Proposal: Add support for FXS

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.

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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.

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.

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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.

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