's really what, you know, S-U-S-D is. It's the same kind of principle. It's just using S&X as collateral instead of ETH. And then there's the third category, which is like the algorithmic stable coins, so things like BASIS, which obviously, unfortunately, didn't launch. So we didn't really get a chance

to kind of see how that would play out. But I think there's a few more algorithmic stable coins that have launched recently. And what are people doing with the Synth USD? Well, so one of the nice things, again about, you know, the sort of synth ecosystem, I guess, is that you can take that synthetic asset and convert it easily into a different asset. So you can go from, you know, SUSD into gold. And so I guess that's kind of a bit of a different property to say something like,

you know, a Gemini or, you know, a tether where you need to find a counterparty to trade with, in order to, you know, convert it into Bitcoin or some other asset. So it's sort of one of the interesting properties of syndetics is that, you know, once you've got any of this debt, whether it's USD or gold or Bitcoin, you have the right to reprice that debt into any other asset. And we talked earlier a little bit about how the defy synth was formed, but where did the idea, or where does the idea for like any particular synth come from? I mean, typically it comes from our community. You know, so we've got a lot of traders in our community and a lot of people who, you know,

very into crypto and crypto trading and, you know, that sort of thing. So we look at what the demand is from the community. So things like SLink, which we launched recently, S-XRP, were kind of, you know, coming from the demand that the community was displaying, you know, in Discord and other places. And I heard that you're also coming out with decentralized futures? We are. Yeah, that's something that we're working on. So essentially it will be a decentralized bitmax or Deribit or any futures exchange, you'll be able to take a leverage position on, you know, something like Bitcoin or ETH and, you know, open that position and it'll be a perpetual future. So let's walk through how this works. So let's say I'm a user. I come to your platform and I want to

create some kind of synth for myself. What do I need to do? So if you want to create a cent, you can't actually create a new synth if you are just arriving in the platform. You can only choose from the existing synths. And one of the reasons that is... Right, I guess I meant mint a synth. Oh, gotcha. Okay. Is that right?

That's right. Yeah, if you want to mint a synth, then, you know, you need SNX and you essentially will turn up at Minter, which is our DAP that we use for minting and kind of maintaining your position. and you'll lock S&X and against that value of that collateral, you'll mint a synthetic asset. So within Minto, you can only mint SUSD, but with the contracts, you can mint any of the synthetic asset. So you could mint synthetic Bitcoin, for example. And again, it's very similar to like a maker vault or a maker CDP where you lock ETH

and then you get issued this debt, which is a synthetic asset priced in U.S. dollars. Oh, wait. Okay. So sorry, let me walk through this again. So I show up at Minter and then I have to give it ETH in order to get S&X. Is that it? Sorry, yeah. So if you don't have S&X, you need to get S&X from somewhere.

So, you know, you would either buy the S&X for Eith or, you know, for something else. But once you've got S&X, you can lock that S&X and issue synthetic USD against it. Oh, okay. So I go to Minter with my S&X and then I turn that into S&X. USD and then from there I can move into any other synth. Is that? That's right. Is that it? That's right. Yep, that's it. So in order to create the S&X though, people need to over collateralize and I think it's by like roughly 700%. Why is it so high? Because the liquidity of S&X is still quite low. So, you know, the idea is that eventually as S&X accrues value and as liquidity grows, we'll be able to lower that

collateralization ratio, but it's sort of a reflection of the risk profile of SNX versus, say, ETH right now is collateral. Oh, okay. Well, do you have any plans to add any other types of collateral? We do, actually. We're working on a proposal to add ETH as a form of collateral to the network, which hopefully will go live later this year or early next year. Okay. So earlier you talked about how one of the ways that you got traction on the platform was to change the monetary supply and I guess give some of the rewards to people who are staking. So will that still be the same if they're staking ETH rather than SNX? No, it won't. It's a slightly different approach. So the people who stake SNX will get the full rewards from trading and the inflation. So the trading

fees on the exchange as well as the inflationary supply. People who lock ETH just have a right to and trade synthetic assets. So once ETH collateral goes live, you'd be able to turn up with ETH. You wouldn't need to have SNX. You'd be able to mint synthetic ETH against that ETH and then start trading on synthetics exchange immediately. And the advantage, I guess, to someone who's holding ETH is that it doesn't force them to convert their ETH into SNX or into one of the SINC. They can still hold their ETH and trade without kind of taking the risk of selling down their ETH position. Oh, I see. Okay. So this is sort of like how currently amongst people who have created S&X only about 80% of them, I think, well, actually, tell me if I understood this correctly, I think about 80% of them are staking it. Is that right?

