Synthetix becomes a strategic partner to THORChain

2019-11-29 — 4 min read

Synthetix

Synthetix is a decentralised finance application on the Ethereum blockchain that provides exposure to synthetic derivatives of other financial assets (called synths). Users can access assets such as gold, Bitcoin and U.S. Dollars, (soon TESLA, AAPL and other stocks) within the Ethereum blockchain in a censorship-resistant way with distribution of trust.

Synthetix has seen meteoric rise in 2019, taking on investment from Framework Ventures, working with Chainlink, launching Mintr and the Synthetix Exchange, listings on Liquid and Bittrex and finishing the year second only to MakerDAO in term of locked assets. Synthetix has shown what decentralised finance can be and how product-market-fit can be achieved.

THORChain

THORChain is essentially Uniswap for the cross-chain environment. Uniswap is another example of a decentralised finance application on Ethereum achieving product-market-fit, with $26m in staked assets, providing liquidity for over 100 markets. However, the following are some key differences between THORChain and UniSwap:

Supports all chains with 1-way state pegs and threshold-signatures
Removes the Impermanent Loss problem with the CLP formula
Prevents sandwich attacks, allowing pools to emit trustless price feeds
Faster execution of swaps with asynchronous liquidity delegation
Protocol-level incentives for stakers
System-wide collaterisation on all staked capital

Trustless Price Feeds

One of THORChain’s unique attributes is its trustless price feeds. Every pool has assets bonded to Rune, such that the purchasing power of the asset at any point in time is given simply by the ratio of the pool balances.

y = (x * Y) / (x + X), where x = input, X = Asset, Y = Rune

This means the pool’s balances emit a price feed, and since anyone can interact with the pool, over time the pool’s balances represent fair market intent. UniSwap has this same feature, and from historical analysis can be seen to track reference market price within a margin of 30 basis points (the UniSwap liquidity fee).

Sandwich Attacks

The problem with UniSwap’s implementation is that it is vulnerable to low-cost sandwich attacks, which is a known problem. Any attacker, for the cost of 60 basis points, can move the pool prices in any direction and back again very quickly in a “sandwich attack” (where the victim’s order is sandwiched by the attacker’s).

Solution

One solution is to create an array of historical prices at regular times and generate a time-weighted average price over a certain time period, which makes the cost of attacks much more easier to reason about (and more expensive). However this can cause runaway state growth (especially for ethereum smart contracts) and can still be sandwich attacked (by sandwich attacking at precisely the point at which the snapshot is taken).

A better solution is to couple the fee paid with the slip caused by the transaction, such that final fee paid is always representative of the demand of liquidity, no matter the pool’s depth or size of the transaction. This is called the “Continuous Liquidity Pool” (CLP) formula:

y = (x * X * Y) / (x + X)^2

Thus if a transaction causes a 0.3% slip in price, the spender will pay 30 basis points, but if the transaction causes a 1% slip in price, the spender will pay 100 basis points. This works no matter the size of the pool or transaction. As a consequence, sandwich attacks become prohibitively expensive, at the same time paying large fees to stakers. This in turn increases the incentives to add capital to the pool, making follow-on attacks even harder.

For the same attack scenario, the attacker will pay 30x in fees with the CLP formula

Liquidity Fees

The other benefit to the CLP formula is that fees asymptote to zero as demand for liquidity drops. This means as the market stabilises it will approach the exact market price.

THORChain and Synthetix

Strategic Partner

Synthetix and THORChain will become strategic partners allowing both projects to play to their strengths and work to roll out decentralised finance to the entire ecosystem.

sRUNE

sRUNE (synthetic RUNE) will also be listed in the Synthetix ecosystem for better price discovery of the asset. This is the first Ethereum-based asset of the RUNE token.

SNX on ASGARDEX

Additionally, SNX will be one of the eligible assets to be listed on ASGARDEX once THORChain connects to Ethereum, estimated to be Q1 2020. SNX holders will be able to stake SNX and access pairings to all other supported assets on all other chains.