Frax Finance In-depth Research Report: Project Highlights and Latest Developments

BeginnerDec 04, 2023
This article offers a simple yet comprehensive introduction to Frax, aiding in understanding its stablecoin and LST operations as well as the history behind it. It systematically showcases Frax's current products and features while providing an objective analysis based on data.
Frax Finance In-depth Research Report: Project Highlights and Latest Developments

1. Introduction to Frax Finance

Frax Finance is a DeFi protocol that offers three types of stablecoins and collateral derivatives (FRAX, FPI, frxETH), designed for earning yields, providing liquidity, and pledging within DeFi. The protocol employs innovative sub-protocols and native governance tokens (FXS, FPI S) to ensure price stability and user governance. As a leading participant in the global cryptocurrency market, it has locked-in assets worth more than $800 million and was founded by Sam Kazemian.

The Three Stablecoins:

FRAX - The Core Stablecoin

Anchored to the US Dollar (USD), FRAX aims to maintain a 1:1 value ratio, striving to equate every 1 FRAX to 1 USD.

( CR USDC + (1- CR ) FXS )

The protocol uses a combination of on-chain assets and algorithmic mechanisms to ensure this anchor. If the price of FRAX deviates from $1, the system intervenes by adjusting the collateral ratio to restore balance. Hence, while offering cryptocurrency advantages like decentralization and transparency, FRAX also serves to mitigate high price volatility, making it a secure stablecoin for earning yields in DeFi.

On February 23, 2023, the hybrid algorithmic stablecoin protocol, Frax Finance, received community approval for a proposal to shift the algorithmic stablecoin FRAX to a fully collateralized mechanism. The collateral ratio will be set at 100%, increasing stablecoin reserves to eliminate the algorithmic element. As of now, FRAX has a market cap of approximately $1 billion.

FPI — A Stablecoin Pegged to the CPI

The Frax Price Index (FPI) is the second stablecoin within the Frax financial ecosystem. FPI is the first stablecoin pegged to the average of the U.S. CPI-U, which is defined by a basket of real-world consumer goods. The aim of the FPI stablecoin is to maintain its price in alignment with the prices of all items in the CPI basket, preserving its purchasing power through an on-chain stabilization mechanism. It serves as a hedge against inflation, as it doesn’t lose its purchasing power even when fiat currencies devalue.

FPI has its governance token called the Frax Price Index Share (FPI S), which is entitled to profits from the protocol. Similar to the FRAX stablecoin, all FPI assets and market operations are on-chain and utilize AMO contracts.

frxETH — A Loosely Pegged Stablecoin to ETH

Within the Frax Finance ecosystem, Ethereum (ETH) exists under the designations frxETH and sfrxETH, acting as liquid collateral derivatives. frxETH is a stablecoin aimed at reflecting the value of ETH on a 1:1 basis, with a target range of 0.9900 to 1.01 ETH exchanged for 1 frxETH. Whenever ETH is contributed to the system, it is minted in equivalent amounts.

Concurrently, sfrxETH is a yield variation of frxETH. Users can convert their frxETH into sfrxETH to earn staking rewards. As these rewards accumulate, more frxETH is minted and added to the vault. Thus, sfrxETH holders possess a share in a continuously growing pool of frxETH, mirroring systems like Aave’s aUSDC or Compound’s cUSDC.

Three Applications:

Fraxswap

Fraxswap is the first constant product automated market maker (AMM) with an integrated time-weighted average market maker (TW AMM). It enables large-scale trades over extended periods without the need for trust. Completely permissionless, its core AMM is built on Uniswap V2.

Fraxlend

Fraxlend is a lending platform that allows anyone to establish a market between a pair of ERC-20 tokens. Tokens from any Chainlink data stream can be lent to borrowers or used as collateral. Every lending pair operates as an independent, permissionless market, which anyone can establish and participate in. Lenders can deposit their ERC-20 assets into this lending pair and receive an interest-bearing ftoken. As interest accrues, the amount of underlying assets redeemable with ftoken increases.

  • Lending AMO operates similarly to current mainstream lending markets, such as Aave/Compound, but it’s essential to be aware of the pool’s utilization rate.

Additionally, Fraxlend supports the ability to create custom Term sheets for over-the-counter debt markets. Fraxlend lending pairs can incorporate features like maturity dates, restricted borrowers and lenders, under-collateralized loans, and limited liquidations.

Fraxferry

Fraxferry is a permissionless, non-custodial, and secure cross-chain bridge designed to transfer locally issued Frax protocol tokens across various blockchains without the need for bridging or third-party applications. Funds will arrive within 24 to 48 hours.

