sUSD depeg, explained: Why Synthetix’s stablecoin fell below $0.70
In a significant and concerning event in the cryptocurrency space, sUSD, the native stablecoin of the Synthetix protocol, saw its value plummet to $0.68 on April 18, 2025.
This drop represents a dramatic 31% deviation from its intended peg of 1:1 with the US dollar, a threshold that is fundamental to the concept of stablecoins. As the name implies, stablecoins are designed to maintain a stable price, which is crucial for their role as a reliable store of value within decentralized finance (DeFi) applications.
For stablecoins like sUSD, maintaining this price stability is essential for ensuring confidence in their usage. However, the steep drop in sUSD’s value sent shockwaves through the crypto community, creating an atmosphere of uncertainty.
The question arises: How did this once-stable digital asset fall below its peg, and why does this matter to the broader cryptocurrency ecosystem?
SUSD depeg was triggered by a protocol shift (SIP-420) that lowered collateralization and disrupted peg-stabilizing incentives. Combined with Synthetix’s (SNX) price drops and liquidity outflows, confidence in sUSD 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 ratio. This shift boosts capital efficiency, simplifies staking, and enhances yield opportunities while discouraging solo staking by raising its collateralization ratio to 1,000%.
Before SIP-420, users who minted sUSD had to over-collateralize with SNX tokens, maintaining a 750% collateral ratio. This high requirement ensured stability but limited efficiency.
SIP-420 aimed to improve capital efficiency by reducing the collateral ratio to 200% and introducing a shared debt pool. This meant that instead of individual users being responsible for their own debt, the risk was distributed across the protocol.
While this change made it easier to mint sUSD, it also removed the personal incentive for users to buy back sUSD when its price dropped below $1. Previously, users would repurchase sUSD at a discount to repay their debts, helping to restore its value. With the shared debt model, this self-correcting mechanism weakened.
Consequences of the change
The combination of increased sUSD supply and reduced individual incentives led to a surplus of sUSD in the market. At times, sUSD comprised over 75% of major liquidity pools, indicating that many users were offloading it at a loss. This oversupply, coupled with declining SNX prices, further destabilized sUSD’s value.
But this is not the first time Synthetix has experienced volatility. The protocol, known for its decentralized synthetic asset platform, has seen fluctuations during past market cycles, but this recent depeg is one of the most severe in the history of the crypto industry.
For instance, Synthetix has faced volatility before — during the 2020 market crash, mid-2021 DeFi corrections, and post-UST collapse in 2022 — each time exposing vulnerabilities in liquidity and oracle systems. A 2019 oracle exploit also highlighted structural fragility.
The significance of sUSD’s depeg extends beyond this individual asset and reveals broader issues in the mechanisms supporting crypto-collateralized stablecoins.
What is sUSD, and how does it work?
sUSD is a crypto-collateralized stablecoin that operates on the Ethereum blockchain, designed to offer stability in a highly volatile crypto market.
Unlike fiat-backed stablecoins such as USDC (USDC) or Tether’s USDt (USDT), which are pegged to the US dollar through reserves held in banks, sUSD is backed by a cryptocurrency — specifically, SNX, the native token of the Synthetix protocol.
Minting sUSD:
- The process for minting sUSD involves staking SNX tokens into the protocol.
- In return, users receive sUSD tokens, which can be used within the Synthetix ecosystem or traded on the open market.
- To ensure that the sUSD token maintains its value, it is over-collateralized, meaning users must stake more SNX than the value of the sUSD minted.
Historical collateralization ratio (C-Ratio):
- Historically, the collateralization ratio has been set around 750%, meaning that for every $1 of sUSD minted, users need to stake $7.50 worth of SNX tokens.
- The high collateralization ratio ensures a buffer against the price volatility of SNX, which is critical for the system’s stability.
In an effort to improve capital efficiency, Synthetix introduced SIP-420, which brought significant changes:
- The required C-Ratio was lowered 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 across a collective pool, meaning individual users are less directly impacted by their own actions.
As a result of these changes, combined with market factors like declining SNX prices, sUSD has struggled to maintain its $1 peg, trading as low as $0.66 in April 2025. The Synthetix team is actively working on solutions to stabilize sUSD, including introducing 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 shifts with trader performance; profits increase debt, and losses reduce it. Through delta-neutral mechanisms in perpetual futures, liquidity providers absorb imbalances until opposing trades restore balance. It’s a system of shared, fluctuating risk.
Is sUSD an algorithmic stablecoin?
One of the common misconceptions surrounding sUSD is its classification as an algorithmic stablecoin. To clarify, sUSD is not algorithmic — it is crypto-collateralized.
The key distinction is important 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 peg, often without actual collateral backing. In contrast, sUSD relies on the value of the underlying collateral (SNX tokens) to maintain its price.
