Proposal: Add support for FXS

Proposal: Add support for FXS (Frax Share)
Updated to fit the ARC template

Add FXS as an asset on Aave
I’m a Frax community member helping with integrations.

References

Summary

FXS is the governance token of the Frax stablecoin protocol. FXS currently has a $110 million market capitalization on approximately $20 million of daily volume. The FXS token currently governs over $300 million of value within the Frax protocol. FXS is not currently listed as an asset on any decentralized money market protocols. The Frax community has expressed demand to leverage against FXS and lend / borrow FRAX, making Aave the ideal market for both assets. Frax is already integrating with Aave and is currently the 4th largest aUSDC holder and growing, demonstrating a strong synergy between the communities.

v2 of the Frax protocol was recently announced and introduces a lending module that can be built directly onto Aave. This would enable the Frax protocol to supply large amounts of FRAX to Aave on demand. The first step towards this integration is the addition of FRAX and FXS as assets on Aave.

Overview

FRAX is a fractionally algorithmic stablecoin with a dynamic collateral ratio that adjusts based on the market demand for FRAX. Currently, each FRAX is collateralized by approximately $0.87 USDC and $0.13 of the Frax governance token, FXS. When the price of FRAX is at or above $1.00, the protocol gradually lowers the collateralization ratio of USDC to FXS. When the price of FRAX is below $1.00, the protocol gradually increases the ratio. FRAX can always be minted or redeemed by the protocol for $1.00 of assets, which counterbalances significant price deviations from the $1.00 target. Frax emphasizes a highly autonomous approach with no active management of the price stability function. FXS is integral to the functioning of the Frax system, both as a volatility sink and stabilizing token within the protocol. FXS holders participate in the governance of the protocol.

The Frax community recently approved the investment of system collateral, currently approximately $96m USDC, into yield bearing USDC. Accordingly, the protocol began supplying USDC to Aave to earn a return on this collateral. Frax already has over 15,000,000 aUSDC and will continue increasing deposits on Aave, demonstrating a strong synergy between the Frax and Aave communities. Frax is currently the #4 largest holder of aUSDC. Continued growth of the Frax protocol and system collateral could lead to Frax becoming one of the larger suppliers of USDC to Aave.

Positioning within Aave Ecosystem

The Frax community is very active and looking for venues to lend and borrow FXS. Aave should enjoy increased revenue from the lending and borrowing of FXS, as well as additional USDC deposits as the Frax collateral pool grows. While Frax is often lumped together with “algorithmic stablecoin” protocols, a closer analysis shows that the Frax protocol is in fact stable and capital efficient.

Frax recently announced v2 of the Frax protocol. v2 introduces algorithmic market operations controllers (AMOs). AMOs are autonomous contracts that build on the base Frax protocol without disrupting it’s operation. The team has proposed incorporating lending AMOs directly into decentralized lending markets. The lending AMO could be built directly on Aave to supply large amounts of FRAX from the protocol to Aave. This would effectively create a FRAX dispenser on Aave, somewhat analogous to the Fed discount window, where borrowers could borrow directly from the FRAX protocol via Aave. A direct integration with Aave will also make supplying FRAX more attractive to other market participants because there is a guarantee of FRAX liquidity directly from the protocol, avoiding the pitfalls of high utilization rates on money markets. This integration could drive significant TVL and fees to Aave.

A direct integration with Frax via a lending AMO contract will offer Aave users the ability to effectively mint and redeem stablecoins on demand via Aave. From a borrower’s perspective, direct protocol integration should keep the supply relatively steady, which should keep borrowing costs low and predictable. This would make FRAX an ideal stablecoin to borrow. To realize this integration, FXS and FRAX need to first be added as collateral on Aave.

Project History

The project launched in December 2020. The project is currently using snapshot voting for governance. The project has deployed Compound Governor Alpha; it is fully functional but awaiting the minimal threshold of FXS to be emitted. There is a 48 hour timelock for governance.

