Concerns Regarding Possible Misconduct by Synapse with Respect to the Usage of ARB Incentives Allocated Through the STIP

As one of the Research Members of the ARDC, Blockworks Research has been gathering data and conducting an analysis of the STIP process, as well as recipients’ performance and utilized mechanisms. During this analysis, concerns have arisen regarding the usage of ARB incentives by Synapse.

As part of STIP Round 2, Synapse received an incentive allocation of 2M ARB, which was streamed to the project’s dedicated Funding Address (0xd31d3a2c19123b8ff48560c20a08ffb16ad62dfe) between January and March 2024. Following the STIP’s conclusion on March 29th, 2024, 750K ARB from the Funding Address was sent to three separate wallets on April 12th, 2024:

0x95aAA6B27D6001dAb496c9FB229dE4CBd443C648 (~360K ARB)
0x7db3441406C34aF060eC64C31c4943A0234d8b36 (~150K ARB)
0xf6a3928F8E6820d78465Ef2675a8ad2438dd2a83 (~240K ARB)

These wallets still hold all of the transferred ARB and have received small amounts of ETH from a wallet connected to the ENS socrates0x.eth (0xfc7A6e0b80b2cfcABBa789ef1565Af9BC5d00aa0), who is the co-founder of Synapse Labs. All of the ARB across the three wallets is currently delegated to socrates0x.eth, as can be seen in this Dune query. Moreover, ARB from the Funding Address was sent to a Distribution Address (0x48Fa1EBDa1AF925898c826c566F5Bb015E125EAd) before tokens were distributed to users. This Distribution Address still holds ~3.3K ARB.

These actions raise questions about compliance with the rules established by the STIP, which stipulate that protocols receiving incentives should return any unused ARB to the DAO and prohibit the use of the grant in governance. We would appreciate an explanation from Synapse regarding these observations.

CCing: @Socrates & @moses

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Looking forward to hearing a response from Synapse about this. The txn trail that leads to the 750k ARB being used in governance and custodied by an EOA that seems to be owned by Socrates is very clear and worrisome. I’m curious if the DAO has any viable recourse here if this is the misuse of funds that it seems to be, outside of social pressure.

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We would like to provide some information on this topic. We asked this question during the STIP Bridge program and this was the answer we received, it is posted on LTIPP’s discord [Arbitrum LTIPP].

And here is the proposal in the synapse forum: Allocation for 2M ARB STIP Grant - Synapse Forum

This is what the @SEEDGov team reported to Syanapse

Note: our intention is to provide data, the Synapase team answered our questions a few weeks ago.

The Synapse STIP Proposal included two main budget items: 1.5M ARB allocated to support slippage free bridging, and 500k ARB towards supporting Arbitrum Partners. The aim of the first allocation was to:

“for any Arbitrum user to bridge up to $5M slippage-free. Concentrated liquidity bridging is similar to going from Uni V2 to Uni V3, allowing slippage-free bridging. This will massively improve Arbitrum’s UX, lowering costs for users and incentivizing users to bring their assets in from other chains.”

To achieve this specifically, the SynapseDAO bootstrapped SynapseRFQ. SynapseRFQ turns every bridge transaction into an auction. Users submit their bridge requests, and relayers compete with each other to provide the cheapest possible quote. The relayer with the best quote is selected and immediately gives the users their funds on their desired destination chain. 750k of the 1.5M ARB was allocated to bootstrapping the relayer ecosystem, encouraging more competition, leading to cheaper prices and more asset and chain support for users.

More importantly, SynapseRFQ delivered its promise of delivering zero-slippage bridging in under 15 seconds. Today, SynapseRFQ makes up nearly all Synapse Volume related to Arbitrum, and is cheaper than aggregators on all Arbitrum routes for native USDC.

The wallets in question are owned by the relayers pursuant to the STIP proposal and the Synapse DAO proposal. None of the wallets are owned by Socrates. Socrates did ask these relayers to delegate to him and they agreed. This is not against the STIP regulations the same way the tens of thousands of users who received ARB through bridge rebates can delegate to whoever they please. That said, we agree that it could be seen as a quid pro quo arrangement and although it’s not against the rules, we have asked the relayers to undelegate from Socrates. Additionally, none of the delegated ARB has been used in any way through voting thus far.

