This Week in Frax – August 11, 2023

A week since Frax v3 was announced, and the response was off the charts

Only a week ago today, Sam Kazemian dropped a new FIP to onboard FinresPBC as Frax’s first RWA partner. And the response was super positive.


Last week we had on Jon Walch who introduced FrxGov to the world. Well over the next week the governance module was deployed to main net and just yesterday Jon posted that the governance docs were updated and live. Go give them a read.

Sam Kazemian Drops Alpha on Frax v3 FraxBonds and more in Flywheel spaces

Our hourlong interview with Sam K was jam packed with alpha. We discussed every part of Frax and how it would be impacted by Frax v3. If you haven’t watched the interview yet, we uploaded it to Youtube for you.

The biggest alpha leak was surrounding FraxBonds, a product which had originally been named in 2021, but did not have the infrastructure to support it at the time. FraxBonds (FXB) will be a huge part of Frax v3 and will bring the yield curve on-chain for the first time.

Sam spent a load of time answering questions about FXB this week and we’re going to do a round up for our Monday post.

PayPal Joins the Stablecoin Fun

The second most interesting story for the week was PayPal introducing its stablecoin PYUSD. We covered its launch on Monday and wrote how Frax would be creating a new basepool in Curve for it.

Frax Discord Was Hacked

Welp. Someone clicked the wrong link and the Frax Discord was hacked. Some people didn’t even know Frax had a Discord, but unfortunately a few users clicked the exploiters fake airdrop link and lost funds.

Federal Reserve Says Banks Can Issue Stablecoins (Kinda)

The Fed issued two letters this week that potentially will allow banks to issue stablecoins and get exposure to DeFi and crypto (a big maybe). While the text is unclear on how it will be implemented, Sam K gave his thoughts in Telegram on it.

frxETH Curve AMO Liquidity Was Called Into Question

When Frax pulled their liquidity during the Curve exploit, a lot of people started to question the imbalances. Crypto research firm ASXN gave them a good lesson on how the Curve AMO’s work on X.

Frax Finance Releases Their Monthly Report

Go read the official monthly report from Frax. Lots of good info and updates.

rETH Got Lucky This Week From Curve Exploit

Frax Dorahacks Hackathon Winners Announced

We announced the winners of the Dorahacks Hackathon this week. So many great submissions and teams took part. Go review the results to see the winners.

PaperImperium Interview

This week’s podcast guest was PaperImperium who walked us through the MakerDAO ecosystem and politics. We also talked with him about the newly announced Frax v3 and his thoughts on it.

Taiki covers FRAXPY basepool

Sam Kazemian Interview on Leviathan News

Sam K Interview on UnChained Podcast

Laura Shin invited Sam K on to talk the Curve exploit and Frax’s response to it.

Alpha Alert: FraxBonds, Frax v3, PYUSD Basepool and More Leaked In Flywheel Spaces

Who needs a published product roadmap? All you need is Sam Kazemian taking over Flywheel’s Spaces for an hour.

In this alpha packed Episode Sam K talked about the entire Frax universe at length. The whole spaces was a great listen and Flywheel Host DeFiDave is now known as the “ALPHA EXTRACTOR.”

Let’s dig into what we found out.

PayPal USD (PYUSD) Basepool?!?

The first thing Sam K said on the Spaces was that he had just gotten off the phone with Paxos. He couldn’t say why exactly, but he left it to the room to guess..

One thing he did say is that a PYUSD-FRAX basepool is 100% coming and will be deployed as soon as enough liquidity is onchain to support it.

“He who yields most, grows best”

When Sam K was asked about what PayPal will need to do to succeed, he answered back with a question of “Will these stablecoin issuers share the yield?”

MakerDAO is a good example of this with their recent EDSR incentives that sucked in $500m of new capital chasing their higher 8% rates. While it’s only a temporary solution, it does show that on-chain actors are highly sensitive to yield changes. And while most of the new capital in the EDSR is borrowed against massive stETH positions, organic demand was also captured.

Crypto has stagnated this past year due to high interest rates, and zero venues to earn treasury yields on-chain. The landscape is changing now, with Ondo and Open Eden launching yield bearing tokens. However, high rates set a baseline of what investment returns across all of DeFi must be to justify capital allocation.

Frax soon will be able to offer a totally new way to reinvest yield with Frax v3 and FraxBonds.

Frax v3 will have three big additions:

  1. BAMM will be a big part of the lending strategy.

  2. frxGov will control the whole thing – no trust needed in m-sig or signers.

  3. FraxBonds tokens that automatically convert to FRAX stable coins at a specific maturity date and they are deployable from a factory on-chain.

From what we’ve seen of Frax v3 so far, Financial Reserves and Asset Exploration Inc, a public benefit C corporation, aka FinresPBC will exist solely to pass treasury yield interest income back to the Frax DAO. With Frax’s model, soon all parts of the custody process and stablecoin issuance will be controlled by Frax and the Core Team. Sam K brought up a tweet of tomorrow’s Flywheel Pod guest PaperImperium that explained why Frax’s model was better than MakerDAO’s.

PaperImperium said “Frax is not adding *additional* counterparties who could do fraud. And the core team has a history of presumably NOT doing fraud. Their ‘fraud credit score’ is good.”

Sam K emphasized “You need to control every part of the stack to control your own destiny.” If the Frax core devs are trusted to run Frax Ferry and honestly control the protocol up until now, they should be trusted to run FinresPBC. It keeps the number of trust assumptions at 1, rather than onboard many other third party actors who might not have the protocol’s intentions at heart.

FraxBonds Bring the Yield Curve On-chain

The big alpha from the episode was FraxBonds, which will provide duration exposure to anyone onchain.

Here’s what we learned about the design:

  1. Frax will issue 4 bonds over consecutive years. Anyone can buy the bonds and when they mature, they convert to FRAX stablecoin.

  2. FraxBonds mature on Jan 1 of every year. As soon as the nearest token matures, a new token appears in the factory for minting.

  3. They are infinitely scalable through FinresPBC.

  4. All FXB tokens will be ERC20’s with deep liquidity in Curve, as well as the usual bribes + FXS gauge incentives.

FraxBonds will be an integral part of Frax v3 and if the MakerDAO eDSR experiment shows anything, degens are hungry for on-chain yield. Right now a 2 year bond yield earns 4.57%, roughly equal to the soon to be nuked eDSR. If we stay in a high rate environment, Sam Kazemian believes that we have to adapt and build new venues to capture rates.

Shipping Faster Than Ever

It may be hard to believe, but Sam K said the core dev team would be shipping even more next year than the current and that they planned on shipping “faster than ever before.”

He gave two hints on when future products would see production.

First, he said that frxETH v2 is approximately 50 days away.

Second, he said that Fraxchain is way closer to going to testnet than people expect.

Fraxchain apparently already has Etherscan support, APIs, etc… which will make it usable day 0. He noted that Fraxchain is NOT going to be another appchain.

“Our goal is we want this to be the largest L2. And the way that we’re actually trying to do that is by making it that the most useful yield from the fed rate, the best POS [staking] rate for ETH and the best inflation protected rate. All of these extremely useful ways to earn yield is the hallmark and central point of Fraxchain,” he stated.

PayPal Steps On-Chain with PYUSD, Marking a Major Shift For Stablecoins

On the morning of August 7th, 2023, payment giant Paypal announced the launch of it’s stablecoin PayPal USD (PYUSD). The new stablecoin will be used to connect all 431m of PayPal’s existing user base and ultimately showcase their unabashed commitment to the world on-chain.

What is PYUSD?

Paypal’s PYUSD is the first stablecoin issued by a major “non-crypto” first company. It represents a marked shift in general corporate attitudes towards stablecoins and future beliefs of imminent policy acceptance.

PayPal’s stablecoin PYUSD is fully-backed by U.S. dollar deposits such as short-term U.S. Treasuries, and equivalent assets. Managed by Paxos Trust Company, PYUSD can be exchanged on a 1:1 basis for U.S. dollars through the PayPal or Venmo apps.

According to Paypal’s press release:

PayPal customers who purchase PayPal USD will be able to: 

Transfer PayPal USD between PayPal and compatible external wallets  

Send person-to-person payments using PYUSD 

Fund purchases with PayPal USD by selecting it at checkout 

Convert any of PayPal’s supported cryptocurrencies to and from PayPal USD  

Why Paypal’s Announcement Moves The Needle For Crypto Adoption

Up until now, the only way to acquire payment stablecoins was through a crypto-focused company like Tether, Coinbase, or Gemini. Now with PayPal entering the market, millions of people will now have access to one of the most widely-used payment platforms in the world as a gateway to crypto.

Former Paxos Head of Portfolio Management and Managing Partner at Zero Knowledge Consulting Austin Campbell said on Leviathan News that “One of the most underdeveloped parts of the crypto ecosystem has been the actual on and off ramps.It’s hard to do better than PayPal from that perspective. I actually think the biggest innovation here is just adding a native stable coin to the PayPal platform period.”

Campbell further stated that he thinks about “two and half years of work” preceded this product launch. Rumors of PayPal’s stablecoin development had been reported as early as 2021, when Jose Fernandez da Ponte, vice president and general manager of blockchain, crypto and digital currencies at PayPal told the media “This is way too early.” Further rumors were leaked to media confirming PayPal’s plans, but in February this year the payments company announced that it had placed its stablecoin product ambitions on hold while Paxos was investigated by the NYDFS. Six months later, the company apparently felt the regulatory landscape had cooled considerably enough to launch their stablecoin.

PayPal tapped Paxos to manage and issue their stablecoin, which means it will be fully reserved, have segregated funds, and monthly transparency reports. Additionally, their stablecoin will be monitored by on-chain analysis firms like Chainalysis and TRM to monitor for illegal usage. PayPal will be able to freeze funds if they are involved in criminal activities.

Paxos had drawn the ire of regulators for its relationship with Binance after a long string of claimed violations finally resulted in New York Department of Financial Services’ order to halt BUSD minting as well as a Wells notice from the Securities and Exchange Commission. NYDFS said that the order was “a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance.”

“Effective February 21, Paxos will cease issuance of new BUSD tokens as directed by and working in close coordination with the New York Department of Financial Services,” Paxos said in a statement, adding that it would “end its relationship with Binance for the branded stablecoin BUSD.”

The market has evolved and the Binance relationship no longer aligns with our current strategic priorities,” said Charles Cascarilla, CEO of Paxos.

Binance’s relationship with Paxos allowed them to mint BUSD directly from their exchange and port it to any blockchain of their choice.

“The Department has not authorized Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos,” NYDFS said.

Now that PayPal is working with Paxos, it must signal the investigation has run its course and the embattled issuer is free to operate now after heavily regulatory scrutiny.

PayPal vs Meta

While the announcement still is fresh, reactions to it are markedly different than the failed Diem stablecoin developed by Meta. The social network was lambasted and roasted in front of Congress by politicians, economists, and activists on both sides of the aisle when it first announced its intentions to enter the market in 2021.

Facebook at the time was still reeling from the Cambridge Analytica scandal which had been a flashpoint in the 2020 elections. The company had yet to rehabilitate its image and so reactions to the Diem news were fierce.

Senator Elizabeth Warren voiced her “strongest opposition to Facebook’s revived effort to launch a cryptocurrency and digital wallet.” Additionally, she, Sens. Brian Schatz (D-HI), Sherrod Brown (D-OH), and others wrote in a letter, “Facebook is once again pursuing digital currency plans on an aggressive timeline and has already launched a pilot for a payments infrastructure network, even though these plans are incompatible with the actual financial regulatory landscape — not only for Diem specifically, but also for stablecoins in general.”

The issues for Facebook were two-fold according to Campbell.

First, unlike PayPal, Diem was a brand new business line for the company. Facebook is a social network used by over 2 billion people globally. It also owns the Whatsapp and Instagram brands. The addition of a payments service would have radically transformed Facebook into a giant quasi-bank that could immediately onboard its entire user base overnight. Lawmakers and regulators were scared that Facebook would further abuse its already substantial powers using data collected from its users.

Not only would the social giant have access to your friends list, likes, posts, direct messages and geographic data. The addition of Diem would also potentially grant Facebook unprecedented personal financial access to every one of its users. For a company whose image was already in the gutter due to scandals, Diem was just one step too far.

The second issue with Diem, instead of just being a US dollar stablecoin, the protocol had imagined plans to issue a SDR like currency backed by multiple foreign currency pairs like the Euro, Yen, Aussie dollar, and Swiss Franc. Economist literally shit gold bars (hah) at this proposal. In their minds, global access to a basket of currencies would impair central banks from imposing domestic monetary transmission. If their pawns citizens were able to easily acquire a volatility dampened stablecoin anywhere globally, then what poor sap would buy their worthless bond offerings?

Diem never made it out of regulatory hell. Paypal is shining.

Interest Rates Rule Everything Around Me

In 2023 every major fintech is a quasi-bank that earns a significant portion of their revenue from net interest income. Coinbase, Robinhood, and a host of other companies all are earning outsized profits from rising interest rates.

The prospect of adding a stablecoin to their product offerings is enticing as its similar in design to a zero coupon bond with zero interest. The stablecoin issuer issues the token, yet gets to keep all of the yield earned from short term treasuries. In a perfectly rational world, with a unbridled competitive market, no one would own stablecoins or cash for that matter. What good would it be to own an asset which fails to pass on interest income? Short answer…. nothing.

But we live in a world with gigantic regulatory hurdles, sanctions, FX swap limits, domestic capital controls, and securities laws. Simple access to dollars is plentiful enough for some people. In crypto land, demand for leverage has, up until recently, far outstripped need for importing treasury yields. With short term yields at 5%+ with no signs of cooling, a new paradigm had emerged.

Enter Tether…

Tether is on track to earn 4bn in net interest income this year. This is more than Blackrock will earn. All for issuing dollar denominated debt. It’s a no brainer that every fintech + bank should issue their own stablecoins, it’s literally ‘free’ money for them.

PayPal in theory should be able to outcompete Tether and potentially Circle with its larger user base and wider global onramp footprint. Campbell in our interview thought that the market cap of PYUSD could rise to $500bn in 5-10 years. At that size, PayPal would be one of the largest holders of US treasuries in the world and earn over $25bn gross interest income annually.

Will PayPal Enter the Curve Wars™?

Short answer…No. Longer answer, it depends on the jurisdiction.

In the United States and Europe there are heavy restrictions or outright bans against paying interest income back to the plebs. Gary G himself would go knock on Paypal’s door if they started OTC’ing CRV from Michael to bribe their pool. In Europoor land, new issuers of stablecoins under MiCA (e-money tokens, or EMT) will be prohibited from granting interest in order to “reduce the risk that e-money tokens are used as store of value.” Economics breaks down when the seigniorage governments extract is no longer a function conduit. We talked about this in our recent podcast with Omid Malekan, governments aren’t ready for treasuries to become the defacto means of payment in the world.

