Article source: BlockBooster
Author: Kazuma, the Researcher from BlockBooster
Currently, most decentralized stablecoins in the market tend to be inefficient, often requiring over-collateralization mainly to cope with the high volatility of underlying reserve assets. This inefficiency limits the scalability of stablecoins, making them difficult for crypto users to use daily. If there were a stablecoin that could strip away part of the volatility and provide it to users pursuing higher yields, would users be more willing to accept it?
f(x)Protocol is a brand new DeFi protocol that achieves this goal by splitting collateral assets into low-volatility tokens and high-volatility tokens. Low-volatility tokens support its stablecoin, while high-volatility tokens enable users to gain returns from leveraged exposure to the price fluctuations of the underlying assets. The core stablecoin of the protocol, fxUSD, is pegged to the USD and built on an innovative split-token mechanism, using ETH as the underlying collateral.
Growth performance of f(x)Protocol in 2024
In 2024, the total locked value (TVL) of f(x)Protocol grew by 273% from 15 million USD to today's 56 million USD. At the same time, the platform has also launched several stablecoins based on the same mechanism but using different collateral assets, such as:
rUSD: Supported by liquid staking tokens (LRTs)
btcUSD: Supported by Bitcoin
In addition, in June 2024, f(x)Protocol launched the automatic compound version of rUSD, arUSD, which allows users to earn additional income from underlying LRT assets.
With the recovery of the DeFi sector, f(x)Protocol is preparing for the release of version V2 in December 2024 and has previewed some content of its white paper. Project partners such as StakeDAO and Convex are also looking forward to the V2 version.
(Source: X)
Highlights of the newly released V2 version white paper of f(x)Protocol
On November 5, f(x)Protocol released the V2 version white paper, which focuses more on leveraging xPositions as a means to promote the effective use of fxUSD. The following are key features:
1. Higher leverage multiples:
The V1 version of xPositions allows users to acquire variable leveraged underlying assets through X-token, but the leverage ratio fluctuates according to market demand for fxUSD. In the V2 version, users can directly establish fixed leverage xPositions with leverage multiples of up to 10 times, and there is no need to mint X-token in their wallets. To support higher leverage multiples while maintaining system stability, the protocol automatically mints a certain amount of fxUSD through flash loans to ensure that the total collateral of X-token matches the leverage ratio chosen by the user.
2. No single point of liquidation risk:
The V2 version introduces a Rebalance Mechanism. When the risk of xPositions approaches the liquidation threshold, the system automatically redeems a portion of minted fxUSD to avoid the common 'liquidation' risks seen in traditional DeFi protocols.
3. USD-based Delta-Neutral stability pool:
The V2 version introduces a brand new stability pool, where users can deposit USDC or fxUSD with one click to provide liquidity support for the protocol's stability. Unlike the stability pool in the V1 version, the V2 version stability pool acts as a stabilizer between USDC and fxUSD to ensure that the value of user deposits is denominated in USD. Through the V2 version stability pool, participants can earn yields in the following ways:
Price arbitrage in the fxUSD/USDC AMM pool.
Transaction and rebalancing fees paid by X-token traders.
No need to execute or manage complex strategies throughout the process, operations are simple and easy to get started, and the sources of income are more transparent.
4. Specific assets 'zero funding cost':
The V2 version provides a 'zero funding cost' design for certain specific assets, further reducing users' trading costs.
Mechanism of fxUSD
To better understand these innovative mechanisms and how they will help fxUSD truly become a scalable, high-yield decentralized stablecoin, let us delve deeper into the current state of the f(x) protocol and its underlying technology.
f(x)Protocol adopts a dual-token mechanism, splitting the underlying assets into fxUSD (stablecoin) and xPositions (leverage). In the V1 version, users need to deposit collateral assets first to mint fxUSD or X-token (xPositions) separately. In the V2 version, users can directly exchange assets for fxUSD through the CowSwap aggregator. In addition, the V2 version allows users to directly open xPositions without going through the X-token minting step, further simplifying the operational process.
The core mechanism of fxUSD:
Users deposit stETH into f(x)Protocol to mint fxUSD or xPositions, with assets supported by underlying USD assets.
As the prices of underlying assets change, the reserve value that users can redeem will also change, but xETH (X-token) will first bear the volatility to make up for the difference.
When the ETH price drops, the value of X-token will decrease by a larger proportion because xETH represents the leveraged position, while fxUSD remains pegged to the USD.
When the ETH price rises, the system still maintains full collateral, and xPosition holders enjoy leveraged returns.
To further maintain the stability of fxUSD, users can deposit stablecoins of liquid assets into the stability pool to obtain native equity yields of stETH, as well as emissions in the form of the protocol's native FXN tokens, which include transaction and rebalancing fees in V2.
