FRAX 102: AN INTERMEDIATE AND IN-DEPTH ANALYSIS FOR DEFI ENTHUSIATS AND RESEARCHERS ON FRAX ECOSYSTEM
In my previous article, I introduced us to the fascinating world of FRAX FINANCE and I made an in depth analysis about what it is all about, history, and it’s innovative approach to stablecoins. From it’s unique fractional-Algorithmic approach to maintaining stability, its governance system, and its potential use cases, we discovered the interesting ecosystem of FRAX FINANCE.
In this article, I would dive deeper into mechanics and systems of FRAX FINANCE, it’s components, subprotocols, tokenomics, and examine it’s challenges and plans for the future. We would cover the major aspects of this incredible ecosystem and examine it’s ongoing efforts to evolve, and solve liquidity and stability. This is going to be a major coverage on the mechanics and functionality of the FRAX Ecosystem.
So if you want to join me on this journey and be updated on the fascinating world of FRAX FINANCE, read my previous here.
Let’s goooooo!
CONTENTS
Liquidity Pools and Staking Frax Tokens
FRAX Protocol
*frxETH
*sfrxETH
*The FRAX Minter
FRAX Subprotocols
*Fraxswap
*Fraxferry
* Fraxlend
Tokenomics
Future Plans for FRAX
Investors and Partners of FRAX Finance
How to Buy FRAX
Trading FRAX
Why FRAX Finance
References and Research Suggestions
FAQs
Key Words
Conclusion
Liquidity Pools and Staking Frax Tokens
The Frax protocol allows users to earn FXS tokens as rewards by contributing liquidity to several Uniswap (UNI) pools. These pools provide liquidity that makes FRAX tokens more tradable across the crypto space, hence strengthening the token’s peg and usability. Frax mints and distributes FXS tokens by adding liquidity to token pairs like the FRAX/USDC, FRAX/FXS, and FRAX/wETH on Uniswap pools.
Long-term time-locked staking: Users who want to be liquidity providers (LPs) can lock their LP tokens into the protocol for up to three years on Frax. Two boost factors multiply the LP stakes: collateral ratio and time locked. The collateral ratio boost applies to the base emission rate of FXS coin, which is 18,000,000 FXS per year. As a result, more FXS will be distributed across the platform. Meanwhile, the time-locked boost applies to an individual’s stake as a proportion of all of the stakes in the pool, making it a zero-sum game for all the stakers. That is to say, a user gets extra FXS tokens by raising their proportion of the pool, which lowers others’ proportion. While this mechanism may sound unfriendly, it’s to help balance the risk and reward of locking liquidity into the system for a fixed amount of time, particularly targeting LPs who are keen supporters of the Frax protocol.
FRAX PROTOCOL
The FRAX Protocol offers stable, flexible, innovative and decentralized stables to the DeFi Ecosystem and to acheive this, it has subcomponents and subprotocols which allows it to operate in an efficient manner.
There are 3 stablecoins in the FRAX Ecosystem and I will be examining the 3 below.
Let’s go
1 FRAX: The first and flagship stablecoin is FRAX and it is USD- pegged
2 FRAX Price Index (FPI)
3 frxETH
Now, let's get into it
FRAX
In my previous article, I explained how FRAX used fractional-algorithimic backing to revolutionize stablecoins by using both collateral and algorithmic backing to make it stablecoins more stable. It uses full collateralization and this has made it different and successful since it’s launch in 2020.It is the flagship stablecoin of the FRAX Ecosystem.
FPI
The second stablecoin is the FRAX Price Index. It is an important and unique part of the FRAX Ecosystem.
Let’s examine why.
FPI is unique as it is a stablecoin that is pegged to a real world of consumer items as defined by the US CPI- U average.
It is pegged to a basket of real-world consumer items to track inflation, keeping its price constant within the Consumer Price Index basket. Similar to FRAX, all FPI assets and market operations are on-chain and use AMO contracts which helped to regulate the supply and stabilize the price.
