Frax Finance Deep Dive Report: Project Highlights and Latest Developments

Written by: AlphaXlabs

1. Background of Frax Finance

Frax Finance is a DeFi protocol that offers three stablecoins and staking derivatives (FRAX, FPI, frxETH) for earning yields, providing liquidity, and staking in DeFi. The protocol employs innovative sub-protocols and native governance tokens (FXS, FPI S) to ensure price stability and user governance. It is a major player in the global cryptocurrency market, with over $800 million in value locked, founded by Sam Kazemian.

Three Stablecoins

FRAX --- Core Stablecoin

Pegged to the US dollar (USD), FRAX aims to maintain a 1:1 value ratio, meaning that 1 FRAX is intended to equal 1 USD.

( CR * USDC + (1- CR ) * FXS )

The protocol combines on-chain assets and algorithmic mechanisms to ensure this peg. If the price of FRAX deviates from $1, the system intervenes by adjusting the collateral ratio to bring the value back into balance. Thus, FRAX not only provides the advantages of decentralization and transparency typical of cryptocurrencies but also plays a role in reducing high price volatility, making it a safe stablecoin for earning yields in DeFi.

On February 23, 2023, the proposal to shift the algorithmic stablecoin FRAX to a fully collateralized mechanism was approved by community vote, setting the collateralization ratio to 100% and increasing stablecoin reserves to eliminate algorithmic elements. As of now, FRAX has a market capitalization of approximately $1 billion.

FPI --- A New Type of Stablecoin Pegged to CPI

The Frax Price Index (FPI) is the second stablecoin in the Frax financial ecosystem. FPI is the first stablecoin pegged to a basket of real-world consumer goods defined by the average US CPI-U. The FPI stablecoin aims to keep its price consistent with the prices of all items in the CPI basket, thereby maintaining its purchasing power through on-chain stabilization mechanisms. It acts like an inflation-hedging stablecoin, as it does not lose purchasing power due to fiat currency depreciation.

FPI has its own governance token, Frax Price Index Share (FPI S), which entitles holders to earn from the protocol. Like the FRAX stablecoin, all FPI assets and market operations are on-chain and utilize AMO contracts.

frxETH --- A Stablecoin Pegged to ETH

In the Frax Finance ecosystem, Ethereum (ETH) exists as frxETH and sfrxETH, which are liquid staking derivatives. frxETH is a stablecoin designed to reflect the value of ETH at a 1:1 ratio, targeting a range of 0.9900 to 1.01 ETH for 1 frxETH. Whenever ETH is contributed to the system, it is minted in equal amounts.

At the same time, sfrxETH is the yield variant of frxETH. Users can exchange their frxETH for sfrxETH to earn staking rewards. As these rewards accumulate, more frxETH is minted and added to the treasury. Therefore, sfrxETH holders have a share in a growing pool of frxETH, similar to systems like Aave's aUSDC or Compound's cUSDC.

Three Applications

Fraxswap

Fraxswap is the first constant product automated market maker (AMM) with built-in time-weighted average market making (TWAMM), allowing for long-term large trades without trust. It is completely permissionless, with the core AMM based on Uniswap V2.

Fraxlend

Fraxlend is a lending platform that allows anyone to create a market between a pair of ERC-20 tokens. Any token from Chainlink data streams can be lent to borrowers or used as collateral. Each lending pair is an independent, permissionless market where anyone can create and participate in lending activities. Lenders can deposit ERC-20 assets into this lending pair and receive ftoken with yield. As interest is earned, the amount of the underlying asset that can be redeemed for ftoken continuously increases.

• Lending AMO is similar to mainstream lending markets (e.g., Aave/Compound). However, attention should be paid to the utilization rate in the pool.

Additionally, Fraxlend supports the ability to create custom Term sheets for the over-the-counter debt market. Fraxlend lending pairs can create features such as: maturity dates, restricted borrowers and lenders, under-collateralized loans, and limited liquidation.

Fraxferry

Frax ferry is a permissionless, non-custodial, and secure cross-chain bridge for transferring natively issued Frax protocol tokens across multiple blockchains without bridging or third-party applications. Funds will arrive within 24 to 48 hours.

2. FRAX Trading Market

Frax tokens can be traded on major exchanges, as shown in the figure below.

