Historical Context

Since Synthetix launched, every SNX staker who minted sUSD has been responsible for their share of the collective protocol debt. While managing debt was never easy, it was initially easier since it only involved spot-price hedging of ETH and BTC. As the protocol evolved, debt hedging needed to cover a complex of inverse tokens, options, wrappers, and derivatives.

At some point on this path, hedging debt became impossible. But even ignoring hedging price exposure, other unanticipated sources of debt inflation quietly contributed tens of millions of dollars to debt. This eventually set the stage for a crisis when the SNX price dropped below one dollar.

To understand why the 420 pool was necessary, we need to understand the evolution of the debt pool and the forces that inflated debt balances. The 420 Pool “Debt Jubilee” averted a death spiral but undermined the stablecoin peg. This post will describe a detailed path forward, realigning incentives, restoring the peg, and laying the groundwork for Perps V4 on L1 and snaxChain.

A final point: none of the details below attempt to make normative judgements about how this all played out. It was neither good nor bad, and every staker took risk by staking. What is clear, though, is that regardless of how we got here, a solution was needed to ensure we could safely resolve the situation.

Debt Pool Evolution

During the pre-DeFi summer era (2018–2020), the debt pool aggregated exposure to spot‑price synths like sETH and sBTC. Every staker’s "active debt" adjusted in real time with index price movements. For every Synthetic Bitcoin (sBTC) in circulation, when the BTC price rose by $10,000, a staker responsible for 1% of the debt pool absorbed $100 of incremental debt.

As the protocol grew, inverse and leveraged synths introduced directional bias and magnified P&L swings. Later, wrappers enabled nine-figure Curve pools: sUSD, sETH, and sBTC, letting users lock ETH to mint sETH for arbitrage. That mechanism eased peg pressure but left the protocol systemically net short ETH. A 10% ETH price delta on $200 million in Synths would create $20 million of debt fluctuation. Given the cost of shorting ETH and the required margin, most users were fully exposed to this short debt pool.

Debt Inflation

Over and above hedging Synth price exposure, three pernicious forces were impossible to hedge:

1. Oracle Front‑Running & Manipulation Early Oracle designs exposed a price‑update window that bots exploited. Front‑runners cost the protocol hundreds of thousands in the early pool, escalating into the millions as the debt pool and open interest grew. Across the years, debt inflation from frontrunning probably exceeded $10 million.

2. Price & Oracle Attacks Incidents like the MKR price manipulation added $2–$5 million in debt; each exploit widened the gap between collateral value and debt outstanding.

3. Wrapper Imbalances By mid‑2021, wrappers enabled tens of thousands of ETH in Curve arbitrage. When markets reversed, the resulting net‑short ETH position injected up to $20 million of debt inflation.

These factors added $20–50 million of debt conservatively; aggressively, total inflation may have approached $100 million. At peak, $4 billion of collateral backed nearly $1 billion in synths, so 5% swings in the debt pool meant tens of millions in debt volatility.

The 420 Pool “Debt Jubilee”

By late 2024, SNX was headed below $1, which created a looming liquidation death spiral. Long‑time stakers faced liquidations on debt they’d never directly minted. To stop cascading liquidations, Synthetix launched the 420 Pool, centralising all historical sUSD obligations into a single, on‑chain pool. Over 12 months, the debt would be "forgiven" as it was transferred to the protocol’s balance sheet.

This "jubilee" halted an immediate collapse but removed the primary sUSD stability mechanism: stakers no longer bought cheap sUSD to close debt and protect the peg.

sUSD stability

Historically, sUSD’s stability has depended on an always‑primed arbitrage loop. When a staker mints sUSD, they post SNX collateral and incur a dollar-denominated debt. Selling sUSD below par value makes no sense unless the staker plans to loop—selling discounted sUSD for SNX to mint more sUSD, and even then, it is pretty degen. So with this arbitrage loop primed, as soon as sUSD traded below $1, rational actors would purchase cheap sUSD, close their debt position, and wait to prime the loop again when peg pressure reduced. This self‑reinforcing cycle consistently restored the peg and underpinned sUSD’s historical stability.

sUSD depeg

In the weeks after the 420 Pool launch, the peg’s fragility increased:

• Curve Liquidity Drain: Several vaults unwound pulling $5–6 million of sUSD liquidity from Curve, eroding the primary peg buffer.

• Supply Imbalance: Stakers and perps traders added to the sell pressure with an additional $4–5 million of sUSD sold.

