SynFutures: The Permissionless Trading Solution for Crypto Assets

Key Insights

• SynFutures is a derivatives DEX that enables the permissionless listing and trading of any crypto asset.
• V1 processed over $17.6 billion in volume with nearly 50,000 traders and 257 underlyings.
• Because there is currently no DAO or native token yet, the protocol can make improvements quickly and efficiently while providing more value to the LPs and traders.
• SynFutures V2 separates itself from other derivative DEXs with unique features like a shared margin system, dual-oracle infrastructure, and three markets per underlying.

Diving Into Derivatives

Liquid markets enable efficient market pricing for assets. As such, the most liquid markets are generally spot markets because they offer the most straightforward way for individuals to gain exposure to an asset and are settled immediately.

For traders with more sophisticated strategies, derivatives offer several advantages over spot trading. When buying or selling a derivatives contract, there is no physical exchange of the underlying asset. Rather, the contract tracks the price of the underlying asset. In turn, dated futures or perpetual futures contracts can be created as long as there is a mutually accepted framework for pricing.

Traders use derivatives to hedge against potential losses in an underlying asset by taking a position that offsets the price risk of that asset. More advanced traders can also use derivatives to speculate on assets with leverage, amplifying the gains or losses of a trade. Ultimately, derivatives offer traders more flexibility with their trading strategies, and they are instrumental in both the traditional and cryptocurrency markets.

SynFutures is competing against many other protocols in the world of decentralized crypto derivatives exchanges.

Derivatives in Crypto

Crypto users can gain access to derivative trading through centralized exchanges (CEXs) or decentralized exchanges (DEXs). Each option comes with tradeoffs, some of which are highlighted below.

How Does SynFutures Work?

SynFutures is competing to be among the leading decentralized crypto derivatives exchanges. Within this ecosystem are a few different value drivers, including traders, liquidity providers, and liquidators.

Traders

Traders begin by depositing their preferred collateral into the protocol. SynFutures accepts USDC, USDT, DAI, FRAX, ETH, wBTC, MATIC, and BNB. Additional tokens can be accepted as collateral in the future depending on demand by the community. If a trader has provided liquidity as an LP, this liquidity and any PnL for existing positions are all considered in the calculation for the total margin for an underlying. Each underlying has two dated futures markets and one perpetual futures market.

After providing margin, a trader can trade with up to 10x leverage for any of the underlyings, given there is sufficient liquidity. Upon opening a trade, the trader must pay a fee of 0.3% if the fair price change is 10% or less. If the fair price change is greater than 10%, a 1.2% fee will be charged. After opening a position, a trader’s position is subject to liquidation if their collateral value falls to 5% of the total position size.

The funding rate for SynFutures is reflected in a trader’s PnL, as opposed to other perpetual futures contracts that have traders pay the funding rate out of their margin account on a fixed schedule. SynFutures’ funding rate is determined by the price discrepancy between the spot price and perpetual futures contract price. Every day at 8 a.m. UTC, the funding rate is used to help to converge the futures price to the index spot price.

Liquidity Providers

The liquidity providers in the system act as the counterparty to traders. LPs can provide liquidity for any of the available underlyings or permissionlessly provide liquidity for an underlying that may not already be listed. This choice gives LPs flexibility with the risk they want to take on. Liquidity providers receive ⅚ of the total fees on the protocol, with the remaining ⅙ directed towards the insurance fund.

From a UX perspective, all the LPs have to do to add liquidity is click deposit, but there is a lot that goes on under the hood. For example, if an LP wants to provide liquidity to the BTC/USDT market, they would only have to deposit USDT. From there, the sAMM (synthetic automated market maker) would keep half of the deposit in USDT and create a BTC 1x long position with the other half. The sAMM would also open a BTC 1x short position to hedge the risk of the long position, due to the liquidity provider only having exposure to USDT, not BTC.

The key benefit of the sAMM is that it allows LPs to deposit liquidity in one token while the other token is automatically created synthetically. This is much more user friendly than having the LP deposit an equal amount of both assets, as seen with traditional AMMs. Notably, whether LPs provide liquidity to an AMM or sAMM, the impermanent loss is the same.

