We’re joined this week by Ouroboros Capital, who has become a fixture in the main Telegram chat as he conducted his research into the Frax protocol and wider ecosystem. His conviction in FXS is even giving Frax Bull a run for his FRAX (pun intended) and publishing an entire written thesis on it. Let’s dive into at his thought process and understand how he came to his conclusions:
Equity Investing Is More About People Than Numbers
The most important part of a startup is its founder because they set the tone at work and determine the project's values, judgment, and ethics. The first place of a project any investor should investigate is its founder. Are they built for war or only peacetime? What is their conviction? How do they carry themselves on a day to day basis?
These pivotal questions that come up in researching is what Ouroboros learned while working at an investment bank for 7 years. Start with the founder, validate his conviction, the rest should fall in line.
When he discovered Sam Kazemian in 2021, he was immediately impressed. Sam was always online, happy to talk to anyone in chat about the smallest details about Frax. He was never condescending or rude, simply explained his vision and kept building higher. Over time he saw that Kazemian was not just determined, but obsessed with his vision to build a decentralized stablecoin and built the proper team around him to accomplish this.
And so over time as Frax grew, adding Frax v2, AMOs, frxETH, FPI, etc., Ouroboros’ conviction also grew and Frax was validated in his mind as a protocol with long-term growth and revenue potential. Proof of this is shown with his prolific community involvement and writing as of late from proposing “FIP-256 Optimizing FIP-77’s TWAMM Parameters” to his investment report for FXS.
The Report
The core question asked in the report is what’s a fair price for FXS? Frax has a bunch of different products and primitives including stablecoins, a flatcoin, a lending market, a DEX, and a bridge all rolled up into one ecosystem. Fraxchain, frxBTC, and frxETH v2 are all on the horizon as well. With this in mind, Ouroboros set his task out to value each product and roll it all up into one valuation.
The first place to start is with Sam Kazemian’s statement that Frax is earning $20m annualized currently. A 20x multiple on revenues is approximately where the current market cap of FXS is priced right now. But is this really a good metric? We’re in the depths of a bear market here and external rate transmission is not entirely possible. Once the regulatory landscape clears and prices recover across DeFi, where will revenues be? Potentially 2-4x higher than where they are now without significant changes in growth.
Prices give a good indication of where valuation is today, but Ouroboros’ thought process is that most institutional investors don’t understand the complex dynamics of the entire Frax ecosystem just yet. If each business line is valued independently, then we can come to a more reasonable conservative number.
His numbers from the report are republished above, and Flywheel has \ to his bull case based on his statements and interviews. Taking a conservative approach, all of Frax’s individual parts should add up to a 5-600m valuation, which would translate to $8-9 per FXS. In the best case, valuations skyrocket and land closer to 5-6bn.
What’s interesting about his analysis is that FRAX the dollar-pegged stablecoin will always retain the highest valuation. Other companies like Tether are reportedly earning more than Blackrock right now; there’s no reason Frax can’t compete or eclipse the embattled stablecoin issuer in the future.
frxETH has lots of growth potential because of v2’s upcoming release. It’s structure as a pooled lending market for validators could radically change the staking market and challenge both Lido and Rocketpool for top market share.
Fraxchain is a big what if. Other L2s like Arbitrum and Optimism are priced around $700m, with less used networks like Boba priced only at $100mm. It’s an extremely open question how much Fraxchain could have an impact and even when it will be released.
Fraxlend is also a key part of Frax’s revenue, as it will be expected to grow as the suite of Frax products gains market share.
Key Thoughts
In all, there is massive promise for Frax in Ouroboros’ opinion. According to him, the market is deeply undervaluing Frax and he believes the narrative surrounding it will change in the next year. As he writes:
We see an asymmetric risk/reward in owning FXS over the next 6 months and even in the longer term as we’ve said that it is certainly one of our highest conviction ideas in the space at the moment.
We’ve detailed many short to medium term catalysts and developments that inclines us to own FXS but also we are also comfortable with ownership of FXS longer term given the quality of the core team and its history on executing and delivering on the growth of the protocol.
Frax has come a long way: FRAX (surviving the post LUNA crash and witnessing death of other algorithmic stablecoins) → AMOs (an innovative solution to peg and value accrual) → frxETH → FraxFerry (Frax’s answer to bridge exploits and CCTP) → Frax v3 + Fraxchain + more to come (frxBTC, frxBonds, etc.).
Markets are cyclical in nature and powered by the engine of narratives pushing into the minds of prospective investors who’s collective intellectual mindprint determines price. Frax has made a name for itself skating to where the puck is going over the years which has lead them build a suite of primitives that serve to grow and proliferate the ecosystem far and wide. What it ultimately comes down to is how Frax can communicate its value in a digestible manner people can understand.
In DeFi Dave’s own words, Frax is a “Fractal of DeFi,” a microcosm of primitives brought together to bring safe yield and capital efficiency to participants in its ecosystem.
~~~~ This article is not financial or tax advice. This content is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This article is not tax advice. Talk to your accountant. Do your own research.
