Pressure Makes Diamonds
Back in early May 2022, we saw one of the largest unwindings in the history of crypto. We watched Luna/UST, a $20 billion protocol, abysmally disintegrate within days, leaving extensive collateral damage across the entire industry.
Ever since then, a disastrous mix of company insolvencies, protocol failures, industry-wide hacks, macro recession fears, and a deeply rooted negative algorithmic stablecoin narrative has punished $FXS. Throughout the billions of forced liquidations and heightened volatility, FRAX displayed its strength, never once de-pegging from $1, proving to everyone that an algo-stable can work if done correctly.
Despite all this, a lot has been going on behind the scenes. FRAX is pushing across the entire ecosystem on all fronts, bringing many new exciting, and innovative features to market, preparing and positioning themselves to benefit greatly when the market turns around.
FRAX Basepool
The FRAX base pool will be made up of FRAX/USDC. The idea here is for other protocols to come in and create metapools. Metapools allow for one token to seemingly trade with another underlying base pool. For example, FRAXBP/alUSD is a metapool meaning users can seamlessly trade alUSD with FRAX and USDC. There are currently 8 other live metapools.
FRAXBP is the only other base pool after 3CRV that you can pair with on Curve (at the moment). This will ultimately bring tons of organic demand for FRAX, as more FRAX will have to be minted to keep up with pool ratios.
If protocols decide to pair with FRAXBP, they’ll earn the fees and bribes FRAX distributes. This means protocols don’t need to bribe themselves if they decide to pair with FRAXBP. The more TVL they drive to their pair, the more fees and bribes they’ll see come back to them.
FraxBP has the potential to have some of the best yields in DeFi. Sam mentioned “Since we won't be subsidizing it at a fixed rate or some kind of unsustainable rate, we will be growing the FRAXBP ecosystem slowly and building it up as more projects pair with it. The APR will be the market set rate of how many people/projects want to LP it and should stabilize at what LPs think is the right risk-adjusted yield. But just like FRAX3CRV and our own gauges, I expect the yield to be some of the best in DeFi.”
Even with Curve launching it’s own stablecoin, crvUSD, in the near future, there’s no need to worry about competition. The idea Frax has instilled in its ethics is to create more positive synergy. In this case, between Curve and Frax. A potential FRAXBP/crvUSD could easily be planned. A win-win for both protocols.
FraxSwap
Fraxswap is the first constant product AMM with an embedded TWAMM for executing large trades over extended periods of time trustlessly. With the embedded TWAMM feature, traders, funds, institutions, and even retail investors can initiate a trade to execute over time, from as little as 1 hour up to 3 years.
FraxSwap makes operations much smoother at the protocol level. It gives protocols the opportunity to
Accumulate treasury assets (such as stablecoins) over time by slowly selling governance tokens.
The ability to buy back governance tokens slowly over time with DAO revenues & reserves.
The ability to acquire other protocol's governance tokens slowly over time with the DAO's own governance tokens (similar to a corporate acquisition/merger but in a permissionless manner).
Defending RFV for treasury-based DAOs like Olympus where the backing of the governance token is socially guaranteed.
The motivation behind creating FraxSwap was so that Frax could conduct monetary policy and forward guidance, just like the federal reserve does.
Quoted “The general motivation was to create this (FraxSwap) so FRAX can conduct monetary policy on it and forward guidance like the Fed. So FXS can be bought back with AMO profits over a long period of time. FRAX can be bought back to increase the CR. All these things are done via smooth TWAMMs over the desired period of time. TWAMMs can also be used to slowly rebalance large amounts of collateral the protocol controls like going from FRAX-WBTC to FRAX-WETH slowly as the WBTC is sold for FRAX, then FRAX sold for WETH through two TWAMMs”
The beauty of this is that the process is all automated and transparent. Sam mentioned “Only Frax has the technology to do this, rather than need to be done off-chain with centralized market makers like LFG had to do. We only conduct market operations and every protocol function on-chain, and Fraxswap is the answer for all of them.”
