This Week in FRAX - February 13-17th, 2023 - EP #1

veFPIS, CR to 100%, GammaSwap and more...

Feb 18, 2023

We’re changing the name of Frax in Review to This Week in Frax. Additionally, we’re also moving the day it goes out from Monday to Fridays, as a way to wrap up the week.

veFPIs gets its love letter

Is there better way to announce the details of a new Frax product than to post some googlely eyes in the main Telegram chat on the evening of Valentine’s Day? We think not <3 Travis dropped a link to the shiny new and updated veFPIS docs. We’re going to cover the entire ecosystem is detail on Monday, but here is the juiciest info.

A new term was introduced “Frax Collateral Ratio” (FCR), which is the required ratio of collateral needed to fund FPI. Anything in excess should go to veFPIS stakers. More will be released about this soon.
10 mil FPIS is allocated to veFPIS rewards, it starts with 5 million and then follows a halvening cycle in perpetuity.
veFXS gets control over 25% of the FPIS, which should keep it in check for the long term.

Also, while writing this article, Travis dropped the following screenshot of the veFPIS dashboard.

Come hang out with the Flywheel crew at ETH Denver!

Governance Recap

We’re also adding a new Governance Recap to FIR. Instead of pairing it with Fraxcheck, we will be discussing governance on Fridays.

Setting the CR to 100%

Welp, it’s been a fun 2 years of capital efficiency. Frax launched with the idea of building the most capital efficient, partially collateralized, algorithmic stablecoin. The idea behind it was that the market would figure out what the most optimal level of collateral would be required to maintain the peg. The CR bottomed out at 82% in Oct 2021, and has risen to 92% where its been stuck at since the beginning of the year.

When Luna/UST crashed, it showed that market participants are playing Bloodsport and will do anything to try and destroy a protocol’s peg to profit. While Luna only had around 6% reserves when it crashed, the effect on the market and its participants was profound enough to drive a political change to bring the CR to 100%. Over the past year, Sam K has said multiple times that CR 100% is needed and inevitable. To harden the protocol against any attacks, market drive or regulatory, each Frax should and will always be backed by 100% or more of collateral. In an expansive gov proposal, Fraximalist Hameed recommended that we move to 100% CR in the following way:

Increase the target collateral ratio to 100%. This is the long-term target of the protocol and will require time to reach. No FXS will be minted to achieve this target. As part of this change, the protocol is retiring the algorithmic backing of FRAX and the decollateralize function.
Retain protocol revenue to fund the increased CR, including pausing FXS buybacks. veFXS yield remains the same.
Authorize up to $3m per month in frxETH purchases to increase the CR.

The biggest driver of this change would be redirecting protocol profits from FXS buybacks to purchasing FrxETH. Given the 8% gap at the moment, it would take around 30 months or 2.5 years to achieve 100% CR. While this might sound conservative, 90m is a large sum. If passed, which we think this proposal will, it would change the dynamics for veFXS for a temporary period. While FXS buybacks might be paused, the increased treasury base of FrxETH will provide additional resilience, protocol profits, and AMO expansion. So while the veFXS yield might decline as a result, the overall health of the protocol would increase, and should negate any negative side effects.

GammaSwap gauge proposal

The GS team dropped a proposal to create a FrxETH/Frax pool in GammaSwap. This would incentivize Sushi LPs to deposit tokens to GS to earn both protocol yield and gauge rewards. Check our interview with GS to learn more about how they are solving the problem of impermanent loss.