Stablecoin sUSD Decentralization Crisis: A Comprehensive Analysis of Causes, Impacts, and Future Prospects

In April 2025, the decentralized synthetic stablecoin sUSD issued by the Synthetix protocol faced a severe de-pegging crisis, with the price dropping to $0.7732, about 23% lower than its theoretical 1:1 USD peg. This event not only sparked widespread discussions in the crypto community but also was associated by some users with events in 2022. Terra The collapse of UST is mentioned in the same breath.

As the core asset of the Synthetix ecosystem, the detachment of sUSD has exposed multiple challenges in the protocol’s mechanism design, market trust, and liquidity management. This article will analyze in detail the background, reasons, current situation, Synthetix team’s response measures, as well as the opportunities and risks faced by investors, providing readers with comprehensive insights.

Overview of the Background and Mechanism of sUSD Decoupling

1. The core mechanism of sUSD

sUSD is the decentralized synthetic stablecoin of the Synthetix protocol, minted by over-collateralizing SNX (Synthetix Network Token), aiming to maintain a 1:1 peg with the US dollar. Its core mechanisms include:

Overcollateralization: Users mint sUSD by staking SNX, with a collateralization ratio typically at 500% or higher to ensure system security.

Debt pool: All pledgers share a global debt pool, and the minting and burning of sUSD directly affect debt distribution.

Price stability incentive: When the sUSD price deviates from the anchor value, pledgers can repay debts by buying discounted sUSD or profit from destroying sUSD, thereby driving the price back.

This mechanism has helped sUSD maintain relative stability in volatile markets in recent years, but since 2024, sUSD has experienced minor deviations several times, with the SIP-420 proposal in March 2025 pushing the issue to a climax.

2. Trigger Point for Unpegging

As of April 21, 2025, the price of sUSD is approximately $0.7732, a 4.25% decrease in the past 24 hours, with a market cap shrinking to around $22.96 million and trading volume surging by 320% to $794,000. This drastic price fluctuation and market response are due to a combination of multiple factors, especially the implementation of SIP-420 proposal.

The deep reasons for sUSD’s anchoring

1. The disruptive impact of SIP-420 proposal

In March 2025, the Synthetix community passed and implemented SIP-420 proposal, introducing the ‘420 Pool’ mechanism, which fundamentally changed the minting and staking mode of sUSD. The main changes include:

Lowering the collateralization ratio: reducing the SNX collateralization ratio from 500% to 200%, significantly lowering the threshold for minting sUSD, and stimulating a sharp increase in the sUSD supply.

Shared pool mode: Allows stakers to delegate SNX to the shared ‘420 pool’, simplifying operations but weakening the original individual debt management mechanism.

Debt repayment incentive failure: Under the old mechanism, pledgers had the incentive to purchase sUSD at a discounted price to repay their debts, supporting price stability. However, SIP-420 has removed this incentive, leading to insufficient buying demand in the market.

As a result, the supply of sUSD has increased rapidly, but the demand has not kept pace, leading to a direct decrease in price due to supply and demand imbalance. In the Curve liquidity pool, sUSD accounts for as much as 90%, further exacerbating the downward price pressure.

2. Market Behavior and Liquidity Crisis

Market participants’ behavior amplifies the anchoring effect, mainly manifested in the following aspects:

Centralized Exchange: A large number of users exchange sUSD for USDT or USDC on decentralized exchanges such as Curve and Uniswap, causing imbalance in the liquidity pool and continuous pressure on the sUSD price.

Impact of Infinex Campaign: Infinex, the decentralized front-end platform of Synthetix, launched sUSD holding and deposit incentive activities before the anchor unbinding, attracting a large number of users to participate. Although the campaign increased the liquidity of sUSD within the system, it failed to bring matching external demand, indirectly exacerbating the supply glut.

Speculative behavior: Some speculators take advantage of the discounted price of sUSD for arbitrage, further increasing selling pressure.

3. The Pains of Mechanism Transition Period

Synthetix founder Kain Warwick admitted in the X platform and community AMA that the sUSD detachment is a “transitional period of pain” for the SIP-420 old and new mechanism alternation. Specific issues include:

The old mechanism is no longer effective: the original debt repayment incentive is no longer applicable under the ‘420 pool’ mode, and the market has lost the mechanism of automatic price adjustment.

The new mechanism is not mature: The staking and minting mechanism introduced by SIP-420 simplifies user operations, but lacks a stable mechanism, leading to intensified price fluctuations.

Asset allocation adjustment: To support the new mechanism, the Synthetix protocol has sold 90% of its ETH position and increased its SNX holdings to enhance internal support. However, this operation may weaken the system’s liquidity and external market confidence.

Comparison with historical cases

The sUSD’s de-pegging is not an isolated incident. Historical cases of stablecoin de-pegging provide reference for analysis:

USDC Depeg (2023): Due to the collapse of Silicon Valley Bank, USDC dropped to 0.87 USD, but Circle’s strong redemption mechanism and transparent communication restored its peg within three days.

UST Crash (2022): Algorithmic stablecoin UST plummeted to $0.022 due to insufficient collateral and a crisis of trust, ultimately collapsing. In contrast, sUSD’s overcollateralization and debt pool mechanism provide higher security, but current incentives are still inadequate and need to be addressed.

DAI slight de-pegging (2020): MakerDAO’s DAI fell to $0.95 on ‘Black Thursday,’ but quickly recovered by adjusting stability fees and increasing collateral assets.

sUSD’s situation is more similar to USDC and DAI, but its decentralized nature and complex debt pool mechanism make its recovery more difficult than centralized stablecoins.

Comparison with other stablecoins

The de-pegging crisis of sUSD is not unique to decentralized stablecoins, here is a comparison with major stablecoins:

USDT/USDC: Centralized stablecoins rely on fiat reserves and strong redemption mechanisms, with extremely low unpegging risks, but their flexibility in decentralized finance (DeFi) is not as good as sUSD.

DAI: MakerDAO’s DAI also adopts a mechanism of over-collateralization, which briefly went off-peg in 2020, but quickly recovered through stable fee adjustments and diversification of collateral assets. The debt pool mechanism of sUSD is more complex, with higher recovery difficulty.

UST: Terra‘s UST collapsed completely due to algorithmic stability mechanism and trust crisis. sUSD’s over-collateralization and SNX staking provide a stronger safety net, but insufficient incentives remain the current bottleneck.

Conclusion

The de-pegging crisis of sUSD is a major challenge that Synthetix encountered during the transition of its mechanism, exposing the complexity of decentralized stablecoins in supply-demand balance, market trust, and liquidity management. The implementation of SIP-420 proposal, while reducing the user participation threshold, unexpectedly weakened the price stabilization mechanism, leading to oversupply and declining market confidence. Nevertheless, the excess collateralization model of sUSD significantly reduces its systemic risk compared to Terra UST, while Synthetix team’s proactive response also provides hope for restoring anchoring.

For investors, the low price of sUSD may bring high return opportunities, but the risks of short-term volatility and trust crisis need to be weighed. In the rapidly changing crypto market, staying vigilant and closely monitoring team progress is a wise move. In the future, whether Synthetix can through Aave Ethena’s integration and Snaxchain’s launch and mechanism optimization reshape the stability and market position of sUSD, determining its long-term competitiveness in the decentralized finance field.