$fxUSD to power LSDs and give Frax the edge! - Cryptovestor's Alpha Corner #11

Jan 16, 2024
$fxUSD to power LSDs and give Frax the edge! - Cryptovestor's Alpha Corner #11

If you have been following me, you know I have been a big fan of protocol f(x) and now with their imminent release of fxUSD we’re going to see some fireworks is the LSD space!

fxUSD, Protocol f(x)’s new stablecoin will be pegged to the dollar, will be backed by staked ETH and because of its split token design (f/x pairs), it will have the highest yield for a stablecoin which comes from native ETH staking. So why is it a big deal for Frax?

Let’s take a deep dive on why I feel fxUSD will benefit Frax the most and how it will do so in the coming months. “Show me the incentive, and Il show you the outcome” this quote from the late Charlie Munger says it all and applies to LSD’s and much of the defi space. You see LSDs are all in a race to increase their TVL and utility across the defi landscape. Their APY is their biggest selling feature besides their utility. One of the main strategies to attract TVL is by incentivizing Curve pools for their LSD. This can be very costly especially when the pools run deep. But what if there was a better way? What if Protocol f(x) could create demand for LSDs while backing an innovative stablecoin, that when staked, generates the highest yield for a stable asset in all of defi?  

Enter the f(x) pair, Protocol fx’s way of splitting two tokens into a volatile and nonvolatile version of the same token. Let use Frax’s LSD, sfrxETH, as an example to explain this further. In fxUSD’s design, sfrxETH would be split into two tokens fsfrxETH and xsfrxETH. The f token is peged to 1.00 and has 0 volatility to ETH while xsfrxETH absorbs all the volatility that fsfrxETH gave up and thus its price will fluctuate wildly as ETH price moves. Think of fxUSD as a basket of f tokens from the top tier LSDs each pegged to $1.00. Each LSD will then have its own rebalance pool where you can stake your f tokens. In the case of sfrxETH, you will stake your fsfrxETH tokens which are pegged to $1.00, in the Frax rebalance pool to earn ETH staking yield coming from Frax ETH validators.  

So, in essence you are staking a dollar pegged asset to earn the ETH staking yield! This by itself is a huge unlock for f(x) because you can now get exposure to ETH yield without ETH price exposure, but it goes a step further than that! While sfrxETH might be earning 5% to 6% natively, fsfrxETH could earn much higher than that because the f token stakers in the rebalance pool earn all the yield the x token holders gave up in exchange for leverage. So, let’s assume of all the sfrxETH in the f(x) system 70% is in the rebalance pool earning ETH staking yield and 30% is in xsfrxETH. The yield from the 30% goes to the rebalance pool amping up the gains in that pool by 50% to 80%. So now the Frax rebalance pool could earn a hypothetical 8% to 9% instead of 5%!

Keep in mind that these rebalance pools have FXN gauges and because f(x) is integrated with Convex, imagine a scenario where Frax uses its CVX voting power to vote for its own rebalance pool, sending FXN emissions to it! That 9% is now 12%

I think you might see where I’m going with this now. But I will take it a step further though. Imagine Frax decides to send a small incentive to its rebalance pool! Now the APY jumps from 12% to 14%!

So, to boil this all down, the f(x) platform will be the most efficient hub for LSDs to grow their TVL and incentivize liquidity. The reason for this is when an incentive is sent to an f(x) rebalance pool, it is 2x more effective than an incentive sent on Curve because you are dealing with just one token in the RP whereas on Curve, its split between the 2 tokens in the pool. So, every dollar spent on incentives in the rebalance pool goes further to increase its APY, causing their TVL to shoot up!

“Show me the incentive, and Il show you the outcome” Charlie Munger

AKA FrxETH TVL is going to skyrocket!

Cheers Anon!

Follow me @Cryptovestor77 on X for 24/7 Alpha on the Curve and Frax and now the f(x) Ecosystems.

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