About 80% of the supply is staked. So the total token supply, yeah. Okay. And then so the remaining are doing what, trading it? Yeah, some of them are just sitting on it and not staking. You know, some of them have it sitting in exchanges. Some is probably lost and unstable, which, you know, something happens in crypto networks. So, you know, there's any number of reasons that someone might decide not to state rather than to participate in the network. Okay. So essentially, when you start adding EF as a collateral, or when you add it as a collateral type, then what? what is likely to happen is that the current stakers will still basically have a similar incentive, but they might earn more in fees because there might be more trading activity, something like that?

That's exactly right. Yeah, that's it. It's just an easier way to get people to trade more. Okay. Yeah, I was just wondering because, as you know, the, well, actually, this is an interesting question. So let's see here. So first, it's like in so many other systems, staking, you know, is correlated with security. is that is that really the function that it's it's providing here it's it's slightly different so you know you're securing the pool of assets i guess or the the pool of debt by putting your collateral there and you're taking a risk so when you lock s and x you take the risk of the total value of the debt pool that's that's out there so you know you're providing that service to someone to allow them to turn up and reprice their debt so you know you're securing the the debt pool essentially

but obviously we rely on the Ethereum network for the actual security of the tokens themselves and consensus, et cetera. Okay, so this is like a slightly weird question, but we were talking about this really high collateralization ratio and how S&X isn't very liquid. Is there any possibility of some kind of like a black swan event or something where like people somehow suddenly cannot actually pay back their, you know, their positions? Definitely. You know, that's one of the big risks that you take as someone who's minting. So if something happened to the debt pool, such that the debt pool, you know, increased by, you know, an order of magnitude, then there would be more debt outstanding than the collateral value of S&X, which, you know, would create some kind of a downward spiral potentially. Now, there's mechanisms that are in place to kind of prevent that from happening, but, you know, it's definitely possible. And in fact, back in July, we had an issue with the price feeds, with our Oracle, which created just that scenario. So there was a bot that was trading on the exchange, and the price feed for the Korean one failed.

And the bot was able to essentially create about $2 billion worth of debt, which obviously was significantly higher than the market cap of the SNX collateral. So that was something that was kind of indicative of one of the risks that exists in the system. Right. So I was going to ask you about this. So when it's creating $2 billion worth of debt, that basically means that then if that bought or whatever wanted to kind of like close out of the SNX system, then they would need to pay back $2 billion or so. Is that what that means? What does that mean? So what it means is that the bot has $2 billion worth of debt outstanding, but there's only, you know, at that time, I think there was about $30 million worth of collateral. So the bot would basically never be able to cash out that position. There's not enough, you know, collateral value. It would be like if there was, you know, a million dollars worth of Eath locked up to issue dye and then all of a sudden the die supply was inflated to a billion dollars. You know, there's only a million dollars worth of Eath there. So the first million can be claimed. But then after that, there's no there's no value there to be claimed. So essentially the system was insolvent and the

ball was unable to close out that position and get the profit. Okay. So we're actually going to talk a little bit more about what happened there in a little bit. But I actually just wanted to talk a little bit more about this, the staking and the S&X and stuff. So I think some other thing that's a little bit interesting to me about how the staking works here is it's not, it's not similar to staking on other platforms where people can basically just earn passive returns. Am I, am I right in thinking that? Yeah. So, you know, typically with staking, you know, you have some level of responsibility. You know, you're providing a service. You know, and there's things like, you know, live peer where you're providing a service running nodes. You know, if you're staking in

8.2.0, you're providing the security to the network. So typically there is some responsibility and some action you have to take. And in our network, that action is that you're providing the collateral, essentially for the network and securing the debt. Okay. All right. And so, all right. So then we talked about how now you're going to add, and when are you going to add, when are you going to add ether as a collateral type? We're working on at the moment. We're hoping to get it done by the end of the year, but it's looking like it might be early next year, the way things are tracking. And for the monetary supply, you said that, you know, right now it's pretty high inflation, but that's going to go down. So what is like the monetary policy?

Yeah, so it's actually an interesting question. So at the moment, we have an inflationary supply that halves every year, and that halving event is coming up in March. But some people within the community have proposed a change to that inflation schedule to, smooth it, essentially, which was something that I was personally against initially, but I've come around to the fact that I think it makes sense. So it's basically been passed. We've had a couple of governance calls where it's been discussed, and the community has kind of reached consensus that it's the right thing to do. There's a couple of minor things around the parameters for the terminal inflation that are still being discussed, but there will be a vote

on that hopefully in the next week or so, and then it will be implemented. So that's something that that will probably change by the end of the year. And it will mean that the inflation goes from a million tokens that had started out to somewhere around 300 million tokens. Okay. And is that just in perpetuity or is there ever going to be a cap that's reached? So it looks like the consensus is to have perpetual 2% inflation approximately. It might be a little bit higher or a little bit lower.

