SIP-411: Acquire Kwenta and relaunch Synthetix Exchange

Simple Summary

This proposal seeks to acquire Kwenta, the leading Synthetix front end, and relaunch Synthetix Exchange.

Approval will only be achieved should the Spartan Council approve SIP-411 and the Kwenta Council approve KIP-137.

This strategic acquisition marks a significant milestone in Synthetix’s commitment to expand its capabilities, generate alternative revenue streams for SNX tokenholders and become the premier decentralised derivatives protocol.

Abstract

This SIP proposes to acquire Kwenta via a token<>token transaction on the following terms.

• 1 $KWENTA <> 17 $SNX (~$13.2m valuation)
• The circulating supply of $KWENTA is 532,375
• $SNX received from acquired token conversions are subject to a 3 month lock and 9 month linear vest following the lock period.

The proposed transaction price is at a 19% discount to the 30 day average KWENTA/SNX ratio. This reflects the relative liquidity of the SNX and KWENTA tokens. Synthetix frequently trades over $20m per day on leading exchanges such as Binance, OKX and Coinbase. Kwenta generally trades $100k per day.

To fund the acquisition, Synthetix will issue 9,050,375 new SNX tokens. This represents a 2.8% inflation over 1 year.

Motivation

Vertically integrating a front end will help Synthetix in achieving its mission to become the liquidity layer of DeFi. For many reasons, Synthetix not owning a front end has proven to be a strategic error. The primary reasons are that Synthetix lost control of the point where customers most interact with their perp engine, and the commercial model has historically not proven to be sustainable for front ends. Reuniting Synthetix and Kwenta is the solution to offering a competitive perps product.

To be very clear, Synthetix will continue to work very closely with front ends and products that continue to leverage the Synthetix perp engine. This strategic acquisition will ensure Synthetix is closer to the end customer, so it can build better perp products, which will benefit all integrators. Synthetix will be forced to integrate its own perp engine, and improve on the areas of most frustration of integrators.

In 2020, Synthetix divested its front end, Synthetix.Exchange, to become a liquidity provision protocol with a vision of attracting dozens of front end integrations. It can be argued that this has failed due to a growing distance from the end user, and poor unit economics for pure front ends. Synthetix operating and offering compelling perp front end to tradersis a necessary step in the short term to become the masters of our own destiny; not reliant on an external party to deliver trading experience to customers.

Some of the reasons that have lead to this decision include:

• Enhanced branding and market positioning - Synthetix will once again be front and center in the community, as Kwenta would rebrand to Synthetix Exchange (or something like this) once again. This ensures that all visual and interactive elements reflect the Synthetix brand, which is important to build awareness and trust within the broader crypto community.
• One team, one dream - Kwenta have their roadmap priorities and Synthetix has our own. Sometimes these do not align and as such we are delayed in deployments or releases whilst we await Kwenta to prioritise. Aligning roadmaps will assist Synthetix to ship products and release trading updates faster.
• Merging of communities - Kwenta has a passionate community and there is a lot of overlap with the Synthetix community given our long standing relationship. Bringing these communities together and creating a cohesive, unified, passionate army of Spartans will be epic.
• Differing strategic motivations - Kwenta continues to have non-Synthetix related strategic motivations that have recently slowed Synthetix's desire to deliver products to the community. Re-aligning the strategies of Kwenta and Synthetix will deliver a better product in a more timely manner to the market.

The acquisition of Kwenta hopes to create additional value for tokenholders through:

• One token - Removing the fragmentation from having two assets, SNX and KWENTA, and having the community focused on one asset can result in more reflexive positive price activity (e.g. $2m of new capital invested into one asset creates more market value than $2m invested across two different assets).
• Growth - The addition of a front end to the Synthetix product stack can result in additional avenues to grow the brand and our product offering. A front end allows Synthetix to increase customer touch points, add new features, control the customer experience and design strategies to drive adoption.
• Awareness/Branding - Market awareness and public recognition of Synthetix will improve significantly as customers will land on a Synthetix branded front end. In crypto where awareness is so important this can drive value.
• Efficiency - Operational efficiencies are expected from the merger of both Synthetix and Kwenta capabilities.

Specification

This acquisition is for everything related to Kwenta, including but not limited to all smart contracts, all code, all repos, all IP, all domains, all front-ends, all operations, everything in its treasury and treasury related wallets.

• 1 $KWENTA <> 17 $SNX
• This is an implied valuation of $13.2m based on a circulating supply of 532,375.
• $SNX received in the conversion are subject to a 3 month lock and 9 month linear vest following the lock period.

The proposed transaction price is at a 19% discount to the 30 day average KWENTA/SNX ratio. This reflects the relative liquidity of the SNX and KWENTA tokens. Synthetix frequently trades over $20m per day on leading exchanges such as Binance, OKX and Coinbase. Kwenta generally trades $100k per day.

Funding the acquisition

Synthetix will mint 9,050,375 new SNX tokens to cover the cost of the acquisition. These tokens will be locked for 3 months and will vest linearly over 9 months after the locked period. This token mint represents an inflation of 2.8% to the total token supply over the following year. This token inflation should be more than compensated by the value added by integrating a front end into Synthetix. The total number of SNX required for the acquisition may be adjusted following due diligence should both councils approve the acquisition.

The decision to issue tokens was chosen over other financing options due to several advantages:

• Liquidity for Kwenta token holders - their current token holders are liquidity trapped and do not have an avenue to sell a meaningful amount without receiving a significant amount of slippage.
• Alignment of interests - By issuing tokens, both existing and new SNX holders will have a vested interest in the future success of the combined entity.
• Community growth - Kwenta has a strong and passionate community of perp trading. Bringing these communities into Synthetix will grow the Spartan Army.
• Capital preservation - This method allows Synthetix to preserve cash reserves for operational and future strategic needs.

Governance

The Kwenta subdao will be dissolved if the governance proposals pass in both communities. At this stage, governance will be transitioned over to the Spartan Council.

The Kwenta treasury will be absorbed into the Synthetix treasury. The Spartan Council will also become responsible for establishing operational efficiencies and allocating a new budget based on synergies created by the acquisition.

For this proposal to pass, not only will the Spartan Council need to reach a majority, but the sister proposal, KIP-136, will need to reach a majority within the Kwenta Council as well.