“The founder of decentralized finance (DeFi) protocol Synthetix, Kain Warwick, has submitted a proposal that would turn off very high yield returns for SNX stakers and cap the total SNX token supply at 300 million. The Synthetix protocol allows traders to issue synthetic versions of crypto native assets, traditional financial assets, and commodities on the Ethereum and Optimism networks” [Lindrea, B. Synthetix looks to turn off the SNX money printer once and for all. (Accessed August 26, 2022)].
On Thursday, August 25, 2022, Warwick tweeted the following:
This SIP (SIP-276) provides us with a handy ‘abstract’, ‘motivation’, and ‘specification’, which is set forth at length as follows:
Abstract
This SIP caps the supply of SNX at 300m tokens and elevates the token supply to metagovernance status, meaning that any future changes to the token supply will require a unanimous vote by the Spartan Council. The inflation for the current fee period has been minted raising the total supply to 293,251,260.7987736034469344 SNX. After the current inflation is distributed this period, inflation will run for a further ten fee periods with 674873.920122639655307 SNX minted each week until the total supply reaches 300,000,000.
Motivation
Inflation was intended to bootstrap the network, it has done this extremely effectively. Now that fee yield from atomic swaps and perps is meaningful and growing it is time to wind down inflation, the fact that we are only a few weeks away from the very memeable 300 million mark is cause enough to make this change now.
Specification
- The total supply will be fixed at 300m.
- The inflationary rewards in the current period will be distributed (~2m SNX)
- A further 6,748,739.201226396553066 tokens will be minted over the following ten weeks.
- The total supply of SNX will be controlled by metagovernance, requiring a unanimous vote to modify it further.
[Warwick, K. SIP-276: Turn off the money printer. (Accessed August 26, 2022)].
“If SIP-276 is passed by the Synthetix governance community, ten periodic installments of 675,000 SNX tokens will be added to the current total supply of 293 million tokens in order to reach the 300 million mark, before ending inflation indefinitely” [Lindrea, supra].
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.
[Haig, S. Synthetix Community Considers Ditching Inflationary Tokenomics. (Accessed August 26, 2022)].
However, this view of inflationary tokenomics appears flawed in the long run:
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.’
Not surprisingly, SIP-276 appears to be garnering support on the social media channels. “Twitter user Synthaman found the news to be particularly bullish, stating '#SNX is about to become rare commodity with inflation going to ZERO […]” [Lindrea, supra]. And "Andrew Fenton commented that abandoning inflationary economics will make Synthetix ‘more like an actual business relying on revenue and providing dividends.’ [Haig, supra].
Nonetheless, some are questioning what SIP-276 will shape for the future of Synthetix. "Analyst firm Delphi Digital tweeted that with Synthetix soon putting a stop to the issuance of SNX tokens, the protocol faced the challenge of maintaining its current user base and to 'attract new users with organic revenue in a market where yield is abundant” [Lindrea, supra]. And “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” [Haig, supra].
“It remains to be seen whether DeFi protocols like Synthetix can attract enough stakers by relying on fee revenue alone or how an end to SNX inflation may impact SNX token price […]” [Lindrea, supra].
