ARC Proposal: Onboarding sfrxETH from Frax Protocol to Aave V3 Ethereum Market

Governance
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ARC Proposal: Onboarding sfrxETH from Frax Protocol to Aave V3 Ethereum Market

References:

Website: https://app.frax.finance/frxeth/stake
documentation: https://docs.frax.finance/frax-ether/frxeth-and-sfrxeth
Documents:
Github: https://facts.frax.finance/frxeth
Source code for the system(s) that interact with the proposed asset: fraxMinter
Ethereum contract address: https://etherscan.io/address/0xac3e018457b222d93114458476f3e3416abbe38f
Audits:

Code4Arena
Bug Bounty: 10% of the total possible exploit or $10m worth paid in FRAX+FXS (evenly split).
Communities:

Telegram: https://t.me/fraxfinance
Discord: https://discord.gg/UJVtDTFRaA
Governance Discussion: https://gov.frax.finance
Governance Voting: https://snapshot.org/#/frax.eth
Twitter: https://twitter.com/fraxfinance

Summary:

This ARC presents the community with the opportunity to add sfrxETH to the Ethereum V3 market as a reserve.

Motivation:

Frax Protocol is a decentralized synthetic asset platform that allows users to mint and trade synthetic assets that track the value of real-world assets. sfrxETH is a synthetic token that represents an exposure to the price of ETH.

Adding sfrxETH to the Aave V3 market as a reserve would bring additional diversity and liquidity to the ecosystem. Frax Protocol’s synthetic assets are strategic assets for Aave and the launch of V3 on mainnet introducing caps & emode allows to replicate the stETH success in a risk-averse environment for other LSDs assets.

Onboarding frxETH is a source of additional revenue for Aave and benefits the ecosystem as a whole because these onboarding has an effect on assets liquidity & peg resilience.

Aave has the opportunity to help ecosystem diversity and decrease the concentration of liquidity to a unique entity while supporting more staking overall and increasing Ethereum decentralization.

Specification:

What is the link between the author of the AIP and the Asset?

The Aave-Chan Initiative is not related in any form nor paid by Frax Protocol to push this proposal. Increasing LSD diversity is part of the ACI delegate platform. The ACI received support from the Frax Protocol team to fill this proposal with relevant data and to answer sfrxETH-related questions.

Provide a brief high-level overview of the project and the token?

Frax Protocol is a decentralized synthetic asset platform that allows users to mint and trade synthetic assets that track the value of real-world assets. frxETH is a synthetic token that represents exposure to Ethereum Staking. The sfrxETH token can be used to gain exposure to the staking of ETH and its revenue without actually the need to run a validating node. This allows users to access Staking ETH without having to hold a 32 ETH minimum and run a node infrastructure. Adding sfrxETH to the Aave V3 market as a reserve would bring additional diversity and liquidity to the ecosystem.

3. Explain the positioning of the token in the AAVE ecosystem. Why would it be a good borrow or collateral asset?

  • sfrxETH is a productive asset it appreciates in value over time based on the rewards generated by Frax node operators… Wherever ETH is presently used as collateral, sfrxETH would make a better collateral since it accrues the staking reward in addition to the underlying ETH value.
  • sfrxETH is based on Ethereum staking returns and has a relatively low counterparty risk compared to other yield bearing tokens.
  • sfrxETH is a good long-term holding collateral, but many people want the option to access the value now and so want to use it as collateral for loans.
  • sfrxETH could be used in leverage and hedge trading strategies by borrowing/lending in Aave.
  • sfrxETH is a standard ERC-20 token and does not rebase, and so it should be technically easier to integrate into Aave.

4. Provide a brief history of the project and the different components: DAO (is it live?), products (are they live?). How did it overcome some of the challenges it faced?

Core concepts to understand the unified Frax Finance ecosystem include:

Fractional – Frax is the first and only stablecoin with parts of its supply backed by collateral and parts of the supply algorithmically stabilized. The stablecoin (FRAX) is named after this hybrid fractional-reserve system.