Additionally, FPI uses the CPI-U unadjusted 12-month inflation rate reported by the US Federal Government is used to determine the redemption price of FPI stablecoins in the system contract.
In this manner, FPI will be pegged to a decentralized consumer price index (CPI) with crypto native elements added on top of Chainlink’s custom CPI oracle built for FRAX. Frax and Chainlink’s initial integration, now live on Ethereum, involves using the Chainlink Any API functionality to create a decentralized, on-chain reference contract that stores the most up-to-date U.S. government Consumer Price Index (CPI) data.
Since the protocol is launched from within the Frax ecosystem, the FPIS token will also direct a variable part of its revenue to FXS holders.
With it's own governance token called, FPIS ( FRAX Price Index Shares) similar to FXS, holders of FPIS are entitled to receive a portion of the protocol’s seigniorage — which is essentially the profits generated from the creation of new tokens.
The aim is to to maintain its price constant to the price of all items within the CPI basket, thereby preserving its purchasing power with on-chain stability mechanisms like AMOs.
FRAX FINANCE intends to have FPI become the first on-chain stablecoin to have its own unit of account derived from a basket of goods from both crypto and non-crypto goods.
Currently, FPI is comprised mainly of FRAX. However, Frax Finance protocol plans to include other crypto-native assets such as bridged BTC, ETH, and non-crypto consumer goods and services in the future in a bid to improve the FRAX Ecosystem.
The Frax Price Index Share (FPIS) is the governance token of the Frax Price Index (FPI) stablecoin. It is called a "linked governance token" as it is interconnected to the FXS (FRAX Share) token.
FXS & FPIS are linked programmatically in a similar way that a layer 1 token is connected to a dapp token on its network.
Similarly, FPIS tracks FPI growth specifically similar to a specific ERC20 token tracks growth of its own protocol rather than the entire L1 economy.
Given that the FPI is pegged to a basket of consumer items, it represents a claim on the value of the basket. The value the protocol generates in excess beyond that basket is captured by FPIS holders. That’s an ingenuity of the FPI in the FRAX Ecosystem.
FPIS Tokenomics
FPIS Token Distribution (100,000,000 FPIS total supply)
No FPIS tokens can be minted over the 100m genesis supply except to keep the FPI peg to the CPI rate and keep the CR constant at 100%.
30% Frax Finance Treasury 30,000,000
FXS voters have total control in voting how to distribute these tokens through governance.
25% FPI Protocol Treasury 25,000,000
FPIS voters themselves have total control in how to distribute these tokens.
10% veFPIS Emissions 10,000,000
FPIS allotted to veFPIS stakers on a yearly halvening emissions schedule starting February 20th, 2023 at 4pm PST. First year emissions of 5M FPIS, second year emissions of 2.25M FPIS, third year 1.125M FPIS, etc. This emission will be augmented with additional FPI Protocol profits distributed to veFPIS holders when the FPI stablecoin is above a certain collateral ratio set by governance.
25% Core Developers & Contributors Treasury 25,000,000
4 year back-vested to start from February 20th 2022 at the same time as airdrop genesis with a 6 month cliff. Distribution occurs on/around 20th of each month.
10% February 2022 Airdrop to FXS Holders 10,000,000
FPIS Stability Mechanisms
To understand how FPIS is stabilized, we would need to remind ourselves about AMOs which I explained in my previous article.
The FPI uses AMOs similar to FRAX to stabilize. However, the main difference here is that it is modelled to keep the CR at 100% all the time.
This implies that for the collateral ratio to stay at 100% the protocol balance sheet must be growing at least at the rate of CPI inflation and the AMO strategy contracts must earn a yield proportional to CPI.
In a case in which the AMO yield falls below the CPI rate, the protocol will sell FPIS tokens for FRAX stablecoins to keep the CR at 100%. Then the TWAMM AMO strategy is removed when the CR returns to 100%.