FraxLend
Fraxlend is a lending platform that allows anyone to create a market between a pair of ERC-20 tokens. Any token part of a Chainlink data feed (deep liquidity required) can be lent to borrowers or used as collateral. Each pair is an isolated, permission-less market that allows anyone to create and participate in lending and borrowing activities.
With the recent Rari/Fuse exploit occurring, it left a bad taste in protocols and users’ mouths, due to the sheer size of the hack and now apprehensiveness in permissionless lending/borrowing.
There is an ongoing feud across Twitter about the Fei/Fuse reimbursement proposal which I won’t go in-depth on right now. Nonetheless, Frax was left in the dark, totaling a $13m loss from the hack. From being one of their biggest and earliest supporters, the reimbursement offer on the table is next to nothing.
Sam noted “With Fraxlend coming…that belongs to the protocol itself, these lending systems will actually work the way we intend. Fraxlend will have a 0 to 1 moment for loan origination on-chain like Uniswap did for trading on-chain.”
With FraxLend, protocols can avoid doing normal treasury swaps and have the loans executed strictly through smart contracts, with fixed/variable rates, all done autonomously. This removes the need to micromanage large p2p swaps, and allows the smart contract to do the work. If all goes well…Frax can become a major and reliable lender.
Now protocols can easily integrate FRAX into their protocol with the new ability to take out a loan on credit from Fraxlend. If they need quick and reliable liquidity, Frax is at the doorstep.
FraxLend can also be deployed on other chains. However, the main focus, for now, is ETH Mainnet but it’s good to recognize the ability to scale is there.
frxETH
Liquid ETH staking has become super popular over the past year or so. There’s been controversy about Lido having a monopoly over liquid ETH staking, and it’s apparent that many new entrants are rushing into the liquid staking space to grab market share before the Merge on September 15th.
According to DefiLlama, there are 34 different liquid staking options with Lido leading the way, and RocketPool in 2nd based on TVL. Sam said they actually are not trying to be competitive when it comes to frxETH. Quoted “We're not trying to be competitive or zero-sum here. We're very much for creating positive value. For example, we could even partly back frxETH with rETH collateral as well. No reason why we have to take rETH market share away from them. It's not in our ethos.”
Currently, FRAX doesn’t hold much ETH. However, it’s more than likely that the ETH available will be converted to frxETH to partially back FRAX’s peg.
The pool for frxETH is currently being tested on Curve. It is way closer than we expected, potentially a few weeks out. I would be interested to see if they can push it before the merge on September 15th. Nonetheless, the Fraxamalists are excited
A Bridge…but not a Bridge
In light of the recent $190m Nomad Bridge Hack, Sam brought up the idea of a FRAX redemption system.
The idea is to make a redemption system on mainnet. This means “canFRAX” can be redeemed on mainnet once every 24 hours. This allows everyone to use canFRAX as normal FRAX across any chain but reduces any worry about a de-peg situation because it can always be redeemed on mainnet. This is called “Fraxit”.
Quoted “We're not going to build a bridge and get hacked like most. We're going to propose building the most secure, slow, but ironclad redemption system for a stablecoin back to ETH L1. they'll be free to use whatever bridge or other protocol they want through their own swaps or their own risks which the protocol will itself never touch so it can stay safe. We will keep it high security and slow redemptions to ETH L1. Users can take their own individual risks for fast bridging or other situations.”
Final Thoughts
I think Frax has an amazing few months ahead. These items above are all things we can expect to see soon, and I’m sure the team will have an entire slew of new ideas once these finish up. I think people are underestimating Frax at the moment but I’m interested to see how everything plays out in terms of demand and success.
At the time of writing
FXS - $6.45
MCAP - $462m
FDV - $644m
FRAX
MCAP - 1.44 Billion
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