Summary:
Frax finance is a fractional-algorithmic stablecoin protocol. FRAX price performance from the inception has proved its stability to stick to the peg in comparison to other stablecoins. Frax has already gone through the expansion and contraction period with the respective swings in the ROI of the incentivized distribution programs (“yield farming”). However, it successfully resisted to the exiting supply pressure even having the Uniswap as the main trading venue. It was due to the sufficient share of users having locked their LP tokens for long-term period and contribute to the protocol on the daily basis.
Developer team and the community work collaboratively on the organic growth of the protocol. There are several upcoming positive triggers including technical improvements of PID controller and vAMM as well as listing on Sushiswap with general trading routing for FRAX-FXS amd FRAX-WETH pairs. FRAX-USDC will be listed on CRV finance module.
Abstract:
We propose to add pool FRAX-3pool and include it in the Gauge.
Background
Frax is the first fractional-algorithmic stablecoin protocol implemented on Ethereum which aims to provide a highly scalable, decentralized, algorithmic currency. Frax protocol is based on 2 tokens: FRAX as a currency and FXS as a seigniorage token. FRAX is backed by USDC in collateral in proportion to Collateral Ratio (CR). When the price of FRAX is above $1 the CR decreases and when FRAX is below $1 vice versa which lead to agnostic nature of collaterization. The main principle is that FRAX is always mintable or redeemable for $1 equivalent. Thus, in the fractional phase the difference between 100% and CR is provided in seigniorage token FXS.
Stability of FRAX
From the inception FRAX has been stick to the peg of $1 trading within the normal range. Figure 1 illustrates the USD price for the last 30 days for stablecoins from different groups: fiat-backed like BUSD, GUSD etc.; algorithmic with overcollaterization like sUSD, DAI; elastic like AMPL and algoseignorage like BAC, ESD and FRAX. The noticeable divergence is present for BAC and ESD – fully algoseignorage without any collateral. Also, elastic AMPL converges to the peg with the high volatility.
Figure 1. Last 30 days stablecoins performance vs. USD.
Figure 2 illustrates the performance without 3 aforementioned unstable ones. As we see FRAX goes in line with other stablecoins demonstrating alike volatility.
Figure 2. Last 30 days stablecoins performance vs. USD without AMPL, ESD, BAC – elastic and fully algorithmic stablecoins.
If we exclude sUSD which has the big spike at the beginning of 2021, we will get the performance illustrated on Figure 3. Figure 3 shows the dynamics of the remaining stablecoins and as we see FRAX does not stand out from others.
Figure 3. Last 30 days stablecoins performance vs. USD without AMPL, ESD, BAC – elastic and fully algorithmic stablecoins. sUSD is excluded as an outlier.
For this period FRAX has already gone through the expansion phase while the CR was steadily decreasing and reached 82% as well as reverted back to 88% during the high pressure on the peg. For the clear view we can also look at the isolated performance of FRAX:
Figure 3a. Last 30 days FRAX performance vs. USD.
The mechanics of FRAX stability through algorithmic fractional collaterization proves its efficiency while staying more capital efficient rather than its overcollaterized peers.
It is worth to note that while FRAX in line with the industry practices introduced seigniorage token distribution (“yield farming”), after the crucial drop in the APY from 100%+ to 20% the liquidity in the incentivized LP decreased without the same amplitude.
The largest FRAX-USDC Uniswap LP suffered only 28% outflow from the ATH (Figure 5).
Figure 5. Average, minimum and maximum daily liquidity in the FRAX-USDC Uniswap LP.
The structure of the staked period also makes us sure that the project is on the solid ground: 25% of the FRAX-USDC LP are under the locked and 7% under the long-term lock for 2+ years as shown on Figure 6 and Figure 7.
Figure 6. FRAX-USDC LP Locked Distribution of time to end of Lock-up in months.
Figure 7. FRAX-USDC LP Cumulative Distribution of time to end of Lock-up in months.
This LP is the most risk-averse option to enter the protocol, so when we look on the protocol native LP of FRAX-FXS we see the increase in engagement of the liquidity providers on Figure 8 and 9: 66% of UNI LP are staked and 46% under the long-term staking. These metrics allow to conclude that ahead of the speculative capital injected in the protocol pursuing the APY there is significant share of users investing in the protocol on the long-term basis.
Figure 8. FXS-FRAX LP Locked Distribution of time to end of Lock-up in months.
Figure 9. FXS-FRAX LP Cumulative Distribution of time to end of Lock-up in months.
Community resistance to the contraction phase also can be seen on the spectrum of inflow-outflow dynamics on staking contract for FRAX-USDC Uniswap LP: as illustrated on Figure 10 after the significant outflow on Jan, 23rd, 26th and 27th the pace slowed down and converged to net zero.
Figure 10. FRAX-USDC LP Staking Contract inflows-outflows.
In the light of the aforementioned we suppose that FRAX has acquired long-term supporters, has correctly incentivized arbitrageurs to maintain the peg and has got the social consensus multiplying the USD denominated collateral with the ratio above 1 (1/CR).
Business
The protocol is led by the seasoned team with the experience in the space. The key leaders have public profiles, actively manage the community and transparently respond to the inquiries as well as disclose the roadmap.
After the upcoming improvements the protocol is to complete the decentralization procedure. Thus, it is not another degen protocol. From the Curve benefits perspective, figure 11 and 12 shows the daily trading volume and respective LP fees on Uniswap for FRAX-USDC pair. Although the trading APY is not outstanding the fee revenue does not fade and can add value to the Curve and CRV.