Unique advantages of f(x)Protocol
In the highly competitive decentralized stablecoin market (such as DAI, LUSD), f(x)Protocol has achieved rapid growth through the following innovative designs:
1. No need for over-collateralization:
Unlike other decentralized stablecoins that rely on over-collateralization to cope with asset volatility, f(x)Protocol concentrates volatility on X-token through the dual-token design of fxUSD (stablecoin) and X-token (xPositions), thereby forming a stable leveraged pair. As a result, fxUSD is able to stabilize its peg at a 1:1 ratio.
2. Diversified but isolated reserve support:
The reserves of fxUSD consist of many whitelisted liquid staking tokens (LSTs), which support its stable pool. At the same time, the main reserves of fxUSD are separated from the LST stable pool, which not only reduces the risk of a single asset but also ensures the opportunity to capture arbitrage from LST price fluctuations.
3. Incentive mechanisms are consistent with stability:
It is relatively common for the staking yields of LSTs to be directly returned to depositors, regardless of whether the stablecoins circulate within the protocol. However, f(x)Protocol has innovatively allocated part of the profits to users holding fxUSD and participating in maintaining the stability of the protocol, which helps support the health and development of the protocol.
4. Simplified real returns:
fxUSD provides users with an efficient way to obtain multiple yields from underlying stETH reserves and combines inflation rewards of FXN tokens, which are fully released into circulation within 50. In addition, the transaction fees for X-token in the V2 version will further promote the sustainable yield growth of the stablecoin, such as opening/closing xPosition and maintaining their liquidation fees.
To further protect the peg of its stablecoin, f(x) has also adopted a unique risk management mechanism:
X-token is the first line of defense: it can absorb market price fluctuations, protecting the stability of F-token (stablecoin), while also providing a leveraged product for those crypto players pursuing high risk and high returns.
What if the X-token can't hold up? If the price fluctuations are too large and exceed the capacity of X-token, the protocol will redeem some F-tokens from the stability pool. This is similar to a 'liquidation' for users, where they need to repurchase underlying collateral assets at the current market price. However, to compensate for this risk, the protocol incentivizes users to participate in staking through underlying asset yields and token rewards.
What happens in extreme situations? In black swan events or market crashes, X-token will not be directly destroyed like traditional liquidations, but will go to zero (value zero). At this point, F-token will become the only token that can claim the underlying reserve assets. This also means that F-token will fluctuate 1:1 with the underlying assets.
Comparison of fxUSD with other stablecoins.
Currently, most mainstream stablecoins in the market are pegged to the USD and rely on nearly the same mechanisms to maintain this peg. However, they often differ in collateral types, market sizes, and levels of integration with the broader crypto ecosystem. The following is a comparison of fxUSD with other stablecoins in several key aspects:
fxUSD Other stablecoins (such as DAI, USDC) Collateral assets such as stETH, LRT, and other liquid staking assets, as well as DeFi tokens DAI relies on ETH; USDC/USDT relies on traditional financial assets Collateral ratio 1:1 fully collateralized, no need for over-collateralization Usually requires 110%-150% over-collateralization Degree of adoption Currently mainly used within the Ethereum ecosystem, gradually expanding integration with DeFi protocols (Spectra, StakeDAO, and Convex Finance) Widely integrated into CEX and DEX, covering multiple public chains Price stability fxUSD largely maintains asset anchoring and stability, but has not yet been fully tested by the market Stablecoins such as USDC and USDT are supported by assets such as US Treasury bonds, but have also decoupled during extreme market fluctuations Market capitalization fxUSD's circulating market value is 10 million USD, with huge growth potential DAI's circulating market value exceeds 3.3 billion USD.
Risks and challenges of f(x)Protocol
As mentioned earlier, launching a new stablecoin in such a competitive environment is not easy, and the f(x) protocol also faces several obstacles in its efforts to increase the ecological application of fxUSD:
The market is highly competitive: fxUSD still has a significant gap in market capitalization and application scope compared to established stablecoins such as DAI and USDT. However, after the V2 version upgrade, f(x) aims to promote fxUSD as a stablecoin of 'real yield', focusing on optimizing its X-token product. The fees generated by X-token traders create a sustainable revenue flywheel for f(x), attracting more idle funds from users. This not only promotes the growth of f(x)'s ecosystem but also increases the application of fxUSD in the process.
Potential risks of the new protocol: As an emerging protocol, its mechanisms have not yet been fully stress-tested in the actual market, posing potential risks.
Ecological applications: Established stablecoins have been widely integrated into various DeFi protocols and blockchain ecosystems, giving them high practicality in a broader range of scenarios, such as lending platforms. fxUSD is currently only supported within the Ethereum ecosystem, with limited application scenarios and a lack of cross-chain and broader DeFi integration. However, the protocol's stability pool provides higher yields compared to other platforms, helping to drive the growth and application of fxUSD.
Despite facing challenges, f(x)Protocol is gradually providing new value propositions for Web3 users through the innovative design of zero liquidation risk leverage and multiple yield stablecoins. In the future, with the launch of version V2, f(x)Protocol is expected to further expand its market share and become an important player in the decentralized stablecoin space.