Outside of these two continents, a competitive market will drive polities in the Middle East and Asia to attract new holding Co.’s that have one job and one job alone, passing on interest. We’ve already seen this with Zunami Dollar (USZ), a Japanese based stablecoin that’s directly depositing its net interest income into Votium pools to boost Curve liquidity. Campbell thinks PayPal could setup in one of these locales, they are “quite global” and “it’s not a requirement that they’re necessarily gonna do this out of a US entity either.”

If Michael’s vision is seen through, Curve will become the leading market for Forex. PYUSD would be just one of the thousands of international stablecoin currencies on the market. Traders will demand liquidity and liquidity on Curve necessitates bribes. If PYUSD does achieve scale, it wouldn’t be so outlandish to see a non-US based PayPal subsidiary entering the Curve Wars.

Banks Under Threat 👀

Payment stablecoins in their current form are a threat to the leveraged loan model inherent to banking. After the collapse of Silicon Valley Bank, depositors were forced to reassess the business model underpinning their savings. If a company like PayPal is offering stablecoins available for use in DeFi, what reasons (other than FDIC insurance and a host of regulations) should any funds be kept in a bank at all?

When I swap my dollars for PYUSD, I can check monthly to see the exact amount of all investments and holdings backing my stablecoin. And Paxos only holds cash and short term treasuries. They have no long bond exposure that led to the downfall of SVB.

“If I want to use a debit card, I also am like engaging in commercial real estate lending. Like people don’t think of it that way, but when you give your money to a bank, that’s what they do with it. They go lend that money out” Campbell said.

With the SEC and Elizabeth Warren doing all they can to hamper bank growth, JP Morgan will be the last institution to get the regulatory sign off to issue stablecoins. Bank deposits are under threat as retail depositors shift their savings out of banks and into DeFi.

Structural changes are imminent if fintech companies are permitted to operate in current fashion. Campbell said “Banks in general, if this model continues to proliferate, and I wanna be clear, I think it should, are gonna face an existential question of what does our funding model look like? What is the real price of borrowing and how should we be structuring this? Because as we discovered in 2008, we’ve probably been way too biased to just making loans at any cost, and that may be because we’re forcing all of the deposits into the system to be lent out in risky fashion, whether people want that or not.

Stable SZN Gaining Massive Momentum

PayPal’s entrance into the market is just the beginning. More major payment and credit companies Visa, Mastercard, and Square have all reportedly been exploring adding stablecoins to their product lines. Today’s announcement will greenlight launch of competitors and speed up development time. PayPal is out the door first, but its competitors will watch intently how the markets and Washington D.C. responds.

If no major objections arise and PayPal’s stablecoin grows, their entrance will be swift and signal a new monetary regime. Congress has yet to pass a unified stablecoin bill and this moment may be the catalyst for forcing D.C. to end its gridlock on the long awaited stablecoin bill. Once clarity is achieved, the “Spring of a Thousand Stablecoins” will commence which will unlock capital efficiency in the world off-chain while flooding liquidity on-chain.

This Week in Frax – Aug 4, 2023

Frax v3 Proposed!!!

This morning, we woke up to see Sam Kazemian had posted a proposal to onboard Finres as Frax’s first RWA partner. Huge news!

Finres would be an isolated non-profit that would serve one purpose, to hold US dollar assets for Frax in an FDIC insured IntraFi savings account and earn yield. Whoa…

This is the first official documentation about Finres or Frax v3 to be released.

Financial Reserves and Asset Exploration Inc (dba FinresPBC 55) will do the following

FinresPBC is not a for profit entity: its incorporation documents state that its public benefit mission is to bring traditional financial assets (colloquially known as “RWAs”) onchain for the benefit of the public. Thus, any yield generated from assets it holds on behalf of Frax Protocol will be returned to the protocol (minus costs/fees incurred to operate the public benefit business). Therefore, FinresPBC’s public mission is to provide the Frax Protocol access to safe cash-equivalent assets and near Fed rate yields for the benefit of all without seeking to make profit from this relationship or charge fees (other than to pay for minimum costs related to serving its mission). Additionally, FinresPBC’s mission is to continue expanding its traditional infrastructure including meeting requirements for a Federal Reserve Master Account (FMA) in the future.

So Finres will be the institution/company that acquires FMA access in the future… good to see some progress on this.

Finres won’t have any control over the protocol, it will just hold assets. It will be limited to 4 actions

1.) Hold US Dollar deposits in FDIC Insured IntraFi savings accounts & earn yield on such accounts.
2.) Mint/Redeem Paxos USDP stablecoins & earn yield.
3.) Mint/Redeem Circle USDC stablecoins & earn yield.
4.) Hold/Purchase/Sell United States Treasury Bills in segregated brokerage accounts & earn yield.

To note, Earn yield is written on every point above. Good things ahead for Frax v3.


Starting on Sunday, July 30 at around 11:30 am news of the Curve hack hit the Frax main chat.

Anons immediately noticed that some of the Frax pools were using the older compiler version

However, the bug was isolated only to native ETH pairs AND the older compiler version.

Travis jumped in…

From then on out, it was a massive operation to remove liquidity and protect protocol assets. Read our summary from Monday.

Frax POL returned

All protocol owned liquidity was added back after the team conducted a full audit of the current Vyper compilers and reviewed the exploit postmortem. Liquidity was added back on Thursday throughout the day. No Frax assets were ever at risk.

Additionally anon Ernest asked if the exploit would cause any delays. Sam K answered “No pushing back anything.”

New Curve LP for fFRAX

We covered the launch of crvUSD’s newest pool paired with fFRAX.

CRV Acquisition

The Curve exploit was the least of Curve Founder Michael Egorov’s issues this week. His massive loan spread across 4 different lending protocols was the most intensely watched position this week.

On Monday night, the price of CRV was pushed lower by off-chain shorters, who had their eyes on his $.40 cent liquidation price. Near midnight, as CRV danced around $.50, Michael’s wallet started sending off chunks of CRV to various wallets controlled by Justin Sun, DCF God, and others in a series of OTC deals. Michael raised capital to pay down his debts, yet he has not stopped selling CRV.

Over the course of this week, Michael sold 63.5m CRV, raising $25.4m in stablecoins that he used to repay his loans. Notably, today Yearn acquired several million CRV and Aave is currently voting on a proposal to purchase $2m worth of CRV.

I asked main chat if we should be looking to acquire CRV through OTC channels and got an emoji seal of approval.

I immediately created a discussion FIP on the subject. Join in and leave comments on the CRV acquisition.

Drake gets spicy

Lots of new eyes of Fraxlend this week, and Twitter Frax-knowlarpers were abundant. Thankfully Drake popped in from his honeymoon to set the record straight.

Later in the week while Abracadabra was voting to change their interest rates, he gave some spicy takes. The proposal was eventually shot down, probably in part to Drake’s feedback.

FraxEtherRedemptionQueue goes live!!

Don’t want to pay a small amount of slippage on frxETH? Want to get exact withdrawals? Well the team is about to push a new redemption system live to assuage any fears about redemptions.

Travis writes:

TLDR: Alternate way to exit frxETH and get 1-to-1 for ETH

You deposit your frxETH and get an NFT receipt. Then you wait, based on what the current Beacon entry + exit queue length is. Protocol triggers a validator exit if needed. Then you can claim your ETH after that comes in (you still have to wait for fairness if enough leftover from a previous exit is there). If you want to cut that short and sell back into the Curve pool, you can redeem your NFT early for your frxETH back, minus a penalty. This is to prevent mass exit request griefing. Reason you have to wait to exit is you didn’t when you entered and got frxETH -> sfrxETH and started earning yield immediately and didn’t have to stand in line with the Beacon entry queue. You can also sell your NFT to somebody else if you want to avoid the early exit fee (e.g. you get a better deal), then they can wait.

IndexCoop adds sfrxETH to their Diversified Staked ETH Index (dsETH)

Check out the new LSD index asset.

Are you ready to SHORT?

Two new governance proposals went live this week to add new Fraxlend markets for FRAX/WBTC and FRAX/WETH. This would allow traders to short both WETH and WBTC.

We’re really enjoying seeing a new diverse variety of collateral types be added to Fraxlend.

Additionally, Dennet gave some feedback on other pair types in our Temp check.

Retro Finance

Watch our Interview with Omid Malekan

Frax in China

Incentives Rule Everything Around Me: How Curve’s Founder Built His Way Out of Liquidation

Whew, what a night. Congrats to those who went to bed before 10pm and woke up to markets flying again.

As we reported yesterday, due to the Curve Finance exploit, the CRV/ETH Curve LP was drained, reducing liquidity, and pressuring prices to the downside. In the previous months Curve Founder Michael Egorov had used his massive CRV holdings to borrow tens of millions of stablecoins from lending markets like Aave and Fraxlend. He was able to borrow so much capital as it had been nearly impossible to source enough CRV to short it to his liquidation point.

All that changed when CRV/ETH LP was completely drained.

Suddenly all the sharks could smell blood. Michael’s untouchable CRV position was now the most desired prize in all of crypto. The hunt began to liquidate Michael at any cost.

Millions of dollars piled into CRV shorts crushing the price lower.


Degen’s were filling the onchain orderbooks with dirt cheap prices for CRV starting at .15 cents downwards. Max pain was expected.

Michael’s public wallet was tracked block by block as he rapidly tried to redeploy capital from one lending market to another to optimize his position. But throughout the day, his position health kept deteriorating. Michael needed a lifeline desperately.

His biggest threat was Fraxlend, where he had originally borrowed $25m FRAX against his position. Yesterday he had paid it down to $17m, but price action spooked lenders and the pools utilization maxed out as lenders tried to squeeze Michael towards liquidation at .40 cents. Around midday, based on his on-chain holdings, it didn’t look like Michael had much more room to maneuver. He was no longer able to borrow from Aave to pay down his Fraxlend debt, and he didn’t seem interested in selling CRV to get ETH or stables.

In production, the interest rate changes every 12 hours.

Due to the high utilization, Michael’s interest rate on Fraxlend started to rapidly increase. By design, the Fraxlend interest rate doubles every 12 hours at max utilization. With it hovering at 99% for 2 consecutive days, his rates skyrocketed from 10% to 150%.

Instead of panicking, Michael did what he did best. He started to build.

At 5:51 pm EST, he dropped a short message with a link. It was a new crvUSD/fFRAX pair with an eye watering 100k CRV rewards funneling through it.

fFRAX is the receipt token issued by Fraxlend when FRAX is deposited by lenders into the contract. Its a a record of how much interest lenders have earned. It’s also a quasi stablecoin, as it represents a secondary claim on debt. Michael knew this and so he spun up his own new pool on Curve and incentivized it with his own CRV stash.

The idea was simple. Michael needed a way to incentivize new deposits into the CRV/FRAX Fraxlend pair. With his new Curve LP, he would create demand for lenders to deposit and then add liquidity on Curve. The high rewards would bring in more and more capital to the Fraxlend pair and over time reduce the utilization rate and his skyrocketing interest rates.

While some were skeptical at first, in just one day the Curve pool attracted $6m in deposits and is paying 50% APR in CRV (wow). A few hours after depositing this, capital started to flood into the CRV/ETH Fraxlend pair.

Notably, Sam Kazemian posted a TG update from one of their private monitoring tools for Fraxlend showing Sifu depositing 700k FRAX.

While it wasn’t a panacea and utilization does remain elevated, it bought Michael enough time to construct and OTC deal to sell his CRV holdings at .40 cents. Justin Sun, C2tP and DCFGod were just a few of the investors who bought millions of CRV at a discounted rate.

Michael used the raised funds to increase his health factor by paying down his debts on Aave and Fraxlend. His new liquidation level is in the low $.30s.

The first of its kind crvUSD pool will persist and might be a good model for other high yielding fFRAX tokens on Fraxlend. There’s no reason that this secondary debt market can’t be liquidity for crvUSD and also earn CRV rewards. It’s a win-win for everyone.

Curve Finance Exploited for $70m, Frax Responds Quickly to Protect Assets, Fraxlend CRV Pair Update

On Sunday July 29, 2023, Curve Finance was exploited due to a previously unknown re-entrancy bug in older Vyper compiler versions. Vyper is a programming language for EVM and the second most popular behind Solidity. Because Curve is coded in Vyper, it was vulnerable to the bug.

The bug only affected Curve pools where native ETH was used, as it has a callback function. White hat and black hat exploiters were able to snipe $69m worth of assets over the course of 8 hours. Currently $15m in assets have been returned, with the potential for more once communication channels are established with the hackers.

Frax Has Zero Exposure and Losses to the Curve Exploit

We want to state that Frax has ZERO exposure to this bug and no Frax Curve LPs are at risk. Frax did not lose any assets in this exploit and all protocol funds are safe and secure.

After the exploit, Frax removed all protocol owned liquidity from all Curve liquidity pools until a full post-mortem is conducted and all currently deployed liquidity pools are reviewed.

Sam Kazemian first wrote in the Telegram group about the protocol pulling frxETH AMO liquidity:

Out of an abundance of caution we’ve removed a good amount of the protocol controlled liquidity from frxETH-ETH pool to protect the protocol. The peg is fine and everything is solvent. We will periodically swap into the Curve pool to keep the frxETH peg tight as usual but the POL itself has been withdrawn safely with zero issues/losses. Please make sure people on Twitter/Discord do not have any false information about frxETH being affected by anything. There are no losses or issues, but until everything is sorted out and dust settles, we’ve acted quickly to keep everyone safe. Again, there are NO issues with frxETH or any losses. We’ve just withdrawn protocol controlled liquidity to be safe. That’s all. Please don’t get it mixed up. We’re just acting fast and professionally for every Frax user’s safety. There are NO issues or losses of any frxETH or protocol owned liquidity.

When asked about the frxETH peg health due to lower liquidity in the Curve pool Kazemian wrote:

The ETH that was used as protocol controlled liquidity is simply sitting idle for the next 2-3 days until we are sure everything is fine. That ETH can be used to defend the peg before a single valdiator is ejected. If necessary validators will be ejected to defend the peg but that is far, far from necessary. There’s no losses or anything across any of the balance sheet for FRAX or frxETH so today’s events do not economically affect the pegs of frxETH or FRAX.

Later in the day after all attacks had taken place he wrote:

Just to update on this, we’ve also removed AMO liquidity owned by the protocol in FRAX3CRV, FRAXUSDC, and FRAXUSDP out of an abundance of caution. We will add it again in the next 48 hours after we’ve done our own independent analysis of the Curve pools and are confident everything is completely safe. For now, there’s more Uni v3 FRAXUSDC liquidity in the meantime. We want to reiterate again, there have been no losses or issues with FRAX or frxETH at this time. There have been no losses of collateral or balance sheet assets. We simply took extra caution to secure protocol owned liquidity/collateral. No other places such as Fraxlend or Fraxswap currently have any losses or issues at this time. We’ll watch the CRV Fraxlend pair but as of now there is no bad debt nor is there any effect on that for the FRAX peg. We’re watching everything around the clock so if anything changes we’ll let everyone know. So far, no losses and no issues at least as of this writing.

