Synthetix: A Crypto Strategy Case Study

Product-Token Fit, Même Factors, Signals, Hooks and Liquidity Incentives

By the summer of 2019, Synthetix were on a roll. As Havven, they had nearly perished in the long cold crypto winter. But now things had started to warm up. In late 2018, they rebranded as Synthetix and had come up with an updated strategy based on minting and trading synthetic assets. By Q1’19 the market started to respond favorably and SNX, the Synthetix token, commenced an extraordinary price rise that is still powering ahead six quarters later.

We have all heard the term product-market fit. Here we have a great example of a mutation of product-market fit that is unique to crypto: product-token fit. When we find product-market fit, we start to see a switch from linear to exponential growth, as excited users tell their friends about the amazing product they have found. In product-market fit we build stories that users can tell about the product: how it helped me solve X problem or save Y dollars. In product-token fit, the mechanism for powering growth is the narrative. It’s no longer about how good the product is, it’s about how compelling the vision is. More precisely it’s about how easy it is for this vision to spread between humans brains i.e. mêmes, in the original Richard Dawkins sense of the word. A même is an idea that is adapted to replicate very efficiently across human brains. In Dawkins original conception, mêmes are subject to evolutionary effects, where they mutate, compete, cross-fertilize and live or die depending on their ability to self-replicate.

Before Synthetix, MakerDAO had shown how you could create a new “virtual” asset out of nothing more than collateral - a synthetic asset or synth for short. Once collateral is locked in Ethereum, any asset can be created out of thin air. In MakerDAO’s case they magicked up a US dollar synth. Synthetix extended this so that you could magic up anything: Euros, gold or Bitcoin. We are now starting to see a range of platforms where synths will include oil, Apple stock, trade credit, futures, swaps and more. The supply of synths is only limited by our imaginations and the size of the pool of collateral we can amass. This sense of unlimited potential is one key factor (a même factor) when it comes to même design. This goes beyond having a large total addressable market. It’s a powerful idea that crypto is not just going to find a niche in our current economic system. Instead it is going to create a whole new economic paradigm. First mover in the green field of generalized synthetics was a very powerful place for Synthetix to be. It also happens to be a very easy idea to spread, bringing hope in the deep crypto winter.

The second même factor was to splice the exchange même into the Synthetix DNA. In the 2017 bubble, the big winners were exchanges. The dominant narrative in 2018 was that centralized exchange dominance was impossible to defeat. Binance were on fire when it came to rolling out new ideas. Decentralized exchanges would never get the liquidity or volumes of trades required to compete effectively. Synthetix created a glimmer of hope that a DEX could compete, not by copying centralized exchanges but by changing the game. Synthetic assets relied on proof of collateral to be credible. This was best achieved on-chain rather than trusting a centralized custodian. This new exchange même factor not only reinforced the unlimited potential même factor: it added in a very credible business model with exchange fees.

The final piece of the puzzle was go-to-market: how would Synthetix bootstrap their exchange? Without a credible go-to-market the même would fall flat. To make the exchange succeed, they first needed people to mint synthetics i.e. to create supply. And then they needed to drive demand for these synths. MakerDAO had shown where the demand was: traders wanted access to on-chain leverage to speculate. MakerDAO allowed them to hold their ETH positions, while levering up to trade with borrowed funds (the DAI synths they minted).

The supply-side incentives were already there. The core protocol was designed to provide rewards to anyone who minted a synth. This superpower of crypto tokens was well understood before Synthetix. Any marketplace could help bootstrap supply, demand or both using tokens. Given the speculative demand already existed, Synthetix choose to focus on supply-side incentives. But here they ran into a problem, and this is where they set in motion the Summer 2020 tsunami of liquidity incentives. So let’s look into what happened and how they stumbled on this amazing new superpower.

