Synthetix’s algorithmic stablecoin sUSD has been facing challenges as it continues to drift from its $1 peg, currently trading at $0.90. The depegging issues started in March, with sUSD briefly falling below $1, but the situation worsened after the implementation of SIP-420—a governance proposal aimed at enhancing capital efficiency and simplifying the user experience within the Synthetix (SNX) ecosystem.
According to Parsec research, the implementation of SIP-420 inadvertently caused a significant increase in the supply of sUSD, leading to the current depeg. Specifically, SIP-420 introduced a protocol-owned staking pool, which allowed SNX holders to delegate their staking to a shared pool rather than managing their own debt and minting sUSD. This change lowered the collateralization ratio from 500% to 200%, making it easier to mint more sUSD—approximately 2.5 times more, as per Parsec’s findings. This adjustment removed the stablecoin’s stabilizing mechanism, which was the incentive for individual stakers to purchase sUSD at a discount to pay off their debt when the price fell below peg.
With the debt now pooled, stakers have less incentive to restore the peg, especially since the 420 Pool holds over $80 million in SNX. As a result, sUSD’s supply has expanded significantly, with some Curve liquidity pools containing over 90% sUSD. Without immediate demand to balance this increased supply, the price of sUSD continues to decline.
Adding to the problem, Infinex began incentivizing the holding of sUSD in the Infinex wallet just before the depegging had started. However, these incentives have led to more liquidity in the system without a corresponding increase in demand. Users have expressed their concerns on Infinex’s Discord channel, stating that the platform should take responsibility for promoting sUSD through campaigns.
The Synthetix team has assured users that this depegging issue is a “transition period.” They are actively working on creating new demand sinks, such as integrations with Aave (AAVE) and Ethena (ENA), to counterbalance the excess supply of sUSD. Additionally, they have pledged to enhance incentives for liquidity pools, particularly on Curve, to restore stability.
In summary, the SIP-420 upgrade brought capital efficiency and a simpler user experience to Synthetix, but it unintentionally removed the organic reflexive peg stabilizer, leading to the sUSD depeg as a side effect. The increase in sUSD supply without sufficient demand to counterbalance it has caused the stablecoin to depeg, with the price currently hovering around $0.90. sUSD holders are now faced with a decision to either exit now or hold and wait for a full recovery.