This week, the code to Frax’s new BAMM (Borrow AMM) has been cracked! And boy is it spectacular. I have been wondering how this mechanism would work for months and its only now that I am beginning to understand its implications. Let’s dive into to the details.
We are still early, and I will admit I don’t understand all the mechanics of BAMM yet, but I will try to explain what was leaked this past week as best as I can using the examples provided by the team. Frax is essentially taking the tried and true “x*y=k” AMM formula and using it as a smoothing mechanism to power “soft liquidations” behind BAMM!! Click here to see an example.
Let’s look at a simple example that was provided to illustrate the concept better, let’s assume that Eth is at $1000.00, Frax is at $1.00 and the Eth/Frax LP token is at $25,000.
If you deposit 1 Eth and take out $250.00 as a loan, in the AMM model, 1 ETH is added to the pool and 250 Frax is removed from it. But the KEY to BAMM is that the LP tokens are still worth $25,000!! Now imagine that your debt is denominated in the LP tokens, BAMM!! You have NO liquidations as the value of the LP always stays at $25,000. Pun intended! It’s the composition of the LP tokens that changed. If ETH has a massive price decrease, then the ETH in the BAMM is slowly sold along the AMM curve into Frax. As ETH recovers in price, the opposite happens. Frax is sold for ETH on the way back up.
The inherent design of BAMM also means that it does not need any price oracles! x*y=k does all the work for BAMM!!! There will however still be some losses as capital is sloshed around swapped seamlessly between one asset to the other, but nothing compared to a complete liquidation of your assets.
So, what does this mean for Frax and how does this all tie into Fraxchain and the CR? Well, my friends, BAMM will have other mechanisms including the ability to lock liquidity and earn higher yields. So now that I understand how BAMM’s zero liquidations works, I can see why someone who is supplying an asset would want to lock it into BAMM for longer periods of time. Longer locking periods will earn higher yields.
Imagine the BAMM lending market on Fraxchain, where any asset can be paired with Frax and locked with ZERO risk of liquidation. This locked asset can now be put on Frax’s balance sheet closing the CR gap. Once closed the Fraxchain sequence fees along with fees from every corner of the Frax ecosystem start to flow to veFXS lockers.
I covered this before in a prior article, remember that as locked liquidity builds up in BAMM, Frax can borrow against it to be used if Frax ever has a depeg event, making Frax the most resilient stablecoin with these mechanisms being developed. Even Michael Egorov from Curve chimed in and was awestruck when he saw the details behind BAMMs soft liquidations.
BAMM is completely permissionless, so any user can crate a lending pair just like they would on Uni V3. But unlike Uniswap, BAMM will have FXS guages so the pools can be bribed! Fees will be dynamic just like on Fraxlend!
Oh wait, did I mention that Fraxchain is actually live now on testnet RIGHT NOW!
Follow me @Cryptovestor77 on X for 24/7 Alpha on the Curve and Frax and now the f(x) Ecosystems.