This is where the FPI Controller Pool has various helper functions related to FPI and its peg in 3 processes:
1 The twammToPeg function
2 The giveFRAXToAMO
3 The receiveFRAXFromAMO
Users mint FPI with FRAX or redeem FPI for FRAX, with a small fee of initially 0.30%. The twammToPeg function is then used by the protocol to introduce market pressure to bring the market price of FPI up (or down) to the target peg price. Then the giveFRAXToAMO and receiveFRAXFromAMO functions are used by the contract to lend FRAX collateral to various AMOs that earn yield.
frxETH
frxETH was the latest catalyst in FRAX Finance latest success and it’s launch catapulted the FRAX Ecosystem into success and popularity with it’s latest Liquid Staking Derivative ( LSD) innovation, the frxETH.
Let's dive into what frxETH is all about and it's components.
Frax Ether is a liquid ETH staking derivative and stablecoin system designed to uniquely leverage the Frax Finance ecosystem to maximize staking yield and smoothen the Ethereum staking process for a simplified, secure, and DeFi-native way to earn interest on ETH.
On October 13, 2022, Frax Ether, the liquid staking system, went live. The system has three components – frax ether (frxETH), staked frax Ether (sfrxETH) and the Frax ETH Minter.
Staking refers to locking up coins in a crypto wallet in return for rewards. Liquid staking is the process of locking up funds to earn rewards while still having access to the funds locked via their liquid derivative coins.
The FRAX Ether comprises of 3 parts:
1 FRAX Ether (frxETH)
2 Staked FRAX Ether (sfrxETH)
3 The FRAX ETH Minter
Let's examine each below:
frxETH: In a LSD system, frxETH acts as a stablecoin loosely pegged to ETH, leveraging Frax's winning playbook on stablecoins and onboarding ETH into the Frax ecosystem. Inherently designed to track the price of the Ethereum cryptocurrency and shares much of its code with both the Frax and FPI stablecoins and implements the ERC-2612 standard.
frxETH is an ether-pegged stablecoin meant to be equal to one ether (ETH). Users can deposit ETH into the Frax ETH Minter contract and get an equivalent amount of frxETH, unlocking the liquidity of ether staked. The frxETH tokens can be used to provide liquidity on the decentralized exchange Curve. To earn rewards on the ether staked, however, users need to exchange frxETH with the staked frax ether or sfrxETH tokens.
sfrxETH: in a Liquid Staking Derivative system in the FRAX Ecosystem, sfrxETH is the ERC-4626 vault that accrues staking yield and represents the amount of frxEth that has been deposited in the protocol’s liquidity pool.
the version of frxETH which accrues staking yield. All profit generated from Frax Ether validators is distributed to sfrxETH holders. Simply by exchanging frxETH for sfrxETH, one become’s eligible for staking yield, which is redeemed upon converting sfrxETH back to frxETH.
Additionally, it can be obtained by first approving the sfrxETH contract as a frxETH spender and then calling mint() or deposit() as it is ERC -426 compliant.
The FRAX ETH Minter:
This is a Smart contract that allows the exchange of ETH for frxETH.
It does this by minting frxETH when it receives ETH through the submit() or receive() function.
Whenever a submission pushes the minter balance over 32 ETH, the contract pops a validator’s deposit credentials off of a stack and passes the 32 ETH deposit along with the credentials to the ETH 2.0 deposit contract, automatically spinning up a new validator nodes.
This makes the stablecoin more stable as it is backed by Ethereum in reserve.
FRAX FINANCE SUBPROTOCOLS
There are 3 subprotocols in the FRAX Ecosystem:
1 Fraxswap
2 Fraxlend
3Fraxferry
We will talking about the 3 subprotocols
Fraxswap
Fraxswap is a unique DEX with specialized features that can help stabilize the price of assets over a prolonged period.
Fraxswap is the first constant product automated market maker with an embedded time-weighted average market maker (TWAMM) for conducting large trades over long periods of time trustlessly. Fraxswap is fully permissionless and the core AMM is based on Uniswap V2 automated market marker which means it could be used trustlessly
Specifically, Frax Protocol will use Fraxswap to buy back and burn FXS from AMO profit, print new FXS to stabilize FRAX, and make purchases or sales according to market conditions.