Sam mentioned Fraxlend because one of the targets of the hack yesterday was the Curve CRV/ETH LP, which was completely drained for $25m over 3 transactions. This liquidity pool was the primary host for CRV liquidity. Michael, the founder of Curve, owns an incredible amount of CRV and has used it to take loans from several lending protocols, to include Aave and Fraxlend.

Now that the largest on-chain liquidity pool is fully drained, if Michael were to be liquidated, it is unlikely that his position could be sold without severe slippage. In this event, FRAX lenders might not recover their full deposit amount. In the case of a shortfall Fraxlend dynamically restructures the debt across all lenders. The shortfall percentage is equally applied to all lenders at the time of liquidation and applied to the virtual price of fFRAX.

Unlike Aave or Compound, Frax’s dynamic debt restructuring keeps the contract from being “bricked” as lenders rush to remove available liquidity as fast as they can. It’s a race to exits for lenders post-liquidation as whomever is last is stuck with “bad debt” and cannot withdraw any amount of assets from the pool.

Michael’s position on Fraxlend is especially precarious for two reasons.

First, all Fraxlend pairs are isolated pools. Depositors collateral cannot be rehypothecated and they cannot use cross-asset margin to bolster their position. Michael must fully pay down his debt to a level lenders find acceptable to fund.

The second problem for Michael is how fast the interest rates on Fraxlend rise based on utilization. Currently the CRV/FRAX Fraxlend pool is 100% utilized. All of the FRAX deposited into the contract has been borrowed by Michael. If Michael fails to pay down his debts, the high utilization ratio with skyrocket Fraxlend APRs, doubling every twelve hours.

Current borrowing rates on Aave, note how high stablecoin rates are.

Michael has started to pay down his Fraxlend debt and is keeping the interest rates under control at the moment, but it’s unclear how long this can continue, as Michael is starting to be stressed on Aave, where his largest borrowing position is. Overnight, stablecoin borrowing rates on Aave rose to 25%+. Unlike Fraxlend, where the borrowing pool is isolated, bad debt on Aave is socialized across the protocol. If Michael’s position is liquidated, resulting in bad debt, the DAO will sell AAVE on the open market to close the debt gap.

Frax doesn’t guarantee any of the shortfall with FXS or protocol funds. This has minimized FRAX risk to Michael’s CRV position almost non-existent. Kazemian stated in the Telegram chat that AMO exposure, or unbacked FRAX seeded into the lending pool, is only $100,000.

Chainlink to save the day

One saving grace for Michael has been the Chainlink oracles that almost all lending markets rely on. When the exploiter stole the 40m CRV, on-chain prices collapsed to near zero. However, Chainlink uses a variety of sources, centralized and decentralized, for its data feeds. Exchange prices for CRV have remained steady at $.63 since the exploit, preventing Michael’s position from being liquidated.

As of writing this, Michael’s liquidation price is $.40. He has deposited 59m CRV and borrowed 17.84m FRAX. His interest rate to borrow FRAX currently is 49%. The maximum interest rate for the lending pair is 10,000%. If utilization stays at this rate, the maximum APR will be reached in 3.5 days.


This Vyper exploit presents a stark reminder of how vulnerable the “blockchain stack” can be. This type of vulnerability was not easy to find and likely took months of carefully combing through code, showing the lengths hackers will go in a bear market to discover weaknesses. Language diversity is important for any system and we as a community must make sure that we prevent a monoculture coming about which would make the stack even more fragile. As the ramifications of this exploit play out in the coming months, thorough audits and time are necessary to build resiliency once again. This is not the first time DeFi has faced adversity and surely will not be the last, it’s all a matter of how DeFi bands together to grow stronger from here.

Frax V3 Full Details, Founder Sam Kazemian Leaks New Stablecoin Updates

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In true Frax fashion, a random anon in the Telegram chat drew out never-before-made-public details about the upcoming product release of Frax v3.

Wukong asks Sam Kazemian about crvUSD, gets an answer about Frax v3.

Frax v3 had been initially alluded to by Frax founder Sam Kazemian back in March 2023. There had been some unsubstantiated announcements that an official product roadmap was soon to be released at the beginning of the year, and the community was interested to learn what the Core Dev Team had in store for the year. While no official roadmap was published publicly, details have been consistently leaked in the Telegram chat by Kazemian and Senior Dev Drake Evans.

Sam Kazemian first names Frax v3 in March 2023

Kazemian first made comments about Frax v3 in response to an anon asking about if the Stablecoin would see updates.

Sam K gives a short description of how Frax v3 works

His announcement was fresh off the Silicon Valley Bank collapse and the subsequent USDC depeg that also had knock on effects for Frax for the first time in its existence. Circle’s stablecoin had been the bedrock collateral asset for Frax leading up to the banking crisis. Other collateral types were on Frax’s balance sheet, but USDC represented the lion’s share of exposure.

The SVB collapse was a wake-up call that no single collateral would ever be resilient enough to back the entire supply of FRAX. In April 2023, Frax began its diversification process by adding a FRAX/USDP (FRAXPP) base pool to Curve.

Now armed with two major collaterals backing the stablecoin, Frax v3 is taking security and diversification further by fully disconnecting from “fiatcoins” like USDC and USDP.

Based on Kazemian’s comments, this potentially could take the form of liquidity pool deposits from other protocols, integration of other protocol’s stablecoins or maybe even wrapped treasuries issued on chain. This could be similar to how Maker passes on Tbill yield to the DSR, but instead of a vault, it would be added as rewards to bi-weekly Votium bribes.

For all of the leaks, no clear information is released at this time. Based on the timeline though, we should see a full announcement within a month hopefully.

Kazemian did say that bribing mechanisms will be a key part of Frax v3 and that the yield will be used to “auto-incentivize deep liquidity” similar to exiting liquidity pools like FRAXBP and FRAXPP.

The new FRAX system is designed completely in-house and is not based on any existing mechanism or systems currently in DeFi.

Frax v3 is apparently nearly ready for launch and Kazemian thinks that it should be released within 30 days.

The community response was ecstatic and excited to see the third iteration of Frax’s stablecoin, especially in the wake of the USDC crisis.

Oh and to top it all off there was some FPIS alpha too mixed in.



Thank you for reading Flywheel DeFi. Share this Frax knowledge with your friends, fam and colleagues to grow our community.


How Ambient Finance Puts LPs First

Action Items

  1. Go watch our interview with Miyu and Doug

  2. Read the Ambient Docs

  3. Follow Ambient Finance, Doug, and Miyu on Twitter

  4. Trade on Ambient

  5. Provide liquidity to a pool

Imitation is the Highest Form of Flattery

Let’s get the air out of the room before we get deeper into Ambient. Uniswap, the largest DEX, recently announced the upcoming deployment of Uniswap v4. The new update includes “hooks” which allow developers to create custom liquidity pools. Uniswap envisions hooks to be used to create all sorts of new order types like: “time-weighted average market maker (TWAMM), dynamic fees based on volatility or other inputs, onchain limit orders, depositing out-of-range liquidity into lending protocols, customized onchain oracles, such as geomean oracles, autocompounded LP fees back into the LP positions and internalized MEV profits are distributed back to LPs”

Additionally, with Uniswap v4, all liquidity is housed in a single contract, greatly reducing the cost of deploying new contracts and increasing gas efficiency when trading. 

This is pretty powerful operational control not available to Uniswap’s users previously. The only problem though is that all of these features had already been coded and deployed by the team at Ambient (formerly CrocSwap).

What is Ambient Finance?

Ambient Finance is a decentralized exchange (DEX) that allows for concentrated and full range (ambient) liquidity. The entire exchange is run on a single smart contract, with individual AMM pools acting as lightweight data structures rather than separate contracts. This makes Ambient one of the most efficient DEX’s on Ethereum. 

Ambient has several advantages over its competitors, with dynamic pool fees to maximize liquidity provider (LP) returns based on market conditions and demand for liquidity, auto-reinvestment of fees from concentrated LP positions, protection against JIT liquidity attacks, gasless transactions and permissioned pool support, where access to pools can be governed through a whitelist.

Account abstraction will also be supported, so that users can sign a transactions offchain and have a relayer execute it for them on their behalf. 

These features are miles ahead of what Uniswap has shipped to market and its no wonder they liberally borrowed from Ambient’s design philosophy. 

Ambient Alpha

We don’t have much to say other than Ambient has yet to issue a token during this initial launch and test-in-prod period. While nothing explicit has been announced, Doug and the team have hinted at it. In a tweet published the same day as this article, Doug posted a screenshot of research into ambient superconductors and asked “and you’re not farming Ambient anon?”

Do what you want with this information. 

Total liquidity on Ambient is not high currently. The largest pool ETH/USDC only has 6m in deposited assets. Once a token comes out, it could help them acquire more liquidity. We shall see. 

Why FraxFerry is the Best Crypto Bridge for Billionaires

On May 24, 2023, rumors emerged that crypto bridge Multichain’s CEO Zhaojun had been arrested in China.

Annnnnnd its gone

The initial damage caused by his arrest was unknown, but it soon became public that he had sole server access and certain parts of the protocol began to fail. The remaining team called it a “force majeure,” and over the course of the next 6 weeks almost no information came out about potential risks.

On July 6, 2023, an exploiter drained more than $100m in assets from Multichain’s wallets. The team confirmed that the funds were stolen and asked the wider community to revoke access to their contracts. Only after the hack did the team publicly state the CEO had been taken into custody by Chinese police. All of Zhaojun’s computers, phones, hardware wallets and mnemonic phrases were all seized. Multichain also stated that all “all operational funds and investments from investors have been under Zhaojun’s control” since inception and they had no access to any servers.

A TVL chart of Multchain. Source: DeFiLlama

A TVL chart of Multchain. Source: DeFiLlama

The first rule of crypto is “not your keys, not your crypto.”

All of the assets held by Multichain were in fact controlled by one man. He’s not the first crypto founder to randomly disappear with all deposited assets. The Multichain incident is just another lesson about the dangers of plowing funds into non-transparent crypto protocols with single sources of failure. Bridges have been especially vulnerable to attack.

The problem with crypto bridges

Hackers love bridges. They are the juiciest targets in crypto. 

A list of all major hacks and exploits in crypto by size of funds stolen. Source: DeFiLlama

According to DeFiLlama, 50% of the largest hacks ever were against bridges. Billions of dollars were stolen because of exploitable code. Bridges are a necessary infrastructural element of crypto networks, but they are the most prone to exploit. Multichain’s woes are yet another addition to this painful ranking.

When a bridge gets hacked, the attacker immediately takes all of the freezable assets like USDC, USDT, and other tokens, and dumps them for ETH, BTC, and other immutable assets. They then send those assets off to mixers like Tornado Cash where they break the chain of custody and prevent law enforcement from tracking them.

The money is gone in a single block.


Normal operations immediately switch to sending empty ETH transactions to the attackers address begging for the money back and offering to pay a white hat fee. It’s not a great position to be sitting in while your protocol burns down around you.

Law enforcement gets called in, but what can they do when the funds are already funding a Lazarus office party?

Lazarus team throwing their weekly “we got em” office party

What are crypto bridges?

We live in a multichain world (no-pun intended). Ethereum, Avalanche, Solana, Sui, Aptos, and the list keeps going on and on. These ecosystems are fertile grounds for Decentralized finance, but the all have one major problem. 

They don’t talk to each other. 

They are their own siloed ecosystems. Assets that live on one chain can’t go to another without help. 

So how do we transfer assets back and forth between blockchains? There are a few options.

First option is to take an asset which is native to a blockchain, like Ethereum’s native token ETH, and then wrap it. You then transmit some information to the other blockchain and then create a synthetic asset. 

For example, ETH can be wrapped and moved to Avalanche, where it becomes Avalanche wrapped ETH (or just wETH). 

Second option is to burn and reissue the asset. This is the preferred method for centrally issued and controlled assets like USDC. See when you send USDC across a bridge by just wrapping, like in our last example, the original asset may not be considered “canonical” or the officially recognized version of that asset. 

So while USDC can be bridged across to Avalanche, once it arrives, it ends up as e.USDC, a non-canonical version of USDC. If you want to move that e.USDC to Solana, you first have to go back to Ethereum to unwrap your non-canonical USDC, and then use another bridge to get to Solana. 

Canonical assets are important for compatibility across networks. In the future DeFi is going to be so diverse and abstracted that you won’t even know what chain you are using, so it’s important that your assets can be bridged to and from or to another network without any hiccups. 

Bridges for Billionaires 

The eponymous name of this article delves into the question of what bridges extremely wealthy crypto holders trust their assets to. 

It’s actually a very difficult question. 

If you had to move $100m of assets from one chain to another, how would you do it? 

Going back to how bridges work, you’re giving over control of your assets to a faceless protocol for custody (or maybe a now-in-custody-CEO-who-has-singular-account-access). The idea is that they give you a synthetic receipt token which you can exchange back for your assets at a later date. If all goes well, when you are ready to bridge back, you swap, pay a small fee and get your assets back. 

The amount of emphasis on “if” cannot be understated here. 

Wrapping assets internally to a network is a well defined operation with robust security guarantees. Wrapping ETH for WETH on Ethereum is quite possibly the most secure contract across the entire network. 

A bridge is more than a wrapper. It’s a complex communication protocol, which means an infinitely higher surface area for hackers to attack and exploit. 

Any weakness in the code or system infrastructure enables attackers to steal money. It’s an extremely difficult solution.

Frax even had its own bridge issues related to a hack. In June, 2022, the Harmony bridge was hacked, and several million dollars of Frax issued assets were stolen. Thankfully, the team was able to act quickly and prevent the fallout from critically impacting the health of the protocol and peg. The hack was a wakeup call for Frax. The present bridge solutions were insecure, so the team built their own system.

Frax’s Bridge Solution – Fraxferry

Fraxferry is a novel, but simple bridge solution that allows transfer of unlimited Frax issued assets, while keeping the Ethereum based protocol safe from any exploits. What the team realized in the wake of the Harmony hack was that the real risk was in providing unlimited instant transfers of assets between chain.

The one change Frax made to their bridge design was to add in a 24hr timelock. Instead of providing instant transfers, users bridging funds have to wait a day. If there is a hack or major exploit and the attacker tries to bridge funds back to Ethereum to cash out, the Frax multi-sig can stop the transfer. It’s a simple design update that provides unparalleled security.

Now this doesn’t stop instant on-demand cross-chain Frax liquidity. Other third party protocols can setup their own pools and infrastructure to provide for these types of transactions. If they get hacked, it wouldn’t affect the overall collateral health of Frax. With the timelocks Frax establishes a checkpoint to prevent system damage to the protocol and peg. It’s the only way to safely allow billions of dollars to move back and forth between chains.

How does Fraxferry work?

The process begins when users send their tokens to the Fraxferry contract, initiating the transfer.

Fraxferry is overseen by a designated individual known as the “Captain,” who examines the source blockchain to determine which tokens need to be moved. The Captain then proposes a batch of tokens to be transferred, which triggers the token transfer process.

