What is Frax Ether?
Frax Ether (frxETH) is a new liquidity pledge product launched by Frax Finance, a liquidity pledge derivative linked to $ETH1:1.
What is pledge?
With the completion of the merger of the Ethereum main network, Ethereum has officially transformed from PoW to a blockchain using the PoS consensus mechanism. Staking in PoS (Proof of Staking) refers to pledge. Pledge is the process of locking digital assets for a certain period in order to obtain corresponding rewards.
To become a validator on the Ethereum network, you need to stake at least 32$ETH, and you also need to prepare equipment with certain hardware performance. Verifiers are randomly given the opportunity to produce blocks, and they can also receive verification rewards. The larger the stake of the verifier, the greater the chance of obtaining block rewards. The greater the total amount staked on a PoS network, the higher the security of the network.
What is Liquidity Staking? What about liquid pledged derivatives?
Liquidity staking hopes to solve the shortcomings of traditional staking. In traditional staking, the $ETH pledged by the verifier will be locked in the smart contract and cannot be used for other purposes. When staking $ETH on the liquidity staking platform, users will receive derivative tokens corresponding to the pledged $ETH 1:1 (if you participate on Frax, you will receive frxETH), which serves as a voucher for the user to participate in liquidity staking. At the same time, in addition to earning verification rewards through the liquidity staking platform, users can also use these derivative tokens for other DeFi protocols to earn additional income. These derivative tokens corresponding to $ETH 1:1 are called Liquid Staking Derivatives.
As mentioned above, due to the high threshold for becoming a validator on the Ethereum network, users will choose to use liquidity staking platforms like Frax Finance to indirectly participate in network verification and earn verification rewards. Like other liquidity staking platforms, Frax Finance takes a percentage of the fees. The fee structure adopted is similar to Lido Finance, that is, the platform charges 10% of the verification reward as a service fee. Among them, 8% is distributed to Frax Finance governance token $FXS holders; 2% is used as Frax Finance’s project fund. (Related reading: Controlling Ethereum with $LDO?)
What is the rating for Frax Ether?
TokenInsight rated Frax Ether's current performance as BB with a stable outlook.
The specific analysis and scoring of the rating results are as follows:
Underlying technology and security 64.55% Roadmap and progress 65.33% Token economy 81.33% Token secondary market performance 38% Ecological development 39.25% Team, partners and investors 65.4% Underlying technology and security (64.55%)
According to Frax Finance, frxETH shares most of its code with $FRAX as well as the $FPI stablecoin, and Frax Finance has exposed its frxETH related code, including frxETH and sfrxETH, on its GitHub.
At the same time, Frax Finance also conducted a separate audit of frxETH. The security audit report of Frax ETH staking was performed by the Callisto Security Audit Department, and the report showed that there are currently no security issues in its code. In addition, Frax Finance has also opened a bug bounty program for frxETH.
As of January 9, 2023, Frax Ether has not experienced any crisis events that have an impact on its security.
Token economy (81.33%)
The amount of frxETH issued is equal to the amount of $ETH a user has staked in Frax Finance. Therefore, there is no token distribution plan or unlocking plan for frxETH. In this section, we will focus on frxETH’s unique staking model and analyze the fundamental reasons why it attracts users.
frxETH staking model
First of all, frxETH’s staking model is quite special. Like other liquidity staking protocols, users who pledge $ETH will receive an equal amount of frxETH as vouchers, but holding frxETH does not directly obtain staking benefits. Holders of frxETH also need to further pledge frxETH, and Frax Finance provides two options.
Continue to pledge frxETH to obtain sfrxETH as a certificate to obtain staking income.
Become a liquidity provider and earn rewards by depositing frxETH into the frxETH/ETH pool on Curve Finance.
Option 1 allows frxETH holders to stake their frxETH to earn staking rewards. Earnings will be distributed to sfrxETH holders in the form of frxETH, thereby increasing users’ earnings.
Option 2 allows users to provide liquidity to the frxETH/ETH pool on Curve Finance and earn rewards in $CRV, $CVX and $FXS tokens. The pool is deployed on Curve Finance by Frax Finance. Since Frax Finance gained an advantage in the previous Curve War, it was able to use governance rights to attract users through $CRV and $FXS gauge proposals on Curve DAO as well as Convex Finance to enrich LP rewards. (Related reading: Curve Finance - DEX designed for stablecoins)
frxETH APR
Compared with other protocols in the current liquidity staking track, what advantages does frxETH’s staking model bring to it?
