Synthetix looks to fix staking, revive stablecoin

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Kain Warwick, Synthetix’s founder, is proposing a fundamental overhaul of SNX. In a new blog post, he doesn’t mince words about why this change is necessary: “There is no incentive to stake SNX; nothing else matters until we fix this.” His answer is the 420 Pool, a new staking model where SNX holders deposit their tokens, allowing the protocol to manage debt centrally and seek yield opportunities. Or, in other words, “internalizing the leverage in the system, reducing risk for everyone.”

At launch, the primary yield source will be sUSDe minting through Ethena, with future integrations expected. Synthetix’s old model had a scaling issue, and Warwick frames this as a necessary evolution: “The problem was as the collateral pool grew, transaction revenue from the exchange didn’t scale. And the leverage was too capital inefficient…the 420 Pool scales linearly with collateral.”

As more SNX is staked, the yield generated scales proportionally — ensuring that returns don’t get diluted as TVL grows.

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The “Debt Jubilee”

Perhaps the most radical aspect of this plan is a “Debt Jubilee,” which forgives historical sUSD debt over 12 months. The question is: Will this bring in holders of Synthetix Debt Shares? They have the opportunity to deposit to the 420 Pool and have the protocol absorb their debt. This re-engagement could boost SNX staking participation, as users who previously avoided the complexity of debt management now have a “clean slate” way to stake.

On the other hand, is this a sustainable fix or just another attempt to dress up old mechanics in a new package? Centralizing debt management in the protocol means trust assumptions change — stakers are no longer in control of their debt, the protocol is. This introduces new risks, particularly if yield sources like Ethena fail to sustain high returns.

Warwick admits the leverage model isn’t without flaws, referencing Synthetix’s earlier attempts at scaling: “I was able to DCA into an extremely large ETH position over the course of 2019 and 2020…the issue was the yield didn’t scale.” Warwick’s essentially betting that this time, the protocol-driven leverage model will work, despite past inefficiencies.

Synthetix’s record with sUSD is checkered; the project neglected its stablecoin even as other DeFi protocols were cashing in on crypto’s killer app.

“While many OG DeFi projects were realizing that issuing a stablecoin was extremely lucrative, Synthetix tried to murder theirs,” Warwick said. The sUSD stablecoin was never designed as a core product, and in 2023, Synthetix pivoted hard toward perps and trading.

Rebuilding sUSD’s role is ambitious, but the challenge remains: Can Synthetix compete with both new and entrenched stablecoin issuers?

Possible game-changer for SNX

If successful, this model could reignite demand for SNX in ways the market isn’t pricing in yet. SNX is trading at 2022 bear market lows on a market cap basis. Warwick suggests that Synthetix is uniquely positioned to pull this off: “We are going to restore SNX as the heart of the Synthetix collateral engine, and we are going to scale sUSD back to its historical position as one of the dominant truly decentralized stablecoins.”

Further, Warwick hints at integration of SNX staking with Infinex. If SNX staking becomes a default option in high-yield DeFi products, it could drive sustained buying pressure.

The 420 Pool is either a brilliant evolution or another over-engineered Synthetix experiment. The bet is that the market wants leveraged yield without liquidation risks. If Synthetix is right, this is DeFi’s most sophisticated staking product to date. If it’s wrong, this will be another chapter in the long history of SNX redesigns.

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