Figure 11. FRAX-USDC Uniswap Daily Trading Volume in USD.
Figure 12. FRAX-USDC Uniswap Daily Trading Fees in USD.
Shown fees were calculated for the Uniswap fee schedule, so the Figure 13 shows the would-be fees if they went though Curve. Total estimated fees for LPs and veCRV holders would have been 104k USD from the Dec, 21st to date.
Figure 13. FRAX-USDC Estimated Daily Trading Fees in USD with Curve fee schedule.
In the light of 2.7m total fees generated on Curve for the same period these fees would have increased that figure by 3.7% as per the cumulative fees on the Figure 14.
Figure 14 (Left). FRAX-USDC Cumulative Estimated Daily Trading Fees in USD with Curve fee schedule.
Figure 14 (Right). FRAX-USDC LP Actual Cumulative Uniswap Daily Trading Fees in USD.
There are several upcoming events and improvements that would make another boost to the organic growth of the protocol and acquire new supporters. One of them is lising on Sushiswap and making these pairs eligible for Sushi distribution and setting it as a routing currency. Also, the technical improvements of PID controller and introduction of vAMM will advance the peg stabilization mechanics to create more dynamic so more efficient incentive structure. Among these advancements the Curve listing will fit and narrow peg dynamics, streamlining the positive feedback cycle of higher stability – higher fees – higher inflows – higher stability. We consider FRAX as the best next-to-be listed asset on Curve protocol and Gauge.
What FRAX community would contribute to Curve from their side
- The FRAX will allocate 16,430 FXS per day to the FRAX-3Pool. Current market value of $75,000 incentives per day.
- FRAX-USDC liquidity as a mixture of the 3Pool will be migrated from Uniswap to Curve. The developing team will write the migration script for this on their end. This is currently the #8 largest pool on Uniswap with about $93m of liquidity.
- Under the migration procedure the staked liquidity will be kept locked for the same period as the old FRAX-USDC pool tokens. As we mentioned before 25% of the FRAX-USDC LP are under the locked and 7% of liquidity are under the long-term lock for 2+ years as shown on Figure 6 and Figure 7. Long-term commitment of the FRAX community is in line with the Curve community approach to the long-term support of the project.
- The FRAX founding team will actively promote this pool within the FRAX community to make it the primary trade venue for FRAX.
In light of the absence of IL risk the anticipated synergy of the FRAX-3Pool may increase the total liquidity and trading volume manyfold.
To be confirmed by the Founder of the project Sam Kazemian.
Motivation:
According to the aforementioned statements regarding stability and organic volume that can securely contribute to the revenue of the Curve LPs and veCRV holders.
Specification:
To be added after the Curve team review.
Website: https://frax.finance/
Dashboard: https://app.frax.finance/
Docs: https://docs.frax.finance/
Staking and Lock-up data: Frax Finance
Contract address: 0x853d955aCEf822Db058eb8505911ED77F175b99e
Github: GitHub - FraxFinance/frax-solidity: Solidity implementation of the Frax Protocol
For:
1.FRAX performs well and maintain the peg to $1 within the affordable range of volatility. This was accomplished even due to the trading on Uniswap which is not the right place for stablecoins trading according to
Uniswap is the reason why algo stablecoins can’t maintain the peg and how to fix it | by SaÐertøøth | Medium . FRAX-3Pool LP in Curve will make the FRAX peg even more stable.
2.FRAX has active community deeply engaged in the protocol which has been staying either through the expansion period and high YF APYs or the contraction period. The attitude and user behaviour is illustrated by lock-ups and liquidity dynamics.
3.FRAX is evolving and the developing team is working on business development as well as technical development. The team has public profiles. The upcoming integrations would bring more value to the system and generate more interest and volume in FRAX conversion transactions.
4.FRAX is more transparent and secure than some of the already listed stablecoins on Curve. FRAX has the verifiable collateral and transparent fundaments which make it differ from, for instance, UST. UST is backed by the Terra blockchain consensus and is issued by burning LUNA native token, which is subject to vulnerabilities and volatility.
Against:
Being risk-aversed in the stablecoins trading business is beneficial, so the algorithmic stablecoins impose market risks on the LPs and reputational risks on the protocol itself. However, it is applicable to AMPL, BAC and ESD which has no backing and collateral while FRAX is fractionally algorithmic and at the moment 86.25% collaterized by USDC so the money multiple is quiet low.
Poll:
Post a link to your proposal if it’s already been created
Outlook
Evolution of macroeconomic thought has ended up with the view that social consensus of currency is worth more than the collateral it is backed by and overcollaterization/full-collaterization is excessive and hinders the development of the system. This resulted in the flexibility of macroeconomic policy with reserve funds to stabilize during the turbulence and inject enough supply for the growth during the expansion. We see that crypto native currencies can adopt the best approaches from the tradFi and combine it with the possibility to be the beneficiaries of the currency adoption through the seignorage tokens. FRAX may be on the front lines of this innovation.
Materials
Dune Analytics Lock-up Dashboard: Dune Analytics
Figure 15. Average, minimum and maximum daily liquidity in the FXS-FRAX Uniswap LP.
Figure 16. Average, minimum and maximum daily liquidity in the FRAX-WETH Uniswap LP.
Proposal is prepared by Ignat Shapkin from Warp Capital investment fund https://warp.is/