The most obvious difference between Frax Finance’s liquidity staking service and other similar products in the current market is that frxETH has a relatively higher staking yield. As you can see from the chart below, frxETH’s APR is far ahead of all protocols.
The reason for its relatively high APR comes from the frxETH staking model mentioned above.
So why does this unique staking model help Frax Finance stay ahead of other protocols in terms of APR? First of all, we need to make it clear that only sfrxETH holders will receive ETH staking benefits, while holding frxETH alone or becoming a Curve LP are not eligible to receive staking benefits. In frxETH’s model, becoming a Curve LP is equivalent to giving up staking benefits and instead choosing to earn $CVX, $CRV, and $FXS on Curve. At the same time, although they gave up the staking income, the deposited $ETH will still be used for network verification and earn corresponding rewards. These rewards will also be distributed to sfrxETH holders, thereby increasing the APR of frxETH.
According to the Dashboard officially provided by Frax Finance, it can be seen from the comparison of the APR of sfrxETH and frxETH/ETH that in most cases, the APR of Curve LP is better than the pledge APR of sfrxETH, so the APR of frxETH can always remain relatively high. level. On January 9, 2023, the APR of Curve LP was 2.09% higher than the staking APR of sfrxETH, so the number of people choosing to become Curve liquidity providers is slightly higher than the number of holders of sfrxETH.
Token secondary market performance (38%)
Currently, the secondary market trading volume of frxETH is low. The 24h trading volume of frxETH on January 9, 2023 was only about $50,000. The 24h trading volume of stETH, a liquid collateral derivative issued by Lido Finance, is approximately $18m, and the trading volume of frxETH is approximately 2.8% of stETH.
frxETH is mainly traded through Curve Finance, the frxETH/ETH pool mentioned above, which accounts for more than 90% of the 24h trading volume. In addition to Curve, frxETH can also be traded on Uniswap V3, but the trading volume is relatively low.
Since frxETH is loosely pegged to $ETH, its price fluctuates around the price of $ETH. As of January 9, 2023, the price of frxETH has been relatively stable and no significant decoupling has occurred.
According to statistics on Etherscan, the current number of frxETH holders is 206, which is relatively small. Although this has something to do with the short time that frxETH has been online, most of it is because you can't earn any income just by holding frxETH. frxETH holders need to deposit frxETH into Curve Finance’s liquidity pool or pledge it in exchange for sfrxETH to receive income. As of January 9, 2023, there were 606 holders of sfrxETH on Etherscan. In addition, as the pledge certificate of frxETH, sfrxETH has not yet been developed into other DeFi protocol-related usage scenarios.
Ecological development (39.25%)
Frax Finance itself is a DeFi protocol based on Ethereum that focuses primarily on algorithmic stablecoins, and frxETH is just one of its many products. Although Frax Finance's project has been operating for a relatively long time and has developed relatively maturely. But for the entire liquidity staking track, frxETH started relatively late. Its protocol’s $ETH liquidity-collateralized derivative, frxETH, only opened for minting on October 21, 2022. The current overall operation time is less than 3 months.
Although it participated late, Frax Finance’s current performance in the liquidity staking track is actually quite impressive. According to data from Dune Analytics, although its market share is relatively small, the growth in $ETH staking ranks among the following projects First. Among them, the 30-day increase reached 40.87%, which is largely related to frxETH’s relatively high APR.
write at the end
In general, Frax Finance has successfully established a token staking model based on the frxETH/ETH liquidity pool and sfrxETH by leveraging its advantages in Curve War. Its unique design helps frxETH stand out in the competition for yield on Ethereum liquidity staking. In the long run, if the liquidity pool on Curve does not produce violent fluctuations, frxETH's staking yield will remain at a relatively high level, thus attracting more users.
On the other hand, frxETH started relatively late and its overall liquidity is relatively insufficient. This is the most obvious shortcoming of frxETH at present. Furthermore, frxETH cannot currently be called a truly “liquid” pledged derivative. Because its current usage scenario in DeFi is only to provide liquidity for Curve, it cannot truly release liquidity. Therefore, we believe that in the future development of Frax Finance, while attracting more users and liquidity, we need to think about how to add more usage scenarios for frxETH on DeFi protocols such as AAVE and Compound, just like Lido Finance.
Based on the above information, TokenInsight gives Frax Ether (frxETH) a rating of BB with a stable outlook.