Frax underwent a significant expansion and contraction withing the first 2 months of launch, providing a stress test for the protocol. In a three week period, the supply of FRAX increased over 5x, from approximately 25m to 134m. The supply of FRAX then contracted by approximately 33%. FRAX maintained a tight band around $1.00 throughout the cycle, and as expected FXS experience high levels of volatility during this time. The team has subsequently released updates to the protocol to smooth volatility during expansions and contractions, most importantly the updated PID controller for the protocol. V2 of the protocol also includes an interest rate module, intended to dampen FXS volatility during periods of contraction.

FXS Usage and Emission

Within the Frax protocol, FXS absorbs volatility to keep the price of FRAX at $1.00. When FRAX is minted, FXS is burned in proportion to the collateral ratio. For example, at the current collateral ratio of 87%, $0.13 of FXS is burned for every FRAX that is minted. When FRAX is burned and removed from circulation, and equivalent amount of FXS is minted. Since launch, a net of approximately 450k FXS have been burned.

The entire genesis supply of FXS will be emitted over the next 37 months. 60% of the supply is being distributed to the community via liquidity mining. During the first year, at least 50% of the supply will be emitted. The exact supply emission depends on the collateral ratio of the protocol. Further information can be found in the documentation linked above.

There are no admin controls on FXS.

Market, Social and Contract Data

FXS has a market capitalization of approximately $108m. The 24 hour trading volume is approximately $20m. FXS has approximately $50m of liquidity across Uniswap and Sushiswap trading pairs. FXS is also listed on Binance, which can account for up to 50% of total daily volume. The 24 hour trading volume is approximately $20m.

Frax’s telegram is the main social channel with 5,600+ members. The contracts were deployed December 16 2020. There have been 74k transfers and currently 2,591 holders.

Security Considerations

Frax has undergone extensive code reviews and an audit by Certik (linked above). Frax is in the process of undergoing additional audits. The protocol currently has approximately $300m TVL.


I appreciate you taking the time to review. Please let me know if you have any questions or concerns.

Vote
  • Add FXS
  • Don’t add FXS

0 voters

48 Likes

“FRAX is a fractionally algorithmic stablecoin”

Nope, never.

1 Like

Hi @metalface
Could you please follow the template for ARC Asset Onboarding ?Template ARC Asset Onboarding - Governance

2 Likes

I think you’re not really understanding how well FRAX works and previous projects have clouded your judgment.

source: app.frax.finance

41 Likes

Have you looked into FRAX at all or any of the specifics around the project? We can do better than dismiss a project because it shares the terms “algorithmic” and “stablecoin”. In 2018 / 2019, a lot of people looked at LEND and wrote it off because of the ICO hangover / bear market. And yet, here we are. It’s also worth noting that this proposal is for the addition of FXS, which is the governance token of the Frax protocol. There are 14 other volatile governance tokens listed on Aave and I do not think FXS is materially different.

FRAX first and foremost is a stablecoin. The stability mechanism combines collateral (“fractional”) with preset rules (“algorithmic”). Each FRAX token is currently backed by $0.87 of USDC and interest bearing USDC. This is a world apart from purely “algorithmic stablecoins”. I respect other projects desire to innovate and try new things, however I’m not sure that any of those projects have nailed the “stablecoin” side of things.

For FRAX, the result has been a high level of stability around $1.00 since launch. FRAX has effectively had the stability of fiat backed stablecoins. These charts are slightly dated now but the stability of FRAX has only increased in the intervening time:


Credit to Warp Capital for performing the following analysis earlier this month. There have been no notable changes or deviations for FRAX since this analysis was performed:

From inception FRAX has maintained the peg of $1, trading within the normal range. Figure 1 illustrates the USD price for the last 30 days of stablecoins from different groups: fiat-backed like BUSD, GUSD etc.; algorithmic with overcollaterization like sUSD, DAI; elastic like AMPL and algoseignorage like BAC, ESD and FRAX. The noticeable divergence is present for BAC and ESD – fully algoseignorage without any collateral. Also, elastic AMPL converges to the peg with the high volatility.

