Synthetix Proposal or the End of the Inflation Era: SNX Holder Rights Restructuring, Potentially Becoming a Deflationary Blue-Chip Project

Recently, the Synthetix community is voting on an important proposal regarding the termination of SNX inflation. If this proposal is passed, it will mark the end of the Synthetix mining and inflation era, and SNX is expected to transform into a blue-chip token with no inflation and possibly deflation.

According to the governance structure of Synthetix, its core decision-making body, the Spartan Council, is elected by SNX holders every four months. As of now, six council members have voted in favor of the proposal, achieving a 100% support rate. This means the proposal is very likely to be approved, with the final voting ending on December 18. It is worth noting that starting from December 21, the proposal will officially take effect, and inflation rewards will no longer be distributed.

The changing landscape of interests between stakers and regular holders.

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

If the new proposal is passed, the sources of income for SNX holders will change: in addition to the profit and loss as a counterparty and the sUSD debt destroyed through transaction fees, it will also include transaction fee income on the Base network. Compared to other perpetual contract projects, Synthetix holders have a more stable income as liquidity providers, showing a continuous upward trend.

Data shows that 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 transaction fees exceeded 5%. The specific values may vary depending on the collateralization rate.

The proposal was put forward mainly considering that the current inflation rate has significantly decreased, while Synthetix v3 is about to be deployed on the Base network, which is expected to bring new sources of income. Another proposal currently being voted on, SIP-345, suggests using half of the transaction fees generated on the Base network for repurchasing and burning SNX, with the other half allocated to liquidity providers.

For ordinary SNX holders, this proposal will increase their rights, as the downward price pressure caused by inflation will disappear. If the SIP-345 proposal is also passed, SNX may even enter a deflationary era.

The key role of SNX staking

For Synthetix, maintaining a high staking rate is crucial. Whether it is the original synthetic assets or the current perpetual contracts, a sufficient amount of synthetic assets is needed to support them.

sUSD, as an "endogenous collateral stablecoin", relies on SNX within the system as collateral. To maintain stability, Synthetix has set the collateralization rate for minting sUSD at 500%. This means that the more SNX staked, the more synthetic assets can be minted. In Synthetix's perpetual contract trading, sUSD is the only collateral asset. Therefore, the issuance of sUSD may limit the trading volume of perpetual contracts.

However, this restriction may soon be lifted. Synthetix's upcoming Andromeda version, which will be deployed on the Base network, will allow the use of USDC as collateral. This change will reduce the importance of sUSD while also decreasing Synthetix's reliance on SNX holders.

historical trajectory of inflation adjustment

Since its establishment, Synthetix has undergone multiple inflation adjustments. In 2019, to attract funds for staking and minting sUSD, Synthetix launched a high inflation policy with initial annual staking rewards 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 every 52 weeks, for a duration of 260 weeks.

Considering the uncertainty brought by the reward halving, SIP-23 and SIP-24 proposed in September and October 2019 adjusted the inflation to a weekly basis, gradually decreasing. By August 2023, the inflation rate had dropped to 2.5%.

In August 2022, there was a proposal suggesting to terminate SNX inflation and set the total supply cap of SNX at 300 million, but the proposal did not enter the voting stage.

Conclusion

The proposal to end inflation essentially represents a redistribution of rights between SNX stakers and regular holders. The proposal is likely to pass, which would mean that the inflation incentives for SNX staking would disappear, and the rights of regular holders would no longer be continuously weakened by inflation.

The income of SNX stakers as counterparties is relatively stable and shows a continuous upward trend, along with transaction fee revenue. This additional income may be sufficient to attract ample staking volume. With the Andromeda version set to be deployed on the Base network, USDC will become the new collateral, which not only reduces reliance on sUSD and stakers but also brings new income sources for stakers.