Synthetix proposes to end inflation: SNX staker equity reshaping, or into a deflationary blue-chip project

Author: Haibo Jiang, PANews

On December 9, Synthetix’s 2043 Improvement Proposal, SIP-2043: End SNX inflation, on ending SNX inflation, began voting on Snapshot. If the proposal passes, it will mean the end of the era of Synthetix mining and inflation, and SNX will also become a blue-chip token with no inflation (and possibly deflation).

According to Synthetix’s governance framework, its governance body includes several committees and panels elected by SNX stakers, which are held every 4 months. The Spartan Council (SC) is the core governing body in the system, responsible for improving the voting on proposals and parameter changes.

As of the morning of December 11, 6 of the 8 Spartan committee members of SIP-2014 had voted with 100% support, which also means that the proposal is highly likely to pass, and the final vote will end on December 18.

Changes in the interests of stakers and ordinary holders

According to the protocol’s rules, SNX stakers in Synthetix act as counterparties for synthetic asset and perpetual contract transactions. On top of that, SNX stakers can earn transaction fee rewards and SNX inflation rewards.

Before that, the rights and interests of SNX stakers include: profit and loss as a trader’s counterparty + inflation reward + sUSD debt burned through fees. Considering that the Andromeda version of Synthetix has been deployed to Base through voting, if the existing proposal to end inflation passes, the staker of SNX will include: profit and loss as a trader’s counterparty + sUSD debt burned through trading fees + transaction fee income on Base.

Compared with other perpetual contract projects, SNX staker’s income as a liquidity provider is also more stable. As shown in the chart below, SNX staker’s profit and loss (including trading fees and profit and loss as a trader’s counterparty) is almost always on an upward trend.

As shown in the figure below, in the last Epoch (November 30-December 6), the APR generated by inflation was more than 10%, and the APR generated by burning sUSD through transaction fees was more than 5%, and the specific value may vary according to the collateral ratio.

This proposal is based on the fact that inflation is now significantly lower than before. In addition, Synthetix v3 will soon be deployed on Base, which will also generate new revenue. At the same time, the SIP-345 proposal, which is being voted on, wants to use 50% of the fees generated on Base to buy back and burn SNX, and the other 50% to liquidity providers. But the proposal is divided, and the vote will close on December 13.

Even if there is no new inflationary income, the above-mentioned stable staking income and new income on the Base may be able to attract enough stakers to continue staking.

For ordinary coin holders of SNX, this proposal will increase their stake, and the downward pressure on prices caused by inflation incentives will disappear. If the SIP-345 proposal passes, SNX will also enter the era of deflation.

SNX the importance of staking

For Synthetix, maintaining a sufficiently high staking rate is more important than other projects. Whether it is the original synthetic asset or the current perpetual contract, there needs to be enough synthetic asset volume.

sUSD is an “endogenously collateralized stablecoin” that relies on SNX within the same system as collateral, and almost all stablecoins of the same kind have failed. In order to maintain stability, Synthetix has set the collateral ratio for minting sUSD to 500%. Even if the SNX falls sharply, it usually does not face liquidation.

This means that the more SNX you stake, the more synthetic assets you can mint. In the current perpetual contract trading at Synthetix, only sUSD can be used as margin. The issuance of sUSD may also restrict the trading volume of perpetual contracts, if there is not enough liquidity in the secondary market, and the volatility is large and you need to buy sUSD for trading or increase the margin, there may be a premium of 1% or even higher for the purchase of sUSD, which will also affect the trading experience. This is also the reason why high inflation was previously relied on to attract staking.

However, the rules governing the development of the project in sUSD may disappear, and the version of Andromeda that Synthetix will soon deploy to Base will use USDC as margin. From this perspective, sUSD will be less important and Synthetix will be less reliant on SNX stakers.

After many inflation adjustments

Synthetix has undergone several inflation adjustments in its history, and it is also considered to be one of the first projects to start liquidity mining, and gradually reducing inflation was also a plan that was made from the beginning.

In 2019, when Synthetix changed its name from its predecessor stablecoin project called Haaven to its current name and synthetic asset business, in order to attract fund staking, minting sUSD, and rapid distribution of tokens, Synthetix began a period of high inflation, and the staking rewards for the first year may be close to 100%.

In March 2019, Synthetix set out an inflation schedule with plans to issue a total of 245 million SNX, starting with 1.44 million SNX per week, with weekly rewards halved every 52 weeks for a total of 260 weeks.

Considering the uncertainty caused by the halving of incentives, SIP-23 and SIP-24, proposed in September and October 2019, changed inflation to a weekly adjustment, gradually decreasing. By August 2023, inflation fell to 2.5%.

In August 2022, Kain also proposed a proposal to end SNX inflation and set the total supply of SNX at a cap of 300 million, but the proposal was only in the draft stage and was not voted on.

Summary

The proposal to end inflation implies a redistribution of equity between SNX stakers and regular holders. There is a high probability that the proposal will pass, the inflation incentive SNX pledged will disappear, and the rights and interests of ordinary coin holders will no longer be weakened by inflation.

SNX staker as a counterparty to a trader and the transaction fees charged are relatively stable and almost always on an upward trend, this part of the additional income relative to ordinary coin holders may also attract enough staking volume. With the upcoming deployment of the Andromeda version on Base, USDC will be used as collateral and will be less reliant on sUSD and stakers, which will also generate new revenue for stakers.