Frax Finance in-depth research report: a new chapter in the stablecoin track

1. Frax Finance background introduction
Frax Finance is a DeFi protocol offering three stablecoins and staking derivatives (FRAX, FPI, frxETH) for earning yield, providing liquidity and staking in DeFi. The protocol uses innovative sub-protocols and native governance tokens (FXS, FPIS) to ensure price stability and user governance. It is a major player in the global cryptocurrency market with over $800 million in value locked and was founded by Sam Kazemian.
Three Stablecoins
FRAX — Core Stablecoin
Anchored by the U.S. dollar (USD), FRAX aims to maintain a value ratio of 1:1, i.e., every US$1 of FRAX is equal to US$1 of 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 bring the value back to equilibrium. Therefore, while providing cryptocurrency advantages like decentralization and transparency, FRAX also plays a role in reducing high price volatility, making it a safe stablecoin to earn returns in DeFi.
On February 23, 2023, the proposal of the hybrid algorithmic stablecoin protocol Frax Finance to switch the algorithmic stablecoin FRAX to a fully collateralized mechanism was voted through by the community. The collateral ratio will be set to 100%, and the stablecoin reserves will be increased to eliminate the algorithmic elements. As of now, the market value of FRAX is approximately US$1 billion.
FPI — A new stablecoin pegged to CPI
The Frax Price Index (FPI) is the second stablecoin of the Frax financial ecosystem. FPI is the first stablecoin pegged to a basket of real-world consumer goods defined by the US CPI-U average. The FPI stablecoin is designed to keep its price consistent with the prices of all items in the CPI basket, thereby maintaining its purchasing power through an on-chain stabilization mechanism. This is like a stablecoin that hedges against inflation, as it does not lose purchasing power due to the devaluation of fiat currencies.
FPI has its own governance token, Frax Price Index Share (FPIS), which is entitled to receive revenue from the protocol. Like the FRAX stablecoin, all FPI assets and market operations are on-chain and use AMO contracts.
frxETH — A stablecoin loosely pegged to ETH
In the Frax Finance ecosystem, Ethereum (ETH) exists as frxETH and sfrxETH as a liquid collateralized derivative. frxETH is a stablecoin that aims to reflect the value of ETH 1:1, with a target range of 0.9900 to 1.01 ETH to 1 frxETH. Whenever ETH is contributed to the system, it is minted in equal amounts.
Meanwhile, sfrxETH is a yield-bearing variant of frxETH. Users can redeem their frxETH for sfrxETH to receive staking rewards. As these rewards accumulate, more frxETH is minted and added to the treasury. As a result, sfrxETH holders own a share of a growing frxETH pool, much like systems like Aave’s aUSDC or Compound’s cUSDC.
Three types of applications
Fraxswap
Fraxswap is the first constant product automated market maker with built-in time-weighted average market maker (TWAMM), which allows long-term and large-scale transactions without trust. It is completely permissionless and the core AMM is based on Uniswap V2.
Fraxlend
Fraxlend is a lending platform that allows anyone to create a market between a pair of ERC-20 tokens. Any token of a Chainlink data stream can be lent to a borrower or used as collateral. Each lending pair is an independent, permissionless market where anyone can create and participate in lending activities. Lenders can deposit ERC-20 assets into this lending pair and receive ftokens with a yield. As interest is earned, the amount of the underlying asset that ftokens can be redeemed for continues to increase.
*Lending AMO is the same as the current mainstream lending market (eg. Aave/Compound). But you need to pay attention to the utilization rate in the pool.
Additionally, Fraxlend supports the ability to create custom term sheets for the OTC debt market. Fraxlend loan pairs can be created with features such as: maturity date, restricted borrowers and lenders, undercollateralized loans, and limited liquidation.
Fraxferry
Fraxferry is a permissionless, non-custodial and secure cross-chain bridge for transferring natively issued Frax Protocol tokens across many blockchains, without the need for bridges or third-party applications. Funds will arrive within 24-48 hours.
2. FRAX Trading Market
Frax tokens can be traded on major exchanges, as shown in the figure below.
3. Tokenomics
Frax Finance adopts a dual-token model, using USDC and its governance token Frax Share (FXS) to partially support its stablecoin Frax (FRAX), with a variable collateral ratio[5]. The following is Frax’s token economics:
Frax is a crypto-collateralized stablecoin pegged to the US dollar[1][6].
Frax’s collateralization ratio is variable, meaning that the amount of collateral backing the stablecoin changes based on market conditions[5].
Frax Share (FXS) is the protocol’s governance and value accumulation token[4][5].
The distribution of FXS tokens is as follows[2]:
60% — Liquidity Programs/Farms/Communities — naturally halved every 12 months through metering and governance.
3% — Strategic Advisors / External Early Contributors — 36 months of advisory tokens for strategic work in legal, technical, and business to drive adoption of the Frax protocol. Tokens distributed evenly over 3 years.
12% — Accredited Private Investors — 2% unlocked at launch, 5% vested in first 6 months, 5% vested in 1 year with 6 months cliff period.
Frax Share (FXS) can be redeemed for Frax (FRAX) or for a portion of the collateral backing Frax[3].
Frax Finance’s token economics is designed to incentivize holders to maintain Frax’s stability. Holders can earn rewards by staking their FRAX tokens into liquidity pools[1].
References:
[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
Notable investors include Dragonfly Capital, Mechanism Capital, Electric Capital, Robot Ventures, and ParaFi Capital, all of which are important players in the institutional investment space. Notable individual investors include recognized project founders in the DeFi space, such as Stani Kulechov of Aave, Kain Warwick of Synthetix, and Eyal Herzog of Bancor. In addition, there are investments from the background of centralized exchanges (CEX), including well-known companies such as Crypto.com, and Balaji Srinivasan, former CTO of Coinbase and partner of A16Z.
