This Week in Frax - September 7, 2023

Frax Core Team introduces Staked FRAX (sFRAX) for users to deposit FRAX, targeting Federal Reserve's IORB rate. Sam Kazemian clarifies its role vs. bonds. Other updates include a Binance Frax presentation and governance matters.

Samuel McCulloch
Samuel McCulloch
Sept 8, 2023
This Week in Frax - September 7, 2023

Core Team proposes DSR-like sFRAX vault

The Frax Core Team has proposed a new product called Staked FRAX (sFRAX) that allows users to deposit FRAX stablecoins into a designated smart contract, enabling them to earn yield on their deposits. The function of sFRAX seems to address the current yield curve challenges faced by FRAX, drawing parallels to the Dai Savings Rate (DSR). Expected rates for sFRAX will start at 10% and then decline to 5% at scale.

sFRAX yield is not guaranteed by the protocol and will not come from one strategy on-chain or off-chain. While Frax’s RWA partner FinresPBC might be resposnsible for some part of the yield, if on-chain options exist, captial can be deployed there. The goal will be to softly target the Federal Reserve Interest on Reserve Deposit Rate (IORB). However, if the protocol falls short of matching the IORB, the primary focus will always be to ensure the FRAX stablecoin remains fully collateralized at 100% CR. Any surplus from the balance sheet revenues will then be redirected to sFRAX.

TG Chat immediately had questions for Sam Kazemian.

Cryptovestor: will the dsr like product frax is developing have a 5% floor? Based on fxbs base rate? I know you said you would propose 10% on the top end?

SK: Yes it will have around 5% base rate that can ideally scale with FRAX supply for billions of dollars hopefully. The 10% is for the top end similar to how DSR had 8% but we think 10% is ideal in these macro markets and will suggest that in the gov proposal to launch sFRAX.

Cryptovestor: Can you explain how you get to 10%? I imagine it has something to do with overlap fees

SK: It's just the "cap rate" meaning that it can support certain amount of deposits up to 10% and then slowly linearly decreases to a 5% asymptote as more people deposit. For example: the first 50M FRAX deposited get 10% APR in sFRAX, then after 51M deposited the APR goes down slowly 9%, 8%.. until it is at 5% at around 500M. It's sort of similar to a farm where the more TVL slowly lowers the APR but this has a cap rate and farms don't.

Ouroboros Capital: Can you walk us through how the flow will look as FinRes connects to sFRAX when it goes live?

  1. User deposits FRAX into sFRAX
  2. FinRes takes the Frax, trades it into USDC
  3. Off ramps USDC and puts it into US treasuries

Is that how it should work? and in this process how does it directly or indirectly result in revenue generation for FRAX?

SK: In short yes. It's not more complicated than that. It doesn't need to be. But to be clear, sFRAX is not a guarantee that Frax DAO will do that nor is sFRAX a legal right to redeem for any part of the FRAX balance sheet like tbills etc.

Ouroboros Capital: Am I right to say that the revenue generation for FRAX via sFRAX is more implicit than explicit? ie if sFRAX is going at 5% then naturally cost of Frax will gravitate towards that and naturally POL will earn a yield closer to 5%.
for eg. with sFRAX at 5%, we will likely see non POL FRAX go towards sFRAX - non-POL FRAX in FraxBP/FraxLend/etc will head there and as a result POL FRAX starts earning a higher yield in those places

SK: Correct. That's the same dynamic as when the Fed itself raises the IORB and lending/mortgage markets adjust to the new cost of borrowing. Think of sFRAX as Frax Protocol's IORB.

Ouroboros Capital: aarrghhhh I'm IORB--innggggg

SK: For reference in case others don't know

Ernest: will 100% of AMO revenues go to sFRAX or will there still be a portion to goes to veFXS (after 100% CR)?

SK: Obviously fees and excess revenue goes to veFXS as usual. This sFRAX feature is meant to provide Frax Protocol the same lever as the Fed has: the IORB.

HumbleOhmie: Regarding FinresPBC, how do you think about the bankruptcy risk of the initial partner bank?
Will it deposit to the bank more than the FDIC-insured amount?

