Scaling the Synthetix Debt Pool with Thales collateral

Summary

The size of the Synthetix debt pool is constrained by the market capitalization of the SNX collateral. Other types of collateral meeting specific requirements around decentralization should be able to collateralize synths, thus diversifying the source of collateral backing the debt pool, engaging communities aligned with Synthetix, and relieving the supply limits. As a Synthetix ecosystem project incubated and funded by the synthetixDAO, Thales tokens will be well-positioned to serve as another source of collateral for the Synthetix debt pool.

This scenario is forward looking as Thales tokens are not live yet. I wanted to get community feedback and a temperature check anyway.

Scenario

The motivation for additional collateral sources, like Thales tokens, is that the SNX debt pool needs ways to scale. The sUSD has traded above $1.00 and sometimes for months at a time. This premium suggests there is significantly more demand for sUSD than the SNX market capitalization can realistically support in the form of supply.

Two required properties of new assets collateralizing the debt pool would be:

1, the asset is reasonably decentralized in ownership.

2, the asset is uncensorable in transfers. While ERC-20 tokens are usually freely transferred, it’s logically possible for USDC or renBTC to be stopped from having free transfers due to potential regulatory capture of legal entities associated with these tokens.

35% of the Thales token supply will be owned by Synthetix stakers. Those stakers are also poised to be eligible for staking rewards on Thales, which makes up 25% of the Thales token supply. In total, at least 60% of the Thales token supply is dedicated to the primary purpose of being in the hands of not only the DeFi community at large, but also the SNX community in particular. From this information it is reasonable to conclude SNX stakers will own significantly more than a simple majority of the total Thales supply.

The Synthetix Council may be wary of adding additional collateral sources. The SNX token has a unique privilege in the Synthetix system of representing a pro-rata claim on the Synthetix fee pool. For non-SNX collateral, such as when a user mints sETH with ETH courtesy of the Ether Wrappr SIP, the owner of ETH position has no claim on the Synthetix fee pool. Other collateral, such as Thales tokens, would follow suit.

Positive impacts for the debt pool would be a reduced sUSD premium and more fees for SNX holders as more synths are floating around.

From the perspective of Thales token holders, participating in claiming fees from the Synthetix fee pool should not be necessary anyway. Capturing protocol fees generated by Thales usage, while generating liquidity against the market value of the Thales tokens, would likely be sufficient to attract most Thales stakers to mint synths. To address potential under-collateralization below the target level of collateralization for non-SNX collateral, an aggressive liquidation mechanism could be put in place to ensure the debt pool is not put at additional risk from a Thales token holder abandoning the collateralized position.

Additional collateral presents its own risk profile. The Synthetix Council may elect to add new collateral with different risk parameters than the parameters used for SNX. Thales tokens might start out with a 750% collateralization ratio to mint synths. Reaching sufficient liquidity on Thales tokens for the Council to be comfortable with liquidation and having a reliable oracle for the Thales/USD token price will also be required.

1 Like

In general I’m all for this, however I think the primary obstacle here is going to be that Thales’ token will likely have relatively little liquidity, as measured in dollars, which will likely result in sTHALES being a difficult synth to approve in the first place. Of course work is already underway towards synth supply caps and other measures that will allow us to expand our offerings there, so gated on those improvements, this proposal seems an excellent one.

1 Like

An interesting proposal. Something that has always been on my mind regarding Synthetix tokonemy is how can you scale the collateralisation/synth market to an industry standard and size without detracting from SNX holders. A good middle ground would be spin off synth project tokens such as Thales, which is rooted from the SNX holders anyway. Smaller market cap of Thales (at least at the start) would constitute a higher c-ratio, as you mention.

I’m not fully across the fee schedule for the planned binary markets on the Thales platform. You imply that Thales protocol fees would go to Thales minters (rather than getting Synthetix fee pool). With your implication of helping the sUSD peg, I’ll assume staking Thales tokens would be minting sUSD? (the tie back to Synthetix) for use on the Thales platform (or to transfer off) which will then be linked to its own c-ratio staking UI on Thales platform, rewards in inflationary Thales tokens (and not SNX)? If this assumption is correct, would this mean each binary market spread would include a synth fee schedule for sUSD use (going back to SNX stakers/fee pool) and a Thales fee schedule that would go to Thales stakers? To expand on that question a bit, will the tokenized binary markets that Thales will offer be incorporated into the Synthetix Synth debt pool? Or will these markets be self-collateralised by its users, so to speak, with a self-contained liquidation system? Would there be any fee schedule back to Synthetix pool for the synth that a particular binary market is founded on?

1 Like

Thanks for the thoughtful reply here BiGs. Yes, the proposal is for THALES tokens to collateralize and mint sUSD debt positions. There will be significant THALES staking incentives for Thales tokens to be earned by Thales token stakers.

“If this assumption is correct, would this mean each binary market spread would include a synth fee schedule for sUSD use (going back to SNX stakers/fee pool) and a Thales fee schedule that would go to Thales stakers?” Fees generated on Thales would go to Thales stakers. On a mechanical level the Thales fee pool is completely separated from the Synthetix fee pool. This proposal only suggests minting sUSD with Thales tokens as collateral and Thales token market value as the determinant for how much sUSD could be minted. Of course, more sUSD in circulation is good for Thales, too. Liquidity begets liquidity. Since Thales only takes sUSD as collateral for starting a market or market making or trading a binary option, the total sUSD supply is an effective upper constraint on pool size. The more sUSD in circulation, the more opportunity that exists for greater orderbook depth.

“To expand on that question a bit, will the tokenized binary markets that Thales will offer be incorporated into the Synthetix Synth debt pool?” The Thales markets would not touch the the Synthetix debt pool in the current implementation. The primary touchpoint between the two systems is that Thales only takes (uncensorable) sUSD as collateral to make a market or trade a long/short binary option.

There’s no liquidation system in Thales yet. Solving for leverage on binary options is a really captivating area for R&D. The issue with leverage on options is a lack of a reliable oracle by which an auto-deleveraging mechanism would function. One might think to use the price of the options themselves as the oracle point for determining when a levered position should be liquidated, but the current market price of an options is not always very liquid and is relatively susceptible to manipulation.

“Would there be any fee schedule back to Synthetix pool for the synth that a particular binary market is founded on?” Nope. Fees generated by usage of the Thales protocol will solely be claimable by Thales token stakers.

1 Like

Sharp points as always, JWTKAT. Developing market liquidity for Thales tokens and sourcing a reliable price feed are certainly concerns that should be fully addressed before the addition of a new source of collateral for the debt pool.

One idea here is DHT (dHEDGE DAO token) and XTK (xToken) are also projects with some alignment with Synthetix. Token holders in those communities might be interested in collateralizing those tokens to mint sUSD. In terms of scaling the Synthetix debt pool to grow 5x from its current state, I’m not sure new ERC20 collateral will necessarily do the trick but it could start to move the needle toward net growth of the Synthetix debt pool in a way that’s not wholly dependent on the SNX market cap.

Yeah that’s a solid plan I’d say. At this stage we want to increase debt pool size without detracting on the founding aspects/rewards. When the volume really starts taking off, Thales/Synthetix could then look at doing that legacy market maker role at least in part, where volitility and skewed liquidity is monitored, backend hedging/mitigation occurs with some sort of teasury fund, while the spread and price divergence from oracle is adjusted according to risk.

1 Like