Frax's Two Token Model Wins Again with Redacted’s Pirex ETH

Samuel McCulloch
Samuel McCulloch
Oct 9, 2023
Frax's Two Token Model Wins Again with Redacted’s Pirex ETH

One thing that we’ve seen play out time and time again at Frax is that big brains of the Core Dev team understand market dynamics and liquidity better than any other builders in DeFi. While they may not often be first movers into a new product space, they always deliver by expanding the design surface with cross protocol integrations.

One of the first examples of this was Frax’s understanding of the power of Curve/Convex. They used their early emissions to acquire a hefty sum of voting power that now serves to incentivize all Curve based liquidity pairs. More importantly, it creates a moat against competitors who might want to fork the Frax code. While the code is fully open-source, the CRV/CVX Frax holds is locked away forever. Unless a team has millions of dollars to spend upfront to acquire CRV/CVX, there is no competing.

Frax’s shining example of their product design mastery was with frxETH’s dual token design. After emerging from the Curve Wars, they knew they had a secret weapon with their acquired voting powers.

The problem that every new protocol faces is how to bootstrap new users and liquidity. Typically this is done through a mixture of governance token bribes, future airdrops, or other ways to earn discounted assets through staking or liquidity provision. New protocols give away huge portions of their token supply to acquire new users, and there is no guarantee they will be sticky.

This is where Curve changes the dynamic. By acquiring CRV/CVX, protocols can build in assumptions to their design process about long term incentive emissions. A treasury full of CRV/CVX ensures the long term health of a protocol and gives a buffer in case early product deployments are only mildly successful, giving runway for teams to continue to build awesome, 100x value products. Instead of protocol’s paying for liquidity, Curve takes on that responsibility.

And so when Frax was designing frxETH, they knew they had an ace up their sleeve. Other tokens like stETH had used a rebasing system, which Sam K refers to as a “mind virus“ and one of the biggest mistakes emerging from DeFi Summer 2021. stETH was eventually wrapped for use in DeFi, into a “number go up token.” But the problem with value accrual tokens is that liquidity for them will always be worse than stablecoins by design.

Without getting too deep into the weeds about Curve LP parameters, based on math alone, stableswap pools will always have a flatter bonding curve than their volatile counterparts, simply based on the assumption that the two assets will stay within a tighter price range. This is reflected in the A values that a Curve LP has. The higher the A value, the more the pool can become imbalanced without affecting prices.

For the stETH/ETH pool, the A value is 30, which is quite low and indicative of higher price volatility.

Compare this to the frxETH/ETH pool, which has an A value of 1200.

What this functionally means is that FRAX can offer significantly deeper liquidity than stETH, at a fraction of its market cap. According to Prisma Risk, frxETH offers similar slippage to stETH on a $50m trade, even though Lido’s LSD has 32x the market cap.

The two token model is only made possible by Curve incentives. Without it, Frax wouldn’t be able to provide enough treasury assets to provide the yields offered.

Pirex ETH Enters the Room

And so this morning when I was reading up on Redacted’s newest LSD offering Pirex ETH, it was of no surprise that they had chose the Frax two-token model. Pirex ETH will have two tokens, pxETH and apxETH. The former is a stablecoin that will be incentivized with Redacted’s $10m Curve/Convex holdings and the latter is an auto-compounding ERC-4626 vault that will capture all fees earned from their vertical staking stack.

What’s interesting about Pirex ETH is that it will earn more than just staking rewards. Sami and team are also integrating block proposal fees and building a Remote Procedure Call (RPC) system to allow for private and meta transactions. Redacted will also enable leverage on day 0 with a protocol issued CDP-backed stablecoin called Dinero.

Yield Stripping aka Pendle Integration

One other cool feature Redacted will be adding to pxETH is “yield stripping” aka Pendle integration. pxETH will use the Pendle contracts to split apxETH into a principal and yield token, allowing degens to speculate on future yield, and also allowing the protocol to build delta neutral structured products using fixed rates.

Go check out our interview with Dan from Pendle to learn more about their innovative product.

Additionally, the DAO just announced a new partnership with Equilibria today to support it with Hidden Hand bribe markets. From launch, pxETH will have debt, lending, leverage, and fixed rates, all provided within their full vertical LSD stack. All incentivized through their formidable treasury.

Two Token Domination

At the end of the day, its design choices like Frax’ two-token model for frxETH that set the tone for future products in DeFi. It’s a sign of respect when other protocol’s use the two token model. It’s the ethos of Stablecoin Maximalism and applicable to any yield bearing instrument used for monetary purposes.

Frax was the first to put all the puzzle pieces together and their foresight has set the standard for the next generation of DeFi innovations. Redacted's adoption of the two-token model underscores Frax's groundbreaking approach. As DeFi evolves, strategies prioritizing stability and growth will lead the way. Frax's model isn't just a victory for them, but for the entire DeFi ecosystem, marking a move towards sustainable financial systems.

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