Synthetix's sUSD Depeg Highlights Risks in Algorithmic Stablecoin Sector

The recent depeg incident involving sUSD from Synthetix has highlighted the persistent risks in the algorithmic stablecoin sector, despite its immense potential. This event is not an isolated incident; algorithmic stablecoins have faced numerous challenges, including technical issues, regulatory pressures, and dwindling community trust. These obstacles have made it difficult for projects in this space to survive and thrive.

Algorithmic stablecoins, which maintain their value without direct asset backing, were once hailed as a breakthrough in decentralized finance (DeFi). However, the total stablecoin market capitalization stands at $234 billion, while algorithmic stablecoins account for about $458 million, equivalent to just 0.2%. This stark disparity reflects the reality that algorithmic stablecoins have yet to gain widespread trust from the community. High-profile failures like the collapse of UST/LUNA in 2022, coupled with regulatory uncertainties, have fueled skepticism.

Synthetix is a well-known DeFi protocol celebrated for its synthetic asset system. Within this ecosystem, sUSD is an algorithmic stablecoin designed to peg its value at 1 USD, backed by the SNX token and price data from Chainlink. However, sUSD has faced significant challenges with a prolonged depeg. At the time of the report, sUSD was trading at 0.77 USD, which has persisted since late March 2025. The primary cause was a major liquidity provider withdrawing from the sBTC/wBTC pool on Curve, which triggered intense selling pressure on sUSD. This forced users to convert other synthetic assets like sETH or sBTC into sUSD, exacerbating the price decline.

On April 21, 2025, Kain Warwick, the founder of Synthetix, announced that the team had implemented an sUSD staking mechanism to address the issue. However, he noted that the mechanism remains manual and lacks a fully functional user interface (UI), which is expected to launch in a few days. Warwick further stated that if the incentive mechanism proves ineffective, Synthetix would adopt stricter measures to compel stakers in the 420 pool to participate more actively. He emphasized that, with the collective net worth of SNX stakers reaching billions of USD, Synthetix has the financial resources to stabilize sUSD and resume development of derivative products on Layer 1.

Before the sUSD depeg incident, the market witnessed the dramatic collapse of UST/LUNA in 2022. UST, Terra’s algorithmic stablecoin, suffered a severe depeg, dragging LUNA’s value down from $120 to near zero. This event caused billions of USD in losses and significantly eroded trust in the algorithmic stablecoin model. More recently, the ‘Godfather of DeFi’, Andre Cronje, behind Sonic (formerly Fantom), also shifted direction. Sonic initially developed a USD-based algorithmic stablecoin but later pivoted to a stablecoin pegged to the UAE dirham. Cronje stated that previous cycle gave him so much PTSD not sure if we should implement.

Beyond technical risks, algorithmic stablecoins face mounting regulatory pressures. The EU’s MiCA regulation, effective since June 2024, imposes strict standards on stablecoin issuers to ensure consumer protection and financial stability. Under MiCA, algorithmic stablecoins are classified as ART (Asset-Referenced Token) or EMT (E-Money Token), requiring projects to meet complex compliance demands. This intensifies the pressure on developers, especially as other jurisdictions also tighten crypto regulations. These examples show the vulnerability of algorithmic stablecoins to liquidity shocks and market sentiment, particularly due to their lack of direct asset backing.

Despite the challenges, algorithmic stablecoins still hold developmental potential. A March 2025 post suggested that a next-generation decentralized algorithmic stablecoin is feasible if lessons are learned from past failures. However, projects must focus on building more price stability mechanisms, combining algorithms with liquidity safeguards to succeed. Additionally, they should prepare for regulatory requirements, particularly in regions with stringent rules. Transparency in operations, regular audits, and clear communication with users are crucial to rebuilding community trust. By addressing these factors, projects in this space can seize the opportunity to regain confidence and drive innovation.