On April 18, the price of the sUSD stablecoin from the decentralized finance (DeFi) platform Synthetix dropped to a local minimum around $0.68. At the time of writing, the coin had recovered to $0.73.
This isn’t the first time that sUSD has lost its peg to the US dollar. Back in March 2020, its price plummeted to $0.43.
The “synthetic stablecoin” is backed by tokens of SNX that are staked as collateral. The stability of sUSD depends on the value of SNX, meaning that fluctuations in the price of SNX directly affect sUSD’s ability to maintain its peg to the dollar.
A representative from Synthetix explained to Cointelegraph that the ongoing volatility since the beginning of the year is related to the implementation of SIP-420. This proposal transferred debt risks from stakers to the protocol itself.
According to Okto’s growth director, Minal Tukral, the new design improved capital efficiency but also disrupted an important stabilization mechanism for sUSD. With the SIP-420 proposal, stakers no longer had the same incentive to maintain collateral, creating an environment ripe for instability.
The implementation of SIP-420 reduced the collateralization ratio from 450% to 200%, and introduced a 12-month delay for older debts. This removed the incentive for stakers to repay their debts and purchase cheap stablecoins, Tukral pointed out. He explained that this led to increased selling pressure, further destabilizing the peg.
Tukral believes that the primary risk for sUSD lies in its underlying SNX collateral structure — if the SNX token price falls, the collateral decreases. When panic spreads on the market, users rush to exit the asset, triggering a cascade effect.
“Once the collateral begins to weaken, it sets off a chain reaction as more and more users attempt to sell their sUSD to mitigate losses,” said Tukral. “The system could very easily find itself on the edge of a catastrophic collapse if the downward pressure on SNX intensifies.”
Tukral noted that the Synthetix team holds capital in other assets like USDC and OP, which could be used to stabilize sUSD. Additionally, the team has ample experience in dealing with stablecoin crises, having faced similar challenges in the past. However, he expressed concerns about the current situation.
“Don’t be fooled, it’s fragile. If SNX continues to fall and trust starts to crack, there will be a real risk of a deeper and more abrupt crash,” Tukral warned. “The system may have the liquidity to stave off collapse in the short term, but without significant structural changes, the risks will continue to mount.”
Over the past year, the price of the SNX token has dropped by 77%, with about 25% of that loss occurring in the last 30 days. This sharp decline has raised questions about the long-term viability of sUSD and the Synthetix protocol as a whole.
“Personally, I think sUSD will eventually return to the 1:1 peg, but not without extremely high volatility in the beginning. The longer the depeg continues, the more doubts it raises about the entire Synthetix ecosystem,” Tukral concluded.
It’s worth noting that former SEC Chairman Gary Gensler referred to Bitcoin as the only truly valuable crypto asset, while most other tokens exist solely based on speculative expectations. With increasing regulatory scrutiny surrounding stablecoins and the broader cryptocurrency market, the future of sUSD and similar assets remains uncertain.
As Synthetix works to regain its stability, the broader DeFi space will be watching closely. The platform’s response to these challenges could set a precedent for other projects navigating similar issues, and its outcome could significantly influence the direction of decentralized finance in the years to come.
