Debt Hedging Refresher for SNX Stakers

Synthetix -

The central mechanism of the Synthetix protocol is that SNX stakers are the counterparty to trades made using the Synthetix platform. What this means in practice is that the debt you owe as a staker is proportional to your share of the global debt pool, rather than the nominal amount of sUSD you mint.

If assets represented by the debt pool are volatile, stakers’ active debt can be equally volatile. This is why it is important to practice good risk management as a staker and use minted sUSD to actively mirror the net exposure in the debt pool.

It’s worth noting, though, that the net exposure of the debt pool is not always long. For instance, inverse synths and synthetic shorts can offset long exposure in the debt pool. More recently, the addition of the ETH <> sETH wrapper to the protocol has introduced a mechanism that can indirectly reduce long skew assigned to stakers.

While the simple act of wrapping ETH as sETH does not alter the skew of the debt pool, subsequent trading activity can. For instance, if ETH wrapped as sETH is converted to sUSD, collateralizing an sUSD obligation with ETH amounts to a long position taken by stakers (to counter the short position of the debt pool).

This mechanism has been a useful tool in neutralizing the large long sETH skew in the debt pool, so much so that as of now the debt pool actually carries a net short position in sETH.

Snapshot of the current debt pool exposure from the Synthetix Staking dApp

Historically, the correlation between SNX and other assets in the debt pool has lessened the penalty for not hedging long debt pool skew (correlation between active debt and collateral value dampens C-ratio volatility).

With a short skew, debt can inflate more quickly as staked collateral depreciates, which underscores the importance of taking positions that hedge against debt pool skew. To hedge the exposure in the debt pool snapshot above, for instance, a staker with 1,000 sUSD of active debt should have a hedging portfolio roughly consisting of:

  • $590 stablecoin position
  • $145 short position in ETH
  • $113 of LINK
  • $104 of BTC
  • $48 of others

If you have any questions about how any of this works or what tools stakers can use to hedge debt pool exposure, come join us in Discord.