This Week in Frax - October 20, 2023

New sFRAX contract, Metronome to the Dome week #2, Sam Kazemian on 0xResearch, VST-FRAX Rage Quit Proposal, Daesu's incredible research and analysis, StableScarab and more..

Samuel McCulloch
Samuel McCulloch
Oct 20, 2023
This Week in Frax - October 20, 2023

Since last week, our Smart Farming enabled $500 FRAX position with 4x leverage in Metronome has earned $1.95, which equates to 20.28% APR. At this rate, our 500 FRAX position will yield $101.40 at the end of 1 year. While our size is small, this yield would still obtain at higher deposit amounts!

If you want even higher yields, you can loop USDC up to 6x for a 48% APR yield. For more details, watch our previous video on how to setup a Smart Farming position and earn leveraged yield.

We would like to thank Metronome again for collaborating with us in our educational Metronome to the Dome initiative.

New sFRAX Contract + TVL Highs

After the successful roll out of the sFRAX contract last week, the Core Dev Team deployed a new version of the contract. Travis posted the following message in chat:

The Frax team deployed a new sFRAX contract due to several reasons:

  1. Name Correction: They fixed the punctuation of the name string, changing it from "Staked Frax" to "Staked FRAX".
  2. Function Addition: They added a pricePerShare() function to the contract. This new function is designed to facilitate easier integrations with platforms like Curve pools and vault protocols. One specific advantage of this addition is that it will make swaps on Curve less expensive.
  3. Technical Updates: The contract has seen minor gas improvements. Moreover, they updated the contract to a newer version of Solidity (0.8.21), and implemented certain optimizations.

After the redeploy, funds shifted over to capture weekly rewards

StableScarab has already updated his Dune dashboard to the new contract and its showing the correct TVL levels again.

[FIP - 292] Implement ragequit function for VST-FRAX Gauge locker with 0 fee

Another contentious Rage Quit proposal for the VST-FRAX pool. The Vesta team asked Frax DAO to vote to open up the stablecoin pool with a 0% fee due to their protocol shutting down. The proposal went up for vote this week and was voted down.


C2tP left some notable comments, which weren't addressed by the Vesta team until after the vote had nearly concluded. We're seeing a troubling trend of proposers posting FIPs without temp checking recently, assumption being all votes will go through without issue.

Mikey's response to C2tP explained how they chose 0%, which was to put a finger to the wind and pick a number.

Suffice to say, C2 wasn't impressed.

Some community members voiced their displeasure at the no votes, but were unaware of the 10% fee Vesta was planning on charging late withdrawals.

As the VST contract is a PSM, there's no downside to the funds remaining locked until the end of the term. It's on the Vesta team to change their proposal to allow for the $1.8m VST to be redeemed once it unlocks.

Sam Kazemian on Blockworks 0xResearch

You want to become safer as your get bigger, not the other way around.

Blockworks hosted Sam Kazemian this week on their 0xResearch podcast and covered a ton of information about Frax. We're going to be breaking down what Sam Kazemian said in Monday's article, so be prepared for that.

Incredible Frax Analysis from Daesu

This is one of the best overall analysis' of Frax's adapting to turbulent market conditions. We're going to publish it in full here.

Road to Frax v3

Changes under the hood are profound in Frax v3, but the path it took to get there is even more interesting. IMO, the v2 arrived at the end of a rocky road, a little lost between expansion, full collateralization, and real utilization. The protocol-owned liquidity skewed heavily towards FRAX as the pools became more imbalanced. The reason? A real bear market > lower activity + low CRV and FXS price > lower yield for FRAX > less demand + a flight to fiat stablecoins (Luna PTSD) > higher cost to maintain the same yield for less TVL.

Not much could be done to stop this and generate buying pressure. Apart from maintaining high yield to mitigate the supply contraction (represented as a pool imbalance), farm the massive POL to make money and so increase the collateral ratio (old formula). The program that matches incentives for stablecoins paired with FRAXBP was a way to generate more buying pressure uncorrelated with the season (+ increase influence over DeFi). As everyone realized that the bear would last longer than expected, Frax decided to activate diversified revenue sources. An obvious source was to lend FRAX. A nice way to expand FRAX supply without paying incentives for that. Another one was staked ETH. As the POL couldn't grow without strong demand (to mint and deposit Frax to the pool when >$1), SFRETH and Fraxlend became priority.

The dual model is a massive success but frxETH costs a lot of FXS as bribes to maintain the yield on curve. The bank crisis and the Curve hack damaged the POL and so the possibility to reach the 100% CR. The outstanding FRAX supply being 100% backed by external stable and volatile collateral. These events bring a serious imbalance of the pools (75-25). More imbalance and less liquidity > less algorithmic supply that can live backed by the pools > more USDC required in case of stress tests. At this point, I thought Frax needed to contract the supply by at least 50% to match the real frax demand, to bring the pools back into balance, and to give itself a chance to reach 100% CR.

Frax took a different path by switching the CR calculation method. It was a big change as it implies that now frax is partly backed by frax IMO; with this tweak, it's again possible to reach 100% CR - the gap is around 60M. Distant but reachable (with a lot of sfrxETH leveraged through Fraxlend, right). But the staked ETH yield headed south from 92 and started to underperform the IORB. If you add ETH price downside volatility, the attractiveness to leverage staked ETH took a real hit. Plus, Frax doesn't allow you to only leverage the staked ETH yield as you can borrow only FRAX so these deteriorated market conditions were bad for the revenue, bad for FRAX demand, bad for the CR.

That's the end of the road I was talking about earlier. The moment Frax took the bull by the horns, took the helping hand of the Fed, and launched v3 with xFRAX and FXB. Fantastic, a sustainable yield that isn't funded by the beloved FXS. But how to scale it as the pools' imbalance don't allow large frax trades anymore without impacting the peg? Just before the launch of v3, Frax took the hard decision to realize its losses in the FRAXBP and FRAXUSDP pools. This means sacrificing all the dollars they would have received if they had withdrawn their LP from a pool balanced 50-50. Frax withdrew 200M FRAXBP and 65M FRAXUSDP LP tokens to receive 265M FRAX instead of 199M FRAX and $66M in USDC and USDP. So they burned $66M to buy FRAX. Potentially $132M if the pools had regained balance without their intervention. Now the pools are reset 50-50 and stronger than ever. And Frax holds directly 362M FRAX.

I think it's the most beautiful thing I saw in DeFi this year. Right behind crvUSD. Now SFRAX and FXB can scale as the buying pressure will have as much price impact as the selling pressure. Seems basic but it's so important in how FRAX is converted to RWA. This way, Frax can handle a bigger expansion of FRAX supply through Fraxlend. Of course, there is a limit to the restored balance, maybe something similar to a PS would be required at one point to scale to billions in treasuries. Another important outcome: As the main pools TVL decreased by more than half, the amount of FXS needed to maintain the yield did the same. Bribes for FRAXBP are already down almost 4x round to round ($104K to $28K). You no longer need that much liquidity in the pools but rather to buy as quickly as possible treasuries with the 362M FRAX held directly. This will improve the external stable collateral backing of FRAX, yes I know I can't get rid of bad habits. The main barrier to level up can now be fixed, the FXS inflation. Less inflation combined with yield-bearing stable assets lay the foundations of the flywheel.

This is a textbook case of how to steady a ship shaken by catastrophic weather. With vision, guts, and courage. For me, "Fluctuat nec mergitur" is the new mantra of Frax.

StableScarab Explains sFRAX

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