Synthetix Proposal to Halt Inflation: Adjustment of SNX Stakeholder Rights, or Transition to a Deflationary Blue Chip Project

On December 9th, a proposal on the Synthetix platform regarding the termination of SNX inflation, Proposal 2043 "Termination of SNX Inflation," began voting on Snapshot. If this proposal is passed, it will mark the end of the Synthetix mining and inflation era, and SNX could potentially become a blue-chip token with no inflation or even deflation.

The governance structure of Synthetix includes several committees and groups elected by SNX stakers, with elections held every four months. Among them, the Spartan Committee is the core governance body of the system, responsible for voting on improvement proposals and parameter changes.

As of the morning of December 11, 6 out of 8 members of the Spartan Council have voted on SIP-2014, with a support rate of 100%, indicating that the proposal is likely to pass. The final voting will end on December 18. (Update: Synthetix's inflation rewards are distributed every Thursday, starting from December 21, and this proposal has taken effect, with no further inflation rewards being issued.)

Changes in Interests of Stakers and Regular Holders

According to the agreement rules, SNX stakers in Synthetix act as counterparties for synthetic asset and perpetual contract trading. Based on this, SNX stakers can earn trading fee rewards and inflation rewards in SNX.

Prior to this, the rights of SNX stakers included: profits and losses as a counterparty, inflation rewards, and sUSD debt destroyed through transaction fees. Considering that the Andromeda version of Synthetix has been voted to be deployed on the Base network, if the current termination of inflation proposal passes, the rights of SNX stakers will include: profits and losses as a counterparty, sUSD debt destroyed through transaction fees, and transaction fee revenue on the Base network.

Compared to other perpetual contract projects, SNX stakers earn more stable income as liquidity providers. Data shows that the profit and loss of SNX stakers (including trading fees and profit and loss as counterparties) has almost always been on an upward trend.

During the previous period (from November 30 to December 6), the annualized yield generated by inflation exceeded 10%, and the annualized yield from the destruction of sUSD through transaction fees exceeded 5%. The specific values may vary due to different staking rates.

This proposal takes into account that current inflation has significantly decreased compared to before. In addition, Synthetix v3 is about to be deployed on the Base network, which will bring new revenue. Meanwhile, the SIP-345 proposal currently under voting suggests using 50% of the transaction fees generated by the Base network for repurchasing and destroying SNX, with the other 50% allocated to liquidity providers. However, there are divergences regarding this proposal, and the voting will end on December 13.

Even without new inflation income, the stable staking rewards mentioned above and the new income from the Base network may still be sufficient to attract enough stakers to continue participating.

For ordinary holders of SNX, this proposal will increase their rights, and the downward price pressure caused by inflation will disappear. If the SIP-345 proposal is passed, SNX will also enter a deflationary era.

The importance of SNX stake

For Synthetix, maintaining a sufficiently high stake ratio is more important than for other projects. Whether it's the original synthetic assets or the current perpetual contracts, a sufficient scale of synthetic assets is required.

sUSD is an "endogenous collateral stablecoin" that relies on SNX within the system as collateral. To maintain stability, Synthetix sets the collateralization rate for minting sUSD at 500%. Even if the price of SNX drops significantly, it usually does not face liquidation.

This means that the more SNX staked, the more synthetic assets can be minted. In the current Synthetix perpetual contract trading, only sUSD can be used as margin. The issuance volume of sUSD may limit the trading volume of perpetual contracts. If there is insufficient liquidity for sUSD in the secondary market and high volatility necessitates purchasing sUSD for trading or increasing margin, purchasing sUSD may involve a premium of 1% or even higher, affecting the trading experience. This is also the reason for previously relying on high inflation to attract staking.

However, the rules that restrict the development of the sUSD project may disappear, as Synthetix is about to deploy the Andromeda version to the Base network, which will use USDC as collateral. From this perspective, the importance of sUSD will decrease, and Synthetix's reliance on SNX stakers will also diminish.

multiple inflation adjustment history

Synthetix has undergone multiple inflation adjustments in its history, and it is considered one of the earliest projects to initiate liquidity mining. Gradually reducing inflation was also a plan set from the very beginning.

In 2019, when Synthetix changed its name from the stablecoin project formerly known as Haaven to its current name and synthetic asset business, Synthetix initiated a period of high inflation to attract funds for staking, minting sUSD, and rapid distribution of tokens. The staking rewards in the first year could be close to 100%.

In March 2019, Synthetix established an inflation schedule, planning to issue a total of 245 million SNX, with an initial weekly issuance of 1.44 million SNX, halving the weekly rewards every 52 weeks, continuing for a total of 260 weeks.

In light of the uncertainty brought about by the halving of rewards, SIP-23 and SIP-24 proposed in September and October 2019 adjusted the inflation to a weekly change, gradually decreasing. By August 2023, the inflation rate had decreased to 2.5%.

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

Summary

The proposal to end inflation this time means a redistribution of rights between SNX stakers and ordinary token holders. The proposal is likely to pass, and the inflation incentives for SNX staking will disappear, while the rights of ordinary token holders will no longer be continuously weakened due to inflation.

SNX stakers serve as counterparties and the transaction fees collected are relatively stable, showing nearly a consistent upward trend. This additional income compared to regular holders may also attract sufficient staking volume. With the Andromeda version set to be deployed on the Base network, USDC will be used as collateral, reducing the dependency on sUSD and stakers, while also bringing new income opportunities for stakers.