Apollo’s Moonshots: Optimistic about Synthetix, although it may draw SEC scrutiny

By August 1, 2021DeFi
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David Angliss, an analyst with Australia’s leading cryptocurrency investment firm, Apollo Capital, shares the fund’s weekly take on what’s happening in the fast-changing and volatile cryptocurrency space.

One of the most successful Australian-founded cryptocurrency projects has just gone live on a layer two Ethereum scaling solution, meaning users will be experiencing much cheaper and faster transactions.

Synthetix, the synthetic asset protocol founded by Sydneysider Kain Warwick, made its debut on Optimism on Friday.

“And that’s massive,” David Angliss says. “Fees are 50 times lower now, which means that traders that were sort of stumped out of the market doing certain activities now have the freedom to move funds around.

“That creates a more optimised marketplace, and being on layer two just means everything is way more streamlined. (Users) can manage positions more efficiently, and that has an effect on the market, making it more stable.”

Being on layer 2 also means that Synthetix’s use of the Chainlink decentralised oracle network is much quicker. Synethix uses Chainlink to get real-world information about the performance of the synthetic assets created on the platform — other cryptos, national currencies, commodities, shares and indices.

Synthetix powers the Kwenta exchange, which launched in June as a rebranded successor to Synthetix.Exchange.

Anyone with an Ethereum web wallet such as Metamask can jump onto the exchange and begin trading without “opening an account” (something that’s obsolete with Web 3.0 applications) or having to go through the know-your-customer process.

On a collision course with the SEC?

Synthetix’s synthetic tokens were in the spotlight last week after Uniswap Labs blocked access on its app interface to about 100 tokens that could be considered securities, including Synth Australian Dollars, Synth FTSE 100 Index, and Synth Perpetual Oil Futures.

As of today, we have started restricting access to a small number of tokens at https://t.co/liqYXtQoM2

These changes pertain to the interface at https://t.co/liqYXtQoM2 — the Protocol remains entirely autonomous, immutable, and permissionless.

Read more:https://t.co/60swtFXbsE

— Uniswap Labs (@Uniswap) July 23, 2021

The move was controversial online, as it was made by Uniswap Labs unilaterally. Uniswap is supposed to be governed by its tokenholders, not an organisation.

….. an organization…. restricting access…. apparently decentralized…. the jokes write themselves nowadays

— TOWELIE THE SHADOWY SUPERCODER (@btcTowelie) July 24, 2021

But the change only applies to Uniswap’s front-end at app.uniswap.org, not the underlying protocol. So if users are intent on trading these tokens, they can simply use an aggregator like 1inch, which compares prices from Uniswap and other decentralised exchanges like Sushi and offers users the best one.

Uniswap Labs said it was responding to the “evolving regulatory landscape” in blocking the synthetic tokens.

Two weeks ago, US Securities and Exchange Commission chairman Gary Gensler cautioned the industry about crypto tokens “that are priced off of the value of securities and operate like derivatives.”

“Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities,” Gensler said in a July 21 speech to the American Bar Association.

“These platforms — whether in the decentralised or centralised finance space — are implicated by the securities laws and must work within our securities regime,” Gensler said, warning that the SEC would “continue to use all of the tools in our enforcement toolkit to ensure that investors are protected in cases like these.”

Under US law, any platform offering the trading of tokenised securities must be registered with the commission as a national securities exchange or request an exemption.

In 2018, Zachary Coburn, the founder of EtherDelta, agreed to pay a US$400,000 ($545,000) fine to settle allegations he had run an unregistered exchange where securities were traded. The platform for exchanging Ethereum tokens was precursor to Uniswap.

Enforcement difficult

But regulating these platforms may prove impossible because the protocols are decentralised and community-governed, Angliss notes.

“The only way these synthetic assets can be stopped from being offered to the market is if the communities decide that they don’t want to support these synthetic assets anymore — which is highly unlikely because it’s why these protocols were created.

“It’s an interesting intersect right now,” Angliss says. “There’s no way you can regulate it.”

Angliss points to a “jam session” that Synthetix’s Warwick took part in last week, along with two founders of similar synthetic asset protocols: Do Kwon of the Mirror Protocol in the Terra ecosystem, and Hart Lambur of the lesser-known UMA Protocol on Ethereum.

“Even if these things were considered securities … there really isn’t anything we can do to shut down these protocols that we’ve built,” Kwon, who lives in South Korea, told The Defiant editor in chief Camila Russo at one point.

“We would be inventors of these various systems .. but for most of us, we don’t actually operate these platforms or profit from the way these platforms are running. So really what we could be held liable for is expressing freedom of speech, or writing code.”

Warwick agreed, saying that software that’s been deployed to Ethereum cannot be stopped.

“It doesn’t matter what you say or do, or how much you dislike it — it’s just the nature of the network itself.”

While some of the projects on Ethereum are not completely decentralised and thus vulnerable to regulation, Synthetix has evolved to become more and more community-governed, with Warwick relinquishing his “benevolent dictator” title.

“The community has pulled control further and further away from centralised aspects,” Warwick said. “There’s very little left in terms of attack vectors you could look for in protocol capture.”

In any case, while decentralised finance may pose a dilemma for regulators, Apollo thinks that being layer two Ethereum will be a huge boon for Warwick’s project.

“We’re ultra bullish on Synethix,” Angliss says.

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