SK: It's entirely FDIC insured and IntraFi deposits are also FDIC insured above 250k as well.

0xMughal: Spent some time looking at sFRAX today. I’m a little confused, I assumed we would either have; Bonds (earning treasury yield) OR a staked frax (like DSR). I’m a little confused why we have both & secondly if the treasury yield is going towards bonds, then what yield is sFRAX getting?

Westwood: Just different products that do the same thing. Team would take the collateral of both products and deploy into the most profitable strategy. sFRAX is a lot safer/simple for retail whereas bonds would be better for more sophisticated actors

0xMughal: So am I right in thinking... Frax takes POL and gives it to Finres who will sell this for TBills. Yield gets passed over back to the frax protocol & they issue FXBs which then mature yearly. But part of the treasury yield also goes into minting new FRAX for sFRAX holders to earn. (I don’t understand how this can be minimum 5% considering some of the TBill yield is going to be going to bonds no?)

SK: Short dated tbills right now yield 5.3% actually. So sFRAX basically could be matched with near overnight bonds/RRPs/short dated tbills. Recall that sFRAX tries to target close to the IORB of the Fed which is the overnight lending rate (another way to describe it is a 1 day bond/lending to the Fed for 1 day).

0xMughal: I thought the TBill yield was going towards the FXBs, how will yield be directed to both FXBs & sFRAX?

SK: Because they both can exist at the same time. Think of sFRAX as the 0 duration part of the yield curve and FXBs as farther out.

For example: 100m 1 year FXBs sold for 95m FRAX means that FinresPBC can take 95m FRAX-->95m USDC-->$95m 1 year tbill purchase.

Now at the same time, if 40m FRAX is staked in sFRAX, then that FRAX can go through the same flow 40m FRAX-->40m USDC-->$40m short dated tbills/RRPs close to the IORB rate.

Both of those things can and will likely happen at the same time. There's no reason both FXBs and sFRAX can't be used in parallel by FRAX holders.

Frax Deposits $65m to DSR

mo: why did frax remove 65m from fraxbp?

SK: We are rebalancing the collateral partly into sDAI POL. This will help the profitability of the protocol and also increase FRAXBP APR.

Cryptovestor: So this is going into the dsr temporarily? While sfrax gets launched ?

SK: Precisely ser. And because a good amount of POL was removed and gets a safe, external yield source outside of Curve, that means FRAXBP APR is going to increase a lot for normal LPs. And while users enjoy higher APR on FRAXBP, the protocol itself earns revenue through sDAI.

Win win. This is until FRAX v3 and the scaling up of FinresPBC, FXBs, and sFRAX after audits in the coming weeks. Once that happens, hopefully the revenues and APRs go up even higher than now.

Flatcoins and FPI

We wrote about flatcoins this week with the latest updates on FPI and FPIS. The article comes in response to a request for product from Brian Armstrong 2 weeks ago asking for "Flatcoins" to be built on Base.

The Rise of Flatcoins: FPI is Brian Armstrong & Balaji’s Answer for a Stable Currency
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Binance Crash Course

FraxGod.eth is going to give an indepth presentation on Frax to the Binance community later this month in Spanish. He's going to cover the following topics.

  1. Stablecoins of the Protocol (FRAX, FPI & frxETH)
  2. Governance tokens of the Protocol (FXS & FPIS)
  3. Protocol Modules (FraxSwap, FraxEther, FraxLend, FraxFerry) and main stakeholders
  4. Future implementations on the Roadmap (FraxV3, FraxGov, FraxChain, FraxBonds y BAMM)
  5. Mechanics of the Algorithmic Market Operators (AMO)
  6. The Power of Liquidity as a Service (LaaS)
  7. Integration of FraxBP into Curve
  8. Integration of the Frax ecosystem into Convex Finance
  9. Participation in the governance of the Protocol
  10. Key Metrics and Balance Sheet

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Deposit your Bunni FRAX or frxETH range tokens and earn boosted emissions without having to hold veLIT. Liquis holds around 2.6M relit and so you'll be earning close to the top of the range you see on the Bunni UI.

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