Author: SK Arora, CoinTelegraph; Compiler: Baishui, Golden Finance
A major and worrying event occurred in the cryptocurrency field: the value of sUSD, the native stablecoin of the Synthetix protocol, plummeted to $0.68 on April 18, 2025.
The plunge meant that its expected 1:1 peg with the US dollar deviated sharply by 31%, a level that is the basis of the stablecoin concept. As the name implies, stablecoins are designed to maintain price stability, which is crucial for their use as a reliable means of storing value in decentralized financial (DeFi) applications.
For stablecoins like sUSD, maintaining price stability is critical to ensure confidence in its use. However, the sharp drop in sUSD's value has sent shockwaves through the cryptocurrency community, creating an atmosphere of uncertainty.
The question is: how did this once-stable digital asset fall below its peg? What impact does this have on the broader cryptocurrency ecosystem?
The sUSD depeg was triggered by a protocol change (SIP-420) that reduced collateral requirements and undermined the incentive mechanism for a stable peg. Coupled with the price drop and liquidity outflows from Synthetix, confidence in sUSD has weakened.
SIP-420 introduced protocol-owned debt pools to Synthetix, allowing SNX stakers to delegate their debt positions to a shared pool with a lower issuance rate. This shift improves funding efficiency, simplifies the staking process, and increases yield opportunities, while disincentivizing individual staking by increasing the collateralization ratio to 1,000%.
Prior to SIP-420, users who minted sUSD had to overcollateralize with SNX tokens to maintain a 750% collateralization ratio. This high requirement ensured stability but limited efficiency.
SIP-420 aims to improve funding efficiency by reducing the collateralization ratio to 200% and introducing shared debt pools. This means that individual users no longer need to take on their own debt, but instead spread the risk across the protocol.
While this change made it easier to mint sUSD, it also removed the individual incentive for users to buy back sUSD when the price of sUSD fell below $1. Previously, users would buy back sUSD at a discount to pay off their debt, which helped restore its value. Under the shared debt model, this self-correction mechanism is weakened.
The increase in sUSD supply, combined with weakened individual incentives, led to an excess of sUSD in the market. At times, sUSD accounted for more than 75% of the main liquidity pool, indicating that many users were selling sUSD at a loss. This excess supply, combined with the falling SNX price, further weakened the value of sUSD.
But this is not the first time Synthetix has experienced volatility. The protocol, known for its decentralized synthetic asset platform, has seen volatility in past market cycles, but this recent decoupling is the worst in the history of the cryptocurrency industry.
For example, Synthetix has faced volatility before — following the 2020 market crash, the mid-2021 DeFi pullback, and the 2022 UST crash — each time exposing vulnerabilities in its liquidity and oracle systems. An oracle breach in 2019 also highlighted its structural fragility.
The significance of the sUSD depeg extends beyond this single asset, revealing broader issues in the mechanisms that support crypto-collateralized stablecoins.
sUSD is a crypto-collateralized stablecoin running on the Ethereum blockchain that aims to provide stability to the highly volatile crypto markets.
Unlike fiat-backed stablecoins like USDC or Tether’s USDt, which are pegged to the U.S. dollar through reserves held in banks, sUSD is backed by cryptocurrency — specifically, SNX, the native token of the Synthetix protocol.
Minting sUSD:
The process of minting sUSD involves staking SNX tokens into the protocol.
In return, users receive sUSD tokens, which can be used within the Synthetix ecosystem and traded on the open market.
To ensure the value of the sUSD token is stable, it is over-collateralized, meaning that the amount of SNX tokens staked by users must exceed the value of the minted sUSD.
Historical Collateralization Ratio (C-Ratio):
Historically, the collateralization ratio has been set at around 750%, meaning that for every $1 of sUSD minted, users need to stake $7.50 worth of SNX tokens.
High collateralization ratios buffer SNX price volatility, which is critical to the stability of the system.
To improve capital efficiency, Synthetix introduced SIP-420, which brought significant changes:
The required C ratio was reduced 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 by a collective pool of funds, which means that individual users are less directly affected by their own actions.
Due to these changes, coupled with market factors such as the decline in SNX prices, sUSD has struggled to maintain its peg to $1, and the trading price fell to $0.66 in April 2025. The Synthetix team is actively working on solutions to stabilize sUSD, including introducing new incentives and exploring ways to enhance liquidity.
Did you know? Synthetix uses a dynamic C ratio to manage system stability. Your active debt changes with trader performance; profits increase debt, losses reduce debt. Through the delta-neutral mechanism in perpetual contracts, liquidity providers absorb imbalances until the opposite trade restores balance. This is a system that shares volatility risk.
A common misunderstanding around sUSD is to classify it as an algorithmic stablecoin. To be clear, sUSD is not an algorithmic stablecoin, but rather a cryptocurrency collateral.