Key Features
Time-weighted Average Market Maker (TWAMM):
The TWAMM is a specialized feature for algorithmic stablecoin monetary policy, forward guidance, and large sustained market orders. It is used to optimize the execution of long-term orders by pooling them together and aligning their expiries hourly.
Fraxswap implements an approximation formula of Paradigm’s original formula and allows for a simplified, more gas-efficient TWAMM.
Core AMM
The Core AMM for Fraxswap is Uniswap V2 and based on the full range xy=k constant product design. Fraxswap has adhered to many of the design decisions of Uniswap V2 as it extended the codebase to support TWAMMs.
Fraxswap also offers use cases for other protocols, stablecoin issuers, and DAOs, including the accumulation of a treasury asset, buying back governance tokens slowly over time, and defending “risk-free value” (RFV) for treasury-based DAOs
Fraxlend
It is a lending service for several ERC-20 assets in the Frax ecosystem. The platform provides a non-custodial lending platform and lenders will get a ftoken whose value accumulates interest from the loan. The Fraxlend platform also utilizes oracle technology to provide optimal pricing for borrowers and lenders. The interest rate is also set by algorithmic calculation.
Fraxferry
Fraxferry is a protocol that allows slower, simpler, but more secure method of bridging tokens.
It is a platform that can move Frax-based tokens issued natively on multiple blockchains. Fraxferry’s bridging technology is more secure than many other technologies but takes longer to process token transfers. So, Frax created this platform out of concern for bridge exploits that often occur in the crypto industry.
Motivation
1 Incessant hacks, bugs and rugs in the DeFi Ecosystem
2 Risk of loop and infinite mints
3 Slow and ineffective bridges
Tokenomics
Frax Share Token (FXS)
Frax Share Tokens eschew DAO-like active management similar to MakerDAO. FXS supply was initially set to 100 million tokens at genesis, but the amount in circulation is deflationary as FRAX is minted at higher algorithmic ratios. The design of the protocol is such that FXS would be largely deflationary in supply as long as FRAX demand grows.
FXS has control of the seigniorage and revenue flow of the protocol. FXS is similar to ownership/stake in the protocol, not debt which is a separate financial primitive.
Frax Finance has two different tokens, FRAX, which is the protocol’s stable token that is pegged to the US dollar, and FXS, which is the governance and value accrual token. The protocol’s economic model concentrates its potential upside and downside in FXS. Assuming that Frax’s demand and adoption grows, there would be more FXS being burnt than minted and its supply would be deflationary, otherwise, there will be a surplus of FXS being minted and the token would be inflationary.
The total supply of FXS was initially set to 100M tokens, nonetheless, this supply isn’t fixed and it will fluctuate depending on the amount of FXS that is burnt and minted. Redeeming Frax is the only way to mint FXS, however, new FXS is also added to the circulating supply through Frax’s liquidity programs.
The entire revenue generated by Frax Finance accrues to FXS holders through token burns that effectively distribute all profits generated by the protocol. This revenue is coming from minting and redeeming fees, seigniorage, excess collateral, and yield generated by Frax’s AMOs. Considering that all revenue is captured by FXS holders, it is possible to conclude that there are robust intrinsic incentives to hold the token.
The liquidity programs that the protocol has in place represent the main source of systemic sell pressure for FXS. In order to improve its tokenomics, the protocol has recently lowered the emission rate of FXS from 56,000 FXS/day to a rate of 49,315 FXS/day through the removal of the CR boost. This boost was negatively correlated with the collateral ratio and represented a uniform boost across all emissions thus benefiting farmers with no long-term commitment to the protocol. As of now, the only stakeholders that receive any kind of boost in inflationary rewards are the ones with aligned long-term incentives through locked liquidity.
Lastly, the protocol has recently introduced a new improvement to its tokenomics with the implementation of FXS1559. This implementation enables autonomous buybacks of FXS with revenue provenient from AMOs that consequently reduce FXS’s supply. At the current rate, this represents a daily burn rate of $20K worth of FXS. Considering that the emission rate of FXS is approximately 15x larger than the current burn rate it is possible to conclude that in the short/medium term the primary demand for FXS will rely on market speculation. In addition to this, Frax Finance has also an upcoming tokenomics improvement that will provide a single asset staking functionality for FXS.