Figure 1. Last 30 days stablecoins performance vs. USD

Figure 2. Last 30 day performance without 3 aforementioned algorithmic stablecoins that have experienced high volatility (AMPL, BAC, ESD). As we see FRAX goes in line with other stablecoins demonstrating alike volatility.

image

Figure 3. Last 30 day stablecoin performance vs USD excluding sUSD.

If we exclude sUSD which has the big spike at the beginning of 2021, we will get the performance illustrated on Figure 3. Figure 3 shows the dynamics of the remaining stablecoins and as we see FRAX is within the range of other stablecoins.

Ryan Watkins also recently did an overview of the space, including FRAX, for Messari:


That being said, the only perfect projects are the ones that never launch. I’m happy to engage in valid criticisms of Frax. Since launch, one of the better criticisms has been that FRAX is basically wrapped USDC and accordingly it’s not very decentralized. I think this was a fair point at the start but is less valid now. There are tradeoffs made with any project. Frax prioritized stability and capital efficiency at the start, understanding that it’s always possible to further decentralize collateral over time but it would be very difficult to regain user confidence if Frax was fully decentralized but highly volatile and useless as a stablecoin. The push to decentralize collateral is a huge priority for the team and community but not at the expense of safety and stability in the near term.

Fast forward to the present and the protocol has diversified the collateral into Aave, Compound and Yearn. Now, freezing Frax’s collateral involves freezing Aave, Compound and Yearn’s USDC. This is incremental progress but significantly strengthens the decentralization of Frax’s collateral. With the recent release of v2, the groundwork has been established to add other forms of collateral and fully decentralize the collateral. If you look at other aspects of Frax, you’ll find a similar story - the team and community understand what needs to be done and are aggressively executing on it.

41 Likes

Squints less than 90 days of existence.

Honestly hope it works out, but lindyness matters on new approaches to what is supposed to be a stablecoin. Come back later though.

“Since launch, one of the better criticisms has been that FRAX is basically wrapped USDC and accordingly it’s not very decentralized. I think this was a fair point at the start but is less valid now.”

Our financial system has degraded so far that arguments that something is “not as bad as it was” is acceptable for something supposed to be a peg. Less valid is still valid.

And yea, I’ll admit that most of what I know about algorithmic stablecoins is based on watching dozens of them all go to zero. Thats why lindyness matters. So are memes. Thats why - while you may have a great protocol, this is all anyone thinks of when they hear algorithmic stablecoin. Prove it wrong and come back after its lindy.

2 Likes

Ya I agree about Lindy effect being very important for stablecoins. I don’t blame you for stereotyping FRAX since it is technically a specific type of algo stablecoin and no other algo coins have been even remotely successful. However, FRAX has clearly unparalleled performance. Even 90 days. There is no other algo coin with such a tight peg and no time de-pegged in 90 days. So there’s really no comparison other than judging by association. You could try to actually critique the design specifically rather than post memes from Twitter, but that would actually require a deep look at the theory on docs.frax.finance.

Lastly, be aware though that FRAX is unique in any stablecoin design in that we introduced the idea of a fractional-algorithmic stablecoin. We technically aren’t an algorithmic stablecoin. We are a hybrid where the market itself sets the collateral ratio. If the price of FRAX is 1.01, the collateral ratio goes down and more newly minted FRAX is unbacked. If the price of FRAX is .99 then the collateral ratio goes up and makes FRAX more backed and restores confidence. Through 90 days, this has worked literally perfectly. FRAX isn’t a cute bond/rebase design that has been tried and failed 100 times. Again, I invite you to give strong critiques of the idea, attack surfaces/potential issues, and specific implementation concerns rather than throw your hands up and scream algo algo coin meme.jpeg.

In any case, I do appreciate you taking the time to respond even though it was fairly dismissive. It’s still important for us to know people in the community think we are too new.

35 Likes

Ya I agree about Lindy effect being very important for stablecoins. I don’t blame you for stereotyping FRAX since it is technically a specific type of algo stablecoin and no other algo coins have been even remotely successful. However, FRAX has clearly unparalleled performance. Even 90 days. There is no other algo coin with such a tight peg and no time de-pegged in 90 days. So there’s really no comparison other than judging by association. You could try to actually critique the design specifically rather than post memes from Twitter, but that would actually require a deep look at the theory on docs.frax.finance.