Regarding the ARB distribution address that still holds 3.3k ARB, Synapse is happy to return those funds. We haven’t found the appropriate address to send it back to but are happy to do it once that’s made available.

Update:
The 3.3k ARB was returned on 5/14 here: Arbitrum Transaction Hash (Txhash) Details | Arbiscan
Important Links:

STIP Proposal

Synapse DAO Forum Post

Thank you for bringing this up @BlockworksResearch. I wanted to respond in addition to @moses’s response to give a quick TLDR of Synapse’s STIP grant:

  1. The original STIP allocation was to enable “slippage-free” bridging, faster and cheaper bridging.

“Slippage-free bridging - 1.5M ARB will be used to support faster and cheaper bridging. Using Synapse’s concentrated liquidity pools and traditional stableswap pools, Synapse’s aim is for any Arbitrum user to bridge up to $5M slippage-free”

Source: [Synapse Protocol] [FINAL][STIP - Round 1]

  1. Synapse DAO built RFQ bridging. An intent-based architecture that allows relayers to complete bridge transactions. We thought this would be the best architecture to reduce bridging times(from 17 minutes to 15 seconds) and make bridging cheaper.

Sources: https://twitter.com/SynapseProtocol/status/1765107103746662888, can share Dune queries as well.

  1. Synapse DAO voted on how to break down incentives between bridges and relayers to bootstrap this RFQ ecosystem best and chose to allocate 750k for RFQ relayers who complete bridge transactions and 750k for bridgers.

Source: Snapshot

  1. By all measures, I’d consider this a massive success, delivering on Synapse’s promises in STIP as much as possible:
  • Bridge times fell from 17 mins to 15 seconds
  • Slippage free bridging(cost savings for users)
  • Over $3B in bridge volume & 60k unique bridges
  • We reduced stagnant TVL liquidity, increasing safety for LPs and the Arbitrum ecosystem

Sources for this are above but can also be seen in the bi-weekly updates, for example: Synapse Protocol Bi-Weekly STIP Backfund Updates - #4 by moses

  1. 750k ARB was distributed to bridgers as fee rebates, and 750k was distributed to RFQ relayers. I asked those relayers if they’d consider delegating their Arb to me which they did. As mentioned in @moses’s reply, I can see how this could be viewed as some sort of “quid-pro-quo” and have since asked them to undelegate or vote themselves. That said, I don’t think it’s against STIP rules; my understanding is the ARB shouldn’t be used by the DAO for governance, but after it’s distributed to relayers, users, LPs, etc, they can use it for governance.

In regards to the 3.3k Arb that was left unused, that was transferred back to the Arbitrum DAO(Arbitrum Transaction Hash (Txhash) Details | Arbiscan). Thank you for pointing this out.

The two concerns raised by @BlockworksResearch are about the unused ARB and the use of ARB in governance.

As mentioned, the unused Arb(3.3k) has been returned.

In regards to the use of Arb in governance, a clarification of the rules here would be helpful. The original STIP proposal says, " Grants are not to be used in DAO governance". Our understanding of this was that Arb tokens given to the respective STIP DAOs shouldn’t be used in governance but once they’ve been distributed, it could be used. Similar to how LPs & traders that received Arb from GMX’s STIP program could use the Arb in governance.

Either way, I see why this could be confusing and have asked the relayers to undelegate. That said, I don’t think this is a breach of STIP rules in the first place, and it certainly wasn’t done with malicious intent.

Would love to hear @BlockworksResearch’s thoughts with more context now and answer any other questions others have on this matter. Appreciate everyone’s diligence on the matter.

The following message is a personal opinion, doesn’t represent any of the protocols i work with, nor the other contributors to the STIP Bridge program (Pm, advisors, others).

So far, on all contentious topics regarding several proposals in STIP/LTIPP, I have taken a neutral stance due to being actively involved in the program itself; but I feel now is the time to directly intervene on this specific discussion. I currently don’t have enough information to understand who operates the entities behind the relayers in question; nor I currently have enough information to understand the mechanism and the economics involved in this process. If anybody, either in synapse or others, can shred some light on these topics, I think it would be quite helpful.

