Synthetix – the permissionless derivatives protocol – is exploring adjusting its economic incentives for liquidity providers across sETH and sUSD pools.

SIP 51 proposes to divert 64,000 SNX from native inflation into Curve in order to incentivize liquidity providers of the sUSD/USDT/DAI/USDC/TUSD trading pair on Curve. The diversion of native inflation towards the Curve stablecoin liquidity pool will come at the cost of sETH liquidity providers on Uniswap.

As a result, the Synthetix Improvement Proposal aims to reduce the Uniswap sETH liquidity incentives down to 32,000 SNX per week.

What To Know

The adjustment to the liquidity incentives comes after a successful trial for the Curve pool, where Synthetix directed a portion of native inflation towards the stablecoin pool over a period of 4 weeks. With sUSD reaching its target peg of $1, it goes without saying that the Curve pool trial was a success. By reducing SNX rewards for the Uniswap pool, the protocol can ensure that the debt pool is not over sETH bias and provides an added incentive for sETH liquidity providers to migrate to sUSD.

$SUSD from @synthetix_io has bid price 0.998233 and ask price 1.000969. Congrats on reaching the peg! — Curve (@CurveFinance) April 8, 2020

With that in mind, ease of access to Synthetix.Exchange (sX) is vital to the overarching success of the derivatives protocol. Enabling users to easily convert ETH and other crypto assets into Synths is the first step for allowing users to interact with the platform. This was the driving motivation behind the original liquidity incentives for sETH.

While sETH acts as the primary on-ramp for Synthetix users, sUSD also acts as a critical off-ramp. Therefore, there must be high confidence (and liquidity) in the stability of the sUSD peg at $1. The added SNX incentives to Curve will aid in sUSD maintaining its $1 peg and assurance for liquidity providers that the incentives will exist in the long term.

At the time of writing, the community seems to be in favor of this proposal with 89 Yes votes to 23 No votes.

Key Takeaways

While sUSD liquidity providers may be jumping for joy, there are obvious tradeoffs to the proposed allocation.

The sETH <> ETH Uniswap Pool is one of the more lucrative opportunities for DeFi users sitting on idle Ether. The sETH <> ETH liquidity p0ol suffers from no impermanent loss and provided liquidity providers an estimated 2.1% return on ETH simply off of trading fees as of writing. With that, the SNX liquidity incentives further added to the returns for sETH liquidity providers. Now, with liquidity incentives being split among two different liquidity pools, sETH LPs will face a downturn in expected return.

That said, sUSD liquidity providers may see a nice bump in returns if the proposal passes and goes live on mainnet. However, the biggest downside is that sUSD LPs lose exposure to ETH returns – a potential drawback for ETH + SNX bulls.

It’s important to note that the proposal is not live on mainnet and is still under consideration by the Synthetix Community. We recommend joining their Discord and heading to the #governance-poll channel to make your voice heard.

In preparation for this change, we encourage users to check out our tutorial on how to start earning weekly SNX inflation on sUSD liquidity using our tutorial.

To stay up to date on the latest discussions surrounding liquidity rewards, make sure to check out the official Synthetix Discord. For any daily updates, feel free to follow them on Twitter.

Until next time!