SIP-37: Fee Reclamations and Rebates

Author
StatusImplemented
TypeGovernance
ImplementorTBD
ReleaseTBD
Discussions-Tohttps://discord.gg/3uJ5rAy
Created2020-01-20

Simple Summary

Deduct profits or rebate losses occurred by exchanges made immediately prior to a market shift.

Abstract

In order to prevent front-running the standard latency of Ethereum block processing, ensure that all synth exchanges take into account any imminent changes to market prices. We can do this by settling the owed funds in successive exchanges of that target synth, as long as the exchange happens after a waiting period of N minutes (configurable by SCCP).

Motivation

In effect, users who exchange in Synthetix are actually converting debt from one form to another at the current market price on-chain. If a user trades to take advantage of latency between prices detectable in the off-chain market (the SPOT rate) and the on-chain one, then they make profit at the expense of the entire SNX stakers (as each staker holds a debt position - a percentage of the entire debt pool).

SIP-12 was implemented as a mechanism to slow down any front-running, adding latency to their exchanges. However, while it prevents true front-running (anyone watching the Ethereum mempool for oracle updates and front-running the actual market prices being committed on-chain), it doesn't help much with oracle latency when the network congestion is low. Consider that oracles can't constantly push prices, at the very least they need to wait for any previous prices to be committed on-chain, and it would be incredibly expensive (and arguably a waste of resources) to try to get an oracle update in each and every block. If Ethereum network congestion is low (and thus gas prices are low), user exchanges can still get in quite quickly and the max gas limit doesn't help much. On top of that, the max gas limit can inhibit legitimate users who accidentally hit it when it adjusts down during regular adjustments.

By creating a short waiting period after exchanges in which exchanges or transfers out of that target synth are restricted, we can then settle the account automatically.

Specification

When a user exchanges src synth for dest synth, the waiting period of N minutes begins. Any transfer of dest synth will fail during this window, as will an exchange from dest synth to any other synth, or a burn of sUSD if it was the dest synth of any pending exchange. If another exchange into the same dest synth is performed before N minutes expires, the waiting period restarts with N minutes remaining.

Once N minutes has expired, the following exchange from the dest synth to any other, or a burn of sUSD, will invoke settle - calculating the difference between the exchanged prices and those at the end of the waiting period. If the user made profit, it is taken to be front-run profit, and the profit is burned from the user's holding of the dest synth. If the user made a loss, this loss is issued to them from the dest synth. The exchange then continues as normal.

In the case of a user trying to transfer some amount of the dest synth after the waiting period has expired, this will always fail if the amount + totalOwing is more than the user's balanceOf. The user has to first invoke settle before a synth can be transferred. Otherwise, the transfer will continue as normal.

The calculation of owing or owed is as follows:

Amount * (1 - feeRate) * (srcRate/destRate - newSrcRate/newDestRate)

If the result is negative, the amount is owed as a rebate, otherwise its owing as a

Examples (with feeRate at 0.003):

  • 100 sUSD into sETH at a ETHUSD rate of 100:1 (1/100) which raises to 105:1 (1/105), the owing would be: 100 * 0.997 * (1/100 - 1/105) = 0.04747619048 sETH.

  • 100 sETH into sBTC at a BTCUSD rate of 10,000:1 and ETHUSD rate of 100:1 which raises to 105:1, the user would be rebated an owed amount of: 100 * 0.997 * (100/10000 - 105/10000) = 0.04985 sBTC

Rationale

The goal is to reclaim any fees owing whilst not impacting usability and composability. Preventing exchange, transfer and burn of the dest synth during the waiting period is necessary to ensure the user has the synths to reclaim if need be.

Once the period is over, we invoke settle within exchange or burn of the dest synth to limit complexity for the user.

Whilst we can also invoke settle within transfer of the dest synth, there are concerns that this will break ERC20 assumptions. When transfer(amount) is invoked, there are assumptions in the Ethereum ecosystem that amount will be received by the recipient. For instance, when Synthetix was Havven, there were issues integrating sUSD into DEXes as the previous sUSD transfer fees meant that these DEXes had to consider these in their accounting systems, which was often too complex for them. That being said, this proposal includes the addition of a transferAndSettle function for users who want that functionality in a single transaction.

Test Cases

Given the following preconditions:

  • Jessica has a wallet which holds 100 sUSD and this wallet has never exchanged before,

  • and the price of ETHUSD is 100:1, and BTCUSD is 10000:1

  • and the waiting period (M) is set to 3 minutes.

    When

    • she exchanges 100 sUSD into 1 sETH.

    Then

    • ✅ it succeeds as sETH has no reclamation fees for this wallet.

    When

    • she exchanges 100 sUSD into 1 sETH
    • and she immediately attempts to transfer 0.1 sETH

    Then

    • ❌ it fails as the waiting period has not expired

    When

    • she exchanges 100 sUSD into 1 sETH
    • and she immediately attempts to exchange 1 sETH for sBTC

    Then

    • ❌ it fails as the waiting period has not expired

    When

    • she exchanges 50 sUSD into 0.5 sETH.
    • and she immediately attempts to exchange 50 sUSD into 0.005 sBTC

    Then

    • ✅ it succeeds as sBTC has no reclamation fees for this wallet

    When

    • she exchanges 50 sUSD into 0.5 sETH.
    • and 1 minute she immediately attempts to exchange another 50 sUSD into 0.5 sETH

    Then

    • ✅ it succeeds, and the waiting period is reset to 3 minutes

    When

    • she exchanges 100 sUSD into 1 sETH (paying a 30bps fee)
    • ⏳ and 2 minutes later the price of ETHUSD goes up to 100.25:1
    • ⏳ and another minute later she attempts to transfer this sETH