Fraxswap, a native AMM – Fraxswap is the first AMM with time weighted average market maker orders used by the Frax Protocol for rebalancing collateral, mints/redemptions, expanding/contracting FRAX supply, and deploying protocol owned liquidity onchain.

Fraxlend, permissionless lending markets – Fraxlend is the lending facility for the FRAX & FPI stablecoins allowing debt origination, customized non-custodial loans, and onboarding collateral assets to the Frax Finance economy.

Crypto Native CPI Stablecoin – Frax’s end vision is to build the most important decentralized stablecoins in the world. The Frax Price Index (FPI) stablecoin is the first stablecoin pegged to a basket of consumer goods creating its own unit of account separate from any nation state denominated money.

Four Tokens – FRAX is the stablecoin targeting a tight band around $1/coin. Frax Share (FXS) is the governance token of the entire Frax ecosystem of smart contracts which accrues fees, seigniorage revenue, and excess collateral value. FPI is the inflation resistant, CPI pegged stablecoin. FPIS is the governance token of the Frax Price Index and splits its value capture with FXS holders.

Gauge Rewards System – The community can propose new gauge rewards for strategies that integrate FRAX stablecoins. FXS emissions are fixed, halve each year, and entirely flow to different gauges based on the votes of veFXS stakers.

Frax Ether: it is a liquid ETH staking derivative 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.

5. How is the sfrxETH token currently used?

FraxLend is the current primary use case of sfrxETH to be used as collateral, with a liquidity of $13.6M

It’s likely an Aave V3 onboarding will put Aave V3 in a top position of sfrxETH holding.

sFrxETH is a yield-bearing Asset

6. Emission schedule

There is no emission schedule.

sfrxETH is only minted when stakers deposit ETH to convert it to frxETH and then stake into frax protocol to obtain sfrxETH

7. Token (& Protocol) permissions (minting) and upgradability. Is there a multisig? What can it do? Who are the signers?

sfrxETH is minted when stakers deposit frxETH into the Frax Protocol deposit pool, and sfrxETH is burnt when stakers withdraw their frxETH.

  • The Frax protocol contracts do have permissions that grant administrators mint/burn capabilities. This was pointed out in code4Arena audit.

8. Market data (Market Cap, 24h Volume, Volatility, Exchanges, Maturity)

  • Market capitalisation: $60 192 819
  • 24H Volume ~$1.4M (frxETH/ETH on Curve)

Decentralized exchange liquidity pools

Exchanges:

  • Curve (the main source of liquidity with frxETH/ETH, sfrxETH can be unstaked for frxETH)
  • Balancer
  • Uniswap V3

Further information here: [Fill this]

9. Social channels data (Size of communities, activity on Github)

  • Discord: 850 members
  • Twitter: 64.1k followers
  • Github: 67 followers
  • Telegram: 14200 members

10. Contracts date of deployments, number of transactions, number of holders for tokens

  • Date of Deployment: 10-06-2022
  • Number of Transactions: 2958 transactions
  • Number of holders for token: 858 holders (liquidity pools are recorded as 1 address)

Technical Specifications

sfrxETH
sfrxETH is a ERC-4626 vault designed to accrue the staking yield of the Frax ETH validators. At any time, frxETH can be exchanged for sfrxETH by depositing it into the sfrxETH vault, which allows users to earn staking yield on their frxETH. Over time, as validators accrue staking yield, an equivalent amount of frxETH is minted and added to the vault, allowing users to redeem their sfrxETH for a greater amount of frxETH than they deposited. The exhange rate of frxETH per sfrxETH increases over time as staking rewards are added to the vault. By holding sfrxETH you hold a % claim on an increasing amount of the vault’s frxETH, splitting staking rewards up among sfrxETH holders proportional to their share of the total sfrxETH. This is similar to other auto-compounding tokens like Aave’s aUSDC.