3. Tokenomics

Frax Finance adopts a dual-token model, utilizing USDC and its governance token Frax Share (FXS) to partially support its stablecoin Frax (FRAX), with a variable collateralization ratio[5]. Here are the tokenomics of Frax:

• Frax is a crypto-collateralized stablecoin pegged to the US dollar[1][6].
• The collateralization ratio of Frax is variable, meaning the amount of collateral supporting the stablecoin changes based on market conditions[5].
• Frax Share (FXS) is the governance and value accumulation token of the protocol[4][5].
• The distribution of FXS tokens is as follows[2]:
• 60% --- Liquidity programs/farming/community --- naturally halves every 12 months through metrics and governance.
• 3% --- Strategic advisors/external early contributors --- 36 months of advisory tokens for strategic work in legal, technical, and business aspects to promote the adoption of the Frax protocol. Tokens are distributed evenly over 3 years.
• 12% --- Accredited private investors --- 2% unlocks at launch, 5% vests in the first 6 months, 5% vests within 1 year, with a 6-month cliff.
• Frax Share (FXS) can be exchanged for Frax (FRAX) or for a portion of the collateral supporting Frax[3].
• The tokenomics of Frax Finance is designed to incentivize holders to maintain the stability of Frax. Holders can earn rewards by depositing their FRAX tokens into liquidity pools[1].

References: [1] https://sometimes-interesting.com/frax-frax-and-tokenomics-an-overview-of-the-frax-token/ [2] https://docs.frax.finance/token-distribution/frax-share-fxs-distribution [3] https://messari.io/report/frax-a-fractional-algorithmic-stablecoin [4] https://albaronventures.com/frax-finance-analysis/ [5] https://coinmarketcap.com/alexandria/article/what-is-frax-finance-features-tokenomics-and-price-prediction [6] https://frax.finance

4. Investment Institutions

Notable investment institutions participating in the investment include Dragonfly Capital, Mechanism Capital, Electric Capital, Robot Ventures, and ParaFi Capital, all of which are significant players in the institutional investment space. Noteworthy individual investors include recognized project founders in the DeFi space, such as Stani Kulechov from Aave, Kain Warwick from Synthetix, and Eyal Herzog from Bancor. Additionally, there are investments from centralized exchange (CEX) backgrounds, including well-known companies like Crypto.com, as well as Balaji Srinivasan, former CTO of Coinbase and partner at A16Z.

5. Team Introduction

One of the founders, Sam Hamidi-Kazemian, has a programming background and graduated from UCLA. In December 2014, he co-founded Everipedia with Theodor Forselius, also an alumnus of UCLA. This entrepreneurial project resulted in a unique online encyclopedia that combines wiki-style collaboration with blockchain technology. Over time, Everipedia has gradually become one of the most recognized DApps on the EOS platform, with Sam serving as president.

The journey of FRAX.finance began in 2019, initially supported by Stephen Moore, a senior economic advisor to Donald Trump. Although Stephen Moore played a significant role in promoting FRAX during 2019, he eventually distanced himself from the project.

Another co-founder, Travis Moore, also graduated from UCLA and began his entrepreneurial journey in a biological laboratory. He later entered the corporate world, holding various positions at the insurance company Anthem. In 2015, Sam Kazemian and Theodor Forselius invited him to join Everipedia as CTO, intertwining his life path with that of Everipedia's founders. Subsequently, when Sam initiated the FRAX project, Travis Moore continued his entrepreneurial journey as a co-founder while retaining the position of CTO.

Jason Huan is a co-founder and a 2021 graduate from UCLA with a bachelor's degree in computer science. He established a blockchain community at UCLA in 2017 and even contributed as a teaching assistant for the university's first blockchain course. During his internship at the blockchain company WhiteBlock, he wrote extensively about various blockchain platforms. Jason Huan joined the FRAX project in June 2020 and currently serves as the Director of Development.

References: [1] https://pitchbook.com/profiles/company/462109-69 [2] https://frax.finance [3] https://messari.io/dao/frax-finance-governance [4] https://iq.wiki/wiki/frax-finance

6. Trading Data

About Frax Share (FXS Token)

• 24-hour trading volume: $34,093,794
• Current circulating supply: 73,354,242 FXS
• Total supply: 99,681,496 FXS

7. Project Highlights

1. Core Team Status:

For further information about the team, please refer to the previous sections. Overall, the team is small but professionally distributed, with a rapid pace of product development and improvement. Sam Kazemian is a leading figure in external and community engagement, actively interacting with users in relevant communities and podcasts.

