Is this another strategy from Frax Finance to solidify its presence within the CRV ecosystem?

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Coinmonks

5 min readAug 25, 2023

Recently, FIP-278 was proposed by Samuel Mcculloch, a core member of the FlywheelDefi. This FIP proposes a strategic initiative to utilize FRAX DAO treasury funds for the purpose of acquiring CRV (Curve DAO Token).

The primary goals of this proposal are to enhance Frax’s participation in the DeFi ecosystem, boost liquidity across FRAX/FrxETH/FPI pairs, and rebalance a portion of FRAX DAO’s treasury funds.

But is it just that?

Or is it another strategy from Frax Finance to solidify its presence within the CRV ecosystem?

Before diving into details, let’s first understand how we got to this point.

How it all began

On July 30th, a breach was uncovered within Curve Finance that originated from a flaw in the Vyper compiler employed by the platform. This vulnerability at the compiler level led to an erroneous code compilation, consequently introducing potential hazards to token accounting. Despite prompt identification of the issue by Curve’s developers and other experts, the damage had already been done — funds were siphoned before a resolution could be implemented.

The principal impact was felt by Alchemix pools and other similarly affected pools. These pools faced the jeopardy of fund depletion due to inaccuracies in token accounting. Thankfully, ethical hackers lent their aid, ameliorating the consequences by restoring a portion of the pilfered funds.

The exploit laid bare vulnerabilities in specific versions of the Vyper compiler, underscoring the urgency of directing greater attention and resources toward its evolution and upkeep.

However, the aftermath of the Curve Finance breach brought turmoil to the CRV-FRAX pairing. Lenders hastened to withdraw their FRAX stablecoins to evade the potential liquidation of CRV tokens. This panicked exodus triggered a twofold surge in interest rates for $CRV borrowers, ushering in substantial challenges. Notably, this predicament extended to Michael, the progenitor of Curve Finance, who held a $CRV collateral loan on Fraxlend.

Fraxlend, a lending platform, set itself apart with a novel approach to interest rates. Its rates weren’t solely tied to utilization; they also hinged on the passage of time. Whenever utilization crossed a certain threshold, interest rates would double every 12 hours, fostering a dynamic borrowing and lending ecosystem.

This arrangement empowered borrowers to align their actions with financial feasibility while affording lenders the advantage of augmented interest earnings.

In the worst-case scenario, with a maximum loan-to-value (LTV) ratio of 75%, the position’s liquidation price could plunge to 0.517 CRV/FRAX within 4.5 days, equivalent to less than a 10% drop from the current price. While Egorov has attempted to mitigate risks by reducing debt and utilization rate, repaying 4 million FRAX over the last 24 hours, his efforts have been in vain as the market’s utilization rate stubbornly remains at 100%. This is primarily due to the immediate withdrawal of liquidity by users upon repayment.

Resolving the predicament necessitated Michael’s partial repayment of the debt across Fraxlend and other platforms. Especially noteworthy were the sizeable over-the-counter (OTC) transactions that materialized. In these deals, Michael dispensed some of his $CRV tokens to prominent figures within the sphere, including Justin Sun and Machi Big Brother. These transactions facilitated debt reduction and curtailed the utilization rate on the Fraxlend pair, thus staving off further escalations in interest rates.

Curve Finance has always been a prominent platform for efficient stablecoin trading within the DeFi space. Recent events have led to a favourable price environment for the CRV token. This presents a unique opportunity for Frax to accumulate CRV tokens.

Proposal:

The core of the FIP-278 proposal is to acquire CRV tokens through an OTC arrangement, leveraging 1 million FRAX from the Frax DAO treasury. The acquisition price will be aligned with previous OTC transactions conducted by Curve founder Mich.

It is important to note that the acquired CRV tokens will not be immediately sold. Instead, they will be strategically staked in veCRV (utilizing Frax’s whitelisted locker) and/or staked in cvxCRV.

The intended outcome of this CRV acquisition is twofold:

Firstly, it aims to strengthen Frax’s foothold within the curve ecosystem
Secondly, it positions the protocol for future growth opportunities

I think that by staking the acquired CRV tokens, Frax not only aligns itself with the growth trajectory of Curve Finance but also contributes to the ecosystem’s stability and development.

Central to Frax’s journey, has always been this strategic collaboration with Curve and Convex, shaping the landscape of yield aggregation.

This synergy fuses liquidity with incentivized provision, enhancing the ecosystem’s vibrancy. By offering multiple avenues, including staking, liquidity provision, and participation in Curve LP rewards, Frax establishes a dynamic ecosystem that thrives on user choices.