Before the actual transfer takes place, there is a waiting period of at least 24 hours to allow for verification and dispute resolution. Departures happen once per day, and users can add and remove assets freely before the Ferry departs.

During this time, other participants, referred to as “Crewmembers,” review the batch proposal to identify any potential issues.

If no disputes are raised, the token transfer is executed, moving the tokens to the target blockchain. Before execution, the system ensures that the transactions are valid by comparing the provided hash to the actual batch of transactions.

In the event of suspicious activity, the multi-sig can prevent a specific token transfer to mitigate any potential damage. It is the responsibility of the multi-sig to manage the tokens in the Fraxferry contract to ensure smooth operations.

It’s called a “ferry” because it’s slow, but it gets there on time.

Multichain Revisited

When Multichain went down this year, Frax was cool as a cucumber. All of the assets that were on Fantom, the network with the largest exposure to Multichain, were 100% safe and suffered no losses as a result. As TVL on the network cratered because of a single malicious actor, the Frax community knew FraxFerry would keep them safe.

In a multichain world, bridges play a role of vital importance and yet have proved to be the weakest link in onchain security. With hundreds of millions if not billions of dollars worth of value on the line, the stakes will only get higher in the future they become a juicier target for hackers and exploiters.

Frax concluded last year that the only viable measure to protect the integrity of the protocol was to build a slow and steady solution that accounts for security above all else. Since the launch of Fraxferry, Frax has been able to sleep easy even in the face of multiple bridge hacks that have happened since. And with Fraxferry v2 coming soon, the system will only grow to become more decentralized and robust in the near future.

This Week in Frax – July 21, 2023

Bluechip Drama Explained

The entire week in the Telegram chat was dominated by discussion of Bluechip’s stablecoin ratings. We covered the back and forth between Sam K and Deathereum on Monday.

Check out our write up of the events

Sam Kazemian comments on the SEC vs Ripple news

Editors note: We’re reprinting Sam Kazemian’s tweet thread in full here.

It’s important we don’t lose site of what Judge Torres’ Ripple ruling means (and what it doesn’t mean). I’m going to try to cut through the noise and keep things concise.

My main conclusion is that this is a political battle and after the first inning, crypto is winning. 🧵

Without any doubt, most importantly, the case struck down the “embodiment doctrine” that has pervaded mainstream legal discourse until this ruling. It’s great to finally break free from this psyop.

Embodiment doctrine states that tokens most likely “embody” the contract (carry the spirit of the original fundraising event+promotions+scheme+circumstances) with them into existence & thus every future sale, trade, secondary tx, speculation, etc is a security tx under Howey.

This ruling unequivocally said tokens do not necessarily “embody” the contract just as orange groves or their oranges didn’t embody the contract when sold in Howey. This is stated in no uncertain terms. No analysis/lawyering is needed. Only 1st grade reading comprehension.


In the coming weeks, it’s important to not get distracted by details or legalese that the other side wants to smoke screen with. They want to psyop you into thinking guilty/security until proven innocent. Not innocent/token until proven guilty/security.

@iampaulgrewal said it best. Do NOT be mistaken or misled by people interpreting the ruling as sometimes XRP is a security & sometimes it’s not. The real ruling is that the token is NEVER a security. Don’t forget this. Break free from the psyop.

It’s not an a priori fact that a token embodies the original investment contract scheme/ICO.

A token+issuer+promotion+obligations=investment contract.

But just token=investment contract is NEVER true.

That is the clear ruling from this case. Full stop. Don’t get it mixed up.

Without assuming the embodiment doctrine, THEN each class/type of token transaction needs to be analyzed. Which is what Judge Torres did. And found that sometimes XRP+contracts+promotions=securities offering while sometimes buying/selling XRP itself=not securities. Very simple.

A lot of embodiment maxis want to psyop you to believe the ruling is all wrong. They’ll try to smoke screen with completely irrelevant examples. Because they know now that everything hinges on embodiment doctrine not being thrown out by the judicial branch.

“If I bought Meta stock on an exchange & not from the company it’s still a security! If Meta gives equity comp to employees, that’s still a sweat equity offering!”

This ruling is all incorrect (if I assume the embodiment doctrine). They won’t say that part out loud.

“If I treat the token as a stock” then…all my arguments work! Judge Torres is wrong. They want to say a token always carry the spirit of the original offering even after a decentralized network/system exists. But it’s not true. Now people are finally snapping out of it.

I respect Matt Levine & love his writing (and still do!), but he’s fully outted himself as a Genslerian token embodiment theorist.

He refuses to believe people writing to the court under oath that they bought tokens thinking of them as genuine commodities can exist. They don’t really mean what they testified apparently. “Everyone surely had the same economic motivations!” is what an embodiment maxi claims.

Even if people write under oath to a court of law that they didn’t! This irks embodiment maximalists. They refuse to accept that it’s even possible or a reasonable starting point. They are the extremists.

This is why you have people that are extremely anti-crypto rejoicing about “crypto investors being protected.” It’s all political positions. The people that seem like they have never touched crypto REALLY want people trading crypto to be protected. How nice of them!

Countless XRP holders/speculators wrote the court telling the truth: they bought XRP because they genuinely thought it as if they were speculating on a commodity asset like oil, sugar, gold. This is simply a political position Genslerians do not accept.

That’s why they’re all extremely annoyed/silent after this ruling. They’ll claim this protects institutions & harms retail the most. While the actual people that they supposedly want to protect are the happiest & celebrating:

Even when actual token holders write to a federal judge under oath saying they truly, honestly trade & hold XRP like a commodity & they want commodity disclosures, not securities disclosures. Apparently, these people don’t exist to protection racket maxis.

Thankfully a growing moderate, reasonable group of bipartisan lawmakers, judges, & regulators believe securities/embodiment maximalism is wrong including Judge Torres, Commissioner @HesterPeirce, Congressman @PatrickMcHenry, @CongressmanGT, & Senators @SenGillibrand, @SenLummis.

We’re blessed America has a brilliant legal system, separation of powers, & a civilly engaged population. America has been on the right side of history with every kind of innovation including railroads, automobiles, & the internet. It will be with crypto as well.

PrimsaRisk releases Collateral Assessment of sfrxETH

This is the best and most in-depth report on sfrxETH we have seen so far. Every possible risk metric is analyzed and reviewed. This is the gold standard for understanding sfrxETH.

Check out this new LSD staked ETH yield tracker

Head over to Joey to check out their beta launch that tracks all LSD ETH yields. They also have a Telegram group you can join and discuss.

Huobi lists FXS

Convex shifts votium incentives for cvxFXS/FXS to new pool

Frax whale almost got liquidated

We saw a FXS whale who was getting dangerously close to liquidation this week. He was within .20 of losing his whole stack.

After we tweeted this, he started to pay down his debts and and currently has a $5.40 liquidation level.


If he had been liquidated, it would have been the largest so far on Fraxlend. The largest liquidations were a month ago and Frax received over $100k in fees.

IQ WIki on Daves speech at ETH CC

IQ Wiki wrote an epic recap of Dave’s speech from ETH CC

Watch the full video here of his speech.

Sommelier Fraximal vault still growing

Fantom yields are crazy rn


“Every founder needs to read this” Ryón Nixon Explains How to Navigate Crypto Legal Structuring in 2023

Starting a crypto project can be daunting.

While dodging North Korean hackers, MEV searchers, and chat room scammers, focusing on the basic stuff such as company setup might get lost in the sauce.

It’s strange sometimes in crypto that founders say “Deploy first, figure it out later.” While code might be law on-chain, the police, and lawyers who live off-chain probably have some different ideas around legality and rights. 

When Gary G is trying to shut every rogue crypto company down, the best thing to do is to speak with a lawyer like Ryón Nixon, head of Horizon’s Law based in Miami.

Ryón is a seasoned veteran of Flywheel now, making his second appearance to discuss four major questions he’s been hearing from founders in these regulatory uncertain times. 

So let’s dig into the five questions

1.) Can I raise money as a crypto project/founder in the United States?

For all of Gensler’s huffing on cable news, YES, you can raise money as a crypto project inside the United States.

Ryón helps a ton of companies every day to set up and raise capital. The United States is the center of the financial universe and while the FUD coming from the SEC has shifted narratives over the last year or two, good projects can still get the money they need to grow. 

Projects are leaving the US, but they don’t have to.

It’s completely fine to raise capital in America with Reg D and Reg S exemptions. These are securities offerings to US and foreign investors that don’t have to go through a lengthy process of getting SEC approval to raise money. Reg D is for US persons and Reg S is for foreigners. Reg D does have some restrictions that Reg S doesn’t, notably any tokens sold must be locked up for at least a year before they can trade on secondary markets. 

Teams and Founders can also receive tokens, but they should be treated the same as Reg D, by locking them up for 1 year. Ryón’s advice, “LOCK IT UP” 

2.) What structure should I use to raise money?

Founders use a variety of financial instruments and structures to raise capital. Over the past few years, trends have changed and what worked in 2017 would be very risky today. 

When you go to raise, you’re going to use either a SAFT, SAFE + Token Warrant, or a priced equity round. 


A Simple Agreement for Future Tokens (SAFT) is an agreement that swaps cash for future tokens. SAFTs were super hot in 2017. All the big projects used them, but since they only sold tokens, it was easier for them to be scrutinized by the SEC as securities sales. Ryón said these agreements are mainly used by teams with no US exposure. Euros love the SAFT because it’s easy and works within their clear regulatory structure.

One issue with SAFTs is they don’t necessarily guarantee a token ever has to be released. SAFTs are long documents, 30 pages or more, and while they pack a ton of risk factors in, they eschew any future statements that could be misconstrued as a security. It’s all about positioning with SAFTs, “If we release a token, we’ll give it to you, but if we don’t, well thanks for the money.”

SAFEs + Token Warrant 

What’s popular in 2023 are Simple Agreements for Future Equity (SAFEs) with an accompanying token warrant. Investors buy both the warrant and the SAFE, but the bulk of invested capital goes towards equity purchase, so the warrant is less likely to be viewed as a securities offering. It’s super popular right now for US founders. We’ll talk about this in the next section on structuring, but crypto development companies can easily raise equity, and then create tokens they give through the warrant. It’s a relatively simple process. 

Priced Equity Rounds

A throwback to pre-crypto VC days. These are more typical funding rounds that cost a lot more, but they provide equity directly upon purchase. Since they don’t have tokens involved, they usually are built for growing the development company. 

3. What does the company structure look like?

Now is when we start to get more nuanced, only because at this point, structures tend to go international in multiple jurisdictions. Delaware, the Cayman Islands, the British Virgin Islands, Switzerland, Singapore, etc. Each locale has its flavor of crypto rules, regulations, and entity structuring. 

Ryón drew us a map. 

Crypto legal structuring BVI Cayman DAO

A nice little diagram of how many crypto projects are structuring in 2023.

Here’s how it goes. 

  1. US DevCo – Founders + Employees get paid out of here. Functions like a normal US corporation. DevCo has access to US banking system for fiat payments when necessary.

  2. Cayman Islands Foundation Company – Overseen by independent director, acts at the direction of the DAO, and provides some degree of indemnity and limited liability for token holders. DAO treasury is held here.

  3. British Virgin Islands Subsidiary – Tokens are issued from this entity. When the token warrant is exercised, the BVI entity is the one who fulfills it.

What about Switzerland? Okay, so while some believe that the Swiss have the gold standard for company structuring, they have expensive, constant, highly invasive reporting and monitoring. Projects can’t raise stablecoins, has to be cash and the money must sit in a Swiss bank account (also hard to open). Lastly, ongoing compliance is needed to prove non-profit status. Dissolving a Swiss foundation is also a pain. Only look to Aragon DAO to see the weird governance disagreements between the DAO and the foundation. 

In Cayman and BVI, costs are lower, it is easier to get back accounts, and reporting requirements are reduced. This is why Ryón mostly deals with these regions for the companies he represents. 

4. What happens when the SEC comes knocking on my door?


Jokes aside, when the SEC comes-a-calling, it’s not always to sue you into oblivion and put your face in the New York Times as the latest crypto founder to be Genslered. 

Sometimes the SEC just wants to ask some questions. At first, they send an info request as a letter to start an informal investigation. They ask questions, which a good attorney like Ryón can answer. Don’t go at it alone, get a lawyer.

If the SEC ghosts you then you passed the test. But at the same time, it means they are keeping the door open to further investigation. While you are not required to respond to these fact-finding requests, it’s best to respond to the SEC’s questions. There are ways to deal with an info request without getting into deep trouble with the SEC. 

In this next phase, they stop being cordial and start sending subpoenas and Wells notices. At this point, you have to comply and submit what they request. Non-compliance can lead to civil penalties or even criminal contempt charges for not responding or making false statements. 

The last phase is enforcement actions. At this point, you’ve broken the law and the SEC sends in the valkyries! The entire commission has reviewed your case and decided to charge you with breaking federal securities laws. Penalties can range from cease and desist orders, to written agreements, industry bans, and civil money penalties. A good lawyer should prevent you from ever getting to this point. 

Sometimes though an army of lawyers can’t stop the SEC. In the case of Coinbase and Binance, the two largest crypto exchanges in the world, the SEC reached out exactly as we described. Both companies cooperated and turned over the documents requested. Then a few months later they got Wells notices. Now the SEC is suing both companies and trying to bring enforcement actions against them. 

5. How can we do better as an industry?

The best way to grow is with sunshine and transparency. All of the terrible companies that failed in the last cycle, FTX, Celsius, etc., all had private books that obfuscated the fraud being perpetrated. Retail public needs full disclosure from DAOs and teams as to how money is spent. Sensitive info doesn’t have to be released, but there is no reason why companies should hide everything internally. For example, projects can document team and investor vesting info, how the token works, what is the DAO, etc.

One of Gensler’s opinions, which Ryón agrees with, is that we need more disclosures and transparency. Frax is a perfect example. Its entire balance sheet is on-chain. Every dollar is accounted for at all times on Frax Facts. The code is open source. Full transparency all the time. 

As mentioned many times in the interview: none of this is by any means legal advice. Please consult with a legal advisor, lawyer, or legal counsel if you have any questions or concerns. If you want to hire Ryón, you can directly contact him! | @ryonnixon on twitter

Core Dev Drake Evans Explains How Fraxlend Triples Up on Oracles for Safety While Lending Against Curve LPs

In a recent tweet thread, Drake Evans, senior core developer at Frax and creator of Fraxlend, shared his insights into the unique design of the Fraxlend Oracle. Drake wrote a great thread about how he built the pricing system for the frxETH/ETH Curve LP that we’re going to dive deeper into today.

An accurate and highly realistic picture of Frax Core Dev Drake Evans

A Double-Edged Defense

Fraxlend employs a unique approach to secure on-chain prices. It always utilizes two sources, which increases the cost of launching an oracle attack. The protocol uses a pessimistic approach, always choosing the less favorable price of the two and puts a halt to borrowings if the prices diverge by more than a small few percentage points.

