Hello Defiers! Today’s op-ed is about pursuing the core values of decentralized finance. A fully permissionless and decentralized stablecoin is one the most important pieces an open financial system should be building, says Kain Warwick, the founder of synthetic assets trading platform Synthetix. As of recently MakerDAO was the main project focusing on such a system, but it recently began to advance towards a more centralized model, by adding assets that rely on third parties such as USDC.

Warwick is taking a stand: Synthetix is going in the opposite direction. While today Synthetix is further from the fully decentralized end of the spectrum than many DeFi projects, its road map is for the Synthetix team to increasingly transfer control of the protocol to its community. Unlike Maker, it pledges to never include permissioned assets, such as fiat-backed stablecoins.

In the following post, Warwick lays out why pursuing a fully permissionless system is important, and the steps Synthetix plans to take to get there.

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Rejecting Permissioned Systems

Thoughts on decentralization, trustlessness and their importance for DeFi

By Kain Warwick, Synthetix founder

I’m writing this article to provide my personal perspective on how I approached the creation of the Synthetix protocol. While my choices provided a framework for the early structure of the project, Synthetix has now far outgrown the perspective of one person. Within the core contributors there are a wide range of views as to how to approach cryptoeconomic systems, and within the community the perspectives are wider still. As we have handed over control of the protocol to the community through our Synthetix Improvement Proposal process my individual perspective has become far less critical in forging a path forward for Synthetix. I think this is incredible and it has been validating to watch the community step into this role. So this post is about how we continue this process and most importantly why.

I have been an advocate for permissionless and distributed systems for a long time. From the early days of file sharing to supporting privacy tools like pgp and Tor. I ascribe to a form of crypto-anarchism, meaning I believe decentralised technology can challenge entrenched power structures, enabling new ways of coordinating people without resorting to top-down hierarchies. When I started blueshyft (a cash payment gateway in Australia), the idea of connecting cash to crypto across a network of thousands of small businesses that did not surveil their customers made perfect sense. A lot of things have changed since 2014, including mandatory KYC/AML for all crypto transactions in Australia with no small value exemption (something myself and others in the industry advocated for back in 2017), large scale data matching efforts to identify crypto users and the emergence of a vibrant DeFi ecosystem on Ethereum. Of all of the changes I’ve observed the ascendance of regulated stablecoins is probably the most concerning.

Stablecoins

When I first started thinking about what would ultimately become Synthetix in 2016 I wanted to create an alternative to USDT, something that did not rely on trust. One of the most disappointing things for me in 2018 was the failure of Basis and other stablecoin projects, not because I thought Basis was especially likely to work, but because their failure represented a loss in experimentation. While startup founders are driven by self interest, individual failure often enables the success of future experiments. So in 2016 the fact that one of the most important pursuits in crypto — a truly decentralised and permissionless stablecoin — had only one project focussed on it, MakerDAO, was concerning.

Cut to today, and a hedge against the potential failure of Dai is even more important than it was then. Dai is now systemically important to both DeFi and Ethereum, and that is problematic — we did not have to end up here. It is representative of the incentive misalignment that can emerge when financial motives in the form of token appreciation devolve into tribalism. This was particularly true for Havven, to the point where we looked at pursuing a deployment on EOS in 2018. Thankfully we abandoned that effort and focussed on Ethereum despite the ambivalence of the community towards Havven.

Permissionless systems

The recent inclusion of USDC as collateral in Maker necessitates an even closer look at how the Ethereum community is hedging our bets on the permissionlessness front. Given this environment and the concerns it raises I wanted to take the time to explicitly lay out my view on building trustless systems and where I hope the Synthetix community will take the project and why. So let me be very clear, I have zero intention of supporting a path towards permissioned assets and a dilution of trustlessness and I will advocate for this view heavily within the community.

