Thread by @kaiynne

Now that sXAG (silver) markets are live I want to provide some context on the situation for those who have not been living in the Synthetix discord for the last few years.

Firstly, sXAG is a Synthetic ERC-20 (lives on Ethereum) silver token that tracks the price of silver via this @chainlink oracle: data.chain.link/xag-usd.

This allows anyone in DeFi to get price exposure to silver without needing a traditional brokerage account or paying crazy spreads on bullion. Synthetix also supports sXAU (gold) and sOIL (Brent Crude Oil) as well as a number of forex currencies like GBP and AUD.

The majority of Synth volumes come from crypto though, which as well all know and love are always on. So there is always a price being pushed to the oracle. data.chain.link/eth-usd for example updates 24/7 365 days a year. No market closures!

With TradFi synths though like sNIKKEI (a Synthetic tracker of the Tokyo stock market) these markets close all the time. Literally they are closed more often than they are open.

The current solution to this is that there is an automated off-chain mechanism to disable trading into these assets when the oracle is not live due to the underlying market being closed. This will likely be transitioned to keep3r in V3.

There was (is?) a plan to handle closures by filling any trade at the next price update. sips.synthetix.io/sips/sip-52 this would allow someone to trade into sEUR on Saturday and get filled as soon as the market opened on Monday. Basically a standing market order placed on the weekend.

That SIP was written in march 2020. In the interim it was felt that the lower volatility of Forex Synths and commodities meant that there was minimal risk to leaving these markets open on weekends. During the week it is fine because there is always a market open somewhere.

Now there is a fair question, which is even if the risk was small why allow it? Mainly because the trade-off was in much worse UX as these synths would be frozen during the weekend andnot- transferrable, which was considered bad enough to offset the risk…

What looked low risk in the past now looks a little quaint in 2021. Based on the expected abnormal volatility in markets like silver and gold or basically any market at this point the Spartan Council decided it was prudent to apply the same market closer mechanism universally.

But where does the Spartan Council get the authority to do this? They are the elected representatives of all SNX holders who actively stake. So they have the power to instruct the protocolDAO to make changes to Synthetix on behalf of all token holders.

They are in many ways a much more effective governing body than previous governance mechanisms, because they are mandated to be more risk averse in protecting token holders, and they are not distracted by implementation level considerations.

So over the weekend as the silver buzz increased they became aware of a situation where the protocolDAO had not implemented a change (SIP-52) for a year, and left stakers exposed to significant tail risk and they immediately acted to ensure the protocol was protected.

Crucially though, now that the global Silver markets are open, trading in sXAG will be available until the last market closes in Europe on Friday. But there is an argument that this model does not deliver on the promise of DeFi. It is a good argument!

As part of Synthetix V3 planning there is R&D being done on how to enable 24/7 trading of any Synth, including importantly equity Synths like FTSE and NIKKEI and maybe individual equities in the future.

As of SIP-104 the Spartan Council is now also in control of SIPs themselves giving them even more power to direct the future of the protocol. This crucial includes new Synths, so whether we add synths like sAAPL and sTSLA is in their hands.

If bilateral trading is enabled traders will be able to leverage ~$500m in Synths outstanding so liquidity is likely to be much higher in these kinds of markets than if they were simply issued as individual synthetic assets as other protocols do.

The final point is that over the weekend there was an arbitrage opportunity due to trading still being enabled on Forex and commodities. Around $6m flowed into sXAG on this basis, at around a 5% profit when the market open and gapped up. Those profits were legitimate!

Anyone who was able to take advantage of this was capturing a bounty for identifying the fact that prior risk assessments were flawed forcing action on the part of protocol governance in a timely fashion. But the profit extracted was at the expense of SNX stakers.

One of the reasons for the high APY on SNX is to compensate SNX stakers for the risks like this that they absorb every day. As an SNX staker myself I accept this and realise it will improve the system moving forward now that this risk has been removed.