    Then

    • ❌ the transfer fails because she owes 100 * 0.997 * (1/100 - 1/100.25) = 0.002486284289 sETH she must settle first

When

  • she exchanges 100 sUSD into 1 sETH (paying a 30bps fee)
  • ⏳ and 2 minutes later the price of ETHUSD goes up to 100.25:1
  • ⏳ and another minute later she attempts to transfer 0.90 sETH

Then

  • ✅ the transfer succeeds because even though she owes 0.002486284289 sETH, she still has 0.997 - 002486284289 = 0.9945137157 sETH that is transferable

When

  • she exchanges 100 sUSD into 1 sETH (paying a 30bps fee)
  • ⏳ and 1 minute later the price of ETHUSD goes up to 103:1
  • ⏳ and 2 more minutes later she attempts to transfer all of her sETH

Then

  • ❌ the transfer fails because she made 100 * 0.997 * (1/100 - 1/103) = 0.02903883495 sETH. She must either invoke settle separately before being able to transfer the sETH or invoke transferAndSettle to combine the actions.

When

  • she exchanges 100 sUSD into 1 sETH (paying a 30bps fee)
  • ⏳ and a minute later the price of ETHUSD goes up to 103:1
  • ⏳ and 2 more minutes later she invokes settle for sETH
  • and immediately transfers this sETH to another wallet

Then

  • ✅ the transfer succeeds as the prior settle invocation burned 100 * 0.997 * (1/100-1/103) = 0.02903883495 sETH, and transfer detected no fees remaining.

When

  • she exchanges 100 sUSD into 1 sETH (paying a 30bps fee)
  • ⏳ and a minute later the price of ETHUSD goes up to 103:1
  • ⏳ and 2 more minutes later she attempts to exchange 1 sETH for sBTC

Then

  • ✅ the exchange succeeds, burning 0.02903883495 sETH and converting the rest into sBTC (minus the exchange fee).

When

  • she exchanges 100 sUSD into 1 sETH (paying a 30bps fee)
  • ⏳ and a minute later the price of ETHUSD goes down to 95:1
  • ⏳ and 2 more minutes later she attempts to exchange 1 sETH for sBTC

Then

  • ✅ the exchange succeeds, issuing her 100 * 0.997 * (1/100 - 1/95) = 0.05247368421 sETH, and converting the entire amount (0.967961165 sETH) into sBTC (minus the exchange fee).

When

  • she exchanges 100 sUSD into 1 sETH (paying a 30bps fee)
  • ⏳ and no oracle update for ETHUSD occurs after 3 minutes
  • ⏳ once 3 minutes from exchange have elapsed she attempts to exchange

Then

  • ✅ the exchange succeeds and no rebate or reclamation is required

When

  • she exchanges 100 sUSD into 1 sETH (paying a 30bps fee)
  • ⏳ and no oracle update for ETHUSD occurs after 3 minutes
  • ⏳ once 3 minutes from exchange have elapsed she exchanges 1 sETH for sUSD (paying a further 30bps fee)
  • ⏳ and a minute later the price of ETHUSD goes down to 90:1
  • ⏳ she burns 50 sUSD

Then

  • ❌ the burn fails as the waiting period for sUSD is still ongoing

When

  • she exchanges 100 sUSD into 1 sETH (paying a 30bps fee)
  • ⏳ and no oracle update for ETHUSD occurs after 3 minutes
  • ⏳ once 3 minutes from exchange have elapsed she exchanges all of her 0.997 sETH for sUSD (paying a further 30bps fee)
  • ⏳ and a minute later the price of ETHUSD goes down to 90:1
  • ⏳ and two minutes later 3 minutes have elapsed since her last sUSD exchange
  • ⏳ she burns 50 sUSD

Then

  • She has 0.997 * 0.997 * 100/1 = 99.4009 sUSD in her account when the burn starts
  • 9.94009 sUSD is reclaimed from the user (0.997 * 0.997 * (100/1 - 90/1)
  • and 50 sUSD is burned.
  • ✅ She is left with 99.4009 - 9.94009 - 50 = 39.46081 sUSD

Implementation

  • Synthetix.exchange() invoked from synth src to dest by user for amount

    • Are we currently within a waiting period for any exchange into src?

      • Yes: ❌ Fail the transaction
      • No: ✅
        • Invoke settle(src)
        • Proceed with the exchange as per usual
        • Persist this exchange in the user queue for dest synth

  • Synthetix.settle(synth) invoked with synth by user

    • Are we currently within a waiting period for any exchange into synth?

      • Yes: ❌ Fail the transaction
      • No: Sum the owing and owed amounts on all unsettled synth exchanges as totalOwing and totalOwed
        • Is the totalOwing > 0
          • Yes: ✅ Reclaim the totalOwing of synth from the user by burning it
        • Is the totalOwed < 0
          • Yes: ✅ Rebate the absolute value totalOwed of synth to the user by issuing it
        • Finally, remove all synth exchanges for the user

  • Synth.transfer() invoked from synth src by user for amount

    • Are we currently within a waiting period for any exchange into src?
      • Yes: ❌ Fail the transaction
      • No: Sum the owing amounts on all unsettled synth exchanges as totalOwing
        • Is the user's balance >= amount + totalOwing
          • Yes: ✅ Proceed with transfer as usual
          • No: ❌ Fail the transaction

  • Synth.burnSynths() invoked by user for amount

    • Are we currently within a waiting period for any exchange into sUSD?
      • Yes: ❌ Fail the transaction
      • No: ✅
        • Invoke settle(src)
        • Proceed with the burn as per usual

Copyright and related rights waived via CC0.

SIPs

  • SIPs

Synthetix Improvement Proposals (SIPs) describe standards for the Synthetix platform, including core protocol specifications, client APIs, and contract standards.