And the intent behind that is to ensure that we've got, some additional supply of S&X to fund the incentives that are outside of the system. So we've got some incentives at the moment around Uniswop to incentivize liquidity there. So we want to make sure that we continue to have that S&X supply to be able to incentivize those external things outside of the protocol. All right. So in a moment, we're going to discuss oracles and we're going to talk more about that bot that could have made the system insolvent, but first a quick word from the sponsors who make this show possible.

Will the world follow France and add banning privacy coins? Will government-backed stable coins become the new fiat? Are distributed and peer-to-peer exchanges just a flash in the pan? The answer is maybe. Virtual currencies can flourish and create a new, private, and more versatile economy. But that grand vision can't happen without keeping crypto clean. And that requires support of governments and accountability for bad actors. Privacy enhanced compliance using cryptographic controls has the potential to preserve anonymity without compromising legitimate investigations. Cypterrace is working on this vision of the future. Sign up to stay up to date on the Privacy Enhanced Compliance Initiative and receive authoritative crypto-amL reports quarterly.

www.cifertrace.com slash keep crypto clean. Today's episode is brought to you by Cracken. Cracken is the best exchange in the world for buying and selling digital assets. With all the recent exchange hacks and other troubles, you want to trade on an exchange you can trust. Cracken's focus on security is utterly amazing. Their liquidity is deep and their fee structure is great, with no minimum or hidden fees. They even reward you for trading so you can make more trades for less. If you're a beginner, you will find an easy on-ramp from five fiat currencies.

And if you're an advanced trader, you'll love their 5x margin and futures trading. To learn more, please go to crackin.com. That's KRAK-E-N.com. Crypto.com sees a future of cryptocurrency in every wallet. Have you seen the MCO Visa Card? A metal card powered by crypto. Loaded with perks, including up to 5% back on all your spending and unlimited airport lounge access. They pay for your Spotify and Netflix too. What's not to love?

With crypto.com, not only can you spend your crypto, but you can grow it too. Earn up to 6% per year on the most popular coins like BTC, XRP, LTC, and up to 12% per year on stable coins like PACs or TUSD. Just a few taps before you start receiving interest every week. Join the over 1 million others and download the crypto.com app today. back to my conversation with Kane Warwick of synthetics. So as we touched on briefly earlier, the integrity of the system is highly dependent on the quality of the Oracle. And as you mentioned, there was this incident with the trader. And I believe, you know, the way that their bot was able to take advantage of the system was something to do with the Oracle. So can you tell us exactly how they were

able to make that hack happened? Yeah, so they were looking at the price feeds that were being published on chain. And they were reading the Mempool. So they're reading all the transactions that are sitting waiting to be confirmed by miners. And they took those feeds and they were able to essentially front run the pricing changes. So they would detect that a price change was going to happen and they would move into that that asset and then as soon as the price was updated they would leave the asset. And we had some measures to prevent that speed bumps and things like that that we're working on.

But the bot was fairly sophisticated and was pretty good at detecting when a large spike was going to happen. And it was fairly profitable. It was making around 10% a day or something like that with its trading. But then we had an issue where there was this cascading failure of, our Oracle for the 4X APIs. So we have a number of APIs that are medianized and several of them failed in different ways simultaneously, which we didn't have a good mechanism to prevent or, you know, to allot us to. And the bot was running and essentially detected this anomaly in the KRW price and was able to trade, I think it was five times back and forth between ETH and KRW, and it was able to

generate about $2 billion with of synthetic ETH. at the time. So, you know, that essentially made this system insolvent. And we then had to work out a way to kind of roll back that trade. Wow. So let's just give a little bit of context on how it is that the price, the Oracle prices get pushed. As far as I understand right now, it's synthetic, or at least back then, it was synthetics pushing the price. Is that correct? And if so, like, how are you determining the price? And yeah. So, yeah, so we had some commercial APIs that were essentially being, you know, pulled into a system. And then, you know, the aggregates were taken.

Allies were thrown out. Like from centralized exchanges? Well, these were Forex APIs. So they were coming from your commercial 4X providers. So, you know, there's a ton of them around. And we picked what we thought were, you know, four or five pretty good ones. unfortunately the the Forex APIs are less

robust than the crypto APIs from our experience which was kind of surprising to us. So we had a lot more protection around the crypto APIs because we were worried that they were going to be a bit of flakey but it was actually the 4X ones that created the issue. Okay.