There is a maximum supply of 100,000,000 FXS tokens, 65% for the community and 35% for the team and investors.
Community – 65% (65,000,000 FXS)
· 60% - Liquidity Programs / Farming
· 5% - Project Treasury / Grants / Partnerships / Bug Bounties
Team and Investors – 35% (35,000,000 FXS)
· 20% - Team / Founders / Early Project Members (12 months vesting with a 6 month cliff)
· 3% - Strategic Advisors / Outside Early Contributors (36 months vesting)
· 12% - Accredited Private Investors (2% unlocked at launch, 5% vested over first 6 months, 5% vested over 1 year with a 6 month cliff)
Future Plans for FRAX
In their bid to be a major stablecoin and offer innovative solutions to the rapidly growing DeFi ecosystem, FRAX Finance is working hard on different strategies to acheive this.
New innovations like FRAX Base Pool (FRAXBP) are one of the exciting things the team is planning for the ecosystem.
There are also plans to add other assets to the reserve, including native tokens of layer 1 blockchains that support the stablecoin. This is part of Frax’s strategy to diversify the reserve and reduce dependence on any one asset.
Frax plans to buy these native tokens as part of its reserve management strategy. This is because the native tokens of layer 1 blockchains are likely to have a low correlation with other assets in the reserve, which can help to reduce overall risk. Additionally, owning these tokens can provide Frax with access to the underlying blockchain infrastructure, which can be useful for developing new products and services within the Frax ecosystem.
Also, by using real-world loans as collateral, Frax can increase the overall size of the collateral pool and reduce the risk of price volatility associated with crypto assets. This can help to increase the stability and reliability of the FRAX stablecoin, which is a key goal of the Frax ecosystem. It’ll also provide an opportunity for borrowers in traditional finance markets to access the benefits of decentralized finance.
Investors and Partners of FRAX FINANCE
ParaFi Capital https://iq.wiki/wiki/parafi-capital
Mechanism Capital
Dragonfly Capital
Crypto.com Capital
Electric Capital
Multicoin Capital
Galaxy Digital
Tribe Capital
Robot Ventures
Ascensive Asset Management
Calvin Liu (Div. VC)
Stani Kulechov (Aave)
Kain Warwick, Jordan Momtazi (Synthetix)
Eyal Herzog, Guy Benartzi (Bancor)
Balaji Srinivasan
Santiago Roel Santos
Tetranode
How to Buy FRAX
You can get in the exciting world of FRAX FINANCE by buying and holding $FRAX and $FXS Token on different exchanges and DEXES on which the token is listed. Follow the steps below to get started! For this step, I will be using The Bybit Exchange
Step 1: Open an account on Bybit and verify it to complete the registration process.
Step 2: Purchase USDT by visiting the Buy Crypto page. You’ll see several options to buy USDT: Express, Fiat Deposit, Crypto Deposit and P2P Trading. Choose the option that's right for you.
Step 3: After you’ve purchased USDT, click the Derivatives tab, then choose USDT Perpetual from the drop-down menu. You’ll be directed to the Perpetual trading terminal.
Step 4: Search for the FXS/USDT trading pair on the left side of the trading platform, which usually displays BTC/USDT by default
Step 5: Enter your long or short position and leverage size by filling in the values on the right side of the trading terminal.
Step 6: For larger amounts of FXS, you can use the TWAMM feature on Fraxswap to trade between FXS, FPI, and FPIS with low slippage over a selected period.
Trading FXS
If youre looking to buy FXS on-chain, you can buy the cryptocurrency of your choice on Bybit or Binance and send it to a wallet such as MetaMask before swapping it for FXS on Fraxswap or Uniswap. For larger amounts, you can try the TWAMM feature on Fraxswap that allows you to swap between FXS, FPI and FPIS with low slippage over a selected period.
WHY FRAX Finance?