What I know is that in crypto in general, in incentive programs specifically, and in the arbitrum dao above all, we should all gun not only for a “good” behaviour, but also for a behaviour that is perceived as “good” from the outside. Whatever good means.

We all work in an industry that, for outsiders, is more often than not synonym of scams, grift and others.
We also all contribute in a dao that, according to some users (few? a lot? can’t quantify but they are definitely out there), creates incentive programs to just “reward ourself”. Ourself = dao contributors, protocols contributors and so on. In my view, the only way to change the above is to strive for transparency and good behaviours. This translates not only doing stuff accordingly to the rules, but also doing them in a way that is clear, at first glance, that there was no malicious intent. If there is the sensation of malicious intent, even if the underlying actions are clear, any doubt on maliciousness should be dissipated in public.

This post is not to accuse synapse of any wrong doing. I honestly don’t have the data to pinpoint, with high confidence, that there was a misues of funds. But, is a call to clarify what has happened, to turn what is a negative perceived event in a potentially positive one. Clarifying why there are only 3 relayers who have been able to collectively accrue 750k arb in rewards, who these relayers are, why there are transactions tied to the ens of socrates, is something that, without any authority neither from the dao nor in this program (because advisors are not watchdog, and currently I am speaking as a simple dao enjoyer), I strongly suggest synapse to clear. Because this the only way i currently see to turn something negative in something potentially positive for all the stakeholders involved: synapse, the dao and the contributors.

I don’t take the step of posting this lightly as Synapse has been a bridge partner of GMX for multiple years, and one of the earliest and most active protocols on Arbitrum, but as a delegate and member of the STIP multisig responsible for the STIP funds (including on various times approving changes and stopping streams for other protocols) it is important to shine a light when there are matters in doubt.

Having taken the time to read Synapse’s original STIP application and Synapse governance vote (SIP-32) that were referenced but also the four weekly updates to the Arbitrum DAO, Synapse governance forum discussion and additional Synapse governance votes (SIP-35 onwards), was left with more questions than answers.

Hoping that the Synapse Team can answers these questions, while they also recognize what could have been done better. This way delegates can take that additional feedback into account.

Dislosure of the change

  • Synapse changed the use of 1.5m ARB originally proposed to support ‘Synapse’s concentrated liquidity pools and traditional stableswap pools’ to instead support your new RFQ system. Appreciate that you have presented the RFQ system as being far superior product and wanted to move your incentivization in that direction.
  • Your reports do mention RFQs regularly but in a more incidental fashion, ex. ‘In aggregate, bridge incentives have driven > $880m in bridge volume and thousands of transactions in its first week of distributions. The program is also driving adoption of RFQ versus other forms of bridging, as RFQ transactions made up nearly 10% of all transactions to/from Arbitrum in its first week.’
  • From a disclosure standpoint your ongoing reports to the DAO never mention the Synapse vote, continuing to state ‘There are no changes to the original distribution plan’ and your final report stated ‘The final tranche of ARB rewards has been claimed. In the last week of the program, the rest of rewards will be distributed according to the original proposal.’

Protocols must have a degree of flexibility so the process should not be bureaucratic, STIP very much allowed for some flexibilty but Synapse could (and probably should) have done a much better job on disclosure and consultation of such a material change.

Relayers

This is the area where your responses lead to more questions than answers.

This past week the Synapse DAO passed a proposal that will drastically increase the liquidity for some of the initial relayers. This proposal should drastically increase the size of transactions that RFQ can offer competitive rates to.

It would be helpful to know if directly or indirectly Synapse Labs or anyone affiliated with it ran, or had an interest in one or more of the initial relayers or the relayer that is funded here if not part of the initial relayers. In short did Synapse or its Labs receive a portion of the ARB incentives?

Couldn’t find any information on your site or docs on how someone could participate as a relatyer, so additional information on how someone becomes a relayer, the process of recruiting them to participate for a share of the 750,000 ARB relayer incentives made available for growth?

Looking at the dune dashboard (https://dune.com/synapse_labs/synapse-stip-reporting), it looks like the RFQ system performed ~2000 transactions and bridged $23 million out of the 3 bilion in volume over STIP. Am i reading the chart correctly? If so in addition to the 750,000 ARB for relayer incentives how much of the 750,000 ARB in bridger rebates were used towards the RFQ system.

