Unpacking Frax's Product Roadmap for Q1-2 2024

Jan 4, 2024

Unpacking Frax's Product Roadmap for Q1-2 2024

Frax is primed to be one of the biggest winners of 2024.

Here are the top 7 unbelievable products that are about to change the entire DeFi landscape forever.

Fraxchain - January

An Infinite design surface for Frax to expand on. Fraxchain is an entirely novel generalizable L2 with native support for all Frax assets.

With novel reward mechanisms, points, and other incentives, Fraxchain will transform Frax from top to bottom, allowing the protocol to onboard and integrate any ambitious team or protocol.

Fraxchain will support all Frax issued assets and existing products like Fraxlend, Fraxswap, and veFXS staking.

For more information on Fraxchain, lets review what we wrote about it after a Spaces with Sam Kazemian:

One of its most notable features is the introduction of blockspace incentives, a new concept where users and developers earn locked veFXS for building on and utilizing the chain, thereby creating a new market dynamic in block space utilization.

For developers and users, the network will introduce an incentive model where deploying smart contracts and using gas leads to earning locked veFXS tokens and 'fraxtal points'. This model is dynamic, allowing for real-time accumulation of rewards based on transaction types. This would mean that products and protocols that drive usage on Fraxchain will be rewarded with locked veFXS. Sam K said that its possible in this system to potentially earn more rewards than what is being paid for fees, as the locking mechanism would prevent short term sybil attacks.

Additionally there will be a "Chainlock" reward system that Flywheel correspondent Cryptovestor detailed this week.

FXB's - January

While interest rates have cooled recently and the buzz around RWA's has quieted, Frax will be the first DeFi protocol to provide an on-chain yield curve with FXB's. When launched, we will have access to 3 different interest rates of varying maturities.

While all the maturities are short term at launch, the team has hinted at the possibility of adding longer duration FXB's later on if there is demand.

Check out what we wrote about FXB's:

FraxBonds are “decentralized utility tokens that denominate a debt in FRAX stablecoins at a certain timestamp” according to Sam K. FRAX holders will be able to buy discounted FRAX at a later date in the form of Fraxbonds or FXBs.

So for example, you could buy $1 worth of FRAX 2 years from now for $.90. When you swap the FRAX into the bond, the protocol now owns that collateral can do what it needs to ensure sufficient income is earned to pay the debt in two years.

As Sam Kazemian said “FXBs don’t entitle the holder to any asset offchain and don’t give a legal right to redeem for fiat or anything like that therefore they’re just a utility token within the Frax Protocol. They only guarantee that each FXB converts to 1 FRAX stablecoin on maturity. That’s all.”

FXBs automatically convert into FRAX at designated maturity dates annually on January 1st. Frax will offer 1, 2, 3, or 4-year terms for FXBs. This will allow Frax to bring the yield curve on-chain (at least for 4 years heh).

As of right now, the FXB contracts are live and the Curve pool contracts are deployed. So we should see their release any day now. Expect a quiet message in the Telegram group to announce them.

Borrow AMM (BAMM) - Q1

BAMM is a brand new lending system that allows users to post collateral and then borrow assets from an existing AMM. It's fully trustless, has no dependencies or oracles, and will open up billions of dollars of liquidity for existing LPs.

Sam Kazemian has said that BAMM most likely will be launched with or shortly after Fraxchain. It will have native integration into the new L2 and be a core part of lending on the network.

BAMM is the biggest "what-if" for the protocol in 2024. We have seen the launch of many other protocol L2s recently like Blast, Manta, and others, but BAMM is an entirely new protocol with no competitors. We think BAMM could potentially have the largest impact on FRAX liquidity and usage for this reason.

frxETH v2 ETH Validator Lending Market - Q1/Q2

Since its launch in October 2021, frxETH has quietly grown to over 300k supply. It's market cap has eclipsed FRAX and FXS and is now the largest user owned asset in the Frax ecosystem.

In 2024, Frax will release frxETH v2, which will radically transform the LSD into a dynamic lending market for validators. Currently all the nodes hosting frxETH are run by the core team. Long term is a net negative for security. In order to remove this dependency, frxETH creates a Fraxlend style lending market for ETH. Users will deposit ETH into a lending contract, and then validators who want to use the asset in their validators will be able to borrow it.