2. FRAX Trading Market

Frax tokens can be traded on major mainstream exchanges, as shown in the image below.

3. Tokenomics

Frax Finance employs a dual-token model, utilizing USDC and its governance token, Frax Share (FXS), to partially back its stablecoin, Frax (FRAX), with a variable collateralization ratio. Here are the tokenomics of Frax:

  • Frax is a crypto-collateralized stablecoin pegged to the US dollar.
  • The collateralization ratio for Frax is variable, meaning the quantity of collateral backing the stablecoin adjusts based on market conditions.
  • Frax Share (FXS) serves as the governance token and accumulates value for the protocol.
  • Distribution for FXS tokens is as follows:
  • 60% - Liquidity Programs / Farms / Community - halving naturally through gauges and governance every 12 months.
  • 3% - Strategic Advisors / Early External Contributors - 36-month advisory tokens for legal, technical, and strategic business efforts to drive adoption of the Frax protocol. Tokens distributed evenly over 3 years.
  • 12% - Accredited Private Investors - 2% unlocked at launch, 5% vested over the first 6 months, 5% vested within the year, with a 6-month cliff.
  • Frax Share (FXS) can be converted to Frax (FRAX) and can also be swapped for partial collateral backing Frax.
  • The tokenomics of Frax Finance aim to incentivize holders to maintain the stability of Frax. Holders can earn rewards by providing their FRAX tokens to liquidity pools.

Sources:

[1] https://sometimes-interesting.com/frax-frax-and-tokenomics-an-overview-of-the-frax-token/

[2] https://docs.frax.finance/token-distribution/frax-share-fxs-distribution

[3] https://messari.io/report/frax-a-fractional-algorithmic-stablecoin

[4] https://albaronventures.com/frax-finance-analysis/

[5]https://coinmarketcap.com/alexandria/article/what-is-frax-finance-features-tokenomics-and-price-prediction

[6] https://frax.finance

4. Investment Institutions

Prominent investing institutions include Dragonfly Capital, Mechanism Capital, Electric Capital, Robot Ventures, and ParaFi Capital, all of which are significant players in institutional investment. Notable individual investors feature renowned founders in the DeFi sector, such as Stani Kulechov of Aave, Kain Warwick of Synthetix, and Eyal Herzog of Bancor. Additionally, investments from a centralized exchange (CEX) background include well-known enterprises like Crypto.com and Balaji Srinivasan, formerly Chief Technology Officer of Coinbase and a partner at A16Z.

5. Team Introduction

One of the founders, Sam Hamidi-Kazemian, has a background in programming and is an alumnus of the University of California, Los Angeles (UCLA). In December 2014, he co-founded Everipedia with fellow UCLA graduate, Theodor Forselius. Their entrepreneurial venture resulted in an online encyclopedia that uniquely merges Wiki-style collaboration with blockchain technology. Over time, Everipedia has grown to become one of the most prominent DApps on the EOS platform, with Sam serving as its president.

The journey of FRAX.finance began in 2019, initially backed by Stephen Moore, a senior economic advisor to Donald Trump. While Stephen Moore played a crucial role in championing FRAX during 2019, he eventually distanced himself from the project.

Another co-founder, Travis Moore, also graduated from UCLA. After graduation, he embarked on an entrepreneurial journey in a biological laboratory. Later, he transitioned to the corporate world, holding various roles at the insurance company Anthem. In 2015, Sam Kazemian and Theodor Forselius invited him to join Everipedia as the Chief Technical Officer (CTO). His trajectory converged with the founders of Everipedia. Later, when Sam initiated the FRAX project, Travis Moore continued his entrepreneurial endeavors as a co-founder and retained his position as the CTO.

Jason Huan, another co-founder, is a 2021 graduate from UCLA, holding a Bachelor’s degree in Computer Science. In 2017, he established a blockchain community at UCLA and even contributed as a teaching assistant for the university’s inaugural blockchain course. During his internship at the blockchain company WhiteBlock, he authored numerous reviews on various blockchain platforms. Jason Huan joined the FRAX project in June 2020 and currently serves as the Director of Development.

Sources:

[1] https://pitchbook.com/profiles/company/462109-69

[2] https://frax.finance

[3] https://messari.io/dao/frax-finance-governance

[4] https://iq.wiki/wiki/frax-finance

6. Transaction Data

About Frax Share (FXS Token):

  • 24-hour trading volume: $34,093,794
  • Current circulating supply: 73,354,242 FXS
  • Total supply: 99,681,496 FXS

7. Project Highlights

1. Core Team Status:

For more details about the team, refer to earlier sections. In summary, the team is small but highly specialized, with rapid product development and enhancement. Sam Kazemian stands out as a leading figure in external and community engagement, actively interacting with users in relevant communities and podcasts.