The design also allows pricing for Curve Liquidity Provider (LP) tokens, which brings along its own set of challenges. As per Evans, the most secure method to price LP tokens is through a ‘pessimistic oracle’, which essentially considers the lower price of the underlying asset and assumes the LP token to be full of this asset. Drake writes that this method helps prevent an entire class of oracle attacks.

When constructing the price feeds, it’s essential to understand how the assets are priced and in what currency they are priced in. For the Fraxlend Oracle, these are values for FrxETH & ETH, since they are the underlying assets of the pool. Furthermore, the values must be denominated in USD because all Fraxlend debt is in FRAX, which is pegged to the US dollar.

The price of ETH/USD is easily obtained from the Chainlink oracle. This is pretty standard and many protocols use this feed.

However, procuring the FrxETH/USD price Drake says can be a bit challenging, as no Chainlink oracle is available for it (at the time of the thread). To tackle this issue, Evans turns to two deeply liquid, trusted price feeds for FrxETH: the FrxETH/ETH curve pool which has an Exponential Moving Average (EMA) price feed, and the FrxETH/FRAX Uniswap V3 Pool that offers a Time-Weighted Average Price (TWAP) feed.

The price feed is a new addition to Curve v2 pools, which internally track prices via trading activity. Two key factors are employed: the Price Oracle, an estimate of the asset’s price, and the Price Scale, a value reflecting the pool’s liquidity.. As trading happens, the pool recalibrates its liquidity to align the Price Scale with the Price Oracle, despite the former typically lagging behind the latter. This way, the pools achieve an effective and dynamic pricing model.

All Curve v2 pools keep track of recent trades within the pool as a variable called last_prices. A simple EMA can be applied to last_prices to create a new variable price_oracle, which is one of the two price feeds use to track frxETH/ETH.

While the Curve V2 pool doesn’t produce USD denominated prices, by combining the Chainlink oracles with the on-chain price sources, it becomes possible to calculate the FrxETH/USD price.

1. ETH/USD (Chainlink) + FrxETH/ETH (Curve EMA) => FrxETH/USD price

2. FRAX/USD (Chainlink) + FrxETH/FRAX (UniV3 Twap) => FrxETH/USD price

Squeezing the juice from LP fees

But that’s not the whole story. LP tokens accumulate rewards by being redeemable for progressively increasing amounts of the underlying tokens. This process is similar to the ERC4626 vaults. So what Drake did for Fraxlend was to always take the lower price of frxETH or ETH to value the LP tokens.

For example, if FrxETH < ETH, it relies on FrxETH prices, and if ETH < FrxETH, it uses the ETH price.

The equation looks something like this:

Price 1: MIN[ETH/USD (Chainlink), FrxETH/USD (Chainlink + Curve)]

Price 2: MIN[ETH/USD (Chainlink), FrxETH/USD (Chainlink + Uniswap TWAP)]

Fraxlend then multiplies these values by the Curve pool’s virtual price (which represents the number of underlying tokens each LP is worth) to derive the LP token’s price.

Safety Nets and Caveats

Safety checks are crucial to the integrity of this system. Drake incorporated staleness checks on the Chainlink oracles to ensure they are functioning correctly, and the values are controlled by a governance timelock for extra security in case Chainlink ever is taken over by a malicious actor.

Furthermore, invariant checking is implemented, which includes setting min/max boundaries on both the Curve EMA price feed and the virtual price. Drake assumes that frxETH can never be worth more than ETH, so he capped the value. Additionally, he knows that the virtual price can never be less than 1. By keeping the values within a tight boundary, it drastically reduces the risk of oracle attacks by reducing the surface area for attack.

Finally, Drake highlights the importance of the Frax Protocol owning a deep full range of liquidity in both the Curve Pool and the Uniswap Pool. This makes it economically unfeasible for an attacker to exploit the system.

In Fraxcheck, one of the key parts of our analysis is what would happen if the largest frxETH holder dumped their entire stack into the Curve LP. Since we started covering frxETH, we’ve never seen slippage in the pool greater than .2%. Frax just has too much liquidity for anyone actor to depeg frxETH effectively for a long period of time.

Drake uses this data to model the least expensive oracle attack, which presupposes every LP departs, and ensures it’s not economically feasible for an attacker. The last point is vital as liquidity can be quite volatile, given changes in incentives, the emergence of new designs, or just general market sentiment. Liquidity can evaporate in an instant, leaving higher slippage and potential a large surface attack vector to exploit.

Does Stablecoin Rating Agency Bluechip Miss the Mark on Peg Stability?

Thanks for reading Flywheel DeFi! We cover the Frax ecosystem and adjacent DeFi projects on a daily basis. If you want the best information about the best decentralized stablecoin subscribe now.

Stablecoin rating agency Bluechip launched its rating system last week to a mixed reception of reviews. The non-profit organization is trying to provide transparent and data-driven evaluations of all stablecoins on the market. 

Bluechip arose out of the same circumstances that brought about Flywheel. In the wake of Terra/Luna’s collapse, Chief Economist Garett Jones came to understand that “many people who were using stablecoins were unaware of risks that were obvious to many experts.” For anyone who had gambled on the myriad of algorithmically backed stablecoins like DSD, ESD, and Basis, it was clear that the model didn’t work. Only after the complete ravaging of the protocol did the entire system collapse, bringing down FTX, Celsius, and a bunch of bad actors with it. Jones says “People who want a safe, legal, and easy way to make and receive payments, but aren’t experts on monetary economics, need a simple tool and a clear grading system so they can decide which stablecoins to use.” 

We agree with him. We needed better transparency in the wake of UST’s collapse. Billions of dollars of paper wealth was lost in a few days, with many losing their life savings. UST had been marketed as a “stablecoin,” an instrument that should retain its $1 backing no matter the market conditions. UST’s addition to the “pristine” asset category was extremely shortsighted and dangerous. Many businesses leveraged the perceived safety of UST to funnel dollars from people’s savings into Anchor, the yield product built on top of Luna that was providing 20% interest. 

What is Bluechip?

Bluechip is a stablecoin rating agency that uses a proprietary, open, transparent rating system to assign grades to all major stablecoins to help investors navigate risks.

A screenshot of

Bluechip’s home page

Bluechip started with ratings for 15 stablecoins (and 2 gold-backed tokens). These are Binance USD (BUSD), Liquidity USD (LUSD), Pax Gold (PAXG), Gemini Dollar (GUSD), Pax Dollar (USDP), USD Coin (USDC), XSGD, Dai (DAI), Rai Reflex Index (RAI), Frax (FRAX), Tether Gold (XAUT), Tether (USDT), Euro Tether (EURT), TrueUSD (TUSD) and USDD.

BUSD, LUSD, PAXG, and GUSD all received A ratings. USDD was the only stablecoin with an F rating. Frax received a D.

Unpacking Bluechip’s SMIDGE Rating System

All of the listed stablecoins are rated based on Bluechip’s self-designed rating framework SMIDGEStability, Management, Implementation, Decentralization, Governance, and Externals.

We will come to Stability last since it’s been the most contentious. 


Reviews the team and structure behind the stablecoin. Bluechip looks at if the team is anon, their background, incentives between stakeholders, compensation, and token allocations. Interestingly, it also looks at legal jurisdiction and judges it against the World Justice Project’s Rule of Law index and the World Bank’s World Governance Indicators. The rule of law is important for judicial recourse in case of any fraud or malicious behavior.

Implementation (Not Currently Used)

Created mainly on-chain actors who use smart contracts for issuance, redemption, and stabilization of their stablecoin. It examines key aspects of a stablecoin’s security, testing, and operational standards. These include the quality, scope, and outcomes of smart contract audits, particularly how identified issues have been addressed; the level of code testing done by the project team and the outcomes of these tests; the extent and control measures associated with administrative privileges, specifically protective measures against misuse; and lastly, the project’s history with vulnerabilities and exploits, assessing the frequency, the financial impact, and the team’s response to such events, including user compensation efforts.

Oracles are a large part of the Implementation score, as they are the weakest link in DeFi. This includes evaluating the freshness and accuracy of the data, the breadth of market coverage, redundancy measures to prevent single points of failure, and incentive mechanisms to maintain data integrity.


It is about more than just censorship resistance, it’s about looking at control over the issuance, governance structures, methods of asset storage, and the ability for stablecoin holders to transact without relying on a trusted counterparty. The score looks at whether the Feds can rug the project themselves, blacklisting, custodian risk, collateral types backing the stablecoin, and DAO structures.


Evaluates the org structures, companies, DAOs, etc… and how they maintain price stability and other malicious actors that would seek to destabilize the stablecoin. Some stablecoins have massive on-chain treasuries that could be at risk of rugging if token holders voted a certain way. What steps does a DAO take to prevent loss of funds? For off-chain structures, the rating looks at what legal protections and redemption and verification methods are available.

Externals (Not Currently Used)

Integrates external market and social sentiment, using market prices as indicators of risk and safety. They specifically focus on three types of markets: perpetual futures markets, stablecoin prediction markets, and credit default swaps (CDS). Perp markets are the most interesting indicator and predictor of future stablecoin prices. They are highly visible markets with deep liquidity. Bluechip pulls live, real-time data for analysis.


For Bluechip, it’s not about how stable a stablecoin is, rather it’s a function of its peg mechanisms and reserve makeup. It’s a broader parameter that looks at the resiliency of a stablecoin. It looks at three broad factors: collateralization, peg stability, and mechanisms.

Collateralization evaluates both the collateralization percentage and the type of collateral. Stablecoins that are backed by safe, liquid assets, such as government bonds or fiat currencies, are generally deemed more stable and thus receive higher scores. On the other hand, coins backed by highly volatile assets require a significant level of over-collateralization due to inherent risks. Additionally, collateral safety and segregation are also a part of this score.

Peg stability reviews historical price data, looking at the frequency and magnitude of deviations from the peg, daily volatility, and the stablecoin’s behavior during market downturns.

Lastly, the core mechanisms that operate the stablecoin, such as unrestricted minting and reserve redemptions (arbitrage), borrower incentives in loan-backed systems, manipulations through interest rates and fees, open market operations by the issuer, and the use of seigniorage shares & bonds are all reviewed.

Deathereum Enters the Chat

After the site went live and the community had time to dig into the docs, the stability rating quickly became the most contentious item of discussion in the Frax chat.

I think that if they had given this term a different name, there probably would have been less reaction to it. Sam K was not impressed at first.

Notably, LUSD was the highest rated decentralized stablecoin in Bluechip’s rating system. 

Sam Kazemian took umbrage with the stability rating as it seems only to penalize downward price movement, and not upwards. Deviation below the peg is much more highly penalized than breaking upwards. Additionally, while daily volatility is taken into account, it’s a small part of the overall score. Kazemian thought this was “dubious to say the least.”


Deathereum’s PFP

At this point, Bluechip contributor Deathereum, the Ratings Director of Bluechip and the person who formulated the SMIDGE rating framework said in the Frax chat that Stability is “more than just price stability” and that it’s “broader in scope than what those two pictures portray. It’s not just about what price has done, it’s mainly about what factors we think contribute to overall long-term stability.”

Deathereum then stated about LUSD “When I said I don’t view LUSD as a strictly fixed-peg coin, I followed it up with a statement that it is still measured as one. I do not use a different benchmark for LUSD and other dollar-pegged stablecoins. LUSD’s high stability score is largely a function of its mechanism and reserves.” Kazemian agreed about the strength of LUSD’s collateral makeup, but said he “just can’t take seriously… [that] a reasonable person would think the concept of ‘stability’ means [LUSD] has much better stability when discussing stablecoins.

Kazemian went on to say “your definitions are questionable to say the least and misleading to be blunt.”

At this point other Frax community members started commenting. Convex Founder C2tP wrote “Saying that lusd is stable, is against the very term of a pegged asset though. It’s actually the least stable of all main stable coins as it’s almost always traded above what it’s supposed to be. People who take loans get rekt by depegging on the upside. Dai had this problem too. But it’s a lot more stable now after things like psm were made.”

Friend of Flywheel and Vesper Finance Founder Green Jeff wrote “Vesper doesn’t convert TVL to LUSD LP for yield because we don’t have enough confidence around the peg, it fluctuates many bp north of $1.00 any given day. (whereas FRAX we do use for LP confidently)”

Liquidity Pool Imbalances

Another contentious issue from the Bluechip report was how they rated Frax’s liquidity makeup. They gave FRAX a .25 for its liquidity imbalances in FRAXBP and FRAX3crv.

Jefe ElJefe responded to this rating with some clear thoughts regarding the AMO’s.

He said:

Liquidity pool balance is almost meaningless when applied to FRAX. 760 million of the Curve liquidity is owned by protocol and FRAX can be added or withdrawn automatically by the AMO. The parameters are set to be super flat pool. Can think of it more as a pool of available to buy frax or a pool of available to buy USDC. The AMO will allow what you might call an imbalance but it doesn’t mean anything about the peg stability or solvency of the protocol.

You’d be better off testing what percentage of outstanding stablecoin can be sold without significant slippage. That is much more meaningful that the pool’s balance.

Frax’s curve AMOs allow massive flows in either direction without slippage which is one reason it will always be very tightly pegged.

Selling 280 million frax causes same percentage depeg as selling 10 million LUSD

Can only buy about 5 million LUSD without any loss… you can buy 200 million frax for 200 million usdc.   It’s available liquidity and thus stability compared to LUSD is MAGNITUDES larger.

And this is despite the fact that outstanding LUSD is actually probably pretty similar to outstanding frax( because most of the frax TVL is actually protocol owned)

This is one reason why people that understand FRAX think your stability ranking is bonkers. What is more important to a stable coin than available liquidity to be able to spend or buy said stable at $1 of value?

Imagine you are a whale that wants to borrow $30 million against eth. If you use LUSD, your 30 million loan can only be used to purchase 9 million usdc(or other assets)… it’s unusable at size without TWAMMing out.

I like Liquity, as do most defi people it seems, but LUSD stability, and utility as a stablecoin are a minuscule fraction of frax’s

Deathereum responded that he thought that these were good points to take into account and that they would update their model to analyze AMO funds deployment.

However, he continued to state that Bluechip has a different definition of stability than available liquidity.

Deathereum writes “The only reason FRAX can maintain such a tight peg is because you use other fiat-backed coins. Try doing that with volatile collateral. Both FRAX and LUSD have unique design choices which have inherent trade offs. FRAX’s peg stability comes at the cost of collateral quality. LUSD’s resilience comes at the cost of peg noise. It’s also worth noting that no stablecoin has to fulfil every single use case. So you’re really comparing apples and oranges.”

And he continued “A stablecoin can be more than a medium of exchange. It can be a store of value too. Pick your use case, pick your stablecoin.”


This is an interesting point Deathereum makes, which I think might get lost in this whole discussion. We’re so used to viewing money as a One-Type-Of-Money-Illusion that all dollars are the same. They aren’t and it’s a gross misconduct of our institutions and businesses to promote them this way.