The sUSD peg is not fixed in the same way that fiat-backed stablecoins like USDC are. The Synthetix system allows for some natural fluctuation in the peg. While sUSD aims to stay close to $1, it’s not fixed — instead, the protocol relies on smart, built-in mechanisms to help restore the peg over time when it drifts.
Here are the key mechanisms post-SIP-420:
- Lower collateralization ratio (200%): As mentioned, the required backing for minting sUSD was reduced, allowing more sUSD to enter circulation with less SNX. This increases capital efficiency but also heightens the risk of depegging.
- Shared debt pool: Instead of individual debt responsibility, all stakers now share a collective debt pool, weakening natural peg-restoring behavior.
- sUSD lockup incentives (420 Pool): To reduce circulating sUSD and help restore the peg, users are incentivized to lock their sUSD for 12 months in exchange for a share of 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 strategies: The protocol plans to use minted sUSD in external protocols (e.g., Ethena) to generate yield, which can help offset systemic risk and reinforce stability mechanisms.
These restoration mechanisms primarily function through incentives. For example, if sUSD is trading below $1, users who have staked SNX may be incentivized to buy discounted sUSD to pay off their debts at a reduced cost. This type of system relies heavily on market dynamics and the incentives of participants to help stabilize the peg.
Did you know? The C-Ratio is calculated using the formula: C-Ratio (%) = (Total SNX value in USD / active debt in USD) × 100. It changes as the price of SNX or your debt share fluctuates — crucial for minting synths and avoiding penalties.
Synthetix’s recovery plan: How it aims to restabilize sUSD
Synthetix has formulated a comprehensive three-phase recovery plan aimed at restoring the stablecoin’s peg to the US dollar and ensuring its long-term stability.
Synthetix founder Kain Warwick recently published a post 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. Bring back good incentives (the “carrot”)
- Users who lock up sUSD will earn SNX rewards, helping reduce the amount of sUSD in the market.
- Two new yield-earning pools (one for sUSD and one for USDC) will let anyone supply stablecoins and earn interest — no SNX required.
2. Add gentle pressure (the “stick”)
- SNX stakers now have to hold a small percentage of their debt in sUSD to keep earning benefits.
- If the sUSD peg drops more, the required sUSD holding goes up — more pressure to help fix the peg.
According to Warwick, this plan restores the natural loop: When sUSD is cheap, people are motivated to buy it and close their debt, pushing the price back up. Kain estimates it might take less than $5 million in buying pressure to restore the peg — totally doable if enough people participate.
Once incentives are realigned and sUSD regains its peg, Synthetix will roll out major upgrades: retiring legacy systems, launching Perps v4 on Ethereum with faster trading and multi-collateral support, introducing snaxChain for high-speed synthetic markets, and minting 170 million SNX to fuel ecosystem growth through new liquidity and trading incentives.
The sUSD shake-up: Key risks crypto investors can’t ignore
The recent sUSD depeg is a stark reminder of the inherent risks that come with crypto-collateralized stablecoins. While stablecoins are designed to offer price stability, their reliance on external factors, such as market conditions and the underlying collateral, means that they are not immune to volatility.
Crypto-collateralized stablecoins like sUSD face heightened risk due to their reliance on volatile assets like SNX. Market sentiment, external events, and major protocol changes can quickly disrupt stability, making depegging more likely — especially in the fast-moving, ever-evolving world of DeFi.
Here are some of the critical risks that crypto investors should be aware of:
- Dependence on collateral value: The stability of sUSD is directly tied to the price of SNX. If SNX falls in value, sUSD becomes vulnerable to under-collateralization, threatening its peg and causing it to lose value.
- Protocol design risks: Changes in the protocol, such as the introduction of SIP-420, can have unintended consequences. Misalignments in incentives or poorly executed upgrades can disrupt the balance that keeps the system stable.
- Market sentiment: Stablecoins operate on trust, and if users lose confidence in a stablecoin’s ability to maintain its peg, its value can rapidly drop, even if the protocol is sound in design.
- Incentive misalignment: The removal of individual incentives, such as those seen with the 420 Pool, can weaken the protocol’s ability to keep the peg intact, as it reduces the motivation for users to stabilize the system.
- Lack of redundancy: Stablecoins should have robust fallback strategies to mitigate risks from single points of failure. A failure in one mechanism, like a protocol upgrade or design flaw, can quickly spiral into a full-blown crisis.
To protect themselves, users should diversify their stablecoin exposure, closely monitor protocol changes, and avoid over-reliance on crypto-collateralized assets like sUSD. Staying informed about governance updates and market sentiment is key, as sudden shifts can trigger depegging.
Users can also reduce risk by using stablecoins with stronger collateral backing or built-in redundancies and by regularly reviewing DeFi positions for signs of under-collateralization or systemic instability.
