Synthetix, the leading decentralized derivatives platform by market capitalization, is set to end the inflation of its governance token, SNX. The proposed SIP-2043 states that Synthetix inflation will cease, dropping to zero in the claim week immediately after the vote.
One of the earliest pioneers of yield farming, Synthetix played a crucial role in catalyzing the DeFi summer of 2020 and the overall expansion of the DeFi space. The protocol was among the first to incentivize its users with protocol tokens in exchange for providing liquidity. This innovative approach was soon adopted by other DeFi platforms, proving to be highly effective. It significantly contributed to the growth of many now-prominent DeFi platforms by boosting their initial liquidity and expanding their user base.
However, as with all things, change is eventually inevitable. According to Kain Warwick, the founder of Synthetix, this approach has become less effective over time and no longer aligns with the best interests of the token holders.
“…Yet in recent years the effectiveness of this incentive (inflation) has declined significantly; with inflation now in low single digits it does not meaningfully impact staker behavior.”
Now, Synthetix aims to encourage existing token holders to hold their tokens while attracting new token holders. Warwick notes that high inflation and the complex nature of staking have discouraged new participants from holding SNX tokens. The current incentives (inflation and staking) disproportionately disadvantage passive token holders. Synthetix is realigning its incentives to better support passive holders by transitioning to a strategy of buybacks and zero inflation.
Under the proposed plan, once inflation ends, Synthetix intends to allocate 50% of generated fees to buy and burn SNX tokens. The remaining 50% of the fees will be distributed as rewards to stakers.
Synthetix, ranking among the top 10 fee-generating protocols, has accrued over $28.5 million in trading fees this year. With the market trending bullish, it is reasonable to anticipate a significant increase in both trading volume and fee generation.
However, the effectiveness of these new token incentives in attracting new users and boosting trading volume is yet to be determined. Although Synthetix is the highest-valued perp exchange by valuation, it still trails behind its peers in trading volume. Illustrating this, in the past 24 hours, Synthetix ranked only eighth in daily trading volume.
Nevertheless, the news about ending inflation has already positively impacted the project’s token price. Since October, the SNX token has more than doubled in value, and the project now boasts a market capitalization of $1.5 billion.