Synthetix's sUSD Stablecoin Drops 30% Below Peg Amid Protocol Changes

Synthetix protocol’s sUSD stablecoin experienced a significant drop this week, falling to a new low of $0.66, which is over 30% below its intended $1 peg. This depegging trend has been ongoing for a month, raising concerns about the protocol’s stability. Synthetix founder Kain Warwick addressed the situation in an April 2 tweet thread, clarifying that sUSD is a pure crypto-collateralized stablecoin, not an algorithmic stablecoin. He explained that while the peg can drift, there are mechanisms in place to push it back in line. However, these mechanisms are currently being transitioned, which has contributed to the recent drift.

Warwick attempted to put the volatility of sUSD into context by comparing it to other stablecoins like Tether’s USDT and MakerDAO’s DAI. He acknowledged that sUSD is more volatile, especially when considering the scale of the chart. The volatility began after the implementation of the SIP-420 upgrade on March 7, a major update that restructured how debt is handled within the protocol. The change moved from individual SNX stakers backing sUSD to a shared debt pool, reducing the collateralization ratio from 750% to 200%. This move weakened key peg-support incentives, leading to the current instability.

On March 20, sUSD dropped to around $0.98, reaching lows of $0.91 by the end of the month before continuing its downward trend through April. Mrinal Thakur, the head of ecosystem at modular blockchain Okto, tweeted that the new design improves capital efficiency but has broken an important stabilization mechanism. He noted that there is no longer a strong incentive for stakers to buy cheap sUSD and repay debts, which could lead to a cascading loop of users rushing to exit and creating more SNX sell pressure.

Thakur also highlighted that liquidity is thin, AMM pools are heavily sUSD-weighted, and small moves cause outsized price swings. Despite the concerns, Warwick expressed optimism about Synthetix’s future, stating that he is not worried about the protocol for the first time in years and has been buying SNX this year. However, he cautioned holders that it would be horrible to get shaken out and that the situation is likely to get worse before it improves.

The instability of sUSD has been persistent since the start of the year. It first dropped to $0.96 in January, struggled through February, and only briefly stabilized in March before diving again in April. Following its crash to $0.66, the price of sUSD recovered to $0.83 on Friday, but volatility remains high. In the short term, Synthetix is bolstering liquidity through Curve pools and deposit incentives on its derivatives platform Infinex. Medium-term fixes include “debt-free” staking to encourage individual debt repayment, while long-term plans involve managing sUSD supply directly and adding new adoption incentives across its product suite.

While the Synthetix treasury reportedly holds $30 million in sUSD and other reserve assets like USDC and OP, Thakur cautioned that the situation is fragile. The protocol is taking steps to address the instability, but the road to recovery may be challenging. The recent depegging of sUSD highlights the risks associated with stablecoins and the importance of robust stabilization mechanisms. As Synthetix works to restore the peg, the community will be watching closely to see how the protocol navigates this turbulent period.