A Deep Dive into Synapse
Picks and shovels for a multichain future
Why Bridges?
Web3 has seen explosive growth in TVL (total value locked in smart contracts), from under 1 million at the start of 2019 to around 600 million at the start of 2020, 18.1 billion at the start of 2021, and 111 billion at present day1.
At first, all of the web3 protocols were deployed on ETH, with the OG DeFi blue chips leading the way like Compound, Synthetix, Aave, and Uniswap. This led to all of the TVL being on ETH, which held true through the DeFi winter into 2021. Coming into 2021, ETH price started to increase, block space became congested, and transactions became more and more cost prohibitive to small players. Binance smart chain (BSC) season officially kicked off the alt l1 narrative as users were able to participate at fractions of the ETH fees, with transaction costs dropping from hundreds of dollars to less than a cent.
While the TVL of ETH has skyrocketed since 2019, ETH is slowly losing relative market share compared to the alternative L1s. Below is the TVL of ETH as a fraction of the total TVL in the entire web3 space. We can see that it has continuously decreased from over 95% at the start of 2021 to just around 55% here in April of 2022, but has recently recovered back above 65% since the Terra implosion.
A common phrase is “during a gold rush, sell shovels” and in this web3 era, bridges are the shovels. In this new multi-chain world, generalized cross chain messaging systems have emerged as a necessity for dApps to integrate across the entire crypto landscape. Currently, bridges are the best product market fit for these messaging systems as they have gobbled up large chunks of TVL and volume. This is mainly due to the current environment where protocols and various L1s (and L2s) are hungry for assets and offer (worthless) governance tokens in return. In order to migrate liquidity to these protocols, users must first bridge to the corresponding chain. Enter the various bridging protocols like Synapse, Ren, Multichain, Wormhole, and Stargate.
Interoperability Issues
In an ideal world, we would be able to migrate assets seamlessly between any chain with the click of a button and after a few blocks of confirmation, our assets would appear on the new chain. In actuality, there are massive frictions when communicating between chains due to differences in infrastructure and messaging standards. This leads to many issues with the current practices:
Bridges take too long (latency)
Not enough assets
No gas on new chain
Unusable wrapped assets (poor UX, fractured liquidity)
Most of the L1s and L2s have default bridges to-and-from ETH, but they suffer from high latency. On the extreme end, we can deposit certain assets into Arbitrum, Metis, and Optimism from ETH which takes anywhere from 10 to 30 minutes. However, going back from these Optimistic rollups takes over a week on the native bridge. For many use cases this is an unacceptable hurdle and is contributing to the slow adoption of Optimistic rollups. Other popular default bridges which take a while include Rainbow bridge (10 minutes from ETH to Near/Aurora but 16 hours back from Near/Aurora to ETH) and Polygon (30 minutes from ETH to Polygon but 3 hours back from Polygon to ETH if using POS bridge, 7 days if using plasma bridge).
Even when there is a fast option like AVAX which takes around 20 minutes either direction from ETH, there is no support for AVAX <> other chains. Any transfer from AVAX to Polygon with these native bridges goes AVAX <> ETH <> Polygon, generating excessive gas usage. A generalized approach would be able to send assets from AVAX to Polygon, thus bypassing the x2 ETH fees.
Other times there are bridging limits as there is not enough liquidity on some of the chains for specific assets, and this structure favors the earlier bridgers and turns bridging into a PVP game searching for liquidity. Even when assets get bridged over, there typically is no gas on the new chain, so another transaction is needed to send the gas currency to the new chain. Fees on fees on fees.
Finally, some bridges give wrapped variants of the bridged assets. Say we send DAI from Etherum to Solana through the Wormhole bridge. We then receive weDAI which is different from the native DAI on Solana. However, protocols mainly want native DAI so this wrapped variant is basically useless unless there is a weDAI-DAI pool to swap into, but that includes additional slippage and more transaction frictions.
What is Synapse?
Enter Synapse, a generalized cross-chain communications protocol that seamlessly connects decentralized applications across all chains. Synapse’s cross-chain messaging protocol ushers in a new era for decentralized application development, one in which applications can share state across all blockspace, creating new cross-chain interactions and a massively improved user experience.
Synapse Token Bridge
Synapse facilitates two methods of bridging:
AMM
The first dAPP built on the Synapse network is the cross chain AMM (Curve stableswap fork), which tackles the interoperability issues highlighted above by creating cross chain liquidity pools. For stablecoins, Synapse creates nUSD, a cross chain stablecoin backed fully on Ethereum2. nUSD is then pooled with native assets on each chain thus enabling low slippage and fast settlement.
Say we want to bridge USDC from Arbitrum to Polygon, which would normally take over a week as we would go from Arbitrum to Ethereum mainnet and then from mainnet to Polygon. Synapse settles in under 5 minutes and does the following transactions behind the scene:
USDC on Arbitrum is swapped for nUSD on Arbitrum.
nUSD on Arbitrum is burned and the same amount of nUSD on Polygon is created.
nUSD on Polygon is swapped for USDC on Polygon.
The key here is that there exists nUSD to native USDC liquidity on both the Polygon and Arbitrum chains. Synapse currently supports stablecoins like USDC, USDT, DAI as well as ETH on a variety of EVM compatible chains (Avalanche, Arbitrum, Aurora, BSC, Boba, and Fantom to name a few). With the recent Terra integration, Synapse now supports more than just EVM chains.
xAssets
For other assets, the AMM employs a more traditional lock/mint where tokens are sent to a Synapse bridge contract, assets are held there, and a wrapped asset on the receiving chain is minted.