And so one other thing that I wanted to ask here was like later on this same trader then wrote this Reddit post and this was like a few months later, actually. And this person complained that you had jacked up their fees, deleted their balance, and forced them to trade their synth for S-U-S-D. This doesn't appear to be sort of the same incident. It's kind of like, well, let me recap, and you can correct anything that is incorrect here,

but essentially, like, after the first incident, you had kind of said, okay, we're going to pay you this bounty fee. and now anything, you know, that you do is basically going to help us make our platform better, something like that. Or actually, why don't you just sort of describe what happened? Yeah, so, you know, it was, as you can imagine, somewhat of an adversarial conversation. You know, it was a bit of a hostage negotiation because the trader was well aware of the fact that the system was insolvent. And if they didn't cooperate with us, you know, we would have had to fork the system or, you know, there would have been a significantly larger impact. So getting them to roll back the trade was definitely the best solution.

And initially they wanted a pretty exorbitant amount of money to do that. And we were able to negotiate them down to something a bit more reasonable. We ended up paying them about $40,000 worth of Ead to cooperate and roll back the trades. But this, you know, trader was pretty, as I said, pretty adversarial and pretty aggressive and arrogant about. what they were doing and their ability to kind of front run the system and our inability to stop them. And so, you know, we basically said, look, you can keep attacking the system. We're working on a number of mechanisms to kind of prevent that. And, you know, this is crypto.

It's adversarial, right? We're going to try and fight back and, you know, work out whatever we can do to kind of make this less profitable. And unfortunately, the kind of calculus that I guess we came to was, that if you don't have any punishment, if there's no downside to someone who's attacking the system, the optimal strategy is just to keep attacking. You know, if the worst that you can do is not profit, then this was only going to escalate. And so we're, we basically worked out that we would need to have some kind of slashing condition implemented in order to, you know, reduce the profitability of these

bots. And so we implemented that. It worked. We're able to slash this trader. And then, you know, but they came back and said, well, I'm going to continue to attack the system. They did. And it was kind of this running battle. And this has kind of kept going on with different traders and different bots, probably for the last six months. It's been a big amount of effort that we've kind of had to implement a number of different pieces of functionality to prevent this front running, which is kind of a constant arms rates, I guess. Wow. Okay.

I bet it's making your platform better very, very, very fast. One thing that I was wondering about, though, is like, what exactly are they exploiting? So I understand that it's this knowledge of, you know, a trade that's about to happen and kind of what the Oracle price is. But is part of that also because maybe just like the frequency with which you can update the prices is like a bit slower than you would like? Yeah, that's exactly right. It's just latency. So they're observing what's happening in the real world and we're observing it. We publish something to say, you know, this is what's happened in the real world.

And they're able to essentially publish it on chain faster than us. That's their intent. That's what they're trying to do. We've gotten to a point now where we've basically been able to reduce the front running to, or at least reduce the profitability of front running, you know, to maybe half a percent a day or 1% a day, which is kind of, I guess, within our risk tolerance from, from where we're sitting now. But again, as I said, this is an arms race.

And every time we make a change, the bots update, and they try and attack the system and improve their bots. So it's definitely improving the system, and it's making it much more robust. But it's certainly been a lot of effort and a lot of engineering time to kind of work on these issues over the last six months. And how do you make the improvements anyway

if, as you mentioned in the original incident, the APIs that failed weren't even in your control? control. So, you know, what we've basically been doing is upgrading the Oracle. And we're working on moving the Oracle away. Synthetics still runs the Oracle. But hopefully by the end of the year, we'll start migrating away from our own centralized Oracle to ChainLink. And we've been working with the Chainlink team to build a set of oracles that will be much harder at front run and, you know, put some mechanisms in place to prevent people from trading and, you know, to, you know, to cover some of the edge cases that they've been using if they are trying to front run the system.

But as I said, it's kind of a balance between usability because some of these things impact the usability for regular traders. And so we have to kind of try and find a balance where you're never really going to get rid of front running completely, but you can reduce it to the point where it's less profitable or not so impactful. So I don't know a ton about chain link, but can you describe how? how that system will differ once it's integrated than what you have now? So essentially they're just doing what we were doing ourselves, but they've got a distributed group of people that are consuming these external APIs,

so crypto APIs, et cetera, and a lot of them are data providers that already have the data. So they've got access to that data themselves, and they take these different node operators who are kind of aggregating this data, and then medianize it and publish it on chain. And so what you've essentially got is our Oracle times 7 or 20 or 30, depending on the asset that the price is being published for, which just makes it so much more robust than what we're using right now. So we're pretty confident that once we get that in place,