The journey starts when users buy and lock up SNX. They are then allowed to mint synths up to the value of 1/5 of their SNX holdings (this was later reduced to 1/6). So it all starts with debt. A user can buy $1000 of SNX and then borrow $167 sUSD, where sUSD is a synthetic asset pegged to the US Dollar. In return, they would earn extra SNX rewards generated from inflation of the token supply. Note here that the leverage is (intentionally) modest. This sets us on a short detour into signals.

If we think of mêmes as driving excitement and generating awareness of the protocol, signals modulate the mêmes. The Synthentix team were very clear in setting out that the project was focused on long-term growth and not a short-term pump-and-dump scheme. By keeping the leverage ratio so low, they signalled how serious they were in that intent. Typically for startups a strong marketing signal is an investment from a brand-name VC, a founder with a history of success or the winning of a strategic account. Signals are a vital part of community building in crypto, especially where the traditional signals are missing e.g. where there are anonymous contributors to a project, or when the project is funded by an anonymous community. But as mentioned above, what we are interested in here is there ability to modulate the perception of mêmes. In crypto, a story that is too good to be true, is more often than not a scam. Signals can dampen the virality of a même, but they can also help to plant the même into the minds of the more influential crypto community members, improving the long-term chances of success.

We can also distinguish here between Dawkinsian mêmes and visual (dank) memes (which is usually written without the circumflex). The Synthetix community has excelled at the visual memes (as you can see in the images throughout this post). The Dawkinsian même, on the other hand, is the viral narrative around a token. For Bitcoin it is digital gold. For Cosmos it is the vision of the internet of blockchains. Ideally the dank memes should reinforce the Dawkinsian mêmes. When the memes work together to add to the narrative in this way, the memes becomes part of the signal. In the case of SNX, the imagery of the SNX Spartan paints a picture of a loyal community that will defend their project at all costs.

One genius feature of Synthetix was that to earn rewards, users not only had to mint synths but they had to come back to Synthetix application to claim their rewards every week. Every Wednesday was payday. It was hard to forget. It was such a powerful hook to get users back to using the product once every week (Nir Eval has described hooks very well in his book called Hooked). Crypto will enable hooks-on-steroids and Synthetix designed a superb experience. Every week a user came back, initially to claim a small reward. But as the SNX price increased the reward got bigger every week. And the rewards compounded. But also over time the user came back to see new features. They saw the progress the Synthetix team were making. They started to see that the team were working hard to increase the value provided for their users. The volume of synth trades was increasing. The SNX price was increasing. Many of these users felt part of a growing community. They followed the blog posts and joined the community. They got involved in governance (we will have a lot more to say on community building and governance in future posts).

And now for the other genius move. The move that accidentally created the liquidity incentives tsunami. The problem was that when a user minted sUSD, it had nowhere to go. Synthetix had designed a system where the incentives were internally consistent. But now the limiting factor was out in the external world. There just wasn’t a functioning market for sUSD. If sUSD was to compete with DAI, the reigning USD-pegged synth, it needed liquidity. To be useful, sUSD had to be converted into the most liquid asset on Ethereum: ETH. And so liquidity incentives were born. Any user could provide sUSD/ETH liquidity on the Uniswap exchange and in return they would earn SNX tokens. Once a synth has liquidity, it can stand on its own two feet. It becomes mobile, in that it can move around the blockchain. It becomes composable, in that it is now a building block that can be reused by other DeFi services.

So that hits on some of our core themes for this publication. To build a successful crypto project you need a Dawkinsian même, a brain virus that can spread. For SNX it was unlimited potential of synths combined with the powerful exchange business model to capture the value. They signaled credibility in a way that was detrimental to the early adoption but that attracted a loyal following of serious crypto users. This loyalty then became part of the community memes, which reinforced the credibility signals. In fact, this worked so well that the “Spartan” memes were incorporated into the official SNX branding (see above). They brought their users back every week for the dopamine hit of free money. And they carefully designed the incentives that would make their synths useful in DeFi, giving them the composability required to create partnerships with other DeFi projects and hence a powerful go-to-market.

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