Synthetix Proposal or Termination of Inflation: Restructuring of SNX Equity Structure, Potential to Become a Deflationary Blue Chip Project

Recently, the Synthetix community is voting on a proposal to terminate SNX inflation. If the proposal is passed, it will mark the end of the Synthetix mining and inflation era, and SNX may transform into a blue-chip token with no inflation or even deflation.

According to Synthetix's governance structure, its core decision-making body is the Spartan Council, elected by SNX stakers. As of the morning of December 11, six council members have voted in favor of the proposal, achieving a support rate of 100%. This indicates that the proposal is likely to pass, with the final voting ending on December 18. It is worth noting that this proposal will take effect starting December 21, and inflation rewards will no longer be distributed.

The interests of SNX stakers and ordinary holders are being rebalanced.

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

If the inflation termination proposal is passed, the yield structure for SNX stakers will change. Considering that the Andromeda version of Synthetix is about to go live on the Base network, the sources of yield for stakers will include: profit and loss as a counterparty, sUSD debt destroyed through trading fees, and trading fee income on the Base network.

Compared to other perpetual contract projects, Synthetix's SNX stakers have more stable income as liquidity providers. Data shows that the earnings of stakers (including trading fees and counterparty profits and losses) are on a continuous upward trend.

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

This proposal takes into account that the current inflation rate has significantly decreased, coupled with the upcoming deployment of Synthetix v3 on the Base network, which is expected to bring new sources of revenue. Currently, the community is also discussing another proposal that suggests using 50% of the transaction fees generated by the Base network for the repurchase and destruction of SNX, with the remaining 50% allocated to liquidity providers.

For ordinary SNX holders, the proposal to terminate inflation will increase their equity, as the downward price pressure caused by inflation will be eliminated. If the buyback and burn proposal is also approved, SNX may enter a deflationary phase.

The importance of SNX staking ###.

For Synthetix, maintaining a sufficient staking ratio is crucial. Whether it is the original synthetic assets or the existing perpetual contracts, there needs to be a sufficient scale of synthetic assets to support them.

sUSD, as an "endogenous collateral stablecoin", relies on SNX within the system as collateral. To ensure stability, Synthetix has set the collateralization ratio for minting sUSD at 500%, meaning that even with significant fluctuations in the price of SNX, liquidation is typically not triggered.

The more SNX staked, the more synthetic assets can be minted. In Synthetix's perpetual contract trading, sUSD is the only margin option. The issuance of sUSD may limit the trading scale of perpetual contracts, and if there is insufficient liquidity in the secondary market, it may lead to higher premiums when trading sUSD, affecting user experience.

However, with the deployment of the Andromeda version of Synthetix on the Base network, it will allow the use of USDC as collateral, which may reduce the reliance on sUSD and SNX stakers.

Synthetix Inflation Adjustment History

Since its establishment, Synthetix has made multiple adjustments to its inflation policy. In 2019, when the project transitioned from a stablecoin to a synthetic asset platform, Synthetix initiated a high inflation period to attract funds for staking and minting sUSD, with initial annualized staking rewards close to 100%.

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

In September and October 2019, in response to the uncertainty brought by the halving of rewards, the inflation was adjusted to decrease weekly through proposals SIP-23 and SIP-24. By August 2023, the inflation rate had dropped to 2.5%.

In August 2022, the community discussed a proposal to set the total supply of SNX to a cap of 300 million, but it did not enter the voting stage.

Summary

The termination of the inflation proposal means a redistribution of rights between SNX stakers and ordinary token holders. The proposal is likely to pass, the inflation incentives for SNX staking will disappear, and the rights of ordinary token holders will no longer be weakened by inflation.

The earnings and trading fee income for SNX stakers as counterparties are relatively stable, and this additional income may still be sufficient to attract a substantial amount of staking. With the launch of the Andromeda version on the Base network, USDC will become a new collateral option, which not only reduces reliance on sUSD and stakers but also brings new sources of income for stakers.