FRAX FINANCE is revolutionary. With their fractional-algorithimic backing, they changed the game on stablecoins and created a scalable, and flexible stablecoin
Frax has the potential to outperform Ethereum (ETH) due to its role as a stablecoin issuer for ETH and BTC. It has a higher yield than other LSD protocols and is therefore a potentially attractive choice for investors looking to switch after the Shanghai upgrade.
Frax Finance has the assets and strong reserve of Frax stablecoin, which can be necessary to replace WETH. If more trading pairs can be created with frxETH, the Frax liquidity AMO can be used to mint Frax based on the protocol collateralization ratio. This’ll lead to frxETH accumulating more market share and providing a healthy source of income, solidifying FXS as a revenue-generating token.
I will be listing some benefits you can gain by joining the FRAX Ecosystem
1 Diversification: Investing in the Frax ecosystem provides you with diversification options, as the protocol operates on multiple blockchain platforms
2 Security
3 Staking rewards: You can stake your $FXS tokens to earn a share of the network’s transaction fees and inflation rewards.
4 Governance participation: $FXS token holders have voting rights to influence the Frax protocol’s governance and decision-making processes.
All these and more are the benefits you can enjoy by joining the fastest growing DeFi Ecosystem in the crypto world. The ecosystem is constantly growing, improving and the future is incredibly exciting for FRAX Finance and this is the best time for you to join in!
References and Research Suggestions
1 FRAX Whitepaperhttps://docs.frax.finance/
2 Explore potential use cases for the stablecoin and consider integrating it into decentralized finance applications or using it as a store of value.
3 Participating in governance decisions by staking your FRAX tokens
4 Contribute to the Frax ecosystem through development, education, or other forms of community involvement
FAQS
1) How’s FRAX different from other stables?
ANS: FRAX used fractional-algorithimic backing to make the stablecoin more scalable, flexible and stable
2) Where can I buy $FRAX and $FXS?
ANS; You can buy any FRAX Finance token on DEXES and exchanges where they are listed eg Binance, Bybit
3) Where can I swap FXS?
ANS; You can swap FXS on Fraxswap or Uniswap
4) How can I make money with FRAX?
ANS: You can make money by staking your $FRAX and also by making arbitrage trades across DEXES among others
5)Why use a fractional stablecoin?
ANS: Capital efficiency, as well as decentralization.
KEY WORDS
1) Fractional-algorithimic Stabilisation
"Fractional-algorithmic" stabilization, which involves adjusting the supply of tokens in circulation based on changes in demand.
FRAX is the first stablecoin to use fractional-algorithimic backing
2) AMO( Algorithmic Market Operations)
A controller module designed to maintain the stability of FRAX peg
3) Staking
Staking in crypto refers to the process of holding and locking up your cryptocurrency funds in a wallet to support the operations of a blockchain network. By staking your crypto, you actively participate in the network’s consensus mechanism and help secure the network. In return for your contribution, you earn rewards in the form of additional cryptocurrency tokens.
4) Minting
Minting refers to the process of creating new tokens or assets on a blockchain network.
5) Governance Token
Governance tokens are tokens that developers create to allow token holders to help shape the future of a protocol.
CONCLUSION
FRAX Finance is revolutionizing DeFi and stables. With their innovative approach with algorithmic and Collateral backing, they are changing and spearheading the revolution in stablecoin ecosystem. The FRAX hybrid model is extremely innovative and I believe that they can take the spot of being the leader of decentralized stablecoins as they continue to build on the project.
FRAX has its risks and it is exciting to see what they are going to build in the nearest future. The stablecoin market is predicted to reach a few trillion of dollars once the cryptocurrency market matures in the future. This could be a strong catalyst for FRAX as the demand for stablecoins would cause more adoption for FRAX, which will result in the growth of the project and increase in the price of FXS.
Disclaimer:All informing here is solely for educational purposes and is not a financial advise. I am not responsible for any financial decision made on the basis of my article. I encourage you to make your own research and make your financial decision on that basis. All information in here are solely for educational purposes.
Thank you
