The Fight to Restore Stability: Synthetix Founder Urges Stakers to Take Action
The synthetic stablecoin sUSD has been struggling to maintain its $1 peg, prompting Synthetix founder Kain Warwick to call on stakers to help restore stability before more drastic measures are enforced.
For weeks, sUSD has been trading below its intended peg due to recent changes in issuance and collateralization. Despite the implementation of a new liquidity initiative by the Synthetix team, the response has not yet been sufficient to correct the imbalance.
In a recent thread on X, Warwick urged SNX stakers to participate in the new staking mechanism, known as the 420 Pool. By locking their sUSD for 12 months, stakers have the opportunity to earn a share of 5 million SNX tokens and help alleviate the sell pressure affecting sUSD’s peg.
While the current process of staking sUSD directly to a contract is not ideal, Warwick mentioned that a user interface will be launched soon to streamline staker participation. If engagement remains low, Warwick warned that the protocol may transition from offering incentives to enforcing compliance.
Describing the situation as a trial of different approaches, Warwick emphasized the importance of mobilizing existing capital within the ecosystem to address the depegging issue effectively.
The Impact of SIP-420 on sUSD Stability
sUSD operates as an algorithmic stablecoin within the Synthetix protocol, backed by the platform’s SNX token and using crypto-based collateral and Chainlink oracles for price feeds. The recent depegging of sUSD can be attributed to the implementation of SIP-420, a protocol update aimed at enhancing capital efficiency.
By reducing the collateral ratio for minting sUSD from 500% to 200% and transitioning to a shared staking pool owned by the protocol, SIP-420 accelerated the minting of sUSD, causing an imbalance in supply and demand. As a result, sUSD has fallen significantly below the $1 peg, currently trading at $0.7714.
Warwick believes that leveraging the substantial wealth of SNX stakers can help resolve the depegging issue and restore stability to sUSD. By optimizing incentives and encouraging participation in the 420 Pool initiative, the Synthetix community aims to rectify the market imbalance and focus on further protocol developments.
Lessons from Other Depegged Stablecoins
sUSD is not the first stablecoin to experience a loss of peg. In March 2023, Circle’s USDC temporarily dropped to $0.87 following revelations of reserve constraints. Similarly, TUSD faced a depegging in January due to delays in releasing a collateral audit by its issuer.
Despite these challenges, Warwick remains confident in the ability of the Synthetix community to overcome the current depegging issue and resume advancing the ecosystem. By rallying stakers and optimizing incentives, the path to restoring stability for sUSD appears within reach.