we won't have any future issues with Oracle outages, but it doesn't necessarily solve the front running problem. We still have some edge cases that we need to handle there. And will that increase the frequency by which you can update the oracles? It actually won't. You know, there's kind of a fundamental latency that you have with Ethereum. So something that we're also looking at is, you know, a layer two solutions that will allow us to publish prices much more rapidly. So right now, the only way we can prevent people from exploiting that latency is by forcing them,

which is what, you know, some centralized exchanges do. put a speed bump in to prevent people from being able to, you know, high-frequency traders, being able to publish things before, you know, everyone else can. And so we're putting these speed bumps in to ensure that, you know, someone can't look at the transaction being broadcast and try and front-run it. They're going to definitely be slower than it. But as I said, you know, there's a trade-off between that and usability of the platform. Because if the speed bump is too aggressive, then it makes it harder for regular traders to trade.

I saw in a blog post that you wrote that once ChainLink is integrated, that will allow anyone to build and run an Oracle to obtain price feeds for Synths. So what does that look like exactly? And how would you expect that would change the platform? I think it changes the platform because it moves away from this centralized control that the team has now, our core team has. So once we get to a point where there are these external Oracle providers, anyone in the community, can essentially request a price feed. So, you know, palladium, weirdly enough, people ask for it pretty regularly. So, you know, the community can say we're putting a proposal to add a palladium token and then provided these node operators who are running, you know, chain link nodes can

source the price for palladium and, you know, kind of credibly produce it. We can add that synth. And it doesn't require necessarily intervention from, you know, the team directly to provide that price feed. So, you know, that's obviously going to be beneficial when we look at things like synthetic equities. So, you know, S Apple, S Tesla, et cetera. Interesting. The Palladium thing threw me a little bit.

I feel like this is one of those moments where you're like in crypto and then you're like, oh, there's yet another rabbit hole I could go down. Yeah. Yeah, there's people who are deep into playgame for some reason. So, yeah, it is what it is, I guess. Okay. So you also had a recent tweet storm about moving to ChainLink, and you talked about how some people objected to it because it's not maximally decentralized. And then you wrote something that I found really interesting.

You said, quote, we are very comfortable not using maximally decentralized oracles, because ChainLink is more than sufficient to move the Oracle attack vector to the bottom of our censorship vector stack, which means governance and other issues become the highest priority. So what did you mean when you said that chain link is more than sufficient to move the Oracle attack vector to the bottom of your censorship vector vector stack? So essentially what I was saying is, you know, at the moment you could theoretically round up five or six people in the community and, you know, throw us in jail and shut the project down, right? And again, I think about these things from a very adversarial perspective, right? That even though that's not likely right now, it's possible. And so long as something's possible, we want to eventually be able to prevent it from happening. And the reason why, the main reason why you could get away with that and lock up five people and shut the project down is the Oracle. Once the Oracle and once the price feeds are being published independently on chain and the protocol is just consuming those

price feeds, then if you were to do that, if you were to round up those four or five people and lock them up, it would be very easy for the community, given that everything that we're doing everything other than the Oracle is open source to essentially fork the protocol or, you know, do a hard spoon and migrate state and, you know, redeploy it on chain and keep the system going. And, you know, I think we're getting pretty close to that, but the limiting factor right now is definitely the Oracle. So, you know, as soon as the Oracle is not us and as soon as it's independent, it's going to be a huge, you know, qualitative state in terms of the censorship resistance of the protocol.

Hmm. Super interesting. So something we referenced earlier that we didn't go in too much was you talked about how somebody could sell, you know, like a million dollars worth of Bitcoin or whatever amount, and there would be zero slippage. So how is that possible? So it's possible because someone is able to reprice the debt. So one of the rights that you have if you're holding debt, whether you minted it or whether you bought it from someone for ETH or Bitcoin or whatever, you can turn up the contracts and you can say, I have 10 synthetic Bitcoin and I want to convert that into synthetic US dollars.

And the system will quote you a rate based on the current spot price and what the Oracle is publishing for those two assets and then take a small fee. So 30 basis point fee. which goes into the feed pool. So that's just a right that you have within the system, which is obviously very beneficial. And I think I brought up Maker earlier. There was someone on Twitter, Andrew Kang,

who actually did an analysis of the slippage on Uniswap for Maker versus synthetics. And I think the slippage was about 50% less for trading Maker on synthetics exchange. So during the kind of MCD transition, when Maker pumped up to like, you know, $650 or $700 and then drop back down. A lot of people were trading S-Maker and I-Maker because it was actually more efficient to trade on synthetics exchange than on the spot markets.

