Synthetix May End Inflation: SNX Stakeholder Rights Restructuring, Potentially Becoming a Deflationary Blue-Chip Project

On December 9, an important proposal regarding the termination of SNX inflation began voting on the Synthetix platform. If this proposal is passed, it will mark the end of the Synthetix mining and inflation era, and SNX may also transform into a high-quality token with no inflation or even potential deflation.

According to Synthetix's governance structure, it includes several committees and groups elected every four months by SNX stakers. Among them, the Spartan Council (SC) serves as the core governance body, responsible for voting on improvement proposals and parameter changes.

As of the morning of December 11, the proposal has received support from 6 out of 8 members of the Spartan Council, with a support rate of 100%, indicating that the proposal is likely to pass. The final vote will end on December 18. It is worth noting that Synthetix's inflation rewards are distributed once every Thursday, and starting from Thursday, December 21, the proposal will take effect, and users will no longer be able to claim inflation rewards.

The shift in interests between stakers and regular holders.

According to the agreement rules, SNX stakers in Synthetix play the role of 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: profit and loss 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 end inflation proposal is approved, the rights of SNX stakers will include: profit and loss 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 have more stable income as liquidity providers. Data shows that the profits and losses of SNX stakers (including trading fees and profits and losses as counterparties) have been on an upward trend.

In the previous period (from November 30 to December 6), the annualized yield from inflation exceeded 10%, while the annualized yield from destroying sUSD through trading 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 be deployed on the Base network, which will bring new sources of revenue. Meanwhile, another proposal currently under voting hopes to allocate 50% of the transaction fees generated on the Base network for the buyback and destruction of SNX, with the other 50% distributed 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 attract enough stakers to continue participating.

For ordinary holders of SNX, this proposal will increase their rights, as the downward price pressure caused by inflation will disappear. If another proposal passes, SNX may even enter a deflationary era.

The importance of SNX stake

For Synthetix, maintaining a high staking 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 rate for minting sUSD at 500%. Even if the price of SNX drops significantly, it typically does not face liquidation risks.

This means that the more SNX staked, the more synthetic assets can be minted. Currently, only sUSD can be used as collateral in Synthetix perpetual contract trading. The issuance of sUSD may limit the trading volume of perpetual contracts. If there is insufficient liquidity for sUSD in the secondary market and prices are volatile, purchasing sUSD for trading or increasing collateral may face a premium of 1% or even higher, which can affect the trading experience.

However, the situation where sUSD restricts project development may change, 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 decrease, and Synthetix's reliance on SNX stakers will also decrease.

multiple inflation adjustment history

Synthetix has adjusted its inflation policy multiple times in history, and it is considered one of the earliest projects to initiate liquidity mining. Gradually reducing inflation was also a plan established from the beginning.

In 2019, when Synthetix rebranded from its predecessor stablecoin project Haaven to its current name and synthetic asset business, it entered a period of high inflation to attract funds for stake, mint sUSD, and quickly distribute 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 rewards every 52 weeks, continuing for a total of 260 weeks.

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

In August 2022, Kain proposed a plan to end SNX inflation by setting a total supply cap of 300 million SNX, but the proposal was only in draft form 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 holders. The proposal is likely to pass, and the inflation incentives for SNX staking will disappear, while the rights of ordinary holders will no longer be continuously weakened by inflation.

SNX stakers serve as counterparties and the transaction fees collected are relatively stable, showing an almost continuous upward trend. This additional income compared to regular holders may still attract enough staking volume. With the Andromeda version set to be deployed on the Base network, USDC will be used as collateral, reducing the reliance on sUSD and stakers, while also bringing new sources of income for stakers.