Synthetix's sUSD Depegs 31% After Protocol Shift

On April 18, 2025, sUSD, the native stablecoin of the Synthetix protocol, experienced a significant drop in value, falling to $0.68. This represents a 31% deviation from its intended 1:1 peg with the US dollar, a critical threshold for stablecoins designed to maintain a stable price and serve as a reliable store of value within decentralized finance (DeFi) applications. The depeg of sUSD sent shockwaves through the crypto community, raising questions about the stability and reliability of crypto-collateralized stablecoins.

The depeg was triggered by a protocol shift known as SIP-420, which lowered the collateralization ratio and disrupted the peg-stabilizing incentives. This change, combined with declining SNX prices and liquidity outflows, weakened confidence in sUSD. SIP-420 introduced a protocol-owned debt pool, allowing SNX stakers to delegate their debt positions to a shared pool with a lower issuance ratio. This shift aimed to boost capital efficiency and enhance yield opportunities but also discouraged solo staking by raising its collateralization ratio to 1,000%.

Before SIP-420, users who minted sUSD had to over-collateralize with SNX tokens, maintaining a 750% collateral ratio. This high requirement ensured stability but limited efficiency. SIP-420 aimed to improve capital efficiency by reducing the collateral ratio to 200% and introducing a shared debt pool. This meant that instead of individual users being responsible for their own debt, the risk was distributed across the protocol. While this change made it easier to mint sUSD, it also removed the personal incentive for users to buy back sUSD when its price dropped below $1. Previously, users would repurchase sUSD at a discount to repay their debts, helping to restore its value. With the shared debt model, this self-correcting mechanism weakened.

The combination of increased sUSD supply and reduced individual incentives led to a surplus of sUSD in the market. At times, sUSD comprised over 75% of major liquidity pools, indicating that many users were offloading it at a loss. This oversupply, coupled with declining SNX prices, further destabilized sUSD’s value. Synthetix has faced volatility before, but this recent depeg is one of the most severe in the history of the crypto industry. For instance, Synthetix has faced volatility during the 2020 market crash, mid-2021 DeFi corrections, and post-UST collapse in 2022, each time exposing vulnerabilities in liquidity and oracle systems. A 2019 oracle exploit also highlighted structural fragility.

sUSD is a crypto-collateralized stablecoin that operates on the Ethereum blockchain, designed to offer stability in a highly volatile crypto market. Unlike fiat-backed stablecoins, which are pegged to the US dollar through reserves held in banks, sUSD is backed by SNX, the native token of the Synthetix protocol. The process for minting sUSD involves staking SNX tokens into the protocol, in return, users receive sUSD tokens, which can be used within the Synthetix ecosystem or traded on the open market. To ensure that the sUSD token maintains its value, it is over-collateralized, meaning users must stake more SNX than the value of the sUSD minted. Historically, the collateralization ratio has been set around 750%, meaning that for every $1 of sUSD minted, users need to stake $7.50 worth of SNX tokens. The high collateralization ratio ensures a buffer against the price volatility of SNX, which is critical for the system’s stability.

In an effort to improve capital efficiency, Synthetix introduced SIP-420, which brought significant changes. The required C-Ratio was lowered from 750% to 200%, allowing users to mint more sUSD with less SNX. Previously, each user was responsible for their own debt. With SIP-420, debt is now shared across a collective pool, meaning individual users are less directly impacted by their own actions. As a result of these changes, combined with market factors like declining SNX prices, sUSD has struggled to maintain its $1 peg, trading as low as $0.66 in April 2025. The Synthetix team is actively working on solutions to stabilize sUSD, including introducing new incentive mechanisms and exploring ways to enhance liquidity.

Synthetix has formulated a comprehensive three-phase recovery plan aimed at restoring the stablecoin’s peg to the US dollar and ensuring its long-term stability. Synthetix founder Kain Warwick recently published a post proposing a solution to fix the sUSD stablecoin. His plan outlines how the community can work together to restore the peg and strengthen the system. The plan includes bringing back good incentives, such as users who lock up sUSD will earn SNX rewards, helping reduce the amount of sUSD in the market. Two new yield-earning pools (one for sUSD and one for USDC) will let anyone supply stablecoins and earn interest — no SNX required. Additionally, SNX stakers now have to hold a small percentage of their debt in sUSD to keep earning benefits. If the sUSD peg drops more, the required sUSD holding goes up — more pressure to help fix the peg. According to Warwick, this plan restores the natural loop: When sUSD is cheap, people are motivated to buy it and close their debt, pushing the price back up. Kain estimates it might take less than $5 million in buying pressure to restore the peg — totally doable if enough people participate.

Once incentives are realigned and sUSD regains its peg, Synthetix will roll out major upgrades: retiring legacy systems, launching Perps v4 on Ethereum with faster trading and multi-collateral support, introducing snaxChain for high-speed synthetic markets, and minting 170 million SNX to fuel ecosystem growth through new liquidity and trading incentives. The recent sUSD depeg is a stark reminder of the inherent risks that come with crypto-collateralized stablecoins. While stablecoins are designed to offer price stability, their reliance on external factors, such as market conditions and the underlying collateral, means that they are not immune to volatility. Crypto-collateralized stablecoins like sUSD face heightened risk due to their reliance on volatile assets like SNX. Market sentiment, external events, and major protocol changes can quickly disrupt stability, making depegging more likely — especially in the fast-moving, ever-evolving world of DeFi.

Some of the critical risks that crypto investors should be aware of include dependence on collateral value, protocol design risks, market sentiment, incentive misalignment, and lack of redundancy. To protect themselves, users should diversify their stablecoin exposure, closely monitor protocol changes, and avoid over-reliance on crypto-collateralized assets like sUSD. Staying informed about governance updates and market sentiment is key, as sudden shifts can trigger depegging. Users can also reduce risk by using stablecoins with stronger collateral backing or built-in redundancies and by regularly reviewing DeFi positions for signs of under-collateralization or systemic instability.