It's been a long and arduous path, but Frax Finance has finally achieved 100% collateralization. At 3am EST on March 14, 2024 the Frax balance sheet finally broke through to full backing. Travis Moore, Co-Founder of Frax, announced the milestone in the public Telegram group to great fanfare.
It's been 13 months since Hameed first posted [FIP - 188] Increase CR to 100%. At the time the collateral gap was 8%, or around $70m. He wrote:
The small algorithmic backing of FRAX creates the perception that FRAX is the less safe option for users to hold, especially after UST’s failure tainted the algorithmic stablecoin concept (whether fairly or unfairly). There is very little benefit in maintaining the current CR of 92%.
With the passing of FIP-188, the protocol directed all all revenues towards closing the CR gap, which by design, ended almost all yield distributed to veFXS lockers.
Unsurprisingly, the market stopped locking new veFXS and its supply dwindled 15% over the year. It was only with the recent bull market, Fraxtal airdrop, and now CR 100% that veFXS has started to be locked again. Currently, veFXS supply is sitting at its highest in 18 months and its on course to break its ATH of 102m.
The balance sheet now shows that Frax is positioned extremely health for its coming growth cycle. Overall liabilities match protocol assets, with the majority of Frax's CR gains coming from the increase in its volatile and FXS/volatile assets.
So what comes now? It's unclear whether CR100 is the stopping point. As the majority of the CR gap was closed by volatile assets, Frax will either need to divest of them or continue to collateralize itself to provide a buffer for market volatility. Frax has close to $100m in volatile assets and if they decline, the CR gap would open again. It might be healthy for the protocol to continue to bolster its balance sheet up to 102-105% before turning on veFXS yield again.
Once yield is routed to veFXS, it will be able to direct roughly $50-80m worth of incentives towards lockers. At current price levels this would translate to double digit yields. 45m FXS is locked as veFXS, with $80m for yields, this would equate to a 20% yield. At $50m the APR would be 12%.
FXS has been languishing for several months now while other assets like ETH and BTC have doubled. With yield incentives returning for veFXS, this might be the imputes needed to spur prices higher.
In the meantime, achieving CR100 brings a sigh of relief for the Frax community, it has been one of the most discussed and debated topics within the public Telegram group and now the narrative can move beyond with its closure.
