Sync Network Analysis – Are CryptoBonds Catching On?

Sync Network - CryptoBonds Protocol
Sync Network

Sync Network Project Brief

Sync Network offers an interesting mechanism to encourage long term liquidity providing on liquidity pools. The idea is to create “bonds” which are in fact smart contracts that lock LP tokens for a set period (3/6/36 months). The reward for the lock is interest accrued in the form of the protocol’s Sync token (minted to the bond owner at maturity time).

Here is the user flow in Sync: User adds liquidity to a supported liquidity pool, say SNX-ETH on Uniswap. Then the user mints a Crypobond that locks the LP tokens for the selected period of time, together with an equal dollar amount of Sync (which the user can buy on a dex such as Uniswap). The resulting bond is minted as an NFT which can be held by the owner till maturity or traded (i.e. on OpenSea). At maturity time, the bond owner gets the released LP token (with the trading fees they accrued) together with the locked Sync plus the added interest rate in the form of more Sync. The interest rate is determined and fixed at the CBond minting time, through a rather complex formula that takes into account the CBond term, total supply of Sync at the time of minting, and the amount of the selected LP tokens currently held in CBonds. A  nice feature is to add to the CBond an art item, making it an art NFT and a financial instrument at the same time.

An example for a CryptoBond traded on Rarible
An example CryptoBond traded on Rarible

Project analysis

Team


The project team is hanging somewhere in the gray area between anonymity and exposure (some team members remain anonymous, one goes by the name of Scot Bondsman which seems to be a pun as he is nowhere to be found on linkedin). Reading through the project social media it seems that the founding team is eager to hand over control (as well as operations) to the community which normally is considered good practice but in this case feels more like passing over a hot potato.

Tokenomics

This is one of the major points of confusion around Sync, and it seems the founders themselves are struggling to make sense of it. Starting with the fact that the total supply of Sync is unpredictable due to the fact the Syncs are burned whenever a CBond is minted (in equal dollar amount to the bond LP value) and re-minted together with interest when it matures. This makes it very hard to predict the future supply of Sync, apparently even to the founders who on the FAQ page mentioned creating a “very complex simulation tool” to try and predict the future supply. When looking at the initial supply things get even more confusing. The initial plan was to mint 630MM Syncs over a 1 year period through a “Fair Release Schedule” mechanism. This mechanism (implemented as a smart contract) distributes these tokens through a daily allocation based on users daily Eth contribution to a pool. Half the daily Syncs are minted to pool contributors proportionally, while the other half (as well as the pool Eth) is minted/given to the founding team (15%) and to a governed treasury (the rest). The daily distribution amount was to decrease exponentially over the year. So…yes, complex. So complex that apparently at some point the founders decided to halt this process and settle for the (roughly) 130MM Syncs minted to that point. This simplifies things to some extent but still leaves a large amount of uncertainty as to the future supply as it depends greatly on the rate CBonds are minted/mature. 

Interest Rates

Adding to the complexity is the formula used to calculate the interest rate per bond when it is minted (I won’t get into the details here but will mention that the current supply of Syncs is the most significant factor affecting the interest rate, and as mentioned, that is hard to predict. Currently the 3 years interest rate for most pools run between 200%-287%.

Should you buy Sync or mint CBonds?

Given the above, it is not trivial to estimate the future value of bonds but lets try running a simple hypothetical exercise:


Scenario A: The demand for CBonds increases gradually to 100MM dollars over the next year.


Since the current market cap of Sync is roughly 8MM and circulating supply is roughly fixed at 134MM, we can assume that with each gradual increase in demand there will be a price increase in Sync, enabling the remaining supply to accommodate more dollar demand for CBonds. Simultaneously, the diminishing supply of Sync will cause the interest rates to drop (this is a feature of the interest rate formula) causing a decline in the demand for CBonds. This process should reach equilibrium around the point where the interest rates are no longer attractive (for example: at 60MM total supply the interest rate is expected to be roughly 20% APY). This means 74MM Syncs should roughly accommodate the 100MM demand, making the target price $1.3 per Sync (an x20 increase from the current price of 0.07 at time of writing). However since the process is gradual not all CBonds will be created equal. The first CBond owners will benefit from both a huge return on Sync (x20) plus significantly higher interest rates (around 80% APY currently). This creates a huge early bird advantage. The last to join will have to settle for lower interest rates (I estimate 20%-30%) and no capital gain on Sync (not to mention a potential loss). However, it is worth mentioning that unlike many other DeFi projects, the last to enter will not necessarily make a bad deal or become the bottom row of a pyramid scheme.

Scenario B: The demand for CBonds never picks up and Sync crashes even lower than it’s current 8MM cap.

Under this scenario, early adopters still get their lucrative APYs (in nominal Sync terms, since the interest rate is locked at the time of minting) but that may be offset by the decline in Sync price by the time of maturity (though it’s hard to imagine a drop from 8MM market cap will be that significant.). Still, there is the possibility of the project going completely bust, which will cause early CBond owners to lose an amount equal to the liquidity they provided on Uniswap. 

While it’s still early to determine weather or not CBonds are catching on or not, the following graph gives an indication of how things are going so far. It shows the number of CBonds minted each day from the project’s launch to the time of writing this article. If anything can be drawn from this graph, it’s that Sync is still far from showing signs of traction, and that the projects has it’s work cut out for it when it comes to marketing.

CryptoBonds minted by day on the Sync Network protocol.

Conclusion

It is hard to estimate the future adoption of Sync. Currently it seems that the rate of CBond minting is highly correlated to Sync’s price. I believe the idea of CBonds is not bad, and hits a number of trendy topics all at once: (NFTs, fixed interest rate staking, re-liquidation of staked assets). What seems to be missing is a touch of marketing pizzazz or some more ‘to the moon’ energy from the team/community. Another thing that would help is better communication and house cleaning on part of the team (as an example I had to dig pretty deep to find out about the change in token inflation/total supply which is a pretty significant event). With some more exposure a little push in adoption can be enough to start a snowball that drives this project to the heights mentioned above (x20) or even beyond.