Kwenta, an exchange interface for Synthetix’s derivatives, has declared itself an “independent project operating outside of the Synthetix core contributors,” according to an announcement post.
The project will also issue a token, KWENTA, that will be used to participate in governance and to “bootstrap the community and fuel an early development team.” It’s a sign that interfaces are beginning to establish their own token, rendering the protocol upon which they run something akin to financial middleware.
This matters because protocols like Uniswap, Yearn, and Synthetix, which DeFi users often think of as “blue chips,” all now have or will have, developers building on top of them, making them less of a consumer facing product.
DeFi protocols are often called “money legos” because of this stackability. For example developers likely will build apps on top of Uniswap’s V3 to manage liquidity positions, and Alchemix is essentially using Yearn as its financial backend.
While Kwenta’s announcement post didn’t address other token mechanics, such as value accrual, Andrew Trudel of the newly spun off team did say in the Synthetix Discord that “Kwenta will be stakable and have all the faculties it needs to become a productive asset.”
Synthetix core contributors are tied up with a host of responsibilities, including the transition of the protocol to Layer 2 (L2). Kwenta spun that off to “receive the development resources it needs to reach its true potential.”
Kwenta acts as a front-end for Synthetix similar to the way Akropolis performs as a front-end for Yearn Finance, minus the institutional focus. This hasn’t worked well for Akropolis so far, whose AKRO token is down 60% in the past 90 days while Yearn’s YFI is up 6.30% in the same span according to CoinGecko.
Some SNX holders were disgruntled by the choice to spin out Kwenda with a separate token. Samantha, as they go by on Discord, believes that both SNX holders and traders who use Kwenta were scammed. Samantha said there’s going to either be higher fees on the platform or “more sucked away from you as a hodler of SNX to compensate ‘kwenta.’”
Following the DeFi exchange model, Kwenta must presumably generate revenue from somewhere. That likely has to come from trading fees, which now otherwise go to SNX stakers. It could be compensation from Synthetix, reducing SNX stakers’ returns.
Some like MiLLiΞ, another Discord user, are more optimistic, positing that Kwenta’s incentives differ from SNX stakers. But as they’re tied to Synthetix tokens, the exchange interface can’t optimize its product.
For example, if traders on Kwenta move from sUSD, a synthetic USD, to sBTC and Bitcoin goes up, the collateralization ratio of staked SNX to Synthetix’s synthetic assets goes down. The trade benefits the Kwenta trader, but actually hurts the Synthetix staker as when their collateralization ratio drops below 500%, they no longer receive trading fees. This makes them “direct counterparty to the trades,” as MiLLiΞ said on Discord.
The new project is bound to spur questions about an airdrop. Kwenta will “likely launch a token that will be distributed to SNX holders,” according to a post by Synthetix founder, Kain Warwick. Specific details of the token distribution remain scant. However, Trudel said on the new Kwenta Discord that “there’ll be a distribution to SNX stakers,” specifically.
For now, users must wait for details about the KWENTA token distribution. One thing’s for sure: the new venture will teach the DeFi community more about how to sustainably stack its proverbial money lego protocols.