The frxETH v2 system introduces a new model for ETH lending and staking, targeted at node operators and validators.

In this system, node operators can deposit ETH as collateral in a smart contract and borrow ETH from a lending market to run a validator. This borrowing arrangement is similar to Aave, where as long as the node operator pays the required interest rate, the frxETH loan remains open. The dynamic interest rate paid by node operators is connected to the existing frxETH v1 system, with the sfrxETH yield reflecting this rate.

frxETH v2 distinguishes itself by creating a unique lending market where validators can borrow ETH at a market-set dynamic rate and stake it in their own systems. If a validator's ETH is slashed or falls below liquidation levels, Frax has the ability to remove the validator and return the ETH to the smart contract.

The innovative aspect of frxETH v2 lies in its dynamic interest rates for borrowing ETH, which contrasts with the fixed rate models used by other LSDs.

These dynamic rates are driven by market forces rather than being fixed against a reward rate, offering benefits to validators who maximize their returns.

Validators can potentially increase their earnings by engaging in modular services or restaking through Eigenlayer. Eigenlayer allows validators to opt-in to additional restaking services with extra slashing conditions, in return for a new yield stream.

This system incentivizes validators to pay higher interest rates to maximize revenues, potentially leading to significant demand for borrowing ETH. The expected outcome is that validators could earn substantial additional yields, making running a validator one of the most profitable infrastructure services.

In this scenario, sfrxETH interest rates might rise significantly, allowing validators to arbitrage between borrow interest rates and their restaking yields. If the frxETH interest rates remain as they are today, validators could borrow ETH at around 4-5%, earn an additional 10-20% from supporting various services, and net a total yield of 12-13% on their operations.

Additionally, frxETH incorporates mechanisms to handle underperforming validators through liquidation, ensuring the return of ETH to the system.

Arbitrum STIP - Ongoing

As of right now, the Arbitrum STIP program is running in full force and Frax is distributing ARB rewards. We previously wrote about Frax's plans for STIP.

The Arbitrum STIP rewards will end in the end of February, but we might see the Arbitrum DAO vote to renew or extend the liquidity rewards into the next quarter.

We wrote yesterday about the best yields on Arbitrum for Frax.

frxGov - Ongoing

Frax's fully onchain governance system will see its full deployment in the first two quarters of 2024.

Frax Governance 2.0, known as frxGov, will see its full deployment in the first two quarters of 2024 and enhance decentralization by transitioning governance decisions to be fully on-chain.

Initially, Frax utilized a multi-signature system for transaction approvals, which, while secure, posed centralization risks and vulnerabilities to external threats. This system was a temporary measure to ensure protocol safety in its early stages, but it was always intended to evolve towards greater decentralization.

The introduction of frxGov brings a dual-governor contract system: Governor Alpha (GovAlpha) and Governor Omega (GovOmega). GovAlpha, which requires a high quorum, holds the primary control, whereas GovOmega allows for quicker decisions with a lower quorum requirement.

This structure aims to balance rapid action with secure, decentralized governance.

The Frax Core Team, including publicly known figures, manages substantial protocol assets via a multisig system. FrxGov represents a strategic shift towards empowering veFXS holders, ensuring robust governance fully embedded in the blockchain.

PYUSD integration/bribing - Q1

Last but not least, Frax is leading the charge into 2024 with its close integration and relationship with PYUSD, PayPal's recently launched stablecoin. We think that their new crypto dollar could be the biggest growth story of 2024 and Frax will be key to unlocking its liquidity.

While we don't know much so far, we've heard rumblings that PayPal will somehow use the interest earned on its collateral to bribe PYUSD pools in Curve. This would be a major step as the first stablecoin issuer to engage in this type of on-chain reward distribution. And with the FRAX-PYUSD base pool, we might see Frax as the core pair for LPs in 2024.

We love what Cryptovestor wrote about the upcoming PYUSD pair

In my view, it’s clear that something big is brewing behind the scenes with PayPal and it will become clearer as more signs emerge. Frax is destined to become the on-chain version of Tether or Circle!

Say no more fam! We love PYUSD.