Synthetix’s sUSD Slides Further Away from Peg After Protocol Update

The Synthetix protocol’s sUSD stablecoin is fighting to recover from a very steep depeg that has it far below its intended dollar peg.

The sUSD has partially recovered from a drop to $0.66 over the past 24 hours, bouncing back to a still far-under-peg $0.83, according to CoinGecko. It has a market capitalization of $27 million, far below its 2021 high north of $300 million.

The Synthetix protocol’s stablecoin has been dropping since mid-March, when it depegged after a brief stay at par. The sUSD stablecoin is pegged one-to-one with the U.S. dollar, but is not algorithmic stablecoin or backed by a fiat reserve. Instead it is a purely crypto collateralized stablecoin that relies on the price of Synthetix’s SNX token.

The problem, said Okto blockchain head of ecosystem growth Minal Thukral in an April 18 X post, is that a recent protocol update designed to improve capital efficiency “broke an important stabilization mechanism. There is no longer a strong incentive for stakers to buy cheap sUSD and repay debts.”

Protocol Update

This was the protocol’s recent SIP-420 update on March 7. It switched the protocol from backing by individual SNX stakers to a shared debt pool. Participants in this debt pool would have their debt forgiven if they leave it there over 12 months, with a penalty for early withdrawal.

This update also cut the collateralization ratio from 750% to 200% Thukral said.

“During this 12 month transition, the peg is exposed without a backstop like a peg stability module,” he added. “The risk here is not just the depeg, it is the structure. Because sUSD is still backed by SNX, falling SNX prices weaken collateral backing. If enough fear builds, users rush to exit, creating more SNX sell pressure and feeding a cascading loop.”

That said, he noted that the Synthetix treasury holds around 30 million sUSD as well as other assets including the USDC stablecoin that could backstop it.

Buying SNX

Because sUSD is a crypto collateralized stablecoin “the peg can and does drift but there are mechanisms to push it back in line if it goes above or below the peg,” said Synthetix founder Kain Warwick in an April 2 X thread. “These mechanisms are being transitioned right now, hence the drift.

The old mechanism was sUSD buying when it went below peg to pay off debt quickly.

Warwick said that it was “absolutely hilarious” to him that the depeg was caused by the 420 update, as it cuts the likelihood of a death spiral “to almost zero.”

He added that the depeg had everyone scared when they shouldn’t be, and that he’s been buying SNX this year — enough to make him the largest token holder.

That said, Warwick also admitted that the April 2 price of $0.90 might not be the bottom, and that “​​it very likely will get worse before it gets better.”