Golden Encyclopedia | Why did sUSD depeg? How to avoid depeg?

Author: SK Arora, CoinTelegraph; Translated by: Bai Shui, Jinse Finance

1. Explanation of sUSD Decoupling: Why Synthetix Stablecoin Dropped Below $0.70

A significant and concerning event has occurred in the cryptocurrency space: the value of Synthetix's native stablecoin sUSD plummeted to $0.68 on April 18, 2025.

This plunge means that its expected pegged exchange rate of 1:1 with the US dollar has deviated significantly by 31%, a level that is fundamental to the concept of stablecoins. As the name suggests, stablecoins aim to maintain price stability, which is crucial for their role as a reliable store of value in decentralized finance (DeFi) applications.

For stablecoins like sUSD, maintaining price stability is crucial to ensuring confidence in their use. However, the significant decline in the value of sUSD has impacted the cryptocurrency community, creating an atmosphere of uncertainty.

The question arises: how did this previously stable digital asset fall below its pegged exchange rate? What impact does this have on the broader cryptocurrency ecosystem?

The decoupling of SUSD was triggered by a protocol change (SIP-420), which lowered collateral requirements and undermined the incentive mechanism for maintaining a stable peg. Coupled with the decline in Synthetix's price and liquidity outflow, confidence in sUSD has 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 rate. This shift enhances capital efficiency, simplifies the staking process, and increases yield opportunities, while suppressing individual staking by raising the collateralization ratio to 1,000%.

Before SIP-420, users minting sUSD had to over-collateralize using SNX tokens, maintaining a collateralization rate of 750%. This high requirement ensured stability but limited efficiency.

SIP-420 aims to improve capital efficiency by reducing the collateralization ratio to 200% and introducing a shared debt pool. This means that individual users no longer need to bear their own debts, but instead, the risks are spread across the entire protocol.

Although this change makes it easier to mint sUSD, it also removes the individual incentive for users to repurchase sUSD when its price drops below $1. Previously, users would repurchase sUSD at a discount to repay their debts, which helped restore its value. In the shared debt model, this self-correcting mechanism has been weakened.

Consequences of Change

The supply of sUSD has increased, coupled with a weakening of individual incentive mechanisms, leading to an oversupply of sUSD in the market. At times, sUSD accounts for more than 75% of the main liquidity pools, indicating that many users are selling sUSD at a loss. This oversupply, combined with the decline in the price of SNX, has further eroded the value of sUSD.

But this is not the first time Synthetix has experienced volatility. The protocol is known for its decentralized synthetic asset platform, which has also seen fluctuations in past market cycles, but this recent decoupling is the most severe in the history of the cryptocurrency industry.

For example, Synthetix has previously faced volatility - during the market crash in 2020, the mid-2021 DeFi correction, and the UST crash in 2022 - each time exposing vulnerabilities in its liquidity and oracle systems. An oracle vulnerability in 2019 also highlighted its structural weaknesses.

The significance of sUSD decoupling is not limited to this single asset, but reveals broader issues within the mechanisms that support crypto-collateralized stablecoins.

2. What is sUSD? How does it work?

sUSD is a crypto-collateralized stablecoin that operates on the Ethereum blockchain, designed to provide stability in the highly volatile cryptocurrency market.

Unlike fiat-backed stablecoins such as USDC or Tether's USDt, which are pegged to the dollar through reserves held by banks, sUSD is backed by cryptocurrency—specifically, the native token SNX of the Synthetix protocol.

Mint sUSD:

• The process of minting sUSD involves staking SNX tokens into the protocol.
• In return, users will receive sUSD tokens, which can be used within the Synthetix ecosystem and traded on the open market.
• To ensure the value stability of the sUSD token, it adopts over-collateralization, which means that the amount of SNX tokens staked by users must exceed the value of the minted sUSD.

Historical Collateral Ratio (C-Ratio):

• Historically, the collateralization rate has been set at around 750%, which means that for every 1 dollar of sUSD minted, users need to stake 7.50 dollars worth of SNX tokens.
• A high collateralization ratio can buffer the price fluctuations of SNX, which is crucial for the stability of the system.

In order to improve capital efficiency, Synthetix has launched SIP-420, bringing significant changes:

• The required C ratio has decreased from 750% to 200%, allowing users to mint more sUSD with less SNX.
• Previously, each user should be responsible for their own debts.
• With SIP-420, debt is now shared by a collective fund pool, which means individual users are less directly affected by their own actions.

Due to these changes, along with market factors such as the decline in the price of SNX, sUSD has struggled to maintain its peg to 1 dollar, with trading prices dropping to as low as 0.66 dollars in April 2025. The Synthetix team is actively researching solutions to stabilize sUSD, including the introduction of new incentive mechanisms and exploring ways to enhance liquidity.

Did you know? Synthetix uses a dynamic C ratio to manage system stability. Your active debt will change with the performance of traders; profits will increase debt, while losses will decrease debt. Through the delta-neutral mechanism in perpetual contracts, liquidity providers absorb imbalances until reverse trades restore balance. This is a system that shares the risk of volatility.

3. Is sUSD an algorithmic stablecoin?

A common misconception surrounding sUSD is classifying it as an algorithmic stablecoin. It needs to be clarified that sUSD is not an algorithmic stablecoin, but rather a cryptocurrency collateral.

