Synthetix Proposes to End SNX Inflation: Reshaping Stakeholder Rights, or Becoming a Deflationary Blue-Chip Project

Recently, the Synthetix community is voting on a proposal to terminate SNX inflation. If this proposal is approved, it will mark the end of the Synthetix mining and inflation era, and SNX will also transform into a potential deflationary blue-chip token.

According to Synthetix's governance structure, its core decision-making body is the Spartan Council (referred to as SC), elected by SNX stakers. As of the morning of December 11, 6 SC members have voted in favor of the proposal, with a support rate of 100%. The final voting will end on December 18, and the likelihood of the proposal passing is high. It is worth noting that starting from December 21, the proposal will take effect, and inflation rewards will no longer be issued.

The interest changes between stakers and regular holders.

In the Synthetix ecosystem, SNX stakers play the role of counterparties in synthetic asset and perpetual contract trading. According to the existing rules, they can earn trading fee rewards and SNX inflation rewards.

If this proposal is approved, the sources of income for SNX stakers will change: from the original "counterparty profit and loss + inflation rewards + reduction of sUSD debt from fee destruction", to "counterparty profit and loss + reduction of sUSD debt from fee destruction + transaction fee income on the Base chain."

Data shows that the earnings of SNX stakers (including trading fees and profits and losses as a counterparty) have been on an upward trend. In the most recent period (from November 30 to December 6), the annualized yield generated by inflation exceeded 10%, while the annualized yield from burning sUSD through trading fees surpassed 5%.

This proposal takes into account the significant reduction in the current inflation rate and that Synthetix v3 is about to be deployed on the Base chain, which is expected to bring new sources of revenue. Meanwhile, another proposal currently under voting, SIP-345, suggests using 50% of the transaction fees on the Base chain for the buyback and burn of SNX, with the remaining 50% allocated to liquidity providers.

For ordinary SNX holders, if the proposal is approved, they will benefit from the elimination of inflationary pressure. If the SIP-345 proposal is also approved, SNX will enter a deflationary era.

The importance of staking SNX

For Synthetix, maintaining a high staking rate is crucial. Whether it's the original synthetic assets or the current perpetual contracts, a sufficient scale of synthetic assets is required for support.

sUSD, as an "endogenous collateral stablecoin", relies entirely on SNX within the system as collateral. To ensure stability, Synthetix sets the collateralization ratio for minting sUSD at 500% to cope with potential SNX price fluctuations.

The more SNX staked, the more synthetic assets can be minted. Currently, Synthetix's perpetual contract trading only supports sUSD as collateral. The issuance of sUSD may limit the trading volume of perpetual contracts, which is also one of the reasons for attracting staking through high inflation earlier.

However, with the deployment of the Andromeda version of Synthetix on the Base chain, USDC will be used as collateral, which may reduce the reliance on sUSD and SNX stakers.

Synthetix inflation adjustment history

Synthetix has undergone multiple inflation adjustments since its establishment. In 2019, to attract funds for staking and accelerate token distribution, Synthetix initiated a high inflation phase, with initial staking rewards approaching an annualized rate of nearly 100%.

In March 2019, Synthetix established an inflation schedule, planning to issue a total of 245 million SNX, with the issuance amount gradually decreasing each week. Subsequently, adjustments were made to the inflation mechanism through proposals SIP-23 and SIP-24, changing to a dynamic weekly adjustment, gradually reducing the inflation rate.

Conclusion

The proposal to end inflation is essentially a redistribution of rights between SNX stakers and regular token holders. Once the proposal is passed, the inflation incentives for SNX staking will be terminated, and the rights of regular token holders will no longer be continuously weakened by inflation.

The earnings of SNX stakers as counterparties are relatively stable, and this additional income may still be enough to attract sufficient staking volume. With the Andromeda version about to be deployed on the Base chain, USDC will become the new collateral, which not only reduces the reliance on sUSD and stakers but will also bring new sources of income for stakers.