Appreciate your contributions to growing Arbitrum, am hopeful of your response and apologize in advance if anything i’ve flagged above is based on an incorrect understanding of the facts. Hopefully this can all be addressed.

The following reflects the views of L2BEAT’s governance team, composed of @krst and @Sinkas, and it’s based on the combined research, fact-checking, and ideation of the two.

While L2BEAT is also the DAO Advocate for the ARDC, we’re also delegates in Arbitrum DAO and we want to make it absolutely clear that the below reflects our opinion in our capacity as delegates and not as the DAO Advocate.

Although the situation with Synapse’s STIP allocation isn’t as severe of a misconduct as the initial findings led us to believe, Blockworks’ research and the discussion it spurred raised some concerns for us as delegates that we want to take the opportunity and seek further clarifications.

We would like to understand why such a big amount (750,000) was allocated to relayers, which at first glance seems like part of Synapse’s infrastructure and not of your user base. There’s no information on why the relayers need ARB incentives, who operates the relayers, and why there was such a big concentration of incentives for only 3 relayers? Even if not strictly against the rules, this does not seem to be an efficient incentivisation plan and raises questions about the rationale behind it.

Another thing that looks suspicious at first sight, is the fact that all 3 addresses have received small amounts of ETH from a wallet connected to the ENS socrates0x.eth (0xfc7A6e0b80b2cfcABBa789ef1565Af9BC5d00aa0) as highlighted in Blockworks report. Something that hasn’t been addressed in any of the responses by either @moses or @Socrates.

Lastly, we agree with @Jojo’s comment above that all participants in the DAO, including ourselves, should not only aim to abide by the rules but also be above board both in practice and in optics. We would like to echo @coinflip’s appreciation for Synapse’s contribution to the ArbitrumDAO so far and we encourage you to use this case as an opportunity to explain better the mechanics behind your RFQ system and the rationale behind decisions made for the incentive program.

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Blockworks Research would like to provide additional relevant information on our Synapse STIP analysis and ask further clarifying questions in a transparent manner.

We have been able to identify two “FastBridge” (RFQ) contracts. FastBridge Contract #1 (0x6c0771ad91442d670159a8171c35f4828e19afd2), shared by Synapse in their Bi-weekly STIP updates, and FastBridge Contract #2 (0x5523d3c98809dddb82c686e152f5c58b1b0fb59e), which became operational in mid-March, fully replacing all RFQ bridging activity to/from Arbitrum (i.e, 0x6c077 was discontinued once 0x5523d went live). Given this reflects standard procedure for upgrading an immutable contract, we are left to assume this will be the current implementation of the FastBridge contract going forward.

FastBridge Contract #1 (0x6c077) launched in early January (pre-STIP distribution) and had one relayer, referred to as Relayer #1 (0xdd50676f81f607fd8ba7ed3187ddf172db174cd3). On March 12th, FastBridge Contract #2 (0x5523d) went live and began operating with Relayer #1 (0xdd506). The next day, a new relayer, referred to as Relayer #2 (0xdc927bd56cf9dfc2e3779c7e3d6d28da1c219969), began relaying for FastBridge Contract #2 as well. Below you will find a chart that shows the number of relays by each relayer dating back to when FastBridge Contract #1 went live. You can find the dune query here. Additionally, Intent Markets, a site dedicated to intent-based protocols, also only identifies the two relayers mentioned above (the site calls relayers fillers).

As @coinflip pointed out, in the third bi-weekly STIP update, Synapse references a passed proposal that extended a $5M loan to Synapse Labs to operate an RFQ relayer. Below you will find the two transactions connected to the transfer of funds from SynapseDAO to Synapse Labs, disclosed by the team under this forum post. Both transactions ultimately lead to these funds being sent to Relayer #2 (0xdc927) that was added to FastBridge Contract #2 in mid-March.

In addition to the inquiries raised earlier by other community members, our main questions thus are: is there any relationship between Relayer #1 and Synapse Labs (as we know Synapse Labs is Relayer #2), and could you point us to a source from where we can find any other relayers that have facilitated/are facilitating transfers on Synapse?

We look forward to @moses and @Socrates responses and their continued support of the Arbitrum ecosystem as one of the leaders in intent-based bridging.

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