Synthetix Considers Ending SNX Inflation: Stakeholder Rights Reconstruction, Potentially Becoming a Non-Inflation Blue Chip Project

Recently, a proposal on the Synthetix platform to terminate SNX inflation has drawn widespread attention. The proposal is being voted on in Snapshot, and if passed, it will mark the end of the Synthetix mining and inflation era, with SNX potentially becoming a high-quality token with no inflation or even deflation.

According to the governance structure of Synthetix, there are several committees and groups elected by SNX stakers, with elections held every 4 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, the proposal has received the support of 6 out of 8 members of the Sparta Committee, achieving a support rate of 100%. This means the proposal is very likely to pass, with the final vote ending on December 18. It is worth noting that the inflation rewards for Synthetix are distributed every Thursday, and starting from the Thursday of December 21, the proposal will take effect, and inflation rewards will no longer be distributed.

Changes in the interests of stakers and ordinary token holders

In the Synthetix system, SNX stakers play the role of counterparties for synthetic assets and perpetual contract trading. According to existing rules, stakers can receive transaction fee rewards and inflation rewards in SNX.

If the current proposal is approved, the rights of SNX stakers will change. Previously, their earnings included: profit and loss as a counterparty, inflation rewards, and sUSD debt destroyed through transaction fees. Considering that the Andromeda version of Synthetix is planned to be deployed on the Base network, the future rights of stakers may 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 relatively stable. Data shows that the earnings of SNX stakers (including trading fees and gains and losses as counterparties) have been on an upward trend.

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

The proposal takes into account that the current inflation rate has significantly decreased compared to the past. In addition, Synthetix v3 is about to go live on the Base network, which will bring new sources of income. Meanwhile, another proposal currently under voting hopes to use half of the fees generated on the Base network for repurchasing and burning SNX, while the other half will be allocated to liquidity providers. However, there are differences 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 generated 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 as the downward price pressure from inflation will disappear. If another proposal is passed, SNX may even enter a deflationary era.

The importance of SNX stake

For Synthetix, maintaining a sufficiently high stake rate is more critical 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 within the system as collateral. To maintain stability, Synthetix sets the collateralization ratio for minting sUSD at 500%. Even in the event of a significant drop in the price of SNX, there is usually no liquidation risk.

This means that the more SNX is staked, the more synthetic assets can be minted. In Synthetix's perpetual contract trading, sUSD can currently only be used as margin. 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 face a premium of 1% or even higher, affecting the trading experience. This is also one of the reasons for previously relying on high inflation to attract staking.

However, the situation where sUSD constrains project development may change. The Andromeda version of Synthetix, which is about to be deployed on the Base network, will use USDC as collateral. From this perspective, the importance of sUSD will decrease, and Synthetix's reliance on SNX stakers will also diminish.

Inflation Adjustment Process

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

In 2019, when Synthetix transitioned from its original stablecoin project named Haaven to its current synthetic asset business, Synthetix began a period of high inflation to attract funds for staking, minting sUSD, and rapidly distributing tokens. Initially, 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, initially distributing 1.44 million SNX per week, with the rewards halving every 52 weeks, continuing for a total of 260 weeks.

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

In August 2022, there was a proposal suggesting to end SNX inflation and set the total supply of SNX to a cap of 300 million, but the proposal was only in 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 regular holders. The proposal is likely to pass, and the inflation incentives for SNX staking will disappear, so the rights of regular holders will no longer be continuously weakened by inflation.

SNX stakers act as counterparties and the transaction fees collected are relatively stable, showing an almost consistent upward trend. This additional income compared to regular holders may also attract sufficient staking volume. With the Andromeda version set to launch on the Base network, USDC will be used as collateral, which will also reduce the reliance on sUSD and stakers, while providing stakers with new sources of income.