Frax is DeFi’s Center of Gravity w/ Winter Soldier - Flywheel #78

Samuel McCulloch
Samuel McCulloch
Nov 15, 2023
Frax is DeFi’s Center of Gravity w/ Winter Soldier - Flywheel #78

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In this week's episode we are joined by Winter Soldier, who we invited on to discuss his epic Frax thread. It's an extremely well written deep dive into the Frax ecosystem and we love it.

We're reprinting it here so you can follow along with DeFiDave, Kiet and Winter Soldier as they read through it.

Frax Finance - Nothing Escapes The Singularity

As a child I was a huge fan of space and sci-fi.Black holes in particular, were the subject of my fascination. Galactic forces of nature feasting on every star and planet they touch

Nothing escapes. Not even light


I soon learned black holes were much more than what I initially thought

They are, surprisingly, the brightest objects in space

As matter spirals into the singularity, friction is so strong it creates electromagnetic radiation up to four trillion times brighter than our sun 

Jets of matter are expelled at lightspeed in the ensuing chaos, reaching up to thousands of light years away to become raw materials for new galaxies

Pretty cool stuff


Frax evokes the same sense of awe

The familiar feeling of “this is so cool” that compelled me to research as much as I could

This protocol is a force of nature - an unstoppable singularity expanding its event horizon with innovative products and astute microeconomics @fraxfinance Much like black holes, Frax’s true purpose and potential are often overshadowed by first impressions.

Yielding 5% on ETH LSDs, inventing AMOs, and integrating RWAs are cool and bullish feats

But you’ll miss the bigger picture if you focus on those @fraxfinance Frax is the only DeFi entity that can programmatically create monetary premium for its stablecoins

Once you understand how they do it, I’m 100% convinced you’ll be as bullish as I am 

Table of Contents:

1️⃣ The Singularity: Stablecoin Maximalism
2️⃣ The Spark: CVX Gauge Weight
3️⃣ The Catalyst: Protocol Owned Liquidity
4️⃣ The Missing Link: FinresPBC
5️⃣ Everything Everywhere All At Once
6️⃣ The Endgame 

The Singularity: Stablecoin Maximalism

At the center of every black hole is the singularity, a core belief if you will

For Frax, that belief is stablecoin maximalism, which states the following


The structure, as defined by Sam, comprises of:

1) Risk free yield (RFY)
Revenue generated by the assets backing the stablecoin at peg, using the lowest risk

2) Swap facility
A place where stablecoins can be redeemed for assets at peg, i.e. liquidity pool @fraxfinance To which I would add:

3) Stability
No de-pegs. Holding = hedge against volatility

4) Composability
Can be used to create derivative assets or integrate with other protocols

Any stablecoin that sustainably engineers all four pillars can scale into the trillions 

We can observe the convergence across various protocols (see graphic)

i.e. DeFi is a game of building the best stablecoins

Which is why Frax has devoted its entire existence to acquiring resources and building infrastructure to optimize their stablecoins


As such, Frax has monetary premium down to an art

And with Finres, it now has all the components for a liquidity engine

A deterministic machine that sustains all four pillars of the structure defined in stablecoin maximalism to drive adoption for Frax stables @fraxfinance Before Finres, the engine consisted of the following components (defined below)

- CVX Gauge Weight
- Protocol Owned Liquidity (POL)
- Autonomous Market Operator (AMO)

We’ll focus on CVX and POL since AMOs are mostly supportive in the engine


The Spark: CVX Gauge Weight

Frax has been accumulating CVX since July 2021. Less than months after Convex launched.

A treasury deployment to farm CVX progressed into a partnership in cvxFXS, before eventually snowballing into one of Frax’s biggest competitive advantages @fraxfinance DeFi liquidity is expensive

Protocols compete for liquidity either by incentivizing LPs with inflationary emissions and bribes, or buying + vote locking $CRV

Both options incur heavy losses for the protocol, who competes against others in a race to the bottom @fraxfinance With $CVX, Frax’s cost of liquidity is practically zero

Using vlCVX’s influence on Curve gauges, Frax can bootstrap deep liquidity for any pool using mostly $CRV emissions to subsidize the liquidity costs

Allowing the protocol to retain most of the value it generates @fraxfinance Emissions and bribes attract LPs, increasing demand by way of minting, swapping, and borrowing, all of which accrue fees and TVL for Frax

All of these economic forces come together to create the first half of a liquidity flywheel for its stables


The Catalyst: Protocol Owned Liquidity

When the price of FXS exploded in 2021, FRAX collateral requirements were lowered, which enabled Frax to deploy its “surplus” collateral to acquire POL

POL provides control over the supply and cost of borrowing of Frax stables @fraxfinance Instead of relying on arbitrage or hard protocol shutdowns, AMOs + POL stabilize peg with unrivaled precision and intent

Want proof?