Hmm. And why is it that it's more efficient on synthetics than on uniswap? So uniswap, because it uses the automatic market making function, it has kind of this built-in slippage. So, you know, the larger the order, you know, trade the more slippage you'll get. So I think, yeah, so like 1% slippage for like a $50,000 order, for example. Whereas with synthetics, I think it was, you know, 35 basis points or something like that. Okay. Yeah. And also, I guess just to, I mean, it's probably obvious to people, but why don't

you just talk about how synthetics differs from other dexes and then therefore how the trading behavior on synthetics differs from on other decks. Yeah, so, you know, typically other dexes, excluding Uniswap. And so, you know, Uniswap and synthetics are kind of in their own category of these like period of contract decentralized exchanges. But in a typical decks like radar relay or something like that that's using, you know, zero X protocol, you need to find a counterparty to match your border. So, you know, if you want to trade maker and you want to trade $50,000 with the maker, there needs to be someone on the other side is willing to buy that and, you know, in any market where you're matching counterparties,

there's going to be slippage. And so, you know, that's something that is kind of exacerbated on Dex's. And it's one of the reasons why Uniswop is so powerful because you don't need to wait for a counterparty to trade. You just have to accept that there'll be some slippage, but you'll always get a quote. You know, you'll never be in a situation where you can't sell, you know, the asset or trade the asset that you want to trade. It's just a question of be willing to deal with the slippage. and synthetics exchange is kind of similar. You can always turn up so long as you've got debt and trade that amount of debt for a different asset and reprice it. And I think I saw you were saying that the average trading size on synthetics is a lot higher than on other exchanges, or at least on other dexes.

Is that right? Yeah, that's right. Yeah, it's typically quite a bit higher because, you know, you just have people who, you know, want to trade, say, you know, $20,000 or $30,000 that they couldn't trade on, uh, on other debts. And obviously, you know, centralized exchanges, there's, there's more liquidity because, you know, they're just much bigger markets. Um, but as the, the synthetic asset pool grows, as the debt pool grows, um, you know, it's possible that we could see orders of, you know, $5 million, $10 million, for example.

All right. And so how are fees set on synthetics? So at the moment, it's a flat 30 basis point fee. and then there's an additional fee if you're moving from a long token to a short token, and this is, again, one of the kind of tradeoffs that we built in to prevent front running. So if you go from S-Maker, which is the long version, to IMaker, which is the short version, you pay 60 basis points. And who decides what those fees are? Well, the community side.

So we had the fees set at 50 basis points up until a few days ago. and one of the community members put in a proposal to reduce it back to 30 basis points, which it kind of has been sitting at historically, and that passed pretty unanimously, and so the fees were updated. So it's kind of, again, handled by our rough consensus within our Discord channel and within the community. And we have talked about Uniswap a few different times, but as far as I understand, Uniswap also has been kind of pivotal to the success of synthetics. How so? So there's this very strong kind of symbiosis, I think, with Uniswap.

You know, when Uniswap was announced, it was very obvious to me that it was going to become quite powerful for Defi protocols, and particularly for us, because we need liquid on-ramps and off-ramps, and we need to know that those on-ramps are always going to be there. You know, we need people to be able to get into the debt pool and out of the debt pool in order to trade on synthetics exchange. And so what we did earlier this year was to incentivize people to put liquidity into the synthetic ether pool. And so that's now grown to be the largest pool on uniswop, you know, and does typically, you know, it's in one of the top exchanges in terms of volume on a daily basis as well. And so now, you know, you can move in and out of synthetics exchange

via this uniswap pool and the slippage is pretty minimal for you know trades of like ten thousand dollars or so which is pretty good so the average trader trying to move in and out of synthetics exchange can go through uniswap pretty comfortably and something that uh you know we talked about earlier was how you changed the monetary policy and um you know how you started the project one way but it ended up going a different way and you know how you had maybe one thought to do a synthetic stable coin, and then later you realize people wanted volatility. And I've also heard you talk about the importance of iterations. So just with like all the different twists and turns that your project has taken, like tell us kind of what the lessons for

you have been and like kind of what the different things are that happened that made you realize, like, oh, it's better to, you know, go this way than that way. I mean, I think, you know, startups just operate that way. You know, there's a lot of, you know, there's a lot of, you know, there's a lot of opacity in, you know, trying to run a startup and trying to kind of predict what's going to happen. It's almost impossible. And, you know, really, you just need to kind of play small bets and respond to what the market says.

