Synthetix will end inflation: SNX stake holders' rights reconstruction may become a deflationary blue-chip project

On December 9th, a proposal to terminate SNX inflation began voting on the Synthetix platform. If this proposal is passed, it will signify the end of the Synthetix mining and inflation era, and SNX may transform into a high-quality token with no inflation or even deflation.

The governance structure of Synthetix includes several committees and groups elected by SNX stakers, with elections occurring every four months. Among them, the Spartan Council (SC) 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 Committee have voted in favor of the proposal, resulting in a support rate of 100%. This indicates that the proposal is likely to pass, with the final vote ending on December 18. It is worth noting that starting from December 21, the proposal will come into effect, and users will no longer be able to receive inflation rewards.

The interests of stakers and ordinary token holders change.

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 SNX inflation rewards.

Before this, the rights of SNX stakers included: profit and loss as a counterparty, inflation rewards, and sUSD debt destroyed through transaction fees. Considering that the Andromeda version of Synthetix has been approved for deployment on the Base network, if the current proposal to terminate inflation passes, the rights of SNX stakers will include: profit and loss as a counterparty, sUSD debt destroyed through transaction fees, and transaction fee income on the Base network.

Compared to other perpetual contract projects, the income of SNX stakers as liquidity providers is more stable. Data shows that the earnings of SNX stakers (including trading fees and gains and losses as counterparties) are generally on a continuous upward trend.

In the previous period (from November 30 to December 6), the annualized return from inflation exceeded 10%, and the annualized return 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 the current inflation has significantly decreased compared to before. In addition, Synthetix v3 is about to go live on the Base network, which is expected to generate new revenue. Meanwhile, another proposal currently being voted on hopes to use 50% of the fees generated on the Base network for the buyback and burn of SNX, with the remaining 50% distributed to liquidity providers. However, there are disagreements 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 on the Base network may still be sufficient to attract enough stakers to continue participating.

For ordinary holders of SNX, this proposal will increase their equity, and the downward price pressure caused by inflation will disappear. If another proposal is approved, SNX will also enter an era of deflation.

The key to SNX stake

For Synthetix, maintaining a sufficiently high stake rate is more important than for other projects. Whether it is the original synthetic assets or the current perpetual contracts, there needs to be a sufficient scale of synthetic assets.

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

This means that the more SNX you stake, the more synthetic assets you can mint. Currently, in Synthetix's perpetual contract trading, only sUSD can be used as collateral. The issuance of sUSD may limit the trading volume of perpetual contracts. If sUSD lacks liquidity in the secondary market and experiences high volatility, purchasing sUSD for trading or increasing margin may incur a premium of 1% or even higher, which can also affect the trading experience. This is also the reason for previously relying on high inflation to attract staking.

However, the rules that limit the development of the sUSD project may be broken, as Synthetix is about to deploy the Andromeda version on the Base network, which will use USDC as collateral. From this perspective, the importance of sUSD will decline, and Synthetix's dependence on SNX stakers will also weaken.

multiple inflation adjustment history

Synthetix has undergone multiple inflation adjustments in its history, and it is also considered one of the earliest projects to launch liquidity mining, with a gradual reduction of inflation being part of the initial plan.

In 2019, when Synthetix transitioned from its original stablecoin project named Haaven to its current synthetic asset business, it entered a high inflation period to attract funds for staking, minting sUSD, and accelerating token distribution, with staking rewards in the first year potentially nearing 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 rewards every 52 weeks, continuing for a total of 260 weeks.

In light of the uncertainty brought about by the reward halving, two proposals put forward in September and October 2019 adjusted inflation to a weekly basis, gradually decreasing. By August 2023, the inflation rate dropped to 2.5%.

In August 2022, there was a proposal suggesting to end SNX inflation and set a cap of 300 million for the total supply of SNX, but the proposal was only in draft stage and did not go to vote.

Conclusion

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

SNX stakers act as counterparties and the transaction fees collected are relatively stable, showing a generally upward trend. This additional income compared to ordinary holders may still attract enough staking volume. With the Andromeda version set to launch on the Base network, USDC will serve as collateral, reducing the dependency on sUSD and stakers, while also bringing new sources of income for stakers.