Security Considerations

Frax Finance smart contracts have been independently audited by :

bug bounty:

The bounty is simply calculated as the lower value of 10% of the total possible exploit or $10m worth paid in FRAX+FXS (evenly split). https://docs.frax.finance/smart-contracts/miscellaneous

Risk parameters

While we suggest the community to wait for the feedback from risks teams Gauntlet (@Pauljlei) & @ChaosLabs, the ACI suggests the following risk parameters to start the conversation. These parameters define a non-borrowable asset with a 67% LTV.

because sfrxETH has limited supply and liquidity compared to stETH and rETH,

and because, as of now, minting permissions are not strictly limited, a supply cap is added in this proposal to limit protocol exposure to this asset

additionally, the current maturity of sfrxETH is not considered fit by the ACI to be a candidate for emode.

The ACI invites the community to follow the evolution of sfrxETH and consider adjusting mid-term the risk parameters of sfrxETH.

This will make sfrxETH slightly less attractive than stETH, rETH & cbETH but reflect the difference in liquidity between them.

Symbol: sfrxETH

Isolation Mode: NO

Borrowable: NO

Collateral Enabled: YES

emode: NO

LTV: 67%

LT: 74%

LB: 7.5%

RF: N/A

LPF: 0.10

Debt Ceiling: N/A

Supply Cap: 5k

Borrow Cap: N/A

8 Likes
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i think adding sfrxETH to Aave will be a huge benefit, because unlike the other LSD, Frax has a better token model in regards of tax. Instead of for example paying up to 45% its only 20%. So a lot more incentive to use sfrxETH instead of the others.

6 Likes
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Chaos Labs supports adding sfraxETH due to the token’s low counter-party risk and decentralized nature. Considering the recent recommendations for other LSDs, such as cbETH and rETH, we believe the same parameters could be applied in this case.

We support the suggested supply cap of 5K. It reflects the differences in market cap and liquidity compared to the recommendations for cbETH and rETH (10K) while taking into account the ability to unstake to frxETH and the deep liquidity for frxETH on Curve.

Symbol Isolation Mode Borrowable Collateral Enabled LTV LT LB RF LPF Debt Ceiling Supply Cap Borrow Cap
sfraxETH NO NO YES 67% 74% 7.5% N/A 0.10 N/A 5K N/A
1 Like
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Thanks for your answer @ChaosLabs, updating the ARC to integrate your feedback and escalating this proposal to snapshot stage.

edit: Link to snapshot vote

5

From my understanding, sfrxETH has significant counterparty risk to the frax team, including:

  • Managing all validators for frxETH
  • Minting rights for frxETH (as mentioned above)
  • Withdrawal keys for staked ETH underlying the asset
  • Control of frxETH Curve LPs generated by withholding 10% of user ETH deposits and pairing with newly minted frxETH

There is no need to run a product like this on a multisig. I find it difficult to call sfrxETH a decentralized liquid staking derivative in its current form. It feels a bit reckless to accept this asset in the same week as the recent Kraken news.

I think sfrxETH would be a suitable addition to Aave once minting, validator withdrawals, and any AMO LP deposits are managed in a decentralized manner (eg on chain governance by FXS or veFXS holders), and underlying staked ETH is distributed across several validators rather than just the Frax team.

3 Likes
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We agree with @monet-supply here, and voted no for the same reason. Our full rationale is posted here.

TL;DR - sfrxETH is valuable for the ecosystem and definitely should be onboarded to Aave at some point in the future, but is immature at the moment and control is relatively centralised in the Frax team.

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Apologies for the late reply, but out of an abundance of caution we will be voting against this proposal due to the centralization and counter-party risk associated with sfrxETH (as highlighted by @monet-supply and which can be found here)

While the 5k supply cap is conservative, in the case of an adverse event I doubt Aave’s expected revenue will be greater than the expected loss.

We’d be much more comfortable voting for this once the Frax team has addressed major centralization concerns, which they expect to do post-Shanghai upgrade.

1 Like
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Update, the snapshot vote passed.

That being said @Pauljlei & Gauntlet have requested time to produce feedback on this proposal.

The ACI will wait for their contribution before posting the AIP to allow the community to form an opinion with as much feedback as possible before casting their vote.

2 Likes
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Gauntlet Analysis

Below, we have conducted research to shed light on the trust assumptions of various ETH LSDs, in order to provide the community with additional information. Although Gauntlet’s platform focuses on market risk, we hope that the below research provides transparency and helps the community in making an informed decision.