A dollar is not a dollar. Dollars can be many things, cash, coins, debt, treasuries, FRAX, LUSD, USDC, but there are clear differences between all of them that make money extremely complex, but appear simple. Most of the issues around money come down to who pays for what and who is responsible when SHTF.

Money has three purposes, store of value, medium of exchange, unit of account. But there is a fourth functional responsibility which we often forget and take for granted, and that’s redeemability at par on demand. This is the ability of the redeemer to use the stablecoin for its intended value whenever they want.

LUSD by design prioritizes decentralization over peg stability. It’s goal is not to remain $1 at all times, but to provide a novel way to create debt from ETH. It’s “stablecoin” in the sense that its debt issued against a collateral asset, but its not “stable” enough for daily usage.

There’s are a myriad of different reasons to hold/mint stablecoins. Storing value is one, trading and leverage another, issuing trustless debt yet another… the list goes on.

I think the primary issue being raised from all of this Bluechip discussion is a debate between the functional operation and legal/reserve backing of a stablecoin. Bluechip firmly prefers stablecoins where all reserve assets in custody are transparent, segregated, and can act as pristine collateral. How the assets are used in day-to-day life are less important, everyone will have their own use case. Their main goal is to prevent retail users from losing money. Protocol, structural, contract and legal risks are potentially universalizable across all stable assets though and this is where the ratings system evolves from.

Bluechip sums up what they are trying to achieve in the conclusion of their Framework document:

As our framework evaluates stablecoins on multiple factors, trade-offs between factors are inherent. The implication is that there can be no single best stablecoin, but there are bests for specific use cases and user groups. While our grading scale will assign an A+ (highest in overall safety) to those stablecoins which have very low risk scores on multiple factors, thus prioritizing the 99% of stablecoin users, it is possible for other stablecoins to have spikes in only one or two factors and yet be the most appropriate for a particular user group. For example, a highly decentralized but reasonably stable stablecoin with a B+ grade would be more attractive to a decentralization/privacy focused user than the most stable fiat-backed stablecoin that held an A+ grade but was more centralized and had slightly weaker privacy protections. We expect our ratings to empower every user, advanced or otherwise, to make an informed choice based on their specific needs.

Kazemian concluded his stance “The reason I am fixated on the extremely unorthodox/dubious stability portion is because I actually WANT the Bluechip rankings to be something I can take seriously. I want to be proud of Frax’s score when the governance portion is up to spec. But it’s hard to take it seriously and care about the rankings when the other portions are egregious while the governance and other portions are reasonable and fair.”

It’s important to remember the circumstances that led to Bluechip’s creation, the utter and complete destruction of LUNA/UST that led to billions in losses across the entire sector. The functional operations of the world’s largest stablecoin ceased to exist in a matter of days due to the poor resilience of their reserves. Just recently, USDC experienced a depeg due to poor asset custody at Silicon Valley Bank. So it’s not like what Bluechip is building is without external negative impetus. There are a lot of bad actors in the crypto space and their collapse leads to serious consequences for those people who trust their assets with them.

We need more Bluechip’s in the space to provide greater clarity and transparency. We need rating systems to help all actors to better understand the risks of what they are swapping their money into. We need defined guidelines as to what makes a stablecoin good. And so while the discussions coming from the Frax community might seem tense, it’s only because we believe we have valuable insight into what good stablecoin metrics are and would like to be apart of the conversation. We applaud the Bluechip team for their work and hope that this is just the beginning of their analytical development.

This Week in Frax – Jul 14, 2023

Sommelier Fraximal Vault is Growing!

In its first week, the Fraximal vault on Sommelier has accumulated more than $2m in TVL and is currently paying 18.2% interest. This is a great start to the yield optimization platform for Fraxlend.

If you want to learn more about the Fraximal vault, the Sommerlier team, and how the have integrated Cosmos, check out our latest interview with them.

Bluechip Rates Frax a D

Bluechip a “Stablecoin rating agency” launched their website this week rating Frax as a D. The report covers a variety of areas including stability, decentralization, management, collateral, implementation and governance.

Frax only received ratings for 4 of 6 categories, with governance receiving a 0. Researcher Deathereum noted that the only reason Frax’s score is poor is due to the current multi-sig setup.

The core team controls a 3/5 multi-sig which will be curtailed in the upcoming frxGov upgrade. Additionally, Bluechip noted the high amount of veFXS voting power owned by the team. Both of these issues have been known for a long time now, and frxGov will remove any ability of the multi-sig to act maliciously against the protocol.

Additionally, Frax also received hits to stability for the two days when USDC depegged, leading to Frax dropping to $0.92.

The platform is funded by donations from MakerDAO co-founder Rune Christensen, Reserve’s co-founder Nevin Freeman and StarkWare co-founder Eli Ben-Sasson.

Economists Tyler Cowen, Robin Hanson, Alex Tabarrok and Lawrence H. White, along with Ameen Soleimani and Nic Carter, also serve as advisors to the project. The Bluechip team is made up of CEO Benjamin Levit, Chief Economist Garett Jones and Ratings Director Vaidya Pallasena.

Stable Scarab wrote about frxETH LTV

DeFi Explained made a video about Frax Ferry

Biz Dev Discussion

FRAX/GHO Liquidity

GHO is launching on July 15th and the Frax community is interested in being a primary liquidity provider for them.

Producer Sam put up a new FIP to create gauges for the upcoming GHO pairs.

Read the full discussion about liquidity on the Aave forums.

FXS Price Clock

A Frax community member set up a dutch auction for his hand-built FXS price tickers The rocket points up or down based on 24hr price action. Check out the website to bid in the auction.

Resonate Hosts Frax for a Twitter Spaces

IQ Wiki Covers frxGov

Mean Finance Adds Frax

Uncorking Frax Yield with Sommelier Finance

Flywheel Action Items

  1. Go to the Fraximal Vault to earn 17% yield in FRAX and SOMM.

  2. Read about the Fraximal Vault strategy.

  3. Review the Fraximal Vault contract holdings on Etherscan

  4. Check the current positions and values in Debank

  5. Read Sommelier’s Documentation on Gitbook

  6. Join Sommelier’s Discord or Telegram

Want to learn more about Frax, DeFi and Stablecoins? Subscribe to Flywheel for daily updates and knowledge.

Sommelier Finance is an innovative yield strategy protocol that just launched a new vault to capture Fraxlend yield called Fraximal. We invited them onto our most recent podcast to learn more about the team and how they are innovating on yield capture.

Did you know that Sommelier is a Cosmos app chain? We didn’t and that’s one thing we learned during our most recent interview with Zaki, Sun, and Stephan. We were actually surprised throughout the interview about their design choices.

Cosmos has always been this little brother to Ethereum, quietly building and growing. It’s funny now to see how Vitalik and crew have pivoted towards the Cosmos idea of a single security layer connecting infinite app-chains. We’ve come full circle. 

We invited the Sommelier team on with the announcement of their Fraximal vault, which optimizes liquidity across Fraxlend. In just a few days, the yield vault has topped over $2m in TVL and is growing fast. 

Fraximal Vaults

The Fraximal vault fills an important need in Frax’s lending ecosystem. It optimizes liquidity across assets where AMO funds are not readily available. For most pairs like sfrxETH and wBTC, the Fraxlend AMO can print near infinite amounts of FRAX to satisfy loan demand, as these assets are highly liquid and don’t post liquidation risk. Some pairs however, like CRV, FXS, etc, are not covered by the AMO and so they pay higher borrowing costs. The Fraximal vault is designed to step in where the AMO cannot and provide optimized liquidity to these non-AMO enabled assets. 

The Fraximal vault is a passive way to earn yield from Fraxlend. The strategy was created by Seven Seas founded by Sun and DeFine Logic Labs founded by Stephen. It captures the highest interest rate possible, while balanced against risk of bad debt from liquidations. It auto-compounds and is completely automated, all that’s required is to deposit assets. It’s very similar to a Yearn or Beefy, however Sommelier uses Cosmos on the backend to manage the strategies and rebalance the portfolios. 

As of writing the vault has $1.8m in assets that are distributed between the gOHM and CRV pools. These have consistently been the highest yielding pools since Fraxlend was launched. In addition to the yield earned through Fraxlend, depositors also earn additional SOMM tokens that increase the yield. The goal with the incentives is to drive enough TVL into the vaults, so that they can be optimized across many different pools. When the pools are small in size it’s harder to diversify. Increased TVL gives the strategist more options to spread assets across many different pools. 

Cosmos All Up and Down

One of the most interesting parts about Sommelier is that all of its strategies are managed and run from their own Cosmos app-chain. It’s too cost intensive and resource constrained on Ethereum. The Somm team runs its own validator set that acts as a messaging layer between the strategists and the chains they use. All of the rebalancing computation is executed off-chain, keeping their data private, and allowing them to predict what future yields in vaults like Fraximal will be. 

After doing analysis, the strategists broadcast their rebalance messages to the Somm network, where they can be reviewed and then validated. Once the message reaches consensus, it can be passed on Somm’s bridge or through Axelar to be executed. The validators act as the gatekeepers for all strategy transactions to prevent any malicious behavior and theft of assets. 

Zaki thinks Sommelier is an engine for tapping into real arbitrage opportunities and real value flows. Those value flows exist at scale on Ethereum and that is why Somm is focused on building on EVM-chains. It’s pretty evident looking at the global TVL charts on DeFiLlama that even in the bear market, ETH dominates DeFi. 

As Ethereum maintains its place as the ultimate execution layer, other support systems like Sommelier will be necessary to handle data analysis and compute, while still benefiting from transparency, self  custody, decentralization. For strategists, Sommelier creates a complex design ecosystem that allows for dynamic, non-custodial secure strategies to be hosted on-chain as a vault. Strategists can build freely, all while investors can feel safe knowing the Sommelier app-chain is in charge of validation. 

The validators are “Stewards” who perform dynamic checks, simulate transactions and other actions to ensure transactions from Strategists are safe. In an unlikely case that a strategist disappears off the face of the earth, the validators are able to step in and swap the position into a strategy that is safe like stablecoins, ETH or other stable positions. 

Fraxchain Should Be On Cosmos

One of the hot things Zaki brought up was that Fraxchain should launch as an appchain on Cosmos, potentially secured through restaking on Eigenlayer. We’ve covered Eigenlayer before and interviewed founder Sreeram Kenann, and this is a crazy mind blowing idea. Eigenlayer can provide the security guarantees of ETH, and Cosmos can provide Tendermint consensus. It’s a great potential match. 

Since Cosmos already has a standardized bridging protocol, Fraxchain could easily be integrated and adopted by other apps and networks. For example, with Cosmos you can easily move assets from Ethereum to DYDX, rather than having to bridge between the two networks. As Zaki mentioned, reflecting upon John Char’s blog post, “at the end of the day it’s all just chains and bridges, L1s and L2s don’t exist.”

Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research.

This Week in Frax – July 7, 2023

The Balance Sheet

Stop the Presses. We gotta jam about the newly released balance sheet for a while. It’s entirely unprecedented what the Frax team just did. It’s the first fully transparent, block-by-block live balance sheet in the world. No off chain assets, no fluff. Just contracts and data.

Ouroboros FXS Investment Analysis Released

We interviewed Ou this week in our latest episode. He dropped a ton of information about his just released investment research for FXS.

To quote his report

Summary: Our investment thesis on FXS is simple. We see an asymmetric risk:reward in buying FXS given 1) the valuation support at these levels and 2) the high likelihood of significant incremental value that the market is likely to attribute to the token in the next 6-12 months.

Check out our episode with Ourosboros and go read his report. It’s valued all the individual parts of Frax and extrapolated future market caps based on that.

Ouruboros Recommends a BD Grant

We like his idea. It’s simple, will expand the protocol and maybe Flywheel can manage it.

Another Rage Quit?

Grills is back again with another Rage Quit vote for the Gelato FRAX/DAI pool that has $2.9m of locked liquidity. He wants to implement a 20% rage quit fee for those who want to exit early. There is only 500-ish days left, so it might pass this time. He writes:

Also I do genuinely believe that $600K of profits for the protocol at the cost of a small loss of 2.9M TVL (which is getting unlocked in +-500days anyway) is +EV for FRAX especially in a time where we are trying to get to 100% asap.

The sooner we get to 100% CR the better imo so we can put out frxeth revenue to more productive use.

I assume most (possibly all) would take the ragequit yeah. There are plenty of opportunities in the market again where you can make very nice apr. So taking a 20% cut now as opposed to having funds stuck for +-500 more days earning basically zero seems sensible

Sommelier Launches Fraximal Vault

The Somm team announced the launch of their Fraximal vault, which allocates Frax to the highest yielding Fraxlend pairs. They write:

This vault will automate the process of capturing the highest interest rates available at any given moment, while also mitigating risk by ensuring that the vault is not overly exposed to any specific lending pool at a time. The strategists estimate that yields on the vault could range between 6–20% net of fees depending on vault TVL and overall market conditions.

Dogelon Mars Adds sfrxETH as a Liquid Staking Option

The Dogelon team added a page to easily stake ETH for sfrxETH. Their interface is very on point and has great visuals 🙂

Frax’s New Balance Sheet is 10,000x Better Than Wall Street

There is a time-honored tradition in the United States that happens four times a year. Hundreds of thousands of people all take part in bringing in about, and millions more hang on the results. Billions of dollars a year is spent on this tradition, and it’s a cornerstone of the American economy. It affects lives, jobs, and the overall sentiment of American business. 

Earnings Szn

A literal descent by CFO’s of public companies from their respective mountains, holding in hand 10-Qs and 10-Ks, delivering the truth to the unwashed masses. Crisp audited financial statements open the doors quarterly to the internal activities of the world’s largest organizations. Approved by the board of directors, audited, one or two or three, even externally. Filed with relevant regulatory bodies, and reviewed by a legion of governmental and non-governmental actors. The process of packaging and preparing companies books is a gargantuan process.

On release day, it’s like Christmas in every season. A cacophony of surprises emerges from the private coffers of public companies. When the time comes, data is released, and the books are opened. In a split second algorithms tear apart every single line, datapoint, and financial entry, trying to glean immediate trade catalysts. Did they beat earnings? Our top line sales down? What about growth expectations for the next quarter? Should we expect layoffs this year? Or is this company destined for the stars?

After market close the numbers and text are released, analysts take their shot, asking questions to the CEO during the public calls. Executives navigate good and bad news, rumors, leaks, and general gossip. Investment bankers probe deeply into mind and motivations of the C suite, hoping to put together their next quarterly outlook. The reports get filed, aggregated into larger narratives and the whole process starts over again with deadlines only a few months away. 

Hello Darkness My Old Friend

The amount of time and energy spent packaging and releasing earnings is astronomical. But it’s the only way that public investors can discover the inner workings of a company. 

Yet, The main issue is that public investors have to wait 3 months between each earnings release. During these down periods, a data blackout occurs where investors can only guess as to the impact of new products and business lines. The investing public spends countless hours trying to peer into the fortune ball of next quarters earnings so they can profit. It’s an information asymmetry that benefits high info funds with access to third party data or congresspersons with inside information. 