5. Team Introduction
One of the founders, Sam Hamidi-Kazemian, has a background in programming and graduated from UCLA. In December 2014, he teamed up with fellow UCLA alumnus Theodor Forselius to create Everipedia. The result of this entrepreneurial project is a unique online encyclopedia that combines wiki-style collaboration with blockchain technology. Over time, Everipedia has grown into one of the most famous DApps on the EOS platform, with Sam taking on the role of President.
FRAX.finance’s journey began in 2019 with the initial support of Stephen Moore, a senior economic advisor to Donald Trump. While Stephen Moore initially played an important role in promoting FRAX during 2019, he eventually distanced himself from the project.
Another co-founder, Travis Moore, also graduated from UCLA and began his entrepreneurial journey in a biology lab after graduation. He then entered the corporate world and held various positions at the insurance company Anthem. In 2015, Sam Kazemian and Theodor Forselius invited him to join Everipedia as CTO, and his life trajectory intersected with the founders of Everipedia. Later, when Sam launched the FRAX project, Travis Moore continued his entrepreneurial journey as a co-founder and retained the position of CTO.
Jason Huan is a co-founder and a 2021 UCLA graduate with a bachelor's degree in computer science. He built a blockchain community at UCLA in 2017 and even contributed to the school's first blockchain course as a teaching assistant. During his internship at blockchain company WhiteBlock, he wrote numerous reviews of various blockchain platforms. Jason Huan joined the FRAX project in June 2020 and currently serves as the Director of Development.
References:
[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 circulation: 73,354,242 FXS
Total supply: 99,681,496 FXS
7. Reasons for recommendation
1.Core team status:
For more information about the team, please refer to the previous section. Overall, the team is small but professionally assigned, and the product development and improvement speed is very fast. Sam Kazemian is the leader in external and community engagement, and he actively interacts with users in related communities and podcasts.
References:
[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 own second-layer scaling solution, Fraxchain, by the end of the year. The news boosted the price of Frax Share (FXS).
In July 2023, Frax Finance published its monthly report which included updates from various projects. One of the updates was about Liquid Staking tokens, and Flywheel published a complete guide covering these tokens.
In August 2023, Frax Finance published another monthly report which included various updates. One of the updates was about Staked Frax ETH (sfrxETH), which comprehensively covered all relevant factors.
The Frax Finance team has been focusing on developing its platform and expanding the impact of its product range.
References:
[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. Track prospects
To date, Frax Finance has established a significant user base and business presence. It has become more than a single currency agreement. Instead, it is forming a DeFi ecosystem centered on the stablecoin FRAX, supported by key features such as LSD (frxETH), with coverage also expanded to include elements such as DEX (FRAXSwap) and lending (FRAXLend).
Frax Finance's initial strengths lie in its efficient monetary mechanism and adaptive monetary policy based on the AMO module. Today, its product lineup covers lending, swaps, stablecoins, and LSD. These products are quite innovative in the DeFi field and may bring lasting competitive advantages to the project.
All in all, Frax is an all-encompassing DeFi platform with a strong ecosystem, a unique stablecoin model, innovative features, and a strong commitment to security and efficiency. All of these aspects make it an important player in the DeFi space. Looking forward to the upcoming LSDFi season, we may witness Frax reach unprecedented heights.
4. Expected Returns
Stablecoin perspective: As of now, FRAX's market capitalization has remained around $1 billion, less than a quarter of DAI's market capitalization. Similarly, MKR's total market capitalization is around $1 billion.
LSD perspective: Lido Finance has about $14.3 billion in Ethereum on-chain volume, while Frax Finance holds about $445 million. In terms of market capitalization, LDO is currently valued at about $2 billion.
From this perspective, Frax Finance's potential in the LSD competition should catch up with or surpass Lido Finance. At present, the growth trajectory of frxETH is closely related to the distribution of stETH. Given that frxETH's growth remains stable and strong, it is possible that it will gradually erode Lido Finance's market share.
When it comes to the stablecoin landscape, Frax Finance’s potential cap is determined by two key factors. First, FRAX’s established trading volume, which has remained around $1 billion for nearly a year. Second, it is directly tied to the amount of crvUSD minted via frxETH as collateral. In just one month after its launch, crvUSD’s trading volume has exceeded $55 million. In addition, frxETH’s use as collateral is almost evenly matched with wstETH.
If we compare these two pioneering projects, their combined market cap potential is as high as $3 billion. Currently, FXS has a market cap of $670 million, which means that its potential growth space is about 4.5 times its current value.
* One important point to consider is that the high yield of frxETH may have a chain reaction. Since its inception, the yield of frxETH has been better than that of Lido's stETH.
The adoption of the protocol and the increase in yields form a virtuous cycle. If the yield on frxETH exceeds that on stETH, more people may choose to deposit ETH into Frax. Especially after Lido launches the withdrawal function, the expanding share of frxETH will generate more protocol revenue. These earnings will flow to veFXS stakers, thereby increasing veFXS staking returns. Since FXS may be in short supply, this may lead to price increases.
Frax Finance's core strength lies in its integrated narrative on LSD and stablecoins. Frax Finance's partnership with Curve to tap into liquidity release opportunities in the multi-billion dollar LSD market is a promising strategic move. In addition to leveraging increased LSD profitability, there is the potential to shape a whole new stablecoin landscape by leveraging crvUSD and the native stablecoin FRAX. This strategic approach could pave the way for a new perspective on stablecoin protocols.