We’ve all heard about what money does a million times. A store of wealth, enables payments, measures value. But what’s arguably more important is how widespread its use is and how people eschew maximizing yield for maximal utility.
A dollar is a dollar, but that money has a cost. Every second that you hold an asset, it has a natural interest rate, the carry. For example, when you hold cash, its a non-productive asset. You don’t get any yield. The cash bills just slowly lose value over time to inflation.
But that’s ok. Everyone loves paper money.
The bodega down the street only takes cash. You tip your bartender for a good drink. The plumber wants to be paid right away for the drain clog. Cash is the grease that helps the economy run.
You don’t have to maximize your yields for everyday events. No one is going to look down on you because you didn’t swap your last $1000 of your paycheck to 5% yielding bonds this month. Cash just works because its the lifeblood of the economy.
The relationship between cash and bonds is between short term utility and long term wealth preservation. Earning a yield is for those who have time to wait. Others may just want a decent haircut.
The utility of cash is what gives the dollar a monetary premium. Real world demand reduces the available amount of money that can flow into bonds, keeping interest rates at healthy levels.
Monetary premium is the primary determinant of success for any payment currency. The more people that use the asset for daily transactions and hold it without yield, the more useful it is.
Reviewing what we wrote back in February after Sam Kazemian’s speech on stablecoin maximalism at ETH Denver:
The success of a stablecoin can be measured by its monetary premium which is the demand for an issuer’s stablecoin to be held purely for its usefulness without expectation of any interest rate, payment of incentives, or other utility from the issuer.
When we judge the success of assets like FRAX, frxETH and FPI, we do so through a lens of its monetary premium. If we can increase it, the entire protocol benefits.
Yesterday, we released a landmark episode with Sam Kazemian, Founder of Frax Finance. During the course of the interview, Sam brought up that Fraxchain would most likely be launched by the end of the year.
Sam Kazemian said that Fraxchain will not just be another L1/L2 that is a copy of Ethereum with no users and poor development. It’s going to be a value additive core part of the Frax ecosystem that enables future growth and adoption.
Here’s what we know so far about Fraxchain
Fraxchain will be a hybrid-rollup, an EVM compatible L2. Hybrid rollups combine optimistic rollup architecture with zero-knowledge proofs, resulting in transcendent scalability and fast finality, as well as enhanced security. This will provide developers with an easy-to-code environment and users with the finality, security, and decentralization that ZK Rollups can offer.
Frax is most likely choosing a hybrid rollup design for its faster transaction finality, enhanced security through validity proofs that ensure the correctness of off-chain transactions and prevent operators from executing invalid state transitions, increased throughput, capital efficiency, and decentralization capabilities.
All Frax assets will be supported on Fraxchain natively and Fraxferry will be integrated at day 0 to ensure liquidity can be transferred seamlessly.
frxETH’s Monetary Premium
One huge piece of info that Sam Kazemian leaked was that frxETH will be used to pay for gas on Fraxchain. Users will have to swap their native assets on-chain or bridge over frxETH to execute transactions.
Assuming FraxChain gains significant usage and market share, it could result in millions of dollars in extra revenue for the protocol. Arbitrum is by far the most successful L2 to date and, according to DeFiLlama, the network has generated $34m in fees and $8.2m in revenue. And we are still in the early innings for L2 growth. At a more mature state, this could turn into hundreds of millions or billions of dollars in revenue annually.
Frax should definitely try to take a chunk of this market for itself. As frxETH supply grows into the millions, the protocol will be uniquely situated to provide services by means of FraxChain for its LSD holders. All services provided on ETH could be deployed on FraxChain, lowering borrowing costs, while increasing liquidity and access for its users.
One of the biggest value adds Fraxchain will provide is to the monetary premium of frxETH.
Simply put, every frxETH that onboards to Fraxchain reduces the available supply eligible to stake as sfrxETH, increasing the overall yield. This would be the true test of whether frxETH can truly become a form of payment, that holders would forsake yields to pay for transaction execution.
Right now frxETH’s monetary premium is purely driven for its demand as liquidity on other networks. Using FraxFerry, frxETH is bridged to a multitude of other networks where it can be provided as LP.
Since being added to FraxFerry, the monetary premium or, rather, the amount of frxETH held outside of the sfrxETH vault and the Curve LP, has hovered around the 9% mark. This provides an inherent boost for sfrxETH, driving up its APR.
Using Arbitrum as a comparison, if Fraxchain is able to achieve similar size, then most likely 300-500,000 ETH would reside on the protocol’s L2, which is 1.5x more frxETH than the current supply right now. All of that ETH would not earn rewards and contribute to sfrxETH yield, to the effect of 15-25k ETH a year in rewards. The subsequent growth potential for frxETH is enormous as a result.