In recent weeks, general activity on the Synapse bridge picked up. This is a function of both a general increase in on-chain activity and an increase in Synapse market share, when it comes to general bridging volume, on the back of specific routes e.g. Canto.
In light of the above, a recalibration of the SYN emissions likely makes sense, especially after those were cut aggressively throughout 2022 in line with the mandate given by the Synapse DAO in SIP-05.
Current inflation of SYN is 5.7% per year, significantly less than most DeFi protocols and obviously less than the one currently experienced by major economies.
The proposal results in an increase in SYN emissions on specific routes, funded by a reduction in emissions on other routes. Depending on the decision taken on the Metis pools, it will either result in an overall slight reduction in emissions or a slight increase in emission.
Current emission schedule:
In order to evaluate a proposal, a few criteria were looked at including volume, swap size, utilisation of the pool, etc. Additionally, in order to those quantitative criteria, a separate analysis was done around competitive landscape on the different routes in order to evaluate whether they are routes which generally see a large bridging volume but where Synapse does not gain an outsized market share, potentially because the TVL is not calibrated to capture large swaps (as those would otherwise result in a large slippage
nETH pools generally see a lower efficiency than stableswap pools, due to a lower utilisation. This is especially the case across alt L1 and was the reason why Synapse historically focused on building those pools on L2, given the difference in user bases and specificities of optimistic rollups. Avalanche was historically the only alt L1 to benefit from an ETH pool (together with Fantom which was discontinued in 2022). As the utilisation of the pool on Avalanche is now too low to justify ongoing emissions, it will be discontinued and emissions will be redirected towards other pools (both nETH pools and stableswap pools). It is expected that an increase in TVL in both the Arbitrum and Optimism pool should see an increased volume, as Synapse will be more competitive when it comes to larger swaps. Increase in the Optimism pool emissions is also higher to improve the TVL and allow Synapse to gain market share on that route.
Metis is left aside for now and treated in a separate section. While there is currently no Canto nETH pool, we understand there is a significant demand for that route and it should be explored.
A small increase in overall emissions is expected, to allow Synapse to increase its market share on the Arbitrum / BNB Chain / Optimism routes.
The largest increase in emissions is directed towards Optimism pool as it is expected that the daily utilisation of that pool could increase, by allowing Synapse to capture larger swaps and allow users to benefit from a lower slippage, when bridging to/from Optimism. On Canto, it is suggested to sunset the existing pool into a nUSD/USDC pool which would come with a higher A, a lower slippage as well as potentially a lower targeted APR by liquidity providers. This should increase the liquidity on the Canto bridge, facilitating in turn larger transactions.
No change to the Metis pool has been suggested as part of that proposal. This is despite volume & utilisation on Metis being lower to what can be observed on other chains which should normally warrant those routes to be removed. As Synapse has historically been the leading bridge into Metis with over $600m of volume in/out the chain, supported the chain by partly seeding those pools and continues to be, by quite a wide margin, the largest bridge by TVL, removing those pools from the Synapse bridge could have an outsized impact on the Metis ecosystem. Additionally, it is noted that some bridges, despite offering a smaller TVL and connecting less chains to Metis, benefited from grants. As such, the proposal suggests Synapse contributors to have discussions around the grant framework and reevaluate, on the back of those discussions, on whether those pools should be discontinued or not.
As mentioned above, it is suggested for the emissions towards the Avalanche ETH pool to be reinvested into other pools, notably on L2, given the overall lower utilisation of ETH on Avalanche.
Additionally, the stableswap incentives should be migrated towards a new nUSD/USDT/USDC pool which would allow i) users to benefit from native assets (instead of Avalanche bridge assets) and ii) a deeper liquidity on the Synapse bridge by having only 3 assets in the nUSD pool compared to 4 currently (no DAI.e)
Summary of changes:
The emission schedule proposed above is a target weekly emission on SYN incentives.
Contributors to the Synapse DAO can change those SYN emissions within a 10% range, depending on the evolution of volume on the different chains, for example to capture an increase in volume on certain routes or limit incentives if a route sees less volume.
This would allow SYN inflation to operate within a 5.1% - 6.3% range.
Additionally, to allow the protocol to be flexible and the first one to deploy to new chains / offer users new routes, new pools could be deployed in the future on the back of this proposal. After that pool has been live for one month, should the volume and the resulting fees make sense, a proposal should be made to the Synapse DAO to allow that pool to be continued.
In addition to those changes, the Synapse DAO also allows contributors to optimise the A (amplification factor) in the stableswap pool to reflect on each chain observations such as i) composition of the pool, ii) respective price of assets and iii) transaction sizes across pools.