|Ethereum, Optimism & Base
End SNX token inflation.
If this SIP is implemented, inflation will be reduced to zero in the claim week following the vote. This change only requires a parameter to be updated so it can be implemented fairly quickly.
Inflation was introduced in 2019 to incentivise staking in the recently deployed Synthetix network, following the pivot from Havven. It was critical the staking ratio was high in the early period of the network to scale liquidity. This incentive loop was incredibly effective and led to a multi-year bull market in Synthetix liquidity and network growth. Yet in recent years the effectiveness of this incentive has declined significantly; with inflation now in low single digits it does not meaningfully impact staker behaviour.
The weekly SNX inflation will be reduced to zero.
Given the recently proposed experiment to buyback and burn SNX using fees generated by the Andromeda deployment to Base, it is counterproductive to continue inflation. This is because inflation will likely outweigh issuance until volume on Andromeda scales. By reducing inflation to zero, any non-zero fee yield on Base will result in the SNX token being deflationary.
There has been significant discussion about the effectiveness of buybacks vs paying yield to stakers. I have historically been against buybacks because they reduce the incentive to stake. This is an issue given the need to maximise SNX collateral backing the Synthetix network. However, I have updated my view on this as I believe high inflation and the complexity of staking has created a strong disincentive for new participants to hold the SNX token. The incentives are arguably too strongly skewed against passive token holders. The combination of buybacks and zero inflation shifts the incentives towards accommodating passive holders.
There are many paths the network can take in the upcoming year, including the deployment of an app chain and the deprecation of SNX as the primary collateral. These approaches are possible regardless of whether the token is inflationary. Halting inflation does not impact any of these pathways significantly. Given all of these considerations, it appears inflation is detrimental to the continued growth of the network.
This is a parameter change to the weekly inflation amount, as such it does not impact any interfaces.
TBC, however, we must ensure there is no impact to setting the inflation rate to null.
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