Prisma Finance: The Ultimate Frax Farming Guide

Samuel McCulloch
Samuel McCulloch
Nov 6, 2023
Prisma Finance: The Ultimate Frax Farming Guide

Action Items

What is Prisma Finance?

Prisma Finance is a fork of Liquity enabling minting of MKUSD, a decentralized, overcollateralized stablecoin. By depositing LSD's into a trove, MKUSD can be minted as a debt position.

What sets Prisma apart is their full integration into the Curve Wars and addition to Convex for ve-liquid staking. Prisma received investment from both Curve, Convex and Frax, predicated on an intention to use them to build a robust liquidity layer for MKUSD. Check out our strategies below to see how you can leverage all three protocols to maximize Prisma for Frax assets

How is Prisma different from Liquity?

Liquity was a revolutionary product, both in terms of decentralization and effect. It's one of the few DeFi protocols where the contracts are renounced, cannot be changed, and are fully trustless. Liquity pioneered a model to provide low-cost loans to ETH holders with a focus on maximum decentralization.

Liquity's main growth problem, however, is that it was deployed in a time before LSD's became the primary asset ETH DeFi users desire to hold and collatearlize. At its peak, over 1m ETH was used to collatearlize LUSD, which peaked in supply at 1.5bn USD in its earliest months. Since that point, its ETH TVL has dropped to 300k ETH, roughly similar to the entire supply of frxETH.

The addition of ETH staking yields changed demand preferences, as borrowers swapped to staked ETH for the additional 5% yield. Liquity's contracts being renounced and immutable meant that it could not adapt to these new asset preferences, and this is where Prisma Finance has been able to carve out a significant piece of market share for itself over the past months.

How to Mint MKUSD using sfrxETH at Prisma Finance

Mint MKUSD against sfrxETH by visiting Vaults and then selecting sfrxETH. On Vaults you will see the total amount of minted MKUSD, sfrxETH TVL, mint fees, and the borrow interest rate. Additionally there is an incentivized APR for borrowing MKUSD.

After selecting sfrxETH you will need to choose the loan parameters.

First, enter the amount of sfrxETH you want to collateralize your Trove with. Then choose a health collateralization ratio to mint MKUSD against your sfrxETH. Prisma requires a minimum 150% at mint and liquidation occurs at 120% CR. However, in practice it's better to have a higher CR, for reason we will discuss in the next section.

Once you choose your collateral amount and CR, click mint and receive MKUSD.

What is a Safe Collateralization Ratio for Prisma Finance?

When minting MKUSD its important to understand how Liquity's Trove system works. There are two factors. First, all dollarized debt is assumed to be priced at $1 no matter the market conditions. Second, anyone can redeem any Trove at anytime, no matter the conditions.

When the price of MKUSD rises above $1, arbitragers are incentivized to mint more MKUSD and sell it to bring the price back towards the peg. If the price rises to high, above $1.10 the arbitrage becomes risk free as the profits received from minting and selling the debt will offset any liquidation fees.

When the price of MKUSD drops below $1, arbitrageurs will buy MKUSD for less than $1 and then immediately redeem it for $1 worth of ETH. This will be from the Troves that have the lowest CR.

Currently there is a lot of demand for MKUSD debt. The protocol only charges a 1% borrowing fee annually, meaning its possible to mint MKUSD, sell it for FRAX or DAI and then deposit it into sFRAX or sDAI and earn 5-7% with relatively little risk.

The heavy selling pressure to acquire other assets pushes the price below $1 and then arbitrageurs scoop up the risk free MKUSD and redeem it against the vaults with the lowest CR. In the picture above, the lowest CR is 150%. When a Trove is redeemed, your sfrxETH Trove is paid down and your sfrxETH is released to the arbitrageur.

In the past month, Troves at Liquity and other forks have seen redemptions in vaults with CR's over 200%! The massive demand for low cost debt is a threat to open Troves. We can't comment on your tax situation, but a Trove redemption does count as a sell, which could trigger capital gains.

The average CR across all Troves is currently 196.2% and fluctuates based on MKUSD sell pressure. Staying at or above the current global CR average is best way to stay safe and keep your LSD debt from being redeemed.

What is the PRISMA token and How Can I Earn It?

The PRISMA Token is the governance token of the Prisma protocol. To earn PRISMA, users engage in various actions within the protocol, such as depositing to the Stability Pool, minting new mkUSD, maintaining an active mkUSD debt, and staking in Curve/Convex. Earned PRISMA can be locked for up to 52 weeks, granting users "lock weight," which is utilized for voting in the protocol's governance decisions, such as the distribution of rewards and other protocol actions.

Incentive distribution follows a set schedule, with a "high emission period" at the beginning where a maximum of 9m PRISMA is released linearly over the first four weeks. Subsequently, the weekly emissions decrease over time, ranging from 1.2% to 0.5% of the remaining unallocated supply per week, depending on the stage in the schedule.

During the first year, PRISMA earned is locked upon claiming, with the lock duration decreasing every two weeks until it reaches zero slightly after one year from launch. It's worth noting that the actual amount of PRISMA released will likely be less than the maximum scheduled due to claims made without the Prisma boost system, and unclaimed tokens are returned to the unallocated supply.

Farming Opportunities for FRAX

The easiest way to start farming Prisma is to take a debt position against your sfrxETH. By simply minting MKUSD, you can earn anywhere between 12.53-25.05%

Once you mint MKUSD, there are a variety of secondary farming options. You can deposit your funds to the mkUSD redemption pool, which is used to facilitate liquidations and earn 14.51% unboosted or 29.02% boosted yields.

Or you could add liquidity to the mkUSDFRAXBP with either FRAX or mkUSD to earn 44.06% boosted rewards. There are also some other options to pair against crvUSD and ETH.

Convex is a great option here as you don't need to have CRV to fully boost your pools. Simply add LP to their protocol and start earning today.

More from Flywheel

View More

Subscribe and join the Flywheel family

Always Free. Never Spam.

Harness the power of the flywheel.

Not financial advice. Flywheel content is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions.

Flywheel and affiliates are not liable for any investment losses or damages resulting from your reliance on any information provided.

2023 ©️ Flywheelpod Inc. All rights reserved.