sUSD depeg, explained: Why Synthetix’s stablecoin fell below $0.70 In a significant and concerning
sUSD depeg, explained: Why Synthetix’s stablecoin fell below $0.70
In a significant and concerning event in the cryptocurrency space, sUSD, the native stablecoin of the Synthetix protocol, saw its value plummet to $0.68 on April 18, 2025.
This drop represents a dramatic 31% deviation from its intended peg of 1:1 with the US dollar, a threshold that is fundamental to the concept of stablecoins. As the name implies, stablecoins are designed to maintain a stable price, which is crucial for their role as a reliable store of value within decentralized finance (DeFi) applications.
For stablecoins like sUSD, maintaining this price stability is essential for ensuring confidence in their usage. However, the steep drop in sUSD’s value sent shockwaves through the crypto community, creating an atmosphere of uncertainty.
The question arises: How did this once-stable digital asset fall below its peg, and why does this matter to the broader cryptocurrency ecosystem?
SUSD depeg was triggered by a protocol shift (SIP-420) that lowered collateralization and disrupted peg-stabilizing incentives. Combined with Synthetix’s (SNX) price drops and liquidity outflows, confidence in sUSD weakened.
Understanding SIP-420 and its impact
SIP-420 introduces a protocol-owned debt pool in Synthetix, allowing SNX stakers to delegate their debt positions to a shared pool with a lower issuance ratio. This shift boosts capital efficiency, simplifies staking, and enhances yield opportunities while discouraging 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.
Consequences of the change
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.
But this is not the first time Synthetix has experienced volatility. The protocol, known for its decentralized synthetic asset platform, has seen fluctuations during past market cycles, but this recent depeg is one of the most severe in the history of the crypto industry.
For instance, Synthetix has faced volatility before — 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.
The significance of sUSD’s depeg extends beyond this individual asset and reveals broader issues in the mechanisms supporting crypto-collateralized stablecoins.
What is sUSD, and how does it work?
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 such as USDC (USDC) or Tether’s USDt (USDT), which are pegged to the US dollar through reserves held in banks, sUSD is backed by a cryptocurrency — specifically, SNX, the native token of the Synthetix protocol.
Minting sUSD:
- 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.
Historical collateralization ratio (C-Ratio):
- 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…
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