FRAX: Forging the Future of Crypto
While crypto VCs pump their bags with Twitter hype, FRAX has been quietly building the decentralised financial infrastructure crypto needs.
The Strong, Silent Type
Making a sound long-term investment in a crypto project requires a lot of skepticism. This is especially true if you’re new to the game.
Since the initial coin offering (ICO) craze a few years back, the crypto space has been dominated by venture capital (VC) money. Trouble is, VCs don’t invest like you or I do.
They get in at rock bottom prices. Solana VCs invested their helicopter dollars at $0.04. Early Polygon buyers got in at $0.00079. The VCs that invested in Polkadot got their tokens at $0.29 (equivalent).
Retail doesn’t get to play that game. U.S. investors are restricted by accredited investor status. Even if you’re an accredited investor, you usually have to be whitelisted and you still have to bring a stack of cash.
But if you are on the whitelist and you have a truck ton of cash, it’s literally the easiest money in the world after that. The reality is, it doesn’t matter what the project does, it only matters what people believe it might do someday.
As long as the developers aren’t complete potatoes and the project is reasonably different enough to have some plausible use, it’s off to the races. Obviously some projects are better than others, at least in terms of what the “use case” is.
But none of these projects has any true utility in real world — yet. It’s no coincidence the narrative for most crypto projects is about how they’re going to change the world when it actually works.
So the focus of the VCs is to create two things as quickly as possible: a strong when it actually works narrative and a community. To do this, they incentivise popular bloggers, YouTubers, and the Crytpo Twitter folks to attract a community to the narrative.
Those incentives can be interviews, access to pre-sale tokens, invitations to media events or conferences, or even just straight cash. The VCs plant the seed, the YouTubers and CT provide the water, the community provides the soil and retail investors are the delicious fruit.
In the unregulated world of crypto, it’s a no-brainer for everyone involved (except retail). It would also be totally illegal if we were talking about stocks and equities (because of retail).
Point is, if you’re super committed to whatever project you happen to be invested in right now, it might be wise to step back a little. Stories and tribalism are primal influences that relate directly to human survival.
They’re also really easy to manipulate. So when you hear that XYZ project has a lot of name brand VC backing, that should be a red flag just as much as a green one.
The FRAX Difference
Not all projects are VC hype machines though. The crypto space is innovative. It is full of conscientious, highly skilled and super talented developers.
Likewise, just because a project has VC backing doesn’t mean it’s a vapour-ware trashcan. It just means if you’re a retail investor hunting for the next big thing, you should always be cautious, sceptical, and ruthless in appraisal.
When I first stumbled across FRAX, I was impressed, but wary. I did my diligence and bought FRAX Shares (FXS) shortly after. Since then I’ve not heard a peep of hype.
FRAX recently inked a deal to become a base liquidity pair on Curve. The largest de-fi protocol by a mile just fundamentally changed how they do business and you could hear a mouse fart over the reaction on Crypto Twitter.
And why should you hear anything? With no VCs lurking around to pump it, there’s no incentive to cover it. I’m covering it because I’m a crypto nerd and I know it’s a big deal.
Like, it’s a BIG DEAL.
The FRAX stablecoin design is elegant. At its heart is an algorithmically managed fractional reserve stablecoin. The ecosystem they’re building around it is nothing short of amazing.
The project was fair launch. Meaning, for FXS there was no pre-sale, no hype train ICO — basically no VC nonsense whatsoever (there were investors, of course). The devs put the tokens up for sale to anyone that wanted them and FRAX was born.
Since then, FRAX has been making huge waves all through the decentralised finance (de-fi) space. Here are a few reasons you should be paying close attention to FRAX Finance:
FRAX Base Pool
FRAX is now deeply embedded with Curve Finance. The reason for this is the Curve DAO (decentralised autonomous organisation) proposal #229, which recently passed.
Proposal #229 created a new “base” pool on Curve. For those not familiar, a base pool on Curve is a core liquidity pool a new token must pair with. Meaning, if you want stablecoin liquidity on Curve, one side of it is going to be a base pool.
Prior to proposal #229, the only stablecoin pool available was 3CRV, which was comprised of DAI, USDC, & USDT. There was almost a 4CRV, but Terra blew up and that went splat.
Nevertheless, because of the way Curve’s incentive system works, it was very difficult (expensive) for newly listed pairs to attract liquidity. What FRAX proposed was a new base pool comprised of FRAX and USDC only. This proposal overwhelmingly passed for a couple of reasons:
It is a base pool that removed USDT exposure.
It redirects CRV emissions that FRAX used to sell back into the Curve ecosystem.
But as a perk for new entrants, FRAX’s automated market operations (AMO) controller redirects all CRV emissions back to newly listed pairs on a percentage basis. This helps mitigate a major barrier to entry for emerging stablecoin designs.
It also (potentially) massively increases the demand for FRAX. In case you were wondering, that would also massively increase the value of FXS and veFXS.
As you can see in the image above, adoption isn’t exactly gang busters. But the the FRAXBP pool has only been live for about a month and chances are good, adoption is only going to accelerate.
FRAX Lending
This AMO will allow a borrower to directly mint FRAX into a money market like Compound. In order to borrow FRAX in the money market, it will require an overcollateralised deposit from the borrower.