References: [1] https://www.countere.com/home/sam-kazemian-frax-interview [2] https://twitter.com/samkazemian/status/1664737658797686784 [3] https://twitter.com/samkazemian/status/1561042961315467264 [4] https://youtube.com/watch?v=RRfNuTA_ZEM [5] https://twitter.com/samkazemian/status/1681718947866120192

2. Recent Developments

• In June 2023, Frax Finance announced plans to launch its own Layer 2 scaling solution, Frax chain, by the end of the year. This news boosted the price of Frax Share (FXS).
• In July 2023, Frax Finance released a monthly report that included updates on various projects. One of the updates was about Liquid Staking tokens, with Flywheel releasing a comprehensive guide covering these tokens.
• In August 2023, Frax Finance published another monthly report with various updates. One of the updates was about Staked Frax ETH (sfrxETH), covering all relevant factors comprehensively.

The Frax Finance team has been focused on developing its platform and expanding the impact of its product range.

References: [1] https://www.ccn.com/analysis/frax-share-fxs-price-prediction/ [2] https://fraxfinancecommunity.medium.com/frax-finance-monthly-report-29-july-2023-ffca1da825e4 [3] https://fraxfinancecommunity.medium.com/frax-finance-monthly-report-30-august-2023-68add8e462be

3. Track Prospects

So far, Frax Finance has established a significant user base and business presence. It is no longer just a single currency protocol. Instead, it is forming a DeFi ecosystem centered around the stablecoin FRAX, supported by key features like LSD (frxETH), and expanding its coverage to elements like DEX (FRAX Swap) and lending (FRAX Lend).

Frax Finance's initial advantage lies in its efficient monetary mechanism and adaptive monetary policy based on AMO modules. Today, its product lineup covers lending, swapping, stablecoins, and LSD. These products are quite innovative in the DeFi space and may provide the project with lasting competitive advantages.

In summary, Frax is a comprehensive DeFi platform with a robust ecosystem, a unique stablecoin model, innovative features, and a strong commitment to security and efficiency. All these aspects make it a significant player in the DeFi space. Looking ahead to the upcoming LSDFi season, we may witness Frax reaching unprecedented heights.

4. Expected Returns

From the stablecoin perspective: As of now, the market capitalization of FRAX has remained around $1 billion, less than a quarter of DAI's market capitalization. Similarly, the total market capitalization of MKR is approximately $1 billion.

From the LSD perspective: Lido Finance has about $14.3 billion in Ethereum staking volume, while Frax Finance holds about $445 million. In terms of market capitalization, LDO is currently valued at around $2 billion.

From this perspective, Frax Finance's potential in the LSD competition should catch up to or exceed Lido Finance. Currently, the growth trajectory of frxETH is closely related to the distribution of stETH, and given that the growth of frxETH remains stable and strong, it has the potential to gradually eat into Lido Finance's market share.

When it comes to the landscape of stablecoins, the potential upside for Frax Finance is determined by two key factors. First, the established trading volume of FRAX has remained around $1 billion over the past year. Second, it is directly tied to the amount of crvUSD minted using frxETH as collateral. In just one month after its launch, the trading volume of crvUSD has exceeded $55 million. Additionally, the usage of frxETH as collateral closely follows that of wstETH, almost evenly split.

If we compare the total market capitalization potential of these two pioneering projects, it could reach up to $3 billion. Currently, the market capitalization of FXS is $670 million, indicating a potential growth space of about 4.5 times its current value.

• One point to consider is that the high yield of frxETH may create a ripple effect. Since its inception, the yield of frxETH has consistently outperformed Lido's stETH.

The adoption of the protocol and the increase in yields create a virtuous cycle. If the yield of frxETH exceeds that of stETH, more people may choose to deposit ETH into Frax. Especially after Lido introduced withdrawal features, the continuously expanding share of frxETH will generate more protocol revenue. These earnings will flow to veFXS stakers, thereby increasing veFXS staking returns. As FXS may be in high demand, this could lead to price increases.

Frax Finance's core advantage lies in its comprehensive narrative around LSD and stablecoins. Frax Finance collaborates with Curve to tap into liquidity release opportunities in the multi-billion dollar LSD market, a strategic move with broad prospects. In addition to leveraging increased LSD profitability, there is also potential to shape a new stablecoin landscape by utilizing crvUSD and the native stablecoin FRAX. This strategic approach could pave the way for a new perspective on post-stabilization currency protocols.