The Rollup - Frax Week in Review Oct 2-10

A low key week from Frax. No major announcements, just updates across several products.

Oct 10, 2022

A low key week from Frax. No major announcements, just updates across several products.

Fraxlend Expansion

The biggest release was the addition of CRV, CVX and FXS to Fraxlend. Each asset was added with 100k FRAX liquidity. The addition of CVX and CRV is par for the course based on the flywheel between all three protocols. But FXS is special. Up until this, it’s been really hard to find good lending liquidity for FXS. The only place previously where decent FXS lending liquidity could be found was on Rari and that was shut down after the hack.

It’s refreshing to see FXS find a lending market again. Two financing options now are open 1.) you can borrow FRAX as debt without having to sell your FXS 2.) You can leverage up on FXS.

Option 1 is great if you want to stay long FXS, especially in this bear market. If your price targets for FXS have two or three zeros in them like us at Flywheel, it makes no sense then to sell any of your FXS.

Option 2 is for the degens who want to supercharge their portfolios for the coming bull market. But it doesn’t come without risks to the protocol when extending AMO funds. The following example I’m going to give does not apply to use supplied funds to Fraxlend. It’s only relevant while discussing unbacked FRAX added to the FXS pool.

It would be extremely unwise and Terra-like for FXS AMO lending to reach a significant level of size to where a drop in FXS price could create a series of cascading liquidations. If the amount borrowed is concentrated into a few large accounts and the LP pool is unable to readily absorb the liquidations, severe negative price impacts from the sell off could threaten the overall health of the FRAX protocol. If the price of FXS drops too quickly it could take the value of the endogenous collateral backing FRAX below what is required to maintain the collateral ratio. Without proper backing, the value of FRAX could fall below $1 and become unrecoverable.

The good news there is an easy solution for this problem. AMO funds can and should be limited for the FXS lending pool. This was first brought up by tan on Oct 7 in the chat. He was discussing FIP-116 which would authorize Frax protocol to deploy AMO funds to Fraxlend.

Initially the FIP had grouped all three assets together into one vote. After tan voiced their opinions, the FIP was split into three and is now in discussion on the governance forums.

[FIP - 116] Authorize Fraxlend AMO for a new pair ( CVX )

[FIP - 117] Authorize Fraxlend AMO for a new pair ( FXS )

[FIP - 118] Authorize Fraxlend AMO for a new pair ( CRV )

The CRV and CVX pools are proposed to receive a maximum allocation of 5mil FRAX each and the FXS pool 1m FRAX.

Responding to Bankless

This week, Bankless published their October Token Reviews and Frax was included. One quick look at the report and we were ready to jump on the inconsistencies that were evident throughout it.

In the above screenshots, their intern analyst Jack derived his opinion about the performance of FRAX on the potential impacts of upcoming proposed stablecoin legislation from US congress. There are currently 3 bills being considered at the moment and it's unclear whether they will pass in 2022.

The most important aspect of the bill is that it could include a potential “ban” on fully uncollateralized stablecoins as a response to the collapse of UST/Terra earlier this year. Based on reporting from Bloomberg, the ban would only affect crypto stablecoins “solely” backed by endogenous collateral. Partially backed stablecoins would be unaffected based on early reports of the draft legislation.

Given all this, Jack’s ultimate opinion that he shared with his readers was that the ban would affect FRAX, forcing USDC to freeze all supply connected in any way, even in protocols like Curve, Aave, and every other DeFi platform where Frax is serviced. It wouldn’t matter to him if the USDC was paired with FRAX in LP, or if it was sitting in Aave as liquidity that could be borrowed. Circle would take the scorched earth option of affecting every single major DeFi platform in existence to enforce the ban.

I find this viewpoint extreme, chilling to the entire DeFi ecosystem, and grossly out of line with previous enforcement actions. I hate using the word FUD, but in this situation, Jack is so off the ball.

Frax’s US footprint is extremely small. No US exchanges have listed FRAX. No US based payment companies are using Frax.

Circle has only frozen its assets in the wake of OFAC’s Tornado Cash ban. Jack thinks the draft legislation of 1 of 3 potential stablecoin bills will force Circle to take similar actions it took against Tornado Cash. Bear in mind the US was responding to multiple hacks by the Lazerus group, a North Korean based operation. Jack stated multiple times when questioned on Twitter that the stablecoin bill would force Circle to fully go scorched earth and ban all USDC connected with FRAX on every DeFi platform and on every chain. And they let this guy write for an audience of thousands of people.

If political history is to be any sort of guide, a middle path is always found. The worst of these draft bills is left out and what’s included is only what makes industry more resilient and open to growth. If 100% CR is required for Frax, that’s fine, there’s only a 7% gap to be closed. The power of what FRAX is and can do with its AMOs and suite of products is greater than that gap.