This will basically be the entire Maker DAO protocol in one FRAX AMO. But the real beauty of the system is the fact that all interest rate conditions are controlled automatically by the AMO.
By either minting or burning FRAX, the AMO is able to exert enormous leverage over the cost of borrowing and shorting FRAX. In turn, this also allows for impressive control over when the AMO lowers or raises rates.
In other words, the protocol can become more competitive during advantageous market conditions and more conservative when market conditions are deteriorating. Not to mention FXS1559, which is an AMO rule that directs excess value back to veFXS holders.
While this is all still in development, FXS1559 will eventually be redirecting excess interest payments from lending operations back to veFXS holders. And much like the FRAXBP, it will also likely significantly increase demand for FRAX.
FRAX Swap
FRAX has already deployed a fully functional cross-chain swap with a really novel bridging mechanism. Their unique approach appears to negate a lot of the security issues around other cross-chain bridge concepts.
As you can see in the images above, liquidity on FRAX Swap is growing fast. It also has pretty impressive deployment across a number of name-brand layer one chains.
On a more practical point, it works great! In fact it’s become my go to swap when I’m moving tokens around or tinkering on different chains. This is only going to keep growing and those swap fees are…you guessed it, going back to veFXS holders.
AMOs and Gauges
Even before all this development, FRAX was generating revenue on Aave, Curve, Convex, Uniswap V3, and Yearn Finance through their AMOs and gauge mechanism. With Curve and Uniswap V3 in particular, FRAX has long been putting “idle” money to work.
In fact, one of the coolest things about the protocol are the AMOs. Everything the protocol does is on-chain. There’s no team of overconfident whiz-kids a la Terra Foundation Guard goofing around and making stupid plays.
Like I said earlier, this is easily one of the most elegant and thoughtfully designed crypto projects out there. And with the AMOs and gauges, it’s also been — since its inception — a positive income, revenue generating machine that is growing exponentially.
But wait, there’s more!
Perhaps the most bullish aspect of FRAX is one that I think gets the least attention: FRAX Price Index (FPI) and FRAX Price Index Shares (FPIS). With props to Sam Kazemian (one of the founders of FRAX), my eyes were opened to what a decentralised global currency might look like.
And I’m pretty sure it looks like FPI.
Consider if you will what the US dollar was, and has become. It started life pegged to gold. For 50 odd years, by government mandate, you could redeem a $20 bill for one ounce of gold.
Then the Great Depression hit and the United States pulled a Terra Luna and lost its peg. Shortly after, World War II happened and the world was in pretty bad shape.
The monetary solution was a pseudo-gold peg for the US Dollar, aka the Bretton-Woods agreement. The United States pulled another Terra Luna on that one too and de-pegged again in 1970.
Today, the dollar’s function is to roughly track the value of a basket of goods called the Consumer Price Index (CPI). The idea being, stability requires a currency that roughly tracks the value of obtaining the things we need to live.
Unfortunately, the US has not done a very good job of managing that “peg” either. But the theory is sound insofar as, a responsibly managed currency should reliably track a standardised acquisition cost of goods, labor, and services.
Thus, if the goal of a truly decentralised, non-sovereign digital currency is going to take root, the most plausible (from my perspective) way to do that is to have a currency that is a reliable, standardised unit of measure that tracks the cost of goods, labor, and services.
FPI is capable of doing that. Implementing it is a whole different ball of string. But I have a surprisingly (even to myself) strong conviction that FPI may very well become the de facto digital currency of the world one day. And I believe that “one” day may be much closer than we all realise.
At the very least, with the dollar gyrating all over the place and the inevitable regulatory restrictions coming down the pike, I don’t think US dollar pegged stablecoins will remain viable for the crypto economy long-term.
Meaning I’m also very much betting that when we go to trade for Bitcoin or Ethereum or whatever ten years from now, we may just might be quoting it in $FPI rather than $USD.
Sounds far-fetched, I know. But I’ll bet you an $FPI it happens.
Conclusion
Tracing back to the start of the article, I think it’s important that crypto investors remain cautious, sceptical, and ruthless in appraisal when looking at a project to invest in. And when it comes to VC backed mega-projects it’s even more important.
My thesis says FRAX is an elegant, thoughtful approach to stablecoins, and potentially a revolutionary approach to creating a decentralised, fair unit of account for the world.
And as much as I’ve poked and prodded and picked apart FRAX, I can’t invalidate the thesis. The peg has remained rock-solid through the crypto equivalent of four Lehman Brothers collapses and a war.
But beyond the peg, the founders have quietly been building out an ever-widening, inclusive, welcoming space for crypto to thrive. Their code is clean, their philosophical approach is admirable, and their designs work amazingly well.
Have I lost all perspective? Maybe. There’s a non-zero chance I drank the Kool-Aid. Thing is, FRAX has a ton of utility right now. It’s slowly becoming the “bank” of crypto. But I genuinely believe it’s bigger than that.
I think it might be the bank of the future.
These are just my opinions. I’m not a financial advisor, this isn’t financial advice, and always DYOR. Following any of these ideas might cause you to lose all of your money. I am 100% serious about that. I like tinkering with this stuff, but I’m on record acting like a total baboon. Invest accordingly.
Until next time, be safe, be smart and be sure to tie the camel.
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