Earnings could have radical transparency. Imagine if you could see Amazon’s sales second by second. Or have full access to Google and Twitter’s ad revenue. Or see trade orders executed the moment goods are assigned. It would revolutionize how we invest and view companies.

Unfortunately, most of this data can only become digital after laborious fitting of sensors or personal driven event entry. Real world data is not naturally digital. We have to design custom systems to broadcast digital copies. On a large scale it’s time consuming and inefficient. 

A Block-By-Block Balance Sheet

This week, Frax launched the most important analytical dashboard in its entire product suite, a block-by-block live balance sheet. Frax lives on a blockchain which is gifted with radical open transparency as a core characteristic. All of the data is already there, it just needed a developer to package in a readable way. 

Now, anyone can get a fresh, live look at the exact composition of all of Frax’s liabilities and assets. It’s the first live public balance sheet for a company in the entire world. No other organization or protocol provides the detail and openness that the Frax balance sheet does.

Instead of waiting for quarterly reports, anyone can now come to the Frax facts page and see the exact makeup and health of the protocol.


Exploring the balance sheet, the craziest thing that immediately pops out is the lack of distribution across networks. Ethereum is the big daddy and guarantor of Frax’s security and over $2bn Frax is parked there. Arbitrum has the highest amount of Frax outside of ETH with $34m. Just based on these numbers alone, there is significant scope for Frax to expand to other networks.

The largest asset by far is the Owned Frax-USD, which is all the assets deployed in the Curve AMO. This is comprised of FRAX & USDC staked in Frax-Convex FRAXBP, FRAX/USDT/USDC/DAI held within FRAX3CRV LP, and the FRAX/USDP staked in Convex FRAXPP. If you’ve watched any FraxCheck, you already would have known all this though. 

The Owned Frax category is all of the Frax that is owned by the protocol, idle Fraxlend AMO funds, and FRAX held in transit by FraxFerry or in its buffer contracts.

The first surprising part of the balance sheet is the Owned Volatile assets, the Underlying CVX locked in Vote-Locked Convex (vlCVX) and sfrxETH held directly. Frax owns $15m CVX and $7m sfrxETH. Additionally Frax owns $5m in CRV that is staked in Convex. 

Digging deeper into the Owned Volatile assets, Frax directly owns gOHM, SYN, ARB, MOVR, ZZ, GLMR, MATIC, VELO, AVAX, THE, PERP, FTM, BNB, SDT, TOKE, ENS, CHR, OP and MULTI. A very robust portfolio of DeFi assets.

Locked liquidity is the CR gap

One of the questions we had when looking at the Balance Sheet was “how do we know what the CR is?” It’s a little confusing at first, but we got an answer from Justin Moore who built the dashboard. He told us that to find the CR, all you do is remove the locked liquidity and divide by total liabilities.

Locked liquidity is all the staked assets that were locked with Frax. They are not counted as collateral, but as an asset. Once the lock is up, they can be removed from the balance sheet once they are withdrawn out of the staking contract. The locked liquidity protects the peg of FRAX as users have committed their assets to the protocol in return for staking rewards.

Ouroboros Capital Makes The Ultimate Bull Case For Frax

We’re joined this week by Ouroboros Capital, who has become a fixture in the main Telegram chat as he conducted his research into the Frax protocol and wider ecosystem. His conviction in FXS is even giving Frax Bull a run for his FRAX (pun intended) and publishing an entire written thesis on it. Let’s dive into at his thought process and understand how he came to his conclusions:

Equity Investing Is More About People Than Numbers

The most important part of a startup is its founder because they set the tone at work and determine the project’s values, judgment, and ethics. The first place of a project any investor should investigate is its founder. Are they built for war or only peacetime? What is their conviction? How do they carry themselves on a day to day basis?

These pivotal questions that come up in researching is what Ouroboros learned while working at an investment bank for 7 years. Start with the founder, validate his conviction, the rest should fall in line.

When he discovered Sam Kazemian in 2021, he was immediately impressed. Sam was always online, happy to talk to anyone in chat about the smallest details about Frax. He was never condescending or rude, simply explained his vision and kept building higher. Over time he saw that Kazemian was not just determined, but obsessed with his vision to build a decentralized stablecoin and built the proper team around him accomplish this.

And so over time as Frax grew, adding Frax v2, AMOs, frxETH, FPI, etc., Ouroboros’ conviction also grew and Frax was validated in his mind as a protocol with long-term growth and revenue potential. Proof of this is shown with his prolific community involvement and writing as of late from proposing “FIP-256 Optimizing FIP-77’s TWAMM Parameters” to his investment report for FXS. 

The Report

The core question asked in the report is what’s a fair price for FXS? Frax has a bunch of different products and primitives including stablecoins, a flatcoin, a lending market, a DEX, and a bridge all rolled up into one ecosystem. Fraxchain, frxBTC, and frxETH v2 are all on the horizon as well. With this in mind, Ouroboros set his task out to value each product and roll it all up into one valuation. 

The first place to start is with Sam Kazemian’s statement that Frax is earning $20m annualized currently. A 20x multiple on revenues is approximately where the current market cap of FXS is priced right now. But is this really a good metric? We’re in the depths of a bear market here and external rate transmission is not entirely possible. Once the regulatory landscape clears and prices recover across DeFi, where will revenues be? Potentially 2-4x higher than where they are now without significant changes in growth. 

Prices give a good indication of where valuation is today, but Ouroboros’ thought process is that most institutional investors don’t understand the complex dynamics of the entire Frax ecosystem just yet. If each business line is valued independently, then we can come to a more reasonable conservative number. 

Not financial advice*

His numbers from the report are republished above, and Flywheel has extrapolated to his bull case based on his statements and interviews. Taking a conservative approach, all of Frax’s individual parts should add up to a 5-600m valuation, which would translate to $8-9 per FXS. In the best case, valuations skyrocket and land closer to 5-6bn.

What’s interesting about his analysis is that FRAX the dollar-pegged stablecoin will always retain the highest valuation. Other companies like Tether are reportedly earning more than Blackrock right now; there’s no reason Frax can’t compete or eclipse the embattled stablecoin issuer in the future.

frxETH has lots of growth potential because of v2’s upcoming release. It’s structure as a pooled lending market for validators could radically change the staking market and challenge both Lido and Rocketpool for top market share.

Fraxchain is a big what if. Other L2s like Arbitrum and Optimism are priced around $700m, with less used networks like Boba priced only at $100mm. It’s an extremely open question how much Fraxchain could have an impact and even when it will be released.

Fraxlend is also a key part of Frax’s revenue, as it will be expected to grow as the suite of Frax products gains market share.

Key Thoughts 

In all, there is massive promise for Frax in Ouroboros’ opinion. According to him, the market is deeply undervaluing Frax and he believes the narrative surrounding it will change in the next year. As he writes:

We see an asymmetric risk/reward in owning FXS over the next 6 months and even in the longer term as we’ve said that it is certainly one of our highest conviction ideas in the space at the moment.

We’ve detailed many short to medium term catalysts and developments that inclines us to own FXS but also we are also comfortable with ownership of FXS longer term given the quality of the core team and its history on executing and delivering on the growth of the protocol.

Frax has come a long way: Frax v1 (surviving the post LUNA crash and witnessing death of other algorithmic stablecoins) → AMOs (an innovative solution to peg and value accrual) → frxETH → FraxFerry (Frax’s answer to bridge exploits and CCTP) → Frax v3 + Fraxchain + more to come (frxBTC, frxBonds, etc.).

Markets are cyclical in nature and powered by the engine of narratives pushing into the minds of prospective investors who’s collective intellectual mindprint determines price. Frax has made a name for itself skating to where the puck is going over the years which has lead them build a suite of primitives that serve to grow and proliferate the ecosystem far and wide. What it ultimately comes down to is how Frax can communicate its value in a digestible manner people can understand.

