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Synthetix Community Considers Ditching Inflationary Tokenomics

The Synthetix community is considering putting an end to its inflationary economics in ten weeks’ time.

Synthetix Community Considers Ditching Inflationary Tokenomics

The Synthetix community is considering putting an end to its inflationary economics in ten weeks’ time.

On Aug. 25, Kain Warwick, the founder of Synthetix, published a proposal advocating for capping the SNX supply at 300M tokens in two and a half months.“Inflation was intended to bootstrap the network, it has done this extremely effectively,” the proposal said. “Now that fee yield from atomic swaps and perps is meaningful and growing it is time to wind down inflation.”

Should the proposal pass, Synthetix would become the latest DeFi blue-chip to do away with inflationary economics. Aave and Uniswap have aboth abandoned incentivizing users with their native governance tokens to do away with the ill effects of an inflationary supply, and SushiSwap is expected to do the same in roughly one year. Compound has also slashed rewards by 50%, with a proposal to do away with inflation entirely barely falling short in a recent May governance vote.

DeFi Summer

Inflationary tokenomics proved to be an effective means to bootstrap liquidity and attract users in the early and heady days of 2020’s ‘DeFi Summer’, with Compound, SushiSwap, Aave, and other top names all garnering ten-figures worth of total value locked (TVL) off the back of generous incentive schemes.But most DeFi blue-chips posted all-time highs in May 2021 and failed to keep pace with the broader crypto markets as Ethereum and Bitcoin rallied into fresh all-time highs during November of last year. Onlookers blamed the inflationary economic models maintained by many of the sector’s top protocols for DeFi’s relative underperformance. 

Synthetic Assets

Synthetix is a protocol enabling traders to create and speculate on derivatives and synthetic assets in a decentralized manner. SNX stakers lock up the token and mint the protocol’s native sUSD stablecoin. Stakers currently receive rewards both in the form of inflationary SNX distributions and sUSD fees generated from traders using third-party dApps that leverage the Synthetix protocol, such as Curve, Kwenta, and Lyra.

Synthetix is currently the 24th-largest protocol with more than $522M locked in its smart contracts, according to DeFi Llama. It has recently found success on the Layer 2 Optimism network, emerging as the second largest protocol on the chain. But its SNX token has taken a beating since early 2021, slumping 89% since tagging an all-time high of $28.5 during February of last year, according to The Defiant data.

SNX Price
ETH Price

SNX Price + ETH Price, Source: The Defiant Terminal

Proposal Garners Support

The proposal is garnering support on social media. Andrew Fenton commented that abandoning inflationary economics will make Synthetix “more like an actual business relying on revenue and providing dividends.” He added that it will be an interesting experiment “to see if people value fundamentals higher than free tokens.”

But not everyone is on board. lso_lX questioned whether distributing yields solely in sUSD will sufficiently incentivize users to stake SNX. “I initially thought the inflation was an incentive for this? Have we reached a consensus that this won’t harm the network?” they said.

Distorted Incentives

Inflationary economics were introduced to SNX in March 2019, targeting a four-year program that would end in march 2023 at a fixed supply of roughly 250M tokens. Subsequent governance measures increased the rate of inflation in a bid to encourage more SNX staking, but the proposal notes that “higher inflation did not meaningfully impact the percentage of SNX staked in the network.”

“Inflation fundamentally distorts the incentives within the network,” Warwick wrote, adding that it “creates downward pressure on the price of the SNX token.”

“Even though inflationary rewards are locked for a year, it is trivially easy to hedge this exposure by continuously selling unlocked SNX each week.”

If passed, SNX’s supply would become controlled by Synthetix metagovernance, meaning a unanimous vote from members of the Synthetix ‘Spartan Council’ would be required to make further changes to supply.

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