And, you know, so we, we placed a very large bet, which, you know, you could argue it was kind of dumb, that, you know, regulated stable points wouldn't be a thing. And then when all of a sudden they were, we realized that, you know, the market that we were attempting to address had kind of been, you know, pulled out from under. us. And you just need to respond to those sorts of things. So, you know, we looked at what we built and we're pretty comfortable that it was a very powerful protocol and would have a lot of value, but we just needed to define the right market for it. And so, you know, we started issuing assets. And again, you know, another kind of small bet that didn't really play out was this idea that

if you had multiple fee currencies, people would be happy to move in between those via currencies. And that turned out to really not be the case either. There's not a lot of demand for that. But what we did see demand for is, you know, trading these volatile assets. assets and having access to a number of different crypto assets and fee currencies and commodities and other assets on a single platform. That was where we really started to see product market fit and generate some real interest. And what about that moment when you had this confrontation with the trader who had built the bot that, you know, had nearly a major system and solvent? And at that moment, what do you feel like the lessons were for you and for other entrepreneurs in the space?

I mean, you know, I've been running startups for a long time and most of them have failed, you know, as startups tend to do. And, you know, you always have these crisis moments. And I do think there is a point where, you know, if you've been through so many crises, you know, you kind of become a newer to them a little bit and you can kind of detach and not become emotionally invested in and what's happening. And, you know, in that moment, it was really just about, okay, how do I resolve this specific issue that's right in front of me and not really thinking through, you know, the implications and consequences. But it was almost three hours, I think, that we were negotiating with him to kind of roll back the system. So it was pretty high stress environment. But, you know,

again, I think having gone through, you know, similar issues in other startups where, you know, things blew up, you just have to kind of roll with it and, you know, treat the situation that's in front of you and deal with that directly. So something also that's come up a few times in this show is, you know, you talked about how you made this decision to change your monetary policy. And I could just imagine that when you decided that that, you thought that that would be a good idea that you might be nervous about presenting it to the community. So was there any community input on that? And if so, how did you factor that in? Yeah, we, you know, I actually had originally came up with the idea, you know, almost eight months before, before DevCon 4. And so at DevCon,

you know, there were a number of people that were stakeholders in the project that I kind of pulled aside and said, hey, what do you think about this? And, you know, it, you know, it was a lot of, It was reasonably positive. There was definitely some skepticism around it. And, you know, is this just kind of some hell Mary to try and, you know, I guess, get attention to the project or something like that? But, you know, I was able to kind of make the case. I think that, you know, the issue we had was we weren't properly incentivizing people

to understand the protocol. And, you know, when you look at things like Bitcoin, for example, and how Bitcoin generated its network effects, it was because it was paying people to understand it. the protocol itself paid people to learn how to install mining software and understand block rewards and all that stuff. And I think if that didn't exist, it probably doesn't gain the traction that it did. And so, you know, I looked at that and I said, we need something similar to incentivize people to care about this and to, you know, to want to actually learn about it.

And, you know, I think we're able to convince most of them. But even still, I was pretty surprised. I expected a lot of pushback from the community when, you know, we announced it. but interestingly, they were super positive about it. I think mainly because most of them already understood the network and we're essentially saying we're going to pay you for understanding it. And people who are not actively participating will be punished. And so it was much more positively received than I expected by a very, very wide margin.

Yeah, and this is kind of like a theme of the conversation where there's this tension because certain elements of what you're doing are centralized, at least at the moment. But then, you know, just even the things like, you know, when I asked about the exchange fees and stuff, you said, oh, well, actually, that was, you know, set by the people in the discord. And, like, the defy index was decided by a community member. So what, you know, what is going on with governance? Like right now, I know you guys have a foundation. but at some point, I think you'd like to move to a Dow.

So what's your vision for how this will be governed? Yeah, I mean, obviously we're quite a small team. I think people don't realize how small our team is and how hardworking the engineers and everyone in the team is to kind of keep the project going. But it's just impossible for seven or eight people to kind of anticipate everything that could happen. We can respond to things, but trying to kind of understand where we should go next just requires the inside of a much larger group of people.

And so, you know, the community has kind of, you know, really stepped up and become pivotal in helping us to, you know, understand where we need to go next and see some of the issues. And, you know, oftentimes we don't necessarily immediately agree. You know, the core team might kind of look at a proposal and say, oh, we don't think that's great. idea. But, you know, the rough consensus model kind of allows for those debates and those discussions to kind of evolve over time. And, you know, most of the time we kind of reach consensus, both internally, you know, within the team and within the community and are able to kind of, you know, move forward. But it's just not possible with a project as complex as this is to not have that outside input. And so we really try to foster it as much as possible and be as open as we can to

to kind of bringing in those outside views. But then, I mean, for the future, do you think that you might move to a Dow? I think we might. You know, it's something that we're looking at right now. You know, in order for us to, I guess, stay ahead of the kind of, you know, potential regulatory issues that are coming up, we need to not be in control of the protocol. And so, you know, rough consensus is helpful and bringing in those external parties. but at some point we need to, I guess, relinquish control, you know, of the protocol upgradeability.