This key distinction is critical because algorithmic stablecoins, such as the now-infamous TerraUSD (UST), rely on algorithms and smart contracts to manage supply and demand in an attempt to maintain their pegs, and are typically not backed by actual collateral. In contrast, sUSD relies on the value of the underlying collateral (SNX tokens) to maintain its price.
sUSD’s peg is not fixed like fiat-backed stablecoins like USDC. The Synthetix system allows for some natural fluctuations in the peg. While sUSD aims to remain near $1, it is not fixed — instead, the protocol relies on smart built-in mechanisms to help restore the peg when the exchange rate fluctuates.
Here are the key mechanisms behind SIP-420:
Reduced Collateralization Ratio (200%):As mentioned above, the collateralization ratio required to mint sUSD is reduced, allowing more sUSD to enter circulation with less SNX. This improves capital efficiency, but also increases the risk of decoupling.
Shared Debt Pool:Instead of all stakers individually taking on debt, all stakers share a collective debt pool, which weakens the natural peg recovery behavior.
sUSD Locking Incentives (420 Pools):To reduce sUSD in circulation and help restore the peg, users are incentivized to lock their sUSD for 12 months in exchange for a portion of the protocol rewards (e.g., 5 million SNX).
Liquidity Incentives:The protocol offers high-yield incentives to liquidity providers who support sUSD trading pairs, helping absorb excess supply and improve price stability.
External Yield Strategy:The protocol plans to use minted sUSD in external protocols (e.g., Ethena) to generate yield, which helps offset systemic risk and enhances stability mechanisms.
These recovery mechanisms work primarily through incentive mechanisms. For example, if sUSD is trading below $1, users who stake SNX may be incentivized to buy sUSD at a discount, thereby paying off their debt at a lower cost. This system relies heavily on market dynamics and the incentives of participants to stabilize the peg.
Did you know? The calculation formula for the collateral ratio (C-Ratio) is: Collateral ratio (%) = (Total value of SNX in USD) / Active debt in USD × 100. It changes as the price of SNX or your share of debt fluctuates - this is critical for minting synthetic assets and avoiding penalties.
Synthetix has developed a comprehensive three-phase recovery plan to restore the stablecoin's peg to the US dollar and ensure its long-term stability.
Synthetix founder Kain Warwick recently published an article on Mirror 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.
Users who lock sUSD will receive SNX rewards, thereby helping to reduce the amount of sUSD on the market.
Two new yield pools (one for sUSD and one for USDC) will allow anyone to stake stablecoins and earn interest — no SNX required.
SNX stakers must now hold a small portion of their debt in sUSD to continue earning yield.
If the sUSD peg falls further, the required sUSD holdings will rise — which will increase pressure to help fix the peg.
Warwick believes the plan will restore the natural cycle: when sUSD is cheap, people will have an incentive to buy and pay down their debt, pushing the price up. Kain estimates that it could take less than $5 million in buying pressure to restore the peg — which is entirely feasible if enough people participate.
Once incentives are realigned and sUSD returns to its peg, Synthetix Major upgrades will be launched: the old system will be phased out, Perps v4 with faster transactions and support for multiple collateral will be launched on Ethereum, snaxChain will be introduced to build high-speed synthetic markets, and 170 million SNX will be minted to drive ecosystem growth through new liquidity and trading incentives.
The recent sUSD decoupling incident once again warned of the inherent risks of crypto-collateralized stablecoins. While stablecoins are designed to provide price stability, their reliance on external factors such as market conditions and underlying collateral means that they are not immune to volatility.
Crypto-collateralized stablecoins like sUSD face higher risks due to their reliance on volatile assets such as SNX. Market sentiment, external events, and major protocol changes can quickly disrupt stability, making decoupling more likely - especially in the fast-growing and evolving DeFi space.
Here are some key risks that cryptocurrency investors should be aware of:
Dependence on Collateral Value:The stability of sUSD is directly tied to the price of SNX. If the price of SNX drops, sUSD is susceptible to undercollateralization, threatening its peg and causing it to depreciate.
Protocol Design Risk:Protocol changes, such as the introduction of SIP-420, can have unintended consequences. Misaligned incentives or poorly executed upgrades could upset the balance that maintains system stability.
Market Sentiment:Stablecoins are based on trust, and if users lose confidence in the ability of the stablecoin to maintain its peg, its value can quickly fall, even if the protocol is well designed.
Incentive Misalignment:Removing individual incentives, such as those in the 420 pool, could weaken the protocol’s ability to maintain the peg because it would reduce users’ incentive to stabilize the system.
Lack of Redundancy:Stablecoins should have strong fallback strategies to reduce the risk of single points of failure. The failure of one mechanism, such as a protocol upgrade or design flaw, could quickly turn into a full-blown crisis.
To protect themselves, users should diversify their stablecoin exposure, pay close attention to protocol changes, and avoid over-reliance on crypto-collateralized assets such as sUSD. It is critical to stay abreast of governance updates and market sentiment, as sudden changes could trigger decoupling.
Users can also reduce risk by using stablecoins with stronger collateral backing or built-in redundancy mechanisms, and by regularly checking DeFi positions for signs of undercollateralization or systemic instability.
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