Uncorking Frax Yield with Sommelier Finance

Zaki, Sun, and Stephan give all the details of their new Fraximal Vault and how its going to optimize liquidity on Fraxlend

Samuel McCulloch
Samuel McCulloch
July 12, 2023
July 12, 2023

Flywheel Action Items

  1. Go to the Fraximal Vault to earn 17% yield in FRAX and SOMM.
  2. Read about the Fraximal Vault strategy.
  3. Review the Fraximal Vault contract holdings on Etherscan
  4. Check the current positions and values in Debank
  5. Read Sommelier’s Documentation on Gitbook
  6. Join Sommelier’s Discord or Telegram

Sommelier Finance is an innovative yield strategy protocol that just launched a new vault to capture Fraxlend yield called Fraximal. We invited them onto our most recent podcast to learn more about the team and how they are innovating on yield capture.

Did you know that Sommelier is a Cosmos app chain? We didn’t and that’s one thing we learned during our most recent interview with Zaki, Sun, and Stephan. We were actually surprised throughout the interview about their design choices.

Cosmos has always been this little brother to Ethereum, quietly building and growing. It’s funny now to see how Vitalik and crew have pivoted towards the Cosmos idea of a single security layer connecting infinite app-chains. We’ve come full circle.

We invited the Sommelier team on with the announcement of their Fraximal vault, which optimizes liquidity across Fraxlend. In just a few days, the yield vault has topped over $2m in TVL and is growing fast.

Fraximal Vaults

The Fraximal vault fills an important need in Frax’s lending ecosystem. It optimizes liquidity across assets where AMO funds are not readily available. For most pairs like sfrxETH and wBTC, the Fraxlend AMO can print near infinite amounts of FRAX to satisfy loan demand, as these assets are highly liquid and don’t pose liquidation risk. Some pairs however, like CRV, FXS, etc, are not covered by the AMO and so they pay higher borrowing costs. The Fraximal vault is designed to step in where the AMO cannot and provide optimized liquidity to these non-AMO enabled assets.

The Fraximal vault is a passive way to earn yield from Fraxlend. The strategy was created by Seven Seas founded by Sun and DeFine Logic Labs founded by Stephen. It captures the highest interest rate possible, while balanced against risk of bad debt from liquidations. It auto-compounds and is completely automated, all that’s required is to deposit assets. It’s very similar to a Yearn or Beefy, however Sommelier uses Cosmos on the backend to manage the strategies and rebalance the portfolios.

As of writing the vault has $1.8m in assets that are distributed between the gOHM and CRV pools. These have consistently been the highest yielding pools since Fraxlend was launched. In addition to the yield earned through Fraxlend, depositors also earn additional SOMM tokens that increase the yield. The goal with the incentives is to drive enough TVL into the vaults, so that they can be optimized across many different pools. When the pools are small in size it’s harder to diversify. Increased TVL gives the strategist more options to spread assets across many different pools.

Cosmos All Up and Down

One of the most interesting parts about Sommelier is that all of its strategies are managed and run from their own Cosmos app-chain. It’s too cost intensive and resource constrained on Ethereum. The Somm team runs its own validator set that acts as a messaging layer between the strategists and the chains they use. All of the rebalancing computation is executed off-chain, keeping their data private, and allowing them to predict what future yields in vaults like Fraximal will be.

After doing analysis, the strategists broadcast their rebalance messages to the Somm network, where they can be reviewed and then validated. Once the message reaches consensus, it can be passed on Somm’s bridge or through Axelar to be executed. The validators act as the gatekeepers for all strategy transactions to prevent any malicious behavior and theft of assets.

Zaki thinks Sommelier is an engine for tapping into real arbitrage opportunities and real value flows. Those value flows exist at scale on Ethereum and that is why Somm is focused on building on EVM-chains. It’s pretty evident looking at the global TVL charts on DeFiLlama that even in the bear market, ETH dominates DeFi.

As Ethereum maintains its place as the ultimate execution layer, other support systems like Sommelier will be necessary to handle data analysis and compute, while still benefiting from transparency, self  custody, decentralization. For strategists, Sommelier creates a complex design ecosystem that allows for dynamic, non-custodial secure strategies to be hosted on-chain as a vault. Strategists can build freely, all while investors can feel safe knowing the Sommelier app-chain is in charge of validation.

The validators are “Stewards” who perform dynamic checks, simulate transactions and other actions to ensure transactions from Strategists are safe. In an unlikely case that a strategist disappears off the face of the earth, the validators are able to step in and swap the position into a strategy that is safe like stablecoins, ETH or other stable positions.

Fraxchain Should Be On Cosmos

One of the hot things Zaki brought up was that Fraxchain should launch as an appchain on Cosmos, potentially secured through restaking on Eigenlayer. We’ve covered Eigenlayer before and interviewed founder Sreeram Kenann, and this is a crazy mind blowing idea. Eigenlayer can provide the security guarantees of ETH, and Cosmos can provide Tendermint consensus. It’s a great potential match.

Since Cosmos already has a standardized bridging protocol, Fraxchain could easily be integrated and adopted by other apps and networks. For example, with Cosmos you can easily move assets from Ethereum to DYDX, rather than having to bridge between the two networks. As Zaki mentioned, reflecting upon John Char’s blog post, “at the end of the day it’s all just chains and bridges, L1s and L2s don’t exist.”

Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research.

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