In a watershed move towards more sustainable tokenomics, decentralized derivatives protocol Synthetix is ending a nearly 5-year long program of inflationary SNX rewards for stakers.
The project’s community recently voted in favor of proposal SIP-2043, terminating the weekly distribution of newly minted tokens to liquidity providers.
- Synthetix tokenholders voted to end SNX inflation rewards, making SNX deflationary
- SNX stakers will now receive rewards only from trading fees, not inflation
- Synthetix will introduce a SNX buyback and burn system using trading fees
- Ending inflationary rewards is part of shift towards more sustainable tokenomics
- SNX price has surged over 30% on the news, reaching a 600-day high
This decision closes the book on an inflationary incentives experiment that helped bootstrap initial growth and adoption for Synthetix. When first introduced in late 2018, SNX inflation rewards proved “incredibly effective” at driving TVL and usage according to the Synthetix team. Generous SNX rewards persuaded users to lock up value in return for freshly minted tokens.
Fast forward to today however, and the efficacy of inflation rewards has faded. With SNX inflation down to low single digits annually, staker behaviors remained largely unchanged week-to-week. The dying influence of inflation rewards sparked a rethink towards more impactful – and sustainable – incentive structures.
Chief among the new reward mechanisms is a SNX buyback-and-burn scheme slated to launch alongside Synthetix’s Andromeda protocol upgrade. Using fees generated from trading activity, Synthetix plans to divert 50% of proceeds to purchase SNX directly from the open market. These tokens purchased will then be permanently destroyed, reducing total supply.
With inflation rewards now terminated, any recurring buybacks and burns would quickly turn SNX deflationary. Trading volume from Synthetix’s futures platform has already generated nearly $30 million in 2023 fees alone, signaling no shortage of burn fuel.
Stakers aren’t being left behind either under the new paradigm. The other 50% of trading fees will go directly to liquidity providers as staking rewards. And stakers can also access interest-free SNX loans using their deposited tokens as collateral – adding further incentive to participate.
SNX prices have reacted strongly to the planned shift. The token has gained over 30% in a week, cracking a 2-year high above $4.90 as investors cheer the sweeping tokenomics changes. With momentum still favorable, analysts have set upside targets as high as $10 in the months ahead if bullish impetus continues.
For Synthetix, the developments usher in a new chapter after half a decade of rewards fueled by supply inflation. With inflation rewards now severed indefinitely, the project can focus its efforts around more concrete value drivers like trading activity and token burns for sustainable growth. It’s part of a broader rethink emerging in DeFi design – valuing long-term consistency over short-term gains.