TLDR: Based on the below, listing sfrxETH requires greater trust assumptions compared to stETH and rETH.

Frax sfrxETH Coinbase cbETH Lido stETH Rocket Pool rETH
Validator Ran by the FRAX core devs Ran by Coinbase 30 entities approved by Lido DAO 2000 deposit addresses
ETH rewards Managed by the FRAX Multisig Treasury Contract Managed by Coinbase Controlled by smart contract + DAO-assigned oracles, the withdrawal credentials are derived from the withdrawal address supplied by the DAO Controlled by smart contract + Oracle DAO, the reward snapshot is compiled into a Merkle Tree and the Rocket Pool contracts enables node operator to claim the reward
Permissions for Minting LSD frxETHMinter contract has frxETH minting permission. The contract owner is a multisig with various permissions. cbETH contract’s master minter set the MintForwarder contract as a minter. The outstanding stETH amount is based on the total amount of ETH controlled by the protocol. Only the RocketDepositPool contract is allowed to mint rETH.

While the counterparty risk is difficult to quantify, based on these qualitative evaluation criteria, listing sfrxETH requires greater trust assumptions compared to stETH and rETH. Given that different LSDs exhibit different levels of trust assumptions, the decision of listing sfrxETH should be based on the community’s risk preference that is separate from market risk.

Frax sfrxETH Frax frxETH Coinbase cbETH Lido stETH Rocket Pool rETH
Market Cap $81M $160M $1.8B $8.4B $350M
Top Liquidity Sources $1.9M on Balancer $62M on Curve $7.3M on Uniswap v3, $3M on Curve, $6.5M 2% depth on Coinbase $820M on Curve $26M on Balancer, $3M on Uniswap v3
DEX 25% Depth $2.7M $88M $9M $1.1B $84M
Supply Cap 10,000 200,000 10,000

Given that sfrxETH may be unstaked into frxETH via smart contract, users looking to liquidate an sfrxETH backed loan can make use of frxETH liquidity. Setting aside the counterparty risk, the liquidity of frxETH on the DEX is greater than that of rETH, although its market capitalization is lower. Therefore, we recommend using the same parameters as those used for rETH (if the community decides on listing sfrxETH). Please refer to our rETH post for considerations regarding ETH staking derivatives.

With the proposed supply cap of 5,000 suggested by Chaos, the highest possible opportunity cost of deferring sfrxETH for two months would be approximately $31.1k in borrowing interest (calculated as 5000 * $1680 * 0.74 LT * 3% stablecoin borrow interest * 2 months / 12, as of 2023/02/16), assuming the majority of the debt against sfrxETH will be stablecoin. Therefore, two potential paths are recommended for moving forward:

  • Conservative approach: wait for the release of frxETH v2, which is expected to launch following Shanghai upgrade, and will enable a more decentralized validator set. By delaying the listing of sfrxETH, the maximum potential opportunity cost in borrowing interest is estimated to be $31.1k.
  • Aggressive approach: if the community favors the listing of sfrxETH, they may choose to reduce the supply cap from 5,000, based on their level of confidence in the Frax team. Gauntlet is unable to provide a specific recommendation for the supply cap since counterparty risk cannot be quantified.

We hope that this analysis helps the community assess the risk-reward tradeoffs.

3 Likes
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Hi guys - what are the plans for an oracle for sfrxETH?

Haven’t seen mention of this in the post or much elsewhere.

I’ve noticed this oracle address on other forums 0xd2F0fa7f2E6a60EEcf4b78c5b6D81002b9789F2c but would love to gauge the community’s willingness for a “SfrxEthFraxDualOracle”

Seems to incorporate Chainlink + Curve EMA & UniV3 TWAP.

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When will the AIP for this proposal be submitted?

12

As soon as a Chainlink price feed is available for this asset.

2 Likes
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what is curve using for their oracle for crvusd w/ sfrxeth?

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IIRC Curve is oracle-less, only relying on pool liquidity to determine price of each asset relative to the other.

And it can’t be used as an oracle as it can be (and already been) manipulated, while benign for curve itself it’s not for protocole that would use them as oracle.

edit: typo