Evolution to onSynthetics v2

As OnX three pillars are about to be completed – OnX Lending, onSynthetics, and OnX alpha – we decided to upgrade onSynthetics to v2 and most importantly, create utility for onEthereum (onE) as onSynthetics itself created utility for aETH.

onSynthetics v2 vision

Bringing more visibility to OnX Finance is helpful to attract more ETH lending supply and we believe that onE, OnX’s ETH stablecoin fully backed by ETH2 bonds, can play an instrumental role to boost OnX Lending as an alternative source of lending supply. Indeed, ETH borrowing utilization rate has been above 95% for several weeks, and enabling onE borrowing will be one of the measures that we are working on to stimulate the lending activity on OnX Finance.

Ultimately, the goal is to enable OnX users to get more exposure to ETH2 bonds as OnX Finance is aiming to become an agnostic hub for Internet Bonds and other reward earning tokens.

To do so, it is essential to review the price stability mechanism of onE to ensure that onE price is pegged with ETH price, and OnX is also committed to make sure that onSynthetics’ onVault fully collateralizes onE circulating supply.

We also plan to maintain onShare (onS) token functionality as a governance token and a medium of payment to mint/redeem onE using onSynthetics’ onVault. As onBonds is no longer needed to ensure price stability under onSynthetics v2, we will rebrand onShare token to onSynthetics token (same token symbol: onS).

onSynthetics v2 price stability mechanism

As onVault is fully collateralizing onEthereum (onE) tokens in circulation, we believe that the price of onE should increase to ETH price level very quickly upon the activation of onVault’s redeem function.

As of this week, the onSynthetics vault redeem function will be activated proportionally to the aETH composition of the vault, meaning that you can redeem 1 onE and receive 1.0683 aETH (aETH in onVault / onE in circulation) as long as onE < ETH.

We expect onS tokens deposited in onVault to create a deflationary pressure as OnX users mint and redeem onE to ensure the price stability of onE and onS will be kept in onVault.

The minting function is blocked as long as onE < 1.05 ETH.

The activation of the redeem function will close the loop of onSynthetics v1.

With onSynthetics v2, the minting and redeeming function will be upgraded to withdraw and deposit aETH proportionally to the market value of ETH/aETH based on the 9-day Time Weighted Average Price (TWAP) to minimize the risk of short-term price manipulation. In other words, anyone will be able at all times to mint or redeem onE at fair value (1 onE = 1 ETH) based on the ETH/aETH 9-day TWAP, deposit/withdraw aETH only as it is the main source of collateral for onSynthetics. The 0.45% minting/redeeming fees will continue to be paid in onS token.

To ensure that the vault is overcollateralized while enabling withdrawing ETH equivalent amount of aETH at all times, OnX Finance is considering a three-tier system where the first collateral subject to be redeemed will be aETH, the second collateral would be onS (accumulated through the minting/redeeming fees) and the third collateral would be the OnX Insurance Fund. OnS and OnX Insurance fund would also be redeemed in case there is no longer any aETH in the vault, which is very unlikely to happen, but important to ensure that onE is overcollateralized, which depends on ETH/aETH price.

Uniswap v3 to further support onE price stability

Uniswap v3 is an opportunity for OnX Finance to further develop onSynthetics and OnX alpha vaults by creating Uniswap v3 Liquidity Pool farming vaults where users deposit an equivalent amount of aETH + onE and the LP farming vault provides liquidity to Uniswap v3 with specific price ranges to provide price support to onE.

Depending on the liquidity provided by non-OnX LP capital providers to onE/aETH Uniswap v3 Liquidity Pool and the aETH/ETH price level, the Uniswap v3 Liquidity Pool farming vaults can adjust periodically the price range. In summary, OnX alpha capital providers delegate the price range allocation in Uniswap v3 Liquidity Pool to OnX Finance, and OnX Finance reinvests the earned trading fees into the liquidity pool as well as distributes onS farming rewards.

Increased utility for onEthereum (onE) and onSynthetics token (onS)

As onSynthetics provide utility for aETH, we believe that it is also important to offer utility for onE once price stability has been reached (1 onE = 1 ETH). We believe that onE can be an attractive source of funding (borrowing) to enable users to buy more aETH when it is traded below fair value, similarly to the existing ONX Lending offering. Therefore, we plan to add onE lending and borrowing on OnX Finance. As onE gets more utility, we expect the trading volume to increase and further support onE liquidity providers (more trading fees).

To further support onE utility, onSynthetics token (onS) farming rewards will be distributed to onE liquidity providers, onE lending suppliers, as well as onE borrowers through negative interest rates (you get paid to borrow onE).

We plan to integrate a onS reinvestment function in a OnX alpha Uniswap v3 Liquidity Pool farming vaults , where the onS rewards will be reinvested in a aETH/onS liquidity pool (not to be confused with onSynthetics LP farming vault that does not include the reinvest of onS farming rewards). We are also studying the possibility to use the vault as collateral so that the vault can borrow aETH to add it to the liquidity together with the earned onS token instead of for example selling half of the rewards, which decreases significant the potential compound APY of the vault.

Governance

onSynthetics governance will be activated after the completion of the following steps:

- activate the onE redeem function

- rebrand onShare to onSynthetics

- formalize OnX Insurance Fund as onSynthetics’ Guarantor of Last Resort

- activate onE lending and borrowing

- activate aETH borrowing

- accept Uniswap v3 Liquidity Pool farming vaults for onE/aETH and aETH/ETH as collateral for OnX lending

Generate yield with onSynthetics’ OnVault assets (aETH, onS)

The first Governance vote will decide whether OnX should reinvest aETH and onS deposited in onSynthetics onVault to generate yield. Once onS farming rewards will end (onS farming period expiry planned on February 2022), governance will decide on the allocation of the yield generated from onSynthetics onVault.

Potential governance applications:

- distribution to OnS token holders

- incentivize onE borrowing

- incentivize onE lending

- grant access to OnE mint/redeem function to onS and/or OnX holders with x number of tokens

Next steps

As the three OnX pillars are about to become fully functional, we will focus our efforts on increasing OnX visibility to attract more ETH lending supply and TVL for the upcoming OnX alpha vaults. This requires the finalization of the OnX Litepaper and coordinate its upcoming release with marketing efforts to increase OnX visibility in DeFi.

OnX alpha is also going to be released during the month of May and is pending audit review. The smart contract and testing phase have been completed.

To further support ETH/aETH and onE/aETH price stability, we will start working on Uniswap v3 LP farming vaults, which will be an important element to ensure price stability for both token pairs, which benefit from low to no impermanent loss.