The End of Synthetix Token Inflation

TLDR

• SIP 2043 Implementation: Ends SNX token inflation.
• SNX Inflation History: Initiated in 2019 to bolster staking, adjusted in 2022 to a dynamic system adjusting to staker behavior.
• Diminishing Impact of Inflation Incentives: Recently, inflation became less effective as an incentive, leading to its termination.
• Unique Inflationary Model: Distributing inflationary rewards across all healthy stakers caused confusion among users due to staking complexity.
• New Rewards Structure: Post-inflation, both stakers and non-stakers benefit from the changes. Stakers receive additional benefits, and non-stakers are no longer disadvantaged.
• Future of Synthetix without inflation: Simplifies staking, improves user experience, and paves the way for strategies like buyback and burn, beginning in the upcoming Andromeda Release, to reduce the SNX token supply.

A New Era for Synthetix: SIP 2043 and the End of SNX Inflation

With the passage of SIP 2043 by governance and subsequent implementation, Synthetix has reached a pivotal moment, ending SNX token inflation. This significant shift impacts both token-holders and liquidity providers, marking a pivotal point for the protocol.

The Evolution of SNX Inflation

SNX inflation, introduced in 2019, was pivotal post-Havven, creating a bull market in liquidity and protocol growth. More recently, in 2022, inflationary rewards were adjusted to dynamically adjust to a target staking. However, inflation's effectiveness as a staking incentive has recently diminished as inflationary rewards have reduced to single digits, leading to the decision to end it under SIP 2043.

Synthetix’s Unique Inflationary Model

The protocol’s approach to inflation, distributing it across all healthy stakers via staking rewards, was unique in DeFi but led to confusion among some users. Concerns about inflationary and staking complexity were notable among users.

The Rationale Behind SIP 2043

The effectiveness of inflation as an incentive has diminished over time. Thus, SIP 2043 proposed ending SNX inflation, aligning with the protocol’s new strategies, such as using trading fees for buybacks and burns. This change reflects a shift towards a more sustainable economic model.

Trading Fees and Protocol Sustainability

As of the publish date in Dec 2023, Synthetix Perps generated over 28.5 million in trading fees, a notable increase for the protocol from previous years. The initial inflation model was designed as a bridge to this kind of reward sustainability, now achievable without the need for inflationary incentives.

Simplifying Staking in the Post-Inflation Synthetix Protocol

Post-inflation, the staking process in Synthetix has been streamlined, eliminating the need for weekly claims. Stakers now automatically receive fee burn rewards, though actively managing debt still remains crucial.

New Rewards Structure Post-Inflation in Synthetix

The post-inflation era introduces a distinct rewards structure for stakers and non-staking token holders. Both benefit from this new structure:

For Stakers

• Free Loan Against SNX Collateral: Stakers receive a free loan (no interest, no fee) against their SNX collateral in sUSD. This loan must still be hedged against debt, but users typically use it for liquidity mining and other yield-generating activities.
• Automated Fee Burn: Fees collected from protocol trading activity are automatically distributed to LPs weekly, creating a self-repaying loan for stakers.
• Buyback and Burn Strategy: Reduces SNX supply by using fees generated from the multi-chain Andromeda Release to obtain and burn SNX. Learn more about the Andromeda Release & buyback and burn here.
• Weekly Claims no longer necessary: Fees are burned automatically, weekly claiming is no longer necessary.

For SNX Token Holders

• Decreased SNX Supply: Reduces SNX supply by using fees generated from the multi-chain Andromeda Release to obtain and burn SNX.

Conclusion

With SIP 2043, Synthetix ends its SNX token inflation. This shift, driven by sustainable trading fees from markets like Synthetix Perps, marks a new phase where inflation is no longer essential for LP incentives, streamlining the staking process and shaping a more efficient model for the protocol.