Lastly, be aware though that FRAX is unique in any stablecoin design in that we introduced the idea of a fractional-algorithmic stablecoin. We technically aren’t an algorithmic stablecoin. We are a hybrid where the market itself sets the collateral ratio. If the price of FRAX is 1.01, the collateral ratio goes down and more newly minted FRAX is unbacked. If the price of FRAX is .99 then the collateral ratio goes up and makes FRAX more backed and restores confidence. Through 90 days, this has worked literally perfectly. FRAX isn’t a cute bond/rebase design that has been tried and failed 100 times. Again, I invite you to give strong critiques of the idea, attack surfaces/potential issues, and specific implementation concerns rather than throw your hands up and scream algo algo coin meme.jpeg.

In any case, I do appreciate you taking the time to respond even though it was fairly dismissive. It’s still important for us to know people in the community think we are too new.

38 Likes

It will be a hard pass from me.
No algos should be accepted (until they have a solid track record, i.e. 2-3 years from now)

I like Frax, but it doesnt fit Aave

3 Likes

Thanks @Alex_BertoG . I’ve edited the original post to match the template. Please let me know if there is anything else you’d like to see.

2 Likes

It would help if you gave constructive and concrete criticism of the protocol specs/mechanics rather than scream algo and dismiss it without understanding why it has remained perfectly stable for 90 days and not broken the peg once.

Sure, 90 days isn’t that long overall, but it is already incomparable to other projects in terms of performance. Only people who have not done the actual due diligence of learning how the mechanism works are saying anything negative. We welcome any and all criticism about the protocol such as things we can fix, code into the protocol, update, and improve. So far, no one has seemed to give that input other than stereotyping the project for the failure of other projects in the same space.

37 Likes

Keep in mind guys, Frax, as a protocol, also does a lot of lending itself on Aave. We are literally the 4th largest USDC lender in all of Aave: $1.0000 | Aave interest bearing USDC (aUSDC) Token Tracker | Etherscan

FRAX deploys its idle collateral to defi blue chips like Aave, yEarn, and Compound to earn yield for FXS holders. We’re not a random algo stablecoin project with a tiny mcap and no traction. We are also a top 10 Uniswap liquidity token with over 100m worth of liquidity. Literally DAI only has 30m more liquidity than FRAX on Uniswap. A little research goes a long way:

39 Likes

I support the addition of FXS, I think they are a solid project whos genuinely trying to build something to improve the defi ecosystem as a whole

38 Likes

Could be added with the USDC backed part of FRAX matched to the collateral ratio on AAVE

38 Likes

Clear yes for me. Mutually beneficial for both communities and would be interesting to see if any FRAX/AAVE AMOs come from this.

38 Likes

Big fan of Frax, the only algo coin that has proved it could work.
If some member of the community feel it is too soon I invite them to follow the stability of FRAX over the next few weeks to be convinced.

One thing I can’t really grasp is asking to list FXS and not FRAX ? Stablecoin demand is extremely important in Aave and it could give new usage to users of FRAX (lenders & borrowers), whereas i feel borrowing FXS will be less popular on the short term.

38 Likes

As an Aave token holder and FXS holder. I vote to add FRAX.

It is a legitimate contender in the stable coin space. Adding FRAX to Aave would be mutually beneficial, and would improve the set of possibilities in the broader de-fi space.

Hard yes!

37 Likes

Great project, only imitated and never surpassed。

38 Likes

I think frax and aave can achieve a win-win situation

37 Likes

We have proposed to add FRAX as well here: Proposal: Add support for FRAX

In fact, it was the first proposal before FXS. We wanted to make a single thread for both proposals but the rules required 1 thread per token so we had to separate them. But yes, we’re very excited to bring the FRAX stablecoin itself to Aave if we can get approved :) FXS would be extra sweet and deserved imo but the real product of the protocol is the decentralized stablecoin itself.

37 Likes