In DeFi Dave’s own words, Frax is a “Fractal of DeFi,” a microcosm of primitives brought together to bring safe yield and capital efficiency to participants in its ecosystem.

~~~~ This article is not financial or tax advice. This content is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This article is not tax advice. Talk to your accountant. Do your own research.


How stETH is frxETH’s New Best Friend + What is the Optimal LP Ratio

In a landmark vote, the Frax DAO approved to add an AMO for the stETH/frxETH Curve LP. The vote allows for the AMO to allocate up to 50% of frxETH to the stETH Curve pool. Since launch, the frxETH/ETH Curve LP has been the primary venue of AMO activities.

In last week’s edition of “This Week in Frax” we mentioned the recently proposed FIP-257. It surprised us how a proposal of this calibre slipped under the radar so quietly. Now that it’s passed, frxETH can further extend its liquidity into other protocols, slowly but surely becoming the new wETH on Curve.

The vote signals a new chapter for frxETH Curve AMO strategy. While the frxETH/ETH LP will remain the cornerstone of the AMO, the inclusion of LSDs pools such as stETH to the mix will increase volume and revenue for the protocol as well as align incentives in a positive sum manner.

What is an AMO?

For those unfamiliar, algorithmic market operations, better known as AMOs, are the onchain activities that the Frax protocol does in order to keep their stablecoins pegged. AMOs were first introduced as a part of Frax v2 in 2021 and have been essential to Frax’s peg performance and profitability since. In the case of frxETH, 10% of its backing is made up of the frxETH Curve AMO and acts as the “swap facility”. By having part of frxETH’s AMO exposure as stETH, the protocol can count the largest LSD on the market as part of it’s balance sheet.

The stETH/frxETH Curve LP currently has the second highest TVL of all the frxETH pools with $15m, which is only eclipsed by the flagship frxETH/ETH pair. 

Why it Matters

Frax adding stETH to the Curve AMO provides several key benefits. The first obvious one is that by growing the liquidity pot for all protocols, Frax makes them more useful. The added liquidity will mean that traders should get the best execution prices when swapping to and from stETH. 

Second, more trading volume should flow through the pair as its increased liquidity should be able to compete with the ETH/stETH Curve LP. Aggregators naturally will route their trades through the Frax pool to find the best execution price. 

Third, protocol revenues will increase, as Frax’s protocol-owner-liquidity (POL) obtains yield from the stETH yields. Once the AMO goes live, Frax will start adding frxETH to the Curve pool, and overtime, a portion of those assets will be swapped by traders into stETH. All of the yield earned by Lido is rebased directly back into the supply, and Frax will earn as well. Revenues will be passed back to sfrxETH, increasing their yield. 

Curve LP Ratios

With the AMO approved, Frax can now deploy frxETH into the pool single sided to create new LP assets. By imbalancing the pools heavily with frxETH, Frax increases its POL, and thus protocol reward yield revenues. The optimal ratio for each pool depends on the A factor and the type of Curve pool.

For stable pools like frxETH/ETH, the mechanics allow for a high imbalance. Currently the ratio sits at 70/30, however for the past several weeks, it had been at 80/20. We covered the discussion between Sunomono and Sam Kazemian in last week’s edition of This Week in Frax. 

A highly skewed pool is normally uncommon for Curve LPs. For other assets like the 3pool, an imbalance signifies market deterioration and potential depeg risk. Post-Luna, any time 3pool appears on the brink of disintegration, PTSD laden threadooors start mashing xanax as fast as they can mash their keyboard with Cheetos stained hands. Wild amounts of hand wringing in the press and on the timeline rapidly boils into a frenzy as the Very Smart People question the ontological inclusion of “The-Soon-to-Be-Failing-Asset-of-the-Day” in our market structures. 

Although it’s unintuitive, the imbalance of Frax LPs is intentional in its design and actually opens profitable opportunities of the AMO. As the scale tips over towards doom, Frax AMO revenues start to shoot through the roof. So Frax intentionally imbalances every pool the AMO operates through to maximize protocol revenue. Obviously there is a hard limit, depegging on the asset price, that prevents 100% skew towards a singular asset. 

How much Frax can push the ratios is determined by the type of Curve pool and its A value. There are two types of Curve pools, stableswap (Curve v1) and cryptoswap (Curve v2). 

Most LSD pools are stableswap, but not all. eETH/frxETH and cbETH/frxETH are both cryptoswap, while stETH pools are stableswap. Stableswap pools allow for a higher imbalance before price depegs. Both the steth/frxETH and frxETH/ETH pools are both stableswap.

The A parameter, also known as the amplification coefficient or amplification factor determines the shape of the pool’s bonding curve, which governs how prices change as liquidity is traded. By modifying the bonding curve, protocols can choose how much slippage and efficiency the pool has. If two assets are pegged 1:1, like the frxETH/ETH LP, the A value can be high… and the higher the A value, the more Frax can exploit the imbalances with its POL to farm revenue. It’s a virtuous cycle. 

The new AMO for the steth pool has an A value of 200 and is a stableswap pool. While the wstETH price does rise slowly as it accrues yield, the stableswap pool adjusts incrementally to maintain pricing. Prices smoothly adjust as the pool remains imbalanced for long periods of time.

The A value is what has the largest effect on slippage and ratios. The stETH LP has an A value of 200, which is relatively high. The stETH/ETH LP, which has a TVL of close to $1bn in assets, only has an A value of 30. (I asked a couple of Curve insiders and they said that they stETH pool probably could have a higher A value) In comparison, the frxETH/ETH LP has an A value of 1200 and 3 pool 2000. So while the stETH/frxETH LP is designed to be more efficient, it has to have a lower A value to account for the slowly rising price.

Based on Frax’s other pools, the stETH/frxETH pool most probably will be imbalanced somewhere between 60/40 to 70/30. Currently there is approximately 24000 ETH set aside to pair with a ratio corresponding amount of frxeth by the AMO. If 25% is moved to the stETH/frxETH LP, Frax will earn 5% on 6000 ETH via stETH or 300 ETH annually. The Curve AMO will also create 9-12000 additional frxETH to pair with the stETH, increasing pool liquidity by 2-300%. The total TVL of the pool should break $50m once the AMO operations are complete, raising it from its current levels of $15m. 

A New Partnership Brewing?

Sam Kazemian has always made it clear that he doesn’t think the LSD wars are winner take all. Lido is a giant, but there’s always room for innovative products like frxETH, which bolsters stETH’s liquidity. Lido’s incumbency is not threatened by Frax, as the protocol is building a radically divergent ecosystem of products that support its mission to become the dominant stablecoin issuer on ETH. 

The addition of the stETH AMO is the first piece towards greater integration. One notable market which is missing is a stETH Fraxlend pair, where users can use stETH as collateral while borrowing frxETH or sfrxETH. With this new deep liquidity source, a Fraxlend pool could now handle several million in liquidations. 

We’re all very excited to see the growth of Frax and Lido together and this is a first step in that direction. 

This Week in Frax – Jun 30, 2023

Watch the recap video on youtube to learn more about all of the topics covered this week, as well as an interview with Rob from Revest.

frxETH statistics 6/30/23 which include earning for 1000 ETH staked

sfrxETH just wins

A new feature was introduced to Frax Facts that compares how the APY of sfrxETH lines up compared to peer LSD protocols. If you’ve been keeping up with our weekly Frax Check’s, as expected, sfrxETH, is the reigning champion. Flywheel has covered more about this new feature and its ramifications in our latest highlight.

frxETH/ETH ratio discussion

Sunomono, expressed his concerns about the imbalance in the frxETH/ETH Curve pool’s. Mainly arguing that the 80:20 imbalance brings a large risk and would cause frxETH to depeg. The imbalance of the pool is the main strategy of the AMO which Frax intentionally implements. Ideally, you would want to attract more ETH and so, the design of the imbalance was specifically done so that whenever there is an imbalance, Frax would slightly push up the bribes to incentivize more people to put more ETH into that pool.

frxETH Redemption Feature Soon™️

After a long discussion with an LPer in the main chat after expressing his thoughts over the 80:20 eth/frxETH pool balance, Sam came to mention that in the next 2 weeks, the contract for a new redemption contract (set to be used in frxETH v2) will be complete. This new contract is meant for users that prefer a queue to get a pure 1 to 1 redemption for any size of frxETH. Because of the nature of the feature, it’s speculated that the speed of redemption contract will be slow in a similar manner as Fraxferry.

Flywheel interviewes Kain Warwick

This week we hosted Kain Warwick, Synthetix founder and DeFi OG. Sharing stories from the early days and where Ethereum and other primitive protocols went wrong during the last DeFi summer.

Sam K went on a Twitter Spaces about LSDs

This week Sam went on a Twitter spaces hosted by Origin DeFi to talk about LSDs with other panellists from peer protocols Lido, Rocket Pool, and Origin DeFi. The panellists took a deep dive to explain LSDs, LSTs and what’s to come for the DeFi ecosystem.


Bankless puts FXS as their #1 pick for the next cycle

This week Bankless published an article on their 10 Altcoins that will survive in the bear market. Highlighting the fact that regardless of market conditions, Frax continues to build an expanding DeFi ecosystem with unique products build from the ground up. It’s impossible to ignore the signs that show the strength of Frax from being the third largest LSD with its innoative design to the upcoming releases of frxETH v2, BAMM, and Fraxchain.

Bonds Incoming

This week Travis Moore teased and Sam confirmed that Fraxbonds will be included in the highly anticipated FRAX v3. As Sam mentioned, these types of bonds will be quite different from the bonding model which we have seen with OlympusDAO’s OHM where users are able to trade various assets for OHM at a discounted price, these bonded assets then provide extra liquidity and reserve assets to the treasury. We are awaiting further information on the mechanics of Fraxbonds as well as when it will be deployed.

Wen frxBTC?

This week, Sam confirmed that frxBTC is on the roadmap but would not be released anytime before Frax v3. Admitting that “there is no real way to make money from Bitcoin”, it is not a priority for the core team at the moment. On the contrary, you can earn interest from ETH because of its PoS and other yield-bearing tokens.

Swaap Vote Passes

Swaap is a protocol which focuses on delivering the best market-making strategies for all types of LPs. Their recent proposal to add the future FRAX/ETH pool on Swaap v2 to FXS gauge controller was passed. What does this mean? It will reinforce FRAX as a ‘connector token’ in the DeFi ecosystem, improve the FRAX/ETH execution through the creation of a direct liquidity venue which entails lower gas and lower spread, deepen the liquidity on FRAX, and create a new opportunity for FRAX holders to earn yield. Frax core team member and Fraxlend lead Drake Evans gave his public endorsement and said that Swaap was the only protocol out of the dozens that truly has a product that can help grow Frax. At the finish line, the proposal to add the Swaap gauge would go on to pass.

FIP-256 – Optimizing FIP-77’s TWAMM Parameters Passes

As mentioned in last week’s article, Ouroboros’ proposal to optimize FIP-77s TWAMM Parameters has been passed! Essentially, this would allow for Frax to buy back more FXS when its cheaper rather than linearly purchasing FXS regardless if the market price is high or low. The community appreciates having an activist investor and experienced fund manager who genuinely cares about the future of Frax to propose and execute this strategy. In fact, we are excited to be hosting Ouroboros on the Flywheel podcast next week so make sure to subscribe to our substack to be the first to know when its released!

How frxETH becomes the next wETH

This new proposal is a massive step forward for frxETH as it seeks to establish a strong relationship with other LSD protocols within the ecosystem which would introduce an AMO for frxETH/stETH on Curve. Moving forward this will mean that frxETH would be partially backed by stETH via its inclusion as a Curve LP token. Partnering with stETH is a massive positive sum partnership as it is the largest LSD there is with the most liquidity providing a win-win scenario for both frxETH and stETH.

FIP-254 – Frax Ecosystem Educational Incentives Program Amendments Passes

Another proposal pushed out by Defi Dave in collaboration with Nader, aims to amend the program and extend it to the end of the year. This will allow more community members to contribute and spread their knowledge about the Frax ecosystem. Anyone interested in participating in the program will have a greater opportunity to contribute to the community and share their knowledge. We encourage everyone to participating and you can do so by entering here.

FIP-258 – Flywheel Grant Amendments

Yes, here at Flywheel we published a proposal which formalizes the production of This Week in Frax, changes the cadence of Frax Check, expand the budget for events, and maintain SamKazBot. More information (and your valued support) can be found on Snapshot where it is currently up for vote.


We had some massive news this week as Curve broke headlines for its mention by The Bank of International Settlements (the central bank of central banks), Swiss National Bank, Bank of France and Monetary Authority of Singapore. These banks stated that they are exploring the use of Curve v2 AMM for their CBDC pools in order to achieve simultaneous trading and settlements. This exploration is called “Project Mariana” a hybrid function market maker (HFMM).

Twitter user @StormlightTower created a diagram to represent where Curve would fit into all of this.

With this breaking news, the Frax community was quick to begin the discussion within the main chat. Sam came in to say that there won’t be any retail CBDC coming into the space for the next couple of years, if ever. He continued by explaining the two types of CBDCs.

1. Retail CBDC: Actual digital cash tokens that can be held by users that can be sent and settled by Fed software. No depositing in bank accounts needed.

2. Wholesale CBDC, which is a 24/7 settlement at the Fed by entities that can hold real dollars”

Overall it is very exciting for Curve to receive such recognition and further supports the notion that Frax made the right decision to early on embed itself in the Curve and Convex ecosystem.

This Week in Frax – June 23, 2023

FXS Buybacks Part Duex

As we discussed last week, Frax Founder Sam Kazemian announced the launch of a $2m buyback program of FXS using the TWAMM over a 5 month period.

Sam’s response to the above meme…

The response to the buyback announcement was slow. It took the wider crypto media two full days to catch on to the story after we reported it on Flywheel. Fraximalists hopped on board right away, buying FXS in size and providing a local bottom. Over the last week, since it was announced, FXS price rose 28.4% to $6.

While the initiative was a good start, some felt that the capital should be allocated faster.

Ouroboros (who is the main character in this week’s review) immediately asked Sam about the 5 month time period. Sam Kazemian told him that it could be changed with a governance vote. And so Ouroboros started a thread on the governance forum “Optimizing FIP-77’s TWAMM Parameters.”

His plan was the following”:

I propose a $1mn TWAMM that spans over 1-month (30 days), buying only when price is below $5 and an additional $1mn 1-month TWAMM on top of it that starts buying only when price is below $4.

Frax supporter Geronimo replied to the post with some deeper analysis of the buybacks.

Ouroboros understood, but he replied:

My view on this is if we become too academic on these things, we will end up not being able to execute on any buybacks which would then defeat the purpose on such a mechanism. Price is often not a function of academic models. If a DCF model can properly price a stock then we wouldn’t have bad investors. Historical price levels reflects the psychological “fair price” the market ascribes to an asset. Right or wrong, that’s what everyone in the room thinks is the consensus standard of “cheap”.

We agree with his viewpoint, the market can and will stay irrational longer than one believes, so optimizing for the TWAMM only when prices get to #3 might never happen.

Sam Kazemian popped in a little later in the thread with his opinion. He asked for another 2-3 days for modification and more feedback. He noted that the TWAMM shouldn’t be run if prices rise above $7 and also that there should be some discretion on time periods for allocation. The bear market can last longer than what Frax might have dry powder for.

Geronimo also pointed out that “The funds usage should be compared against alternatives. What else could the $20M be put towards that would increase long term value?” Is there somewhere that Frax can make a higher return for the protocol than buying back FXS?

C2tP popped in with some thoughts. While he was ok with Ouroboros’ price targets for the TWAMM, he did say the proposal had a pumpy vibe to it to speed up buybacks to impact prices. In his opinion, 1 month was too short of a time for the buyback.

Ouroboros responded that the 30 day interval was chosen based on previous price action. Over the past year the time that FXS has spent under $6 has been less than 30 days on average. While we could go lower for longer, as Sam Kazemian pointed out, history has shown otherwise so far.

Bastion Proposes Cash Secured Puts

In the latest developments, Jake from Bastion Trading, proposed Frax sell cash secured puts to their trading firm, to buy the rights to purchase FXS at a, most likely, strike of $4 or $5. This would have to be a custom contract approved by FXS holders.

After posting this, Jake and his team posted Proposal – Bastion Trading / Implementing FIP-77’s TWAMM with extra yield to the governance forums. He posted a few examples of what the contract structure could look like for a $1m outlay from Frax.


Mathletamine remarked that puts are a bad idea and could lead to problems.

I asked Math about his position and thought about how the contracts would be setup.

While 26% might seem low, it is for the lowest strike. The ATM strikes will always have a higher APR. My biggest issue is how they are calculating the volatility pricing. 65% seems low for the strikes they are proposing.

Obviously this situation is still developing. The original $2m TWAMM is still active over the original 5 month period.

Frax Forks?

Adam Cochran posted a short tweet thread after the buyback announcement hit the major crypto news publications. He was bullish on the idea and growth potential for Frax.

However, in his third tweet, he said that most of the products in the Frax ecosystem are simple forks. Sam responded saying that all of the products were inspired, but all of the code was Frax’s alone and were designed to enhance the protocol at large. He brought up Fraxlend, which was coded from scratch and released before any other major protocol. He also brought up the AMO’s, which still are a revolutionary creation of Frax’s.

It’s all about the endgame….

Release of Fed Master Account Holders

This week, a list of all Fed Master Account holders was released. The list was surprising to say the least and probably bolsters Frax’s chances to acquire one longer term. Interestingly, of the 9000 approved FMA holders, 414 are not federally insured, which is what narrow banks like Custodia and potentially Fraxbank would be.

Frax Bonds? BTC?

Travis dropped a new logo this week… what’s it for? Bonds or Bitcoin?

More Fraxchain Updates

Our weekly main character Ouroboros also asked this week what dapps would be built on Fraxchain. Sam listed that all of the currently built products would be live, and that it would have some new applications as well like privacy tech and other financial products.

Sam is bullish on Fraxchain….

Rocketpool is a losing game

Rocketpool has some of the lowest yields in crypto due to how their fees and commissions are structured. rETH holders get rekt while node operators earn upwards of 40-60% getting leveraged. Someone asked Sam Kazemian why this was…

TriCrypto Pools

Tetranode proposed what have all been wanting, a FXS-FPIS-FRAXBP. A deep liquidity pool to house all of the Frax governance assets. We like the idea and it can be a reality with the new Curve Tricrypto metafactories.

CVX Peg restored

Wow. It took 6 months, but the cvxFXS peg is restored. All is good in the world.

Frax 101 – A Complete Guide to Using Frax

This is a page that will host all of the Frax 101 videos. These tutorials will provide a overview of how to use the Frax website and all of his products.

If you have any questions about Frax 101 or are having any problems using the Frax website, please join the Flywheel telegram to get all of your questions answered.

Frax 101 Topics

How to Navigate the Frax Finance Dashboard

How to Stake ETH with Frax as sfrxETH

What is FraxFerry and How to Use It



This Week in Frax – June 16, 2023

History repeats itself, or does it rhyme?

Approximately one year ago, the protocol authorized $20m FRAX to be used for discretionary buybacks of FXS. Up until now, only $2m was ever utilized, with the rest sitting in reserve. With the FXS price near 2 year lows, Sam Kazemian announced today that a new TWAMM order had been created. Over the next 5 months $2m FRAX will be used to buyback FXS.

Currently 72m FXS is circulating, of that, 40m is locked in veFXS, leaving 32m free floating and locked as LP. Most likely, the team knows that the outstanding share of FXS is starting to decline and buybacks will be effective at these price levels.

Last year, Fraxlend had just launched and frxETH was just announced. Fast forward to today, frxETH v2, Borrow-AMM (BAMM), Fraxferry v2, and Frax v3 are upon the horizon.

The previous buyback ultimately marked last years price bottom. The question is now, will it mark the bottom of this year?

Michael’s CRV position and Fraxlend

In one of the biggest news stories of the week, Gauntlet Network proposed freezing the CRV Aave pool, preventing additional borrowing. Curve founder Michael Egorov had deposited over 25% of the circulating supply of CRV to protect his $65m USDT loan. If liquidated, the total aggregated liquidity across all AMM’s would not be able enough the absorb the collateral sale, leaving the protocol will millions of dollars in bad debt.

Where people have issue with Michael’s position is that he recently moved it from Aave v3 to v2, where there are less capital controls. His position, which is extremely risky, allows him to borrow USDT at the pooled rate of 3.5%. The complete disconnect between rates and risk has worried several parties with exposure to Aave.

While this is Aave’s problem ultimately, the systemic risk caused by liquidation threatens the lenders who have supplied close to $20m FRAX to the pool for Michael. Unlike the Aave pools, Fraxlend’s are isolated, meaning there is no shared risk between assets and the protocol cannot end up with bad debt.

In the chat this week, Sam K said the protocols exposure is limited. Only $100k of protocol owned liquidity is in the pool. If his CRV was liquidated, the risk of bad debt would be carried by the lenders, not the protocol. In return for such risks, lenders are receiving 20% APR, the highest on Fraxlend.

And even if the CRV price falls precipitously, conversely yields will rise.

First down week for frxETH

We shed a tear for up only. For the first time since launch, frxETH contracted after a sharp market selloff. We knew the chat couldn’t be perfect forever, and Sam K gave some additional info on it in the chat.

[FIP – 238] Frax Lend ITB Risk Management Tools

This proposal by IntoTheBlock Research did not pass. They were requesting $60,000 to build a near real-time economic risk monitoring and analytics platform for Fraxlend. There is speculation why the vote failed, some may deem it unnecessary since Frax Facts already exists provides information while others believe that the community is trying to be conservative with unallocated treasury funds until the CR reaches 100%.

[FIP – 239] FRAX Convergence – Seed investment proposal

Convergence, a Convex like system for Tokemak, proposed a seed investment of $100,000. In the past several months, voters appetites for cash investments has waned, instead preferring to swap for liquidity incentives.

[FIP – 