“But wait! Admin keys, proxy contracts…” I hear you say. Yes, Synthetix is permissioned today, but this is where we need to discuss an important concept: directionality. Decentralisation is a multiplicative factor. If you add decentralisation while keeping all else equal you will undoubtedly have a better system. But this begs the question: how do you create something that has value in the first place onto which to add decentralisation? The path that I chose for Synthetix in the early days was to build something valuable and then add decentralisation incrementally as the project progressed. This is important to understand because one of the worst parts about decentralisation is it slows iteration, with early and fast iteration often the only way to build something of value.

Let’s take Augur as an example. Augur is one of the most decentralised projects in crypto, but unfortunately four years later and realistically no one but a few people in the core Ethereum community actually give a shit. No one uses it because they optimised for decentralisation and thus iteration has been incredibly slow. Here is how painful this is - one of the major additions to Augur V2 is Dai. But Dai actually iterated so much faster, that now, just as Augur is about to release V2 and integrate Dai, Maker has shifted DAI into a semi-permissioned stablecoin, due to the addition of USDC. This renders it far less useful for a maximally decentralised system like a prediction market. Ouch.

My view was that it is OK to start almost maximally centralised and then iterate quickly and cut bridges as we went to remove aspects of centralisation. This is the optimal path for building a system that is at any given time balanced in terms of centralisation and utility. Sure, sometimes you are too permissioned for the amount of utility you have created, and we are likely in such a position now. But you can address this fairly rapidly, as we are about to do with the upgrade of our protocolDAO and the recent launch of our grantsDAO.

The most important thing is to not move backwards, to not become more centralised over time. While we certainly welcome the roadmap laid out by Maker this week, which was strikingly similar to the one we released late last year (here), there are still many questions raised by the path that Maker has plotted, and the short-term decisions like the inclusion of USDC as collateral. That said every community must choose their path, which is why experimentation is so critical.

Continuing to decentralise Synthetix

Over the next few months Synthetix will continue to make aggressive moves to decentralise the protocol with two large changes coming soon, the migration to protocolDAO v2 which will enable several new features including timelocks on upgrades and token holder upgrade veto power. In addition, we will transition fully to Chainlink, removing the central point of failure in the current Synthetix oracle.

I am confident that by the middle of the year, the protocol will be almost maximally censorship resistant, with the removal of all of the unilateral controls held by core contributors.

The current state of protocol governance is:

The grantsDAO is established and is actively funding Synthetix public goods. There are five members including core contributors. To date 300k+ SNX has been allocated to the grantsDAO from the synthetixDAO.

The protocolDAO is established and is currently controlling protocol upgrades, the last two upgrades, Achernar and Hadar, were coordinated via the protocolDAO. We are currently working on a number of major upgrades to the protocolDAO to improve Opsec which will be published as SIPs shortly.

The synthetixDAO controls the protocol treasury and has been funding the operating expenses of the Foundation, specific projects and other operating entities since the token sale in 2018. The synthetixDAO is currently controlled by three key stakeholders. We expect to expand membership over time alongside the expansion of the protocolDAO and the handover of control of the protocol and treasury to token holders.

Below is a high level plan for the continued transition to token holder control:

grantsDAO
- Additional capital allocation from synthetixDAO
- Expansion of membership
protocolDAO
- Delegated migrator contract launch
- Migration to Aragon
- Timelocks on contract upgrades
- Tokenholder veto power launched
Australian Foundation
- Entity Windup
synthetixDAO
- migration to aragon
- Membership expansion
- Transition to representative democracy

I’m extremely confident the SNX community has created something of value over the last few years, and the level of centralised control is now an impediment to progress. However, there is tension between transition to full token holder control and speed of iteration. In the last two releases alone we have seen that the migration to the protocolDAO has placed limits on upgrades and other protocol changes, and while these are minor inconveniences now, the speed of iteration will continue to slow as we cut bridges so we must ensure we time the transition well. I’m confident that the upcoming changes will be a significant net positive for the project and will reduce the need for trust in the core contributors significantly while maintaining the ability to move quickly and efficiently. My ultimate goal for the project has been for it to be maximally censorship resistant, and it is exciting to see how close we are to finally achieving that goal.

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About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

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