This publication presents the community an opportunity to add sFRAX to the Ethereum Aave V3 Liquidity Pool.
Motivation
Staked FRAX (sFRAX) is an ERC-4626 staking vault that distributes a portion of the Frax Protocol yield. sFRAX APY attempts to roughly track the interest on reserve balances (IORB) rate of the United States Federal Reserve.
Integrating sFRAX as collateral asset in the Aave V3 Ethereum Pool has the potential to create new demand for borrowable assets on Aave V3, such as stablecoins and FXS.
Chaos Labs supports the listing of sFRAX with the proposed parameter values. These parameters are noticeably equivalent to that of FRAX itself, as in the context of liquidations, sFRAX can functionally be atomically withdrawn to FRAX itself, thereby subjecting it to equivalent underlying liquidity logistics when deriving parameters.
We want to highlight that the underlying oracle within this ARFC is the FRAX/USD oracle, thereby effectively pricing sFRAX as FRAX whilst sFRAX alternatively grows in ERC-4626-standard fashion. This should be addressed prior to the final AIP, utilizing the sFRAX/FRAX exchange rate and employing the price-correlated oracle
Gauntlet recommends adding sFRAX to the Ethereum Aave V3 Liquidity Pool, conditioned on the price feed being addressed properly in final AIP.
Assessment
Market Cap
Current supply of sFRAX is ~28M.
Staking Yield
sFRAX is designed to allow holders of the protocol’s partially collateralized fractional-algorithmic stablecoin FRAX to earn yields matching the U.S. Federal Reserve’s (Fed) interest rate on reserve balances (IORB), currently around 5.4%.
Below shows yield rankings of stablecoin LSD on Ethereum, ordered by TVL.
Slippage and Liquidity
sFRAX liquidity creates ~2.5% slippage on trade over $2M sFRAX to FRAX (see here)
The primary liquidity venues for sFRAX include the sFRAX - crvUSD (~$165M TVL) on Curve (see here)
Counterparty Risk
In the sFRAX model, users deposit FRAX, and the DAO invests their own equivalent funds in short-term assets via Finres. Thus sFRAX is able to be atomically exchanged for FRAX without any liquidity concerns funds invested in RWAs.
Recommendations
Given the market cap, liquidity and risk profile analyzed above, Gauntlet recommend parameters as below.
It confirmed that @ACI is ready to proceed to the next stage - Creating AIP - of this proposal as the preparations for the implementation of CAPO are complete.
We request that @ChaosLabs provide the CAPO parameters and the latest recommended risk parameters to creat the AIP.