Together, these forces drove sUSD from $0.98 toward $0.60. With the natural arbitrage loop deprecated, the stablecoin lacked its stabiliser.

Realigning Incentives: Carrot and Stick

Restoring sUSD to $1 requires reintroducing rational incentives:

Carrot (Positive Incentives)

• SNX Rewards: New inflationary SNX emissions for stakers depositing sUSD into the 420 Pool, distributed in proportion to contribution and duration.

• Stable only Pools: Two new pools—one for sUSD, one for USDC—allow any user (no SNX required) to supply stablecoins and earn yield, reinforcing liquidity and entry/exit flexibility.

Stick (Negative Incentives)

• Debt-to-Deposit Ratio: Each staker must deposit a floating percentage (initially 5–10%) of their outstanding debt in sUSD; failure to maintain this ratio will pause their debt forgiveness.

• Graduated Penalties: As the peg deviates, the required ratio adjusts upward, tightening alignment when stability is most critical.

Because less than $5 million of sUSD buying pressure is likely needed, even partial staker participation will be sufficient. Rational actors will recognise that purchasing discounted sUSD secures both peg defence and generous SNX rewards, reviving the dynamic that once stabilised the system. With the current discount to par value, a race condition is initiated, favouring early buyers of sUSD.

Pooled staking

The introduction of the 420 pool averted a liquidation crisis while creating a peg crisis, but it also created the conditions for far greater staking participation. The yield market has matured significantly over the last five years, and numerous passive yield strategies and protocols are now available. To remain competitive, the Synthetix staking model had to evolve. This new pooled staking model is far superior to the legacy system; that will become clear once we get through this transition.

Pooled staking of SNX is only the start. Other 420 pools will be created that accept new collateral assets, allowing the protocol to expand the sUSD supply again. This time with no risk of liquidations. This will initially consist of USDC but could be expanded to other DeFi tokens over time. Yield for these pools will be paid out in options on the underlying collateral. More details on this mechanism will be released soon.

Roadmap to Perps V4 and snaxChain

With incentives realigned and the peg restored, we’ll execute four coordinated initiatives:

1. Legacy Unwind Deprecate v2/v2x deployments and legacy Perps versions across L2s and mainnet; consolidate debt and liquidity into the mainnet 420 Pool and new stake‑only pools.

2. Perps V4 on Ethereum Mainnet

• Off-chain order matching on Ethereum: Peer-to-peer execution off-chain minimises gas and latency. A perp venue on Eth mainnet. Wild, I know.

• Batched L1 Settlement: Aggregate net trades into efficient, low‑frequency on‑chain transactions.

• Multi‑Collateral Support: Accept sUSD, sUSDe and USDC as collateral, broadening market access and enabling yield-bearing collateral.

3. snaxChain

• Host options and perpetual futures markets on a dedicated Superchain appchain.

• Integrate the Infinex Wallet SDK for low‑latency signing, seamless onboarding across Ethereum and Solana.

• Enable frictionless collateral bridging—traders won’t need to switch networks or bridge to trade.

4. SNX incentive pool

• With the launch of snaxChain, incentives are required to drive liquidity and open interest. Unfortunately, Synthetix depleted the incentive pool years ago to drive the growth into DeFi summer. But the harsh reality is that without incentives, it is impossible to compete, and we must once again bootstrap a new perps market on both mainnet and snaxChain. This will require a deep pool of token incentives. We will mint an additional 170 million SNX tokens, bringing the supply to 500 million, with the new tokens deployed on snaxChain and earmarked solely for incentives.

By mid-year, users will enjoy a unified ecosystem: a robust sUSD peg with deep liquidity, high‑performance L1 and L2 markets, diversified collateral, and a seamless UX powered by modern wallet infrastructure with robust incentives to drive protocol growth. More details on the perps V4 design will be provided over the next few weeks. But we are targeting a deployment of perps to mainnet by end of Q2 this year at the latest.

Conclusion

Synthetix’s debt pool design and staking incentives have been the largest historical driver of protocol growth, but also one of the major headwinds. Hidden debt inflation and market shocks nearly drove the protocol to collapse. The 420 Pool “Debt Jubilee” bought time to restructure and reorganise the protocol, and pooled staking will reduce complexity, unlocking a new cohort of stakers. A recalibrated incentive framework will restore the peg and rebuild confidence. With SNX rewards and penalties aligned, sUSD will return to $1. From there, Perps V4 on Ethereum and snaxChain will deliver scalable, multi-collateral perps and options markets, ushering in a new era of network growth. LFG.