And so that's something that we're looking at, you know, that potentially could be managed by a Dow. But, you know, it's something that we obviously need to, I guess, you know, understand a little bit better and, you know, work through what the implementation looks like as well as, you know, working with the community and letting them kind of, I guess, help us to understand what they want from that. because, you know, if you move to on-chain governance and you implement a Dow, and the Dow is kind of controlled by this plutocracy, as we've seen in a couple of other projects, kind of emerge, I think it has a really chilling effect on participation within the community. And so we're really wary of trying to thread that needle and kind of manage that, I guess. And as mentioned earlier, you guys also did an ICO, and I think you raised about 30 million.

Is that right in 2018? Yeah. Yeah, that's right. And I believe from a conversation that we had, you think it was maybe from about 70,000 wallets. Is that right? So there's about 70,000 wallets who hold our token, but a lot of that came from a very large air drop that we did

that was, I think, about 65,000 wallets. So there were about 5,000 or 6,000 people who participated in the sale, you know, in the open sale. and then there were bounties and airdrops and things like that. Okay. Well, in addition to that, you also recently did a small VC raise. What was the purpose of that raise? So, you know, we have a large treasury, obviously,

that, you know, is mainly SNX tokens. And it was really about bringing in, I guess, some new stakeholders. And there had been a lot of interest in people participating in the protocol. And, you know, one of the challenges, I guess, of having not that much liquidity in the spot markets is that if someone wants to get, you know, two, three, four, five million tokens, they really can only get it from the foundation. And so as that demand grew and more people were interested, we started to kind of, you know, have some conversations and vet those people. And we ended up going with framework ventures who've been amazing that, you know, they're participating in all aspects of the system that kind of helped to work on the inflation. change as well. So, you know, I think we pick the right team to kind of come in and help us,

but, you know, we need, as I said, to bring in external stakeholders and people who can kind of help to push things forward. So, you know, if you find the right people in the future, we'll probably look at, you know, selling tokens out of the treasury to them as well to get them into the ecosystem. And there were also rumors about Andrews and Horowitz taking an interest. What was that about? I mean, you know, there's a, there's a wallet that is controlled by A16Z that has S&X tokens in it. It didn't come from at the foundation directly. But, you know, it looks like they do have a position in synthetics if you look on chain.

So, you know, I can't really provide it much more information than that because, you know, that's kind of all I know. But, you know, there's a lot of people in our community who are very good with chain analysis and we're able to kind of work out. what was going on and, you know, it was on Twitter before I knew anything about it. So it was, it was kind of an interesting incident, I guess. There are so many incidents like that in crypto. But anyway, well, yes, like the whole space. In other interviews, you've mentioned that you have confidence that decentralized finance will consume centralized finance eventually, but that right now there's a lot of challenges. What are the biggest challenges? I think the main is that we still haven't abstracted enough complexity away for, you know, the average user.

And that kind of flows all the way through the stack, right? So, you know, user interfaces and user experience is still, you know, pretty far behind centralized finance. I think, you know, the other issue is there's a lot of friction getting money in and out of the system, getting value into the system. So, you know, it's going to take at least, you know, a few years, I think, before we can kind of bring all of this this kind of complexity much lower

and just remove it and kind of provide I guess experiences for users and products for users without them needing to really understand what's happening in the background. All right. Well, we'll see

how you and others resolve all these problems or all these challenges. Where can people learn more about you in synthetics? Best place is probably to, you know, if you really want to dive in to jump into our Discord

channel. But you know, you can go to synthetics.io if you want to have a look at the system and get an overview. We also have a dashboard, which is dashboard.sympatholics.com, which gives an overview of the network, which is kind of cool. You can see all the different sense and what the open interest is, et cetera. Great. Well, thanks for coming on Unchained. Thank you very much for having me. Really appreciate that. Thanks so much for joining us today. To learn more about Kane and Synthetics, check out the show notes inside your podcast player. If you're not yet subscribed to my other podcast Unconfirmed, which is shorter, a bit newsier,

and now features a short news recap. Be sure to check that out. Also, find out what I think are the top crypto stories each week by signing up for my email newsletter at Unchained podcast.com. Unchained is produced by me, Laura Shin, with help from faster recording, Anthony Yoon, Daniel Nuss, Josh Durham, and the team at CLK transcription. Thanks for listening.