Synapse Network
It is important to stress that Synapse Bridge is not the only use case for Synapse network, rather one in a suite of possible integrations. Because the messaging system allows protocols to transmit data across chains, it is possible that protocols will be able to tap into various liquidity pools to trade or for lending borrowing purposes on a multitude of chains.
Along those lines it's not hard to envision a world where the synapse AMM is wrapped into an aggregator like 1inch which bridges assets in the backend and abstracts the UI away. If a user uses an aggregator to swap $ETH for $USDC on Arbitrum, but the best price after fees is on Avalanche, the aggregator will be able to integrate Synapse to swap on Avalanche and send $USDC seamlessly across the chains minimizing MEV and slippage while maximizing user profits.
An even more innovative use case could be protocols which want to be cross chain but are constrained by liquidity. Take Perpetual protocol (PERP) which allows leverage trading built on top of Uniswap v3 and is currently the most prominent application on Optimism. Currently, users must bridge to Optimism to trade on PERP and it is difficult for PERP to branch to other chains because then the liquidity would be fractured. If PERP used the messaging technology, it would be possible for them to aggregate liquidity across multiple chains and also trade on any chain. If DeFi 1.0 was the birth of the dAPPs, and DeFi 2.0 revamped tokenomics to create value accrual mechanisms, the next step could be efficient integration of gas and liquidity across Web3.
$SYN
The native token of the Synapse Network is SYN. SYN is currently used to bootstrap liquidity and as a method to govern the Synapse DAO. In the near future, Synapse Chain will launch and SYN will be used to provide economic security to the chain like other POS coins. The DAO may also elect to turn on a fee switch, which would give them access to all of the fees generated on the network.
The Archean Phase: Further validator decentralization is introduced, primarily via the launch of the Synapse Chain, economically secured via Delegated Proof of Stake (DPoS). Validators and delegators are incentivized via SYN rewards and protocol fees. The Synapse Chain will create a cross-chain interoperable ecosystem, secured by $SYN, connecting all chains.
Currently, SYN is used to subsidize liquidity and tokens are emitted to liquidity providers every block for select nETH and nUSD pools. There are two main ways the Synapse protocol generates earnings, through swaps and bridge fees. The first SIP set swap fees to be split 60% for admin fees and 40% for liquidity providers. The swap fees have been lowered over the past few months following the second SIP which introduced dynamic swap fees.
Finally, there is around a 9 bps bridge fee3 for every transaction and 100% of this goes towards the treasury. Taking the example above swapping USDC from Arbitrum to Polygon, the fees would be:
4bps swap fee for the USDC to nUSD swap on Arbitrum metapool.
9bps to bridge from Arbitrum to Polygon
4bps swap fee for the nUSDC to USDC swap on Polygon metapool.
In this example, out of the estimated 17bps of fees, around 80% or 13.8bps4 would go to the treasury and after the Archean Phase, this fee will be switched over to the validators/stakers.
Synapse Analytics
Synapse had an average daily bridge volume around 50mil in 202256. Below is a chart with the left y-axis and the bar chart showing the daily bridged volume and the right y-axis with the red line plot showing the cumulative volume bridged. Since inception there has been over 10 billion in assets bridged, with the vast majority of that occurring in 2022.
Next we can look at the progression of fees which show strong value accrual to the SYN token. The two graphs below are split into bridge fees and pool fees, both of which currently flow into the treasury7. This year there is an average of 62k in daily bridge fees and around 18k in daily swap fees for a total of around 80k in daily revenue.
Conclusion
Looking at the analytics, we see a clear product market fit for bridging in this multi-chain world and a lot of traction for Synapse bridge. However, there are some areas that can be improved. Right now, liquidity is fragmented across various chains causing the AMM to be less liquid and creating more slippage than necessary if all liquidity was on one chain. In addition, Synapse has had to pay high inflationary rewards to achieve this liquidity which is unsustainable in the long run8. The team understands these issues and Synapse chain will kill two birds with one stone: increasing AMM liquidity and decreasing SYN emission.
Synapse will connect to other chains and entrench itself as a preeminent DeFi cross chain lego block solving cross chain interaction for both users and builders to live in omnichain harmony. Synapse will then be able to extract rent from other dapps using its network and these fees will trickle down towards SYN stakers.
Note: Nothing in the article constitutes professional and/or financial advice. Ape if you want to ape.
With a peak at over 240 billion before the market came crashing down
Issuing nUSD on ETH allows it to inherit security from the ETH chain as 1 nUSD is backed to 1 lp token. nUSD is created by depositing USDC, USDT, and DAI into a curve plain pool similar to 3pool
The bridge fee is dynamic
8*0.6+9=13.8
Mid to late January had a huge spike in volume bridged due to Andre launching Solid which airdropped protocols who had the largest TVL on Fantom, causing people to bridge assets over to the Fantom ecosystem
The large spike around April is the launch of the DFK Subnet
LP fees are included in the graph, but these go to the liquidity provider and are approximately 40% of the swap fees
Right now around 270k $SYN tokens (310k USD) are being distributed weekly while revenue is around 560k. The emissions have been slowly decreasing as early this year was over 700k weekly emissions. Due to the recent price drop emissions are now less than revenues for the first time