The Rollup - Frax Week in Review - Sep 25 - Oct 1

Samuel McCulloch
Samuel McCulloch
Oct 1, 2022

What a week. Vibes have been tough this week, as seen in the price of FXS and FPIS. As usual FRAX is still holding strong at a dollar.

At Flywheel, we are of the belief that the Frax team can solve or innovate any techonological problems heading into the future. The core team of developers “Seal Team 8” are some of the smartest minds in the industry and they do one thing very well…. Ship. Our product speaks for itself in terms of quality and speed to market. Going forward into the future, we have no doubts they will continue to push great code.

However, the final boss in crypto was never going to be code based… It’s this guy

And also this guy….

The regulators are finally coming for crypto, and especially stablecoins, in a big way. This month we’ve seen the release of the White House’s “Comprehensive Framework for Responsible Development of Digital Assets” This was a follow on to a growing suite of regulatory proposals from the executive concerning crypto markets. For stablecoins, this was the most influential piece of proposed regulatory action since the “President’s Working Group on Financial Markets Releases Report and Recommendations on Stablecoins.” We’re going to deep dive into this document next week for money moves, but tldr, the market didn’t like its outlook for Frax.

FXS is down 21% since the White House’s framework was released on the 16th, down to $4.20 (shout out Elon) and showing continued weakness going into the weekend. Pairing this drop with the corresponding drop in ETH prices since the Merge has resulted in a staggering 46% drop in FXS in less than 2 months. Like we said at the start…the vibes could be better.

Additionally, more news has come out this week about the Markets in Crypto-Assets framework (MiCA), the forthcoming broad-based European regulatory regime for all crypto assets. While much of the information in the framework surrounding crypto assets had been known for some months now, new information about stablecoin regulation has also cast more doubt on the industry. One provision in the MiCA framework that has been removed and added several times now limits stablecoin payments Euro wide to $200mn USD or 1 million transactions per day. In countries like Belgium, where, as of July 1, 2022 companies must provide at least one digital payment option, acceptance of USD stablecoins as payment will be illegal or considered a invalid payment method.

The MiCA provisions are a threat to USDC and its issuing company Circle, as it would effectively cut off all stablecoins (USDT, BUSD, Paxos all included!) as a means for payment. While the bill would not cover stablecoins used for trading purposes, thus relieving large exchanges from having to delist all USDC and USDT pairs, it would create an onerous regulatory enviroment that would stifle innovation and potentially leave Europe behind in these new Money Wars.

As for Frax, MiCA would have little effect on its operations or growth in our current state. Frax is not listed on any major Centralized exchanges for deposit, withdrawals, or trading and its markets are primarily in DeFi. Over 70% of AMO FRAX is in Curve as liquidity. There is not a market for FRAX outside of DeFi right now. This isn’t a major problem at this stage in Frax’s growth, we must first conquer DeFi and crypto as a transactional currency that people want to hold and use for payments.

As long as Frax grows within the confines of crypto, it will be difficult for any regulatory body to ban Frax notwithstanding any sanctions. But it’s for this reason that expectations for the future might be muted or nullified for the current moment. Before Terra’s collapse, several discussions were taking place around funding or integration of Real World Assets (RWAs) into the treasury portfolio or AMO’s. There was a growing sentiment that Frax should diversify its treasury into a hybrid asset mix of on and off-chain yield generating assets.

Centrifuge, dAMM, and other RWA protocols were in discussion to partner with Frax before the collapse of Luna. Much like what DAI/Maker is going through right now, the Frax community was starting to have discussions around what would potential RWA loans and partnerships look like. Terra failing like it brought any hopes for branching out back to reality. Until the regulatory environment changes and the potential financial stability threats arising from off-chain liabilities are relieved (if they can be), then the RWA issue is dead for now.

We don’t need RWAs right now. We are generating fee revenue in Curve and other protocols with the AMO’s. Unlike Maker, we have a way to put our treasury to use in a maximally profitable manner. We don’t have to rely on Coinbase to provide %1.25 on a small part of the treasury assets. Frax is profitable with no RWAs and in an environment where regulators cannot affect the protocol.

I don’t see the forthcoming regulatory regime as a negative for Frax. There might be some backlash against “algorithmic” stablecoins, but we always have the ability to raise the CR to 100%. It won’t mean “wrapped USDC,” rather a suite of products that provide for full collateralization. The addition of Fraxlend + POL is a huge step towards that reality if necessary.

I’m actually pretty positive about the new regulations on stablecoins. We need to have greater clarity for USDC and Tether. The growth of crypto is now inexorably linked to these two stablecoins and their success will determine the size of Ethereum TVL in the next decade. Investment funds and other large institutions demand clarity and regulatory safety before allocating. Stablecoins right now sit in a weird gray area and until we have defined rules their circulating supply will not move significantly higher. $200bn across all chains and assets is a drop in the pond, I’d expect the number to move to the trillions if all goes well on the regulatory/legal front.

Best of Sam K

Ohmies unite! Frax is working hard to get you added to Frax lend. This would deepen the existing relationship between the two communities and help drive fur demand for FRAX.

Fraxlend is different than COMP and AAVE in how it adjusts interest rates. Read the full docs here.

We need to acquire as much BTC and ETH lending as possible

The latest Gitcoin round just ended and FRAX was one of the largest donors to good causes. We’re using our profits to fund regulatory efforts to protect the protocol.

Don’t sleep on FPI.

What to Read

CryptoRiskAssesment wrote up an extremely detailed and comprehensive report on Frax’s Multi-sigs. They come at Frax from a Curve risk management perspective and what it would mean for Curve to suffer because of a hack.

Here’s their conclusion

“The current use of a multisig in the governance and management of Frax does pose a risk to Curve, given the value of Frax assets in Curve pools. If Frax were to become compromised, 21.5% of assets on Curve would be at risk, and 32% of CRV emissions would be ineffectively distributed. However, the Frax team is aware the current structure is unsustainable and is implementing a secure and decentralized model that shifts majority control of the protocol to FXS voters. The successful implementation of this new governance model would remove the current risks posed by multisig wallets. A Crypto Risk Assessment completed in December 2021 stated the core team was planning to remove the multisig "in 3-6 months so that it is purely governance on-chain." Since this has yet to happen, the core team is currently 3-6 months behind their previous timeline.

Given the information described in this report, I believe that the Curve DAO should actively monitor the implementation of the optimistic governance model but take no action now. Suppose the new model is not implemented by December 31, 2022. In that case, the Curve DAO should consider funding a report to investigate why and push the Frax core team to provide an updated timeline on deprecating the multisig. If the implementation is successful, the Curve DAO should consider funding a report to assess the decentralization and security of the new governance model.”

Jack Chong published an in depth primer for RWAs in crypto. It’s a great read to understand the complexities of adding these assets to DeFi and the companies that are trying to make this a reality.

Dyad Manifesto - A new algo stable design using a fixed supply of NFTs.

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