As part of a watershed move toward more sustainable tokenomics, decentralized derivatives protocol Synthetix is ending a nearly five-year program of inflationary SNX rewards for stakers.
The project community recently voted in favor of proposal SIP-2043, which would end weekly distribution of newly issued tokens to liquidity providers.
key point
- Synthetix token holders voted to end SNX inflation rewards, making SNX deflationary.
- SNX stakers are now only rewarded by transaction fees, not inflation.
- Synthetix plans to introduce a SNX redemption and burn system using transaction fees.
- Ending inflation rewards is part of the shift towards a more sustainable tokenomics.
- SNX prices surged more than 30% on the news, hitting a 600-day high.
This decision closes the book on the inflation incentive experiments that helped drive Synthetix’s early growth and adoption. When first introduced in late 2018, SNX Inflation Compensation proved to be “incredibly effective” in increasing TVL and usage, according to the Synthetix team. Generous SNX rewards persuaded users to secure value in return for newly minted tokens.
But today, the effect of inflation compensation has disappeared. Staker action remained largely unchanged from week to week as SNX inflation fell into the low single digits on a yearly basis. The declining impact of inflationary rewards has prompted a rethinking of more impactful and sustainable incentive structures.
Chief among the new reward mechanisms is the SNX buyback and burn plan, which is scheduled to launch with Synthetix’s Andromeda protocol upgrade. Synthetix plans to use 50% of the proceeds to purchase SNX directly on the open market, using fees generated from trading activity. Purchased tokens are permanently destroyed, reducing the total supply.
Now that inflation rewards are ending, repeated buybacks and burns will quickly turn into SNX deflation. Trading volume on the Synthetix futures platform has already generated nearly $30 million in 2023 fees alone, indicating there is no shortage of fuel to burn.
Even under the new paradigm, stakers are not left behind. The remaining 50% of trading fees goes directly to liquidity providers as staking rewards. Stakers can also use their deposited tokens as collateral to access interest-free SNX loans, adding further incentive to participate.
SNX price reacted strongly to the planned changes. The token rose more than 30% in a week, surpassing $4.90 and hitting a two-year high as investors cheered a major change in token economics. With momentum still favorable, analysts have set an upside target of up to $10 over the coming months if the bullish momentum continues.
For Synthetix, this development marks a new chapter after five years of compensation due to supply inflation. Now that inflation rewards are suspended indefinitely, projects can focus their efforts on more specific value drivers such as trading activity and token burns for sustainable growth. This is part of a broader rethinking of DeFi design that values long-term consistency over short-term gains.