Liquidators

Liquidators are crucial to the overall health of the protocol. They are responsible for taking over accounts when they fall below the margin requirement. Anyone can act as a liquidator, and in the case of multiple liquidators targeting the same position, “first come first served” rules apply. This dynamic essentially turns the liquidation into a gas bidding war: the liquidator whose transaction goes through first gets to take over the account.

In the event that an account is not liquidated fast enough and the account falls into a deficit, an insurance fund is used to fill the deficit. If the insurance fund is not large enough, the excess loss will be socialized among every open position on the opposite side. For example, if a short position falls into a deficit and there are not sufficient insurance funds, the deficit will be filled by the PnL of all long positions from the same underlying.

Price Oracles

There are two unique price oracles used by SynFutures: Chainlink and LWAP (liquidity-weighted average price) from spot DEXs. If an asset is not native to the chain with SynFutures, the Chainlink oracle is used. If the asset is native, SynFutures uses an LWAP from spot DEXs. The LWAP oracle calls for pricing data from DEXs where the target asset is listed and assigns a weight to them based on the DEXs’ liquidity. With both oracles, there is a maximum spot index price movement of 1% per minute. This smoothing mechanism is used to minimize the impact of price manipulation on the spot DEXs since the mark price which is used to calculate the unrealized PnL of positions follows the spot index price. It should be noted that the fair price, which is calculated by the sAMM inventories, follows the price of the actual trades on Synfutures and is not affected by the smoothing mechanism.

Insurance Fund

The insurance fund is funded by ⅙ of the fees generated by traders on the protocol. There is an insurance fund for each underlying that’s used to fill the deficit from traders’ accounts that aren’t liquidated quick enough. Liquidators are the first line of defense against bad debt, followed by the insurance fund and then socialized loss as the third and final line of defense.

SynFutures Features

SynFutures has implemented a number of unique features in its DEX.

Long-Tail Crypto Derivative Trading

A DAO vote or decision by the SynFutures team is not required to list new assets for trading, but rather, the assets available are only limited by the liquidity provided by LPs. The ability to list essentially any crypto asset is possible due to SynFutures’ unique dual-oracle infrastructure and system safety measures. The combination of the Chainlink and LWAP oracles played a critical role in scaling the number of tradable underlyings on V1 to 257.

Even with these oracles, trading long-tail crypto assets can be risky and requires a couple additional system safety measures to be put in place. The first measure is a minimum amount of liquidity needed for an asset to be enabled for trading, currently set to $10,000. Additionally, the price change of the spot index for an underlying has been capped to 1% per minute to reduce the price manipulation risk of tokens with lower liquidity.

Futures and Perpetual Trading

Every underlying listed on SynFutures has three markets. There are two futures contracts, one for the current quarter and one for the next quarter. For example, if it were March 1, there would be a Q1 contract and a Q2 contract, both due to expire on the last Friday of the quarter.

Additionally, there is a perpetual futures contract, which is a futures contract without an expiration date. To maintain a level of price parity with the underlying spot prices, perpetual futures contracts use a mechanism called a funding fee. In the case of SynFutures, every day at 8 a.m. UTC traders PnLs are updated to reflect the funding rate calculated by this equation.

Shared Margin System

For a majority of crypto derivative exchanges, a user's margin is siloed to each specific position. In other words, if a trader posts their margin and opens a long position on ETH, the system will calculate the trader's liquidation price based solely on the margin posted for that position. With SynFutures, each underlying shares its margin account across all three markets mentioned previously. The margin account includes the user’s collateral, LP position, and even PnL of open positions of that market. For example, a user could open a $1,000 ETH short position on a Q1 futures contract and a $1,000 ETH long position on a Q2 futures contract using the same margin since these positions offset one another. This shared margin system ultimately increases a trader’s margin efficiency up to 200%, allowing for more sophisticated positions.

Fees

SynFutures charges a fixed percentage trading fee for all trades based on the price impact. If a trade changes the fair price by less than 10%, the fee on the trade is 0.3%. If the fair price change is greater than 10% the fee on the trade is 1.2%. The fee is split between liquidity providers and the insurance fund with a 5:1 ratio. This variable fee model incentivizes liquidity providers towards assets with lower liquidity as these assets generally pose a greater risk.

