Thread by @BarryFried1

Interested in using @synthetix_io?

Want to avoid liquidations whilst collecting max $SNX yield?

Here’s a comprehensive guide to risk management on the @synthetix_io platform, and why a “death spiral” scenario is EXTREMELY unlikely🧵👇

As we know, users can stake their $SNX tokens and mint Synths (synthetic assets) against their $SNX with a minimum c-ratio of 400%, receiving synth trading fees in $sUSD + 12 mo escrowed $SNX rewards.

(Min c-ratio constantly changing based on mkt conditions)

Synths can be used on @kwenta_io for perps, @lyrafinance for options, LPing on Curve, Uniswap Velodrome etc, allowing EXTREMELY low slippage swaps (utilized in swap aggregators like @1inch->juicy $sUSD fee revenue back to $SNX stakers!)

synthetix.io/synths

“But ser, what happens when $SNX price drops (or debt pool value increases), causing Synth minters’ c-ratio to drop below 400%?”

Simple.

Users will no longer be able to claim $SNX staking rewards UNTIL they either top up $SNX collateral or burn Synth debt back to 400%+ c-ratio

Now, the c-ratio % is given based on the TOTAL debt pool ratio between ALL Synths (not just personal debt)…

For example, let’s say I mint $1000 worth of $sETH and you mint 1000 $sUSD, each with $5000 worth of $SNX staked collateral (500% c-ratio)

Currently, we each own 50% of the debt pool=500% c-ratio.

However, let’s say $sETH price jumps 50% (whilst $sUSD price obviously stays constant)…

Now, the value of my debt=1500$, while yours=1000$

Given total debt is based on the debt pool ratio, this equals 1250$ of owed debt per person,(1500+1000=2500/2->1250$) leaving me with a 250$ net profit +you with a 250$ net loss

(If $SNX price stayed constant, our c ratios would now be 400%)

Don’t want to worry about this?

Users can effectively hedge against the debt pool on @dHedgeOrg to mitigate risk! (On L2s as well👀)

(Note: this is automatically provided on the Synthetix debt frontend. For backend details, check this👇)
app.dhedge.org/pool/0x59babc1…

Let’s say the Synth minter doesn’t fix his <400% c-ratio, and it goes below 145%.

The minter will be flagged for liquidation, giving them 12 hours to raise their c-ratio all the way back to 400%+…

(+higher staking rewards for everyone else if <400%)

The minter has 3 options…

a. Top up $SNX collateral or burn Synths back to 400%+ c-ratio

b. Self liquidate->20% staked $SNX liquidation penalty

c. Does nothing->30% staked $SNX liquidation penalty

Where does this “penalty $SNX”+ synth debt go after liquidation?

You guessed it — proportionally back to $SNX stakers based on debt pool share!

($SNX is escrowed over 12 months. For example, $SNX stakers could receive 130$ of escrowed $SNX+100$ of extra synth debt)

So why exactly is this system so robust?

1. Violating synth minters cannot claim $SNX staking rewards well before liquidation (targeted around 85% APR in $SNX+sUSD).

If unclaimed by the end of the week, his share of rewards will go back into the pool for next week’s rewards.

Because of this, the liquidation-flagged violator would have to be…

a. synth minter who simply forgot to top up, and will most likely self liquidate (20% fee)

b. someone nowhere to be found and/or trying to wreck the system, and will be liquidated by a 3rd party (30% fee)

2. Other stakers are heavily incentivized to keep a healthy c-ratio due to substantial liquidation fees.

In addition, liquidators do NOT use their own funds to pay off debt (as we traditionally see, potentially resulting in earned collateral sold…

…->further price dump->c ratios ⬇️ ->more liquidations->repeat)

Rather, violator debt+ $SNX collateral+ 20-30% liquidation fee is proportionally distributed to $SNX stakers, whilst those who perform the liquidation are rewarded with a flat 20 $SNX reward! (2 $SNX on L2)

3. Large insolvent accounts that are unable (some synth debt liquidated on @kwenta_io, didn’t hedge against debt pool) or willing to burn debt/top up SNX collateral can simply self-liquidate any time below target c ratio if desirable and incur a smaller “net loss”

So what’s the potential “death spiral” doom scenario?

Well, since accounts are flagged 12 hrs before liquidation, it gives the violator extra time to top up and/or self-liquidate…

The $SNX price would have to drop 50-90% EXTREMELY quickly +small amount of self liquidations in order to cause multiple below 100% c-ratio liquidations, causing lots of bad debt to accrue to other stakers…

(Aka very unlikely :)

But that’s not all…

As synth swap utilization scales due to low slippage from atomic swaps on mainnet/L2 (more aggregator/amm swaps)->more sUSD trading fees back to SNX stakers->users incentivized to top up c ratio-> healthier system!

(Will write on Synth atomic swaps soon 👀)

Thank you for reading.

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@BarryFried1

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https://twitter.com/BarryFried1/status/1549376455095865345

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