Synthetix Tokenholders Vote To End SNX Inflation – Crypto News – Crypto News
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Synthetix Tokenholders Vote To End SNX Inflation Synthetix Tokenholders Vote To End SNX Inflation

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Synthetix Tokenholders Vote To End SNX Inflation – Crypto News

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The community for Synthetix, a veteran DeFi protocol credited with pioneering yield farming, has voted to put an end to SNX token inflation.

On Oct. 11, SNX tokenholders passed the proposal SIP-2043, ending the issuance of rewards in the form of newly-minted SNX tokens after Wednesday. Moving forward, Synthetix stakers will exclusively receive rewards in the form of trading fees, with the protocol set to introduce a buy-back and burn mechanism once its Andromeda upgrade is deployed on Base.

“The effectiveness of inflation as an incentive has diminished over time,” Synthetix said in a blog post. “SIP 2043 proposed ending SNX inflation, aligning with the protocol’s new strategies, such as using trading fees for buy-backs and burns.”

The Synthetix team tipped that SNX’s supply will become deflationary following the rollout of Andromeda. Half of the trading fees generated from Andromeda will be used to purchase and burn SNX tokens, with stakers receiving the other 50% of fees as rewards.

Stakers can also access loans in the form of Synthetix’s sUSD stablecoin against SNX collateral without paying interest or fees on the position. Synthetix noted users taking out said “free” loans must still actively manage the position or hedge the associated debt.

The news has driven up the price of trading volume of SNX, with the token gaining 31% over the past seven days to tag its highest level since May 2022, according to CoinGecko.

End of an era

The end of Synthetix’s SNX rewards comprises a milestone in the evolution of DeFi, with many projects looking to do away with the aggressively inflationary rewards that propelled DeFi’s growth throughout the last bull cycle in the search for more sustainable tokenomics.

Synthetix was among the earliest DeFi protocols to use an inflationary rewards mechanism when it introduced SNX incentives to bolster liquidity and adoption in 2019.

Liquidity providers could initially earn SNX tokens by providing ETH and Synthetix’s sETH token to a staking contract, with rewards later offered to users providing liquidity for stablecoins and other popular assets as well.

The proposal said the incentives were “incredibly effective” in driving up liquidity and protocol adoption for Synthetix. However, tokenholders voted to significantly reduce SNX inflation last year, with Synthetix concluding that its current inflationary mechanism has little influence on the actions taken by stakers and liquidity providers.

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“In recent years the effectiveness of this incentive has declined significantly,” wrote Kain Warwick, Synthetix’s founder and the author of SIP-2043. “With inflation now in low single digits, it does not meaningfully impact staker behavior.”

Warwick added that inflationary rewards would likely offset any SNX burned following the rollout of Andromeda. “By reducing inflation to zero, any non-zero fee yield on Base will result in the SNX token being deflationary,” he said.

The Synthetix protocol raked in roughly 28.5M from perp trading fees in 2023. “The initial inflation model was designed as a bridge to this kind of reward sustainability, now achievable without the need for inflationary incentives,” Synthetix said.

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