SynFutures’ V1 Success and Bottlenecks

SynFutures V1 had plenty of success even before the derivative DEX narrative really took off following FTX’s collapse in November 2022. V1 was live from October 2021 until February 2023, and in that time, it generated $17.6 billion in cumulative trading volume. There were over 75,000 total users and nearly 50,000 traders. Most notably, there were 257 all-time underlyings for V1 — a level of variety normally seen only on CEXs.

At the end of January 2023, V1 was officially retired with a couple of key improvements in mind for V2. The first is the addition of the perpetual futures contracts. Since BitMEX launched perpetual futures contracts in 2016, they have been preferred over dated futures contracts by crypto derivatives traders. These contracts remove the pain points associated with traditional dated futures contracts, such as having to roll over a position and choose which maturity date to trade.

Another pain point for V1 was the limited liquidity for tokens. In V1, Uniswap was the only DEX used to source pricing data for tokens that were native to the chains where SynFutures was deployed. V2 now uses an LWAP as previously mentioned, resulting in a more robust price feed as it pulls pricing data from multiple DEXs.

The final focus of V2 was a total overhaul of the UI and UX for the protocol. V2 places a greater emphasis on the trader's experience as opposed to the liquidity provider. All markets available for trading are now listed on the first page, and the overall look and feel of the platform resembles that of a CEX.

Competition

The FTX collapse has kicked off an explosion of derivative DEXs fueled by discussions about the benefits of non-custodial and decentralized trading. As of Feb. 28, 2023, derivatives DEXs still only make up 2.73% of the over $75 billion dollar crypto perpetual futures markets. As more of this volume continues to move to on-chain trading, there will undoubtedly be a number of DEXs to capitalize on this transition.

Currently, the top three derivatives DEXs by volume on the market currently are dYdX, GMX, and Gains Network. Both Gains Network and GMX use liquidity pools, while dYdX uses an orderbook. All three DEXs process hundreds of millions of dollars in volume per day, with dYdX leading the charge with over $1 billion in volume some days.

Although it may seem that these DEXs offer very similar products, they have begun to carve out their own niches. For example, over 50% of the trading volumes on Gains Network are for forex markets, while GMX volumes are dominated by ETH and BTC. dYdX has become a viable option for institutional traders as the orderbook, and its UI is similar to that seen on a CEX. SynFutures’ niche is the ability to offer trading for any long-tail cryptoasset as shown previously in the dominant trading base assets chart.

Roadmap

Looking forward, SynFutures has already begun thinking about new features to add for V3. For liquidity providers, V3 will provide more flexibility and advanced features similar to those seen with Uniswap V3, like ranged liquidity provision.

V3 also has plans for cross-chain liquidity and margin as SynFutures continues to expand to other chains. The cross-chain integration of margin and liquidity will vastly improve the trader’s experience. It should reduce slippage and increase the efficiency of the trader's margin.

Another unique feature to be integrated is NFT perpetual futures trading. With the fractionalization of NFTs already a reality, there are some collections that can trade on SushiSwap or Uniswap like any other ERC-20 token. SynFutures’ unique LWAP oracle paired with these fractionalized NFTs makes it possible to trade some NFTs as tokens essentially. Overall, the SynFutures team is adapting quickly to the desires of both traders and liquidity providers.

Closing Summary

As the competition for derivative DEXs continues to heat up, SynFutures is in a strong position to continue to capitalize on this narrative. V1 alone reached over $17.6 billion in total volume and nearly 50,000 traders, giving the team enough experience in this sector to develop a strong plan for V2 and further iterations. With no value-extractive token or DAO governance, the protocol can make improvements quickly and efficiently while providing more value to the liquidity providers and traders. Additionally, the unique dual-oracle design allows SynFutures to offer traders exposure to the most underlyings of any derivatives DEX. Furthermore, SynFutures’ introduction of perpetual futures contracts will be a familiar face for many traders and will reduce the friction previously experienced in V1 with dated futures contracts. As on-chain derivatives trading grows, SynFutures looks to gain a significant share of the pie by quickly reacting to market demand for new and improved features.