Earlier this week, Synthetix implemented a new protocol upgrade, Capella, featuring two new Synthetix Improvement Proposals (SIPs) surrounding the protocol’s issuance policy. 

The two SIPs introduce inflation smoothing (SIP 23) and terminal inflation (SIP 24) to SNX’s issuance policy. This move comes after Synthetix implemented an inflationary issuance policy back in March 2019, removing the fixed supply of 100M SNX and increasing the total supply to ~250M with diminishing yearly distributions to stakers.

Since the adding an inflationary monetary policy back in March, the network has seen enormously positive results both in terms of network participation and price action of SNX. In November, Synthetix surged to prominence within the broader DeFi community as the demand for synthetic assets grows. 

Now, with these new upgrades, the Synthetix community is emphasizing the long-term stability of the network over short-term volatile movements based on specific catalysts.

SIP 23: Inflation Smoothing

With SIP 23, SNX issuance will gradually decrease by 1.25% per week rather than annual halvenings. The driving factor behind this change was to mitigate the risks associated with abrupt drops in inflation and the affect it may have on network participation (including stakers and liquidity providers) that are vital to the overarching success of the network.

With the implementation of SIP 23, the inflation curve shifts from sharp annual step-downs to a smooth exponential decay over the next few years. 

Graph via SIP 23

SIP 24: Terminal SNX Inflation

The other SIP implemented in the Capella upgrade was SIP 24 which includes a perpetual 2.5% annual issuance rate starting on September 7th, 2023. Previously, inflation was scheduled to stop in March 2024 as stakers would entirely be rewarded through exchange fees. However, as the broader crypto community is beginning to see, terminal inflation is an important mechanism to keep a network stable and incentivize long-term network participation. 

The graphic below outlines how perpetual inflation will affect the token supply over the next 500 weeks. 

Graph via SIP 24


Ultimately, these new changes to the issuance policy create long-term stability to the network’s issuance policy while creating assurances for the staking community at large. Since the initial monetary policy changes back in March this year, Syhnthetix has become one of the fastest-growing DeFi protocols in terms of Total Value Locked (TVL). The network is recently coming off one of its best months ever as total value locked soared to over +132% in November alone. Moreover, SNX has been one of the best performing tokens in recent months as it has surged by over 175% in the past 90 days. 

With these new changes, it will be interesting to see how not only the participation in the network is affected over time (in the form of stakers and liquidity providers) but also how the token price changes given the removal of the fixed total supply. 

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