This key distinction is crucial 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 pegged exchange rate, and often lack actual collateral backing. In contrast, sUSD relies on the value of underlying collateral (SNX tokens) to maintain its price.

The pegged exchange rate of sUSD is not as fixed as fiat-backed stablecoins such as USDC. The Synthetix system allows for some natural fluctuations in the pegged exchange rate. While sUSD aims to stay around $1, it is not a fixed exchange rate – instead, the protocol relies on smart built-in mechanisms to help restore the peg rate when the exchange rate fluctuates.

The following are the key mechanisms after SIP-420:

• Lower Collateral Ratio (200%): As mentioned above, the collateral ratio required to mint sUSD is lowered, allowing more sUSD to enter circulation with less SNX. This improves capital efficiency but also increases the risk of decoupling.
• Shared Debt Pool: All stakers no longer bear debts individually, but instead share a collective debt pool, which undermines the natural anchoring recovery behavior.
• sUSD Lockup Incentives (420 Pool): To reduce the circulating supply of sUSD and help restore its peg, users are incentivized to lock up 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 for liquidity providers supporting the sUSD trading pair, helping to 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 mitigate systemic risk and enhance the stability mechanism.

These recovery mechanisms mainly function through incentive mechanisms. For example, if the trading price of sUSD falls below 1 dollar, users who stake SNX may be incentivized to purchase sUSD at a discounted price, thereby repaying their debt at a lower cost. This system largely relies on market dynamics and the incentive mechanisms of participants to stabilize the pegged exchange rate.

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 will change with fluctuations in the SNX price or your debt share - this is crucial for minting synthetic assets and avoiding penalties.

4. Synthetix Recovery Plan: How to Stabilize sUSD

Synthetix has developed a comprehensive three-phase recovery plan aimed at restoring the peg of the stablecoin to the US dollar and ensuring its long-term stability.

Kain Warwick, the founder of Synthetix, 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.

1. Restore a good incentive mechanism ("carrot")

• Users who lock sUSD will receive SNX rewards, which helps to reduce the supply of sUSD in the market.
• Two new yield pools (one for sUSD and one for USDC) will allow anyone to provide stablecoins and earn interest—no SNX required.

2. Apply gentle pressure ("big stick")

SNX stakers must now hold a small portion of their debt in sUSD in order to continue earning rewards.

If the sUSD peg rate further declines, the required amount of sUSD holdings will increase - this will increase pressure to help restore the peg rate.

Warwick believes that the plan will restore the natural cycle: when the price of sUSD is low, people will be motivated to buy and pay off debts, thus pushing the price up. Kain estimates that restoring the pegged exchange rate may require less than $5 million in buying pressure—if enough people participate, this is entirely feasible.

Once the incentive measures are readjusted and sUSD returns to its pegged exchange rate, Synthetix will launch a major upgrade: phasing out the old system, launching Perps v4 on Ethereum with faster transaction speeds and support for multiple collateral types, introducing snaxChain to build a high-speed synthetic market, and minting 170 million SNX to drive ecosystem growth through new liquidity and trading incentives.

V. The Volatility of sUSD: A Key Risk That Cryptocurrency Investors Cannot Ignore

The recent decoupling incident of sUSD has once again warned about the inherent risks of crypto-collateralized stablecoins. Although stablecoins are designed to provide price stability, their reliance on external factors such as market conditions and underlying collateral means they are not immune to fluctuations.

Cryptocollateral stablecoins like sUSD face higher risks due to their reliance on volatile assets such as SNX. Market sentiment, external events, and significant protocol changes can quickly disrupt stability, making decoupling more likely—especially in the rapidly evolving and dynamic DeFi space.

Here are some key risks that cryptocurrency investors should be aware of:

• Dependence on Collateral Value: The stability of sUSD is directly related to the price of SNX. If the price of SNX falls, sUSD is prone to collateral insufficiency, which threatens its peg and leads to depreciation.
• Protocol Design Risks: Changes to the protocol (such as the introduction of SIP-420) may have unforeseen consequences. A misalignment in incentive mechanisms or poor execution of upgrades may disrupt the balance necessary to maintain system stability.
• Market Sentiment: Stablecoins are based on trust. If users lose confidence in a stablecoin's ability to maintain its pegged exchange rate, its value may quickly decline, even if the protocol is well-designed.
• Incentive Mechanism Disruption: Canceling individual incentive mechanisms (e.g., the incentive mechanism in the 420 pool) may weaken the protocol's ability to maintain the pegged exchange rate, as this reduces users' motivation to stabilize the system.
• Lack of Redundancy: Stablecoins should have robust fallback strategies to mitigate the risks associated with single points of failure. A failure of one mechanism, such as a protocol upgrade or design flaw, can quickly escalate into a full-blown crisis.

In order to protect their own safety, users should diversify their exposure to stablecoin investments, closely monitor protocol changes, and avoid over-reliance on crypto-collateralized assets such as sUSD. Staying informed about governance updates and market sentiment is crucial, as sudden changes may trigger a decoupling.

Users can also reduce risks by using stablecoins with stronger collateral support or built-in redundancy mechanisms, and by regularly checking DeFi positions to identify signs of under-collateralization or systemic instability.