Proposal: Add support for FXS

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.

43 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.

36 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:

40 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

39 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.

39 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.

38 Likes

Elastic supply tokens are a new sub-class of crypto. It’s an absolute killer in terms of its usefulness, especially due to its non-correlation to other instruments.

However, it’s still quite fresh and requires a way longer track record - a couple of black swan events, a few major market collapses, and ideally a full cycle would be a great way to see its performance.

When I look at reviewing collateral, I don’t look at it in isolation, I compare it to what’s sitting next to - wBTC, wETH, AAVE, SNX, etc. Am I comfortable to take on additional collateral risk next to pristine reserve assets and DeFi blue-chips? Gresham’s law prevails over each and all monetary decisions we make.

1 Like

I can’t tell if you’re talking about Frax or are making a general statement because…Frax is not an elastic supply/rebase token…it’s a new stablecoin that obeys the classical supply/ERC20 standards. It just has a slightly new stability mechanism that allows for higher capital efficiency.

18 Likes

FXS Risk Assessment

FXS is the governance token of the Frax protocol. FXS governs over $300m of value within the Frax protocol.

FXS Smart contract Risk: C

The FXS contract launched in December 2020. The FXS contracts have undergone extensive code reviews and audit.

FXS Counterparty Risk: B-

FXS has a limited number of holders given that it is a younger asset. The FXS contract is permissionless.

image

FXS Market Risk: C+

The FXS market cap has fluctuated along with the FXS price, which is reflected in the normalized volatility. The average daily volume for FXS demonstrates relative strength when compared with the FXS market cap. FXS trades primarily on Binance and Uniswap with $9.9MM in average daily trading volume over the last 30 days.

FXS Overall Risk: C+

FXS overall risk score is largely reflective of FXS’s age and inherent volatility. Over time it could be expected that FXS will strengthen in all three categories. A 30% LTV is significantly lower than many other tokens listed on Aave including BAL, BAT, CRV, and ZRX.

Proposed Risk Parameters:
LTV 30%
Liquidation Threshold 50%
Liquidation Bonus 15%
Reserve Factor 20%

Variable Interest Rate Model:
UOptimal 45%
R_0 0%
R_s1 7%
R_s2 300%

We welcome any feedback from the community.

I strongly support the addition of both the FXS governance token and FRAX the stablecoin.

FRAX is a unique project in the stablecoin space and although its early days, like AAVE itself, its a leader in innovation.

I’ve personally seen AAVE develop from the ETHLend days to now, through not being afraid to iterate and experiment and I can see the same drive in the FXS team.

AAVE was the underdog once too!

The mechanisms for controlling the peg of FRAX are extensive and integrate well into the wider DeFi community.

This has a mutual benefit for driving more volume into AAVE platform also.

FRAX itself is backed by a high % of USDC as it stands and has proven it can maintain a strong peg in volatile circumstances. The risk here is therefore low.

The FXS token is volatile but price wise is closely linked to uptake and confidence of people in FRAX.

As a big supporter of both projects (long time AAVE, more recent FXS), I support this proposal.

1 Like