Source:

[1] https://www.countere.com/home/sam-kazemian-frax-interview

[2] https://twitter.com/samkazemian/status/1664737658797686784

[3] https://twitter.com/samkazemian/status/1561042961315467264

[4] https://youtube.com/watch?v=RRfNuTA_ZEM

[5] https://twitter.com/samkazemian/status/1681718947866120192

2. Recent Developments:

  • In June 2023, Frax Finance announced plans to launch its second-layer scaling solution, the Frax chain, by the end of the year. This news boosted the price of Frax Share (FXS).
  • In July 2023, Frax Finance released a monthly report, which included updates on various projects. One of these updates was about the Liquid Staking token, and Flywheel provided a comprehensive guide covering these tokens.
  • In August 2023, Frax Finance issued another monthly report, featuring various updates. One such update revolved around Staked Frax ETH (sfrx ETH), encompassing all relevant factors.

The Frax Finance team remains dedicated to developing its platform and broadening the impact of its product range.

Source:

[1] https://www.ccn.com/analysis/frax-share-fxs-price-prediction/

[2] https://fraxfinancecommunity.medium.com/frax-finance-monthly-report-29-july-2023-ffca1da825e4

[3] https://fraxfinancecommunity.medium.com/frax-finance-monthly-report-30-august-2023-68add8e462be

3. Prospects of the Field

To date, Frax Finance has established a significant user base and business presence. It has evolved beyond just a singular monetary protocol. Instead, it’s shaping up to be a DeFi ecosystem centered around the stablecoin FRAX, bolstered by key features such as LSD (frxETH). Its scope has expanded to include DEX (FRAX Swap) and lending (FRAX Lend) components.

Frax Finance’s initial strength lies in its efficient monetary mechanism and an adaptive monetary policy based on the AMO module. Now, its product suite encompasses lending, swaps, stablecoins, and LSD. These products are quite innovative within the DeFi realm, potentially offering the project a lasting competitive edge.

In summary, Frax is a comprehensive DeFi platform with a robust ecosystem, a unique stablecoin model, innovative features, and a staunch commitment to security and efficiency. All these facets position it as a significant player in the DeFi landscape. As we look forward to the upcoming LSDFi season, we might witness Frax reaching unparalleled heights.

4. Expected Returns

From the stablecoin perspective: As of now, FRAX’s market cap has consistently hovered around $1 billion, which is less than a quarter of DAI’s market cap. Similarly, MKR’s total market value is around $1 billion.

From the LSD perspective: Lido Finance has approximately $14.3 billion in Ethereum collateral, while Frax Finance holds about $445 million. In terms of market cap, LDO is currently valued at around $2 billion.

From this angle, Frax Finance’s potential in the LSD competition might catch up with or surpass Lido Finance. Currently, the growth trajectory of frxETH is closely related to the account split situation of stETH. Given that frxETH’s growth remains stable and robust, it might gradually erode Lido Finance’s market share.

Speaking of the stablecoin landscape, Frax Finance’s potential ceiling is determined by two key factors. Firstly, FRAX’s established trading volume has consistently remained at around $1 billion over the past year. Secondly, it is directly linked to the amount of crvUSD minted using frxETH as collateral. Within just a month of its launch, the trading volume of crvUSD has exceeded $55 million. Moreover, the usage of frxETH as collateral closely follows wstETH, nearly sharing the limelight.

If we compare these pioneering projects in both areas, their total market cap potential reaches as high as $30 billion. Currently, FXS’s market cap is $670 million, which means its potential growth space is approximately 4.5 times its present value.

An important point to consider is that the high returns of frxETH might trigger a domino effect. Since its inception, the returns from frxETH have outperformed Lido’s stETH. The adoption of the protocol and the increase in returns have created a positive feedback loop. If frxETH’s yield surpasses stETH, more people might opt to deposit ETH into Frax. Especially after Lido introduces a withdrawal feature, the ever-expanding share of frxETH will generate more protocol income. These profits will flow to veFXS stakers, thereby increasing the returns for veFXS staking. Given that FXS might be in short supply, this could lead to a price surge.

Frax Finance’s core advantage lies in its comprehensive narrative on LSD and stablecoins. Collaborating with Curve, Frax Finance explores opportunities to unlock liquidity in the multi-billion dollar LSD market, a strategy with vast potential. Beyond leveraging increased LSD profits, the use of crvUSD and the native stablecoin FRAX could also shape a new stablecoin landscape. This strategic approach can pave the way for a fresh perspective on post-currency protocols.

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