What is Synthetix?
Synthetix is a derivatives liquidity protocol that allows users to get exposure to a variety of crypto and real-world assets through buying synthetic assets. Synthetic assets (Synths) track the price of other assets through price feeds supplied by an oracle. This makes large trades with nearly 0 slippage possible.
The problem with the current SNX economic model
As Kain Warwick stated in his proposal, inflation was intended to bootstrap the network and encourage as many $SNX holders as possible to stake their tokens.
Right now, the rewards received by the $SNX stakers is dependant on the amount of synthetic assets minted against the staked collateral.
Synths can be used to interact with the protocols built on top of Synthetix including Kwenta, Lyra, and Polynomial Finance.
The inflation ensures that $SNX stakers are incentivized to mint synthetic assets in order to create deep liquidity for synths trading and support all of those protocols that rely on Synthetix liquidity.
However, inflation is a double-edged sword. While it definitely helped in bootstrapping the network, it also creates constant selling pressure for $SNX.
The rationale behind Kain’s proposal
The founder of Synthetix specified that the higher rate of inflation that was introduced a few months ago didn’t positively impact the percentage of $SNX staked in the network.
As Synths trading volume significantly increased in the last 3 months and $SNX stakers receive a fee for each trade between synthetic assets, he considers that the fee generated through volume should be enough to incentivize $SNX staking.
At the time of the writing, the APY for staking is 22.4% based on the revenue generated in the last 30 days. This yield is entirely paid in sUSD. After internal discussions, Kain Warwick mentioned that he expects the proposal to be accepted.
If the proposal passes, the $SNX stakers will continue to receive inflationary rewards for ten consecutive weeks before emissions stop.
A shift in protocols
It’s interesting to see that more and more protocols have recently started to shift from a relatively unsustainable economic model with high token emissions to a revenue-generating model without resorting to token emissions.
The teams of popular projects seem to understand that if they build a product that creates real value for users the inflationary incentivizes aren’t required anymore.