FRAX absorbed more than $1 Billion of sell pressure during the $UST meltdown


More importantly, by deploying POL, Frax is eligible for swap fees and emissions from its own pools, to

- re-collateralize FRAX
- buyback FXS to fully offset cost of liquidity
- recycle into vlCVX and veCRV gauges

And restart the cycle with more gauge weight and POL


That's not all, tokens paired with Frax Base Pool (FraxBP) inherit this flywheel

FraxBP = composable LP tokens of the FRAX/USDC Curve pool that can be paired with other assets

At its peak, FraxBP POL supported nearly $856m of liquidity across 36 pairs on Curve @fraxfinance Partner protocols are entitled to pool revenue proportional to the demand they generate for FraxBP

As demand rises, AMOs mint new FRAX into the pools, earning fees and emissions that are recycled by Frax into the flywheel.

Protocol gauge bribes are recycled the same way. The effectiveness of the FraxBP flywheel is best expressed in a blog post by @0xcryptoharry from Inverse Finance, the beneficiary of the DOLA/FraxBP pool that peaked at $61m


FraxBP aligns incentives perfectly between the partner and Frax

Demand for the stable = Demand for FRAX

In exchange, the partner gains an AMO managed swap facility, a stable peg, and a capital efficient flywheel for sustainable liquidity i.e. The whole liquidity engine

FinresPBC is the final piece in Frax’s liquidity engine

The key to a trillion dollar stablecoin

In Frax’s stablecoin maximalist centric view, it is impossible for any onchain stable to scale up to 4-comma mcap without ties to fiat @fraxfinance @0xCryptoHarry Finres’ functions as the RWA conduit for the Frax ecosystem, providing access to T-bills, reverse repos, and USD deposits earning the overnight rate

Completing the risk free yield pillar for FRAX with yield from the Fed


With Finres, Frax has constructed an onchain yield curve that uses the IORB rate to determine optimal allocation of assets to generate yield

My gud fren @deficheetah anticipates an influx of onchain + institutional capital to Frax as a result

Once FRAX is fully collateralized by RWAs

I also wouldn’t be surprised to see Frax phase out the FRAX/USDC BP for a pure FRAX BP, and scale it with the same liquidity flywheel

POL would instead be strictly used to facilitate FRAX <> RWA on/off ramping 

Everything Everywhere All At Once

At 100% collateralization, FRAX will join the ranks of USDT and USDC as reserve stablecoins backed by RWAs

But unlike Circle and Tether, Frax actually distributes the yield back to holders. FRAX will also become a hedge against volatility

AMOs and POL not only maintain stability autonomously and transparently in real time, but also accrue value for the ecosystem and its partners with flywheel economics

We will hold FRAX in our wallets like USDC & USDT. And with it, we hold the key to sFRAX, FXB, FPI, FRAXBP, and all current & future partner stablecoins and their respective ecosystems

Money markets, yield vaults, FRAX as a Service with Ondo Finance, Paypal with PYUSD etc.

Gaining access to everything, everywhere, all at once


The Endgame

And there you have it, a scalable, replicable liquidity engine powering FRAX, as well as FPI, and frxETH

Working deterministically to uphold the four pillars, generate monetary premium, and capture value for DeFi in all economic environments


To quote @defi_naly

Frax will offer "a monetary premium over the full interest rate liquidity cycle. Frax offers the full vertical, on-chain liquidity stack for investors”

High rates >> sFRAX & FXB

Low rates >> frxETH & sfrxETH

Frax will become the center of gravity for DeFi during the next bull run

Drawing in retail, DAOs, and institutions by issuing money, generating yield, structuring loans, and incubating other financial entities. We are witnessing the ascent of an ecosystem of composable assets and subprotocols

Capable of capturing trillions of $$$ of liquidity held in ultrasound stables and facilitated by precise, progressive engineering

A intergalactic force of nature

A black hole. Entering the black hole’s orbit creates friction

And with friction, galaxies are born.


If you’ve made it this far, my heartfelt thanks to you

I’ve spent a considerable amount of time on this piece

If you liked my work, I would appreciate your support with a like + RT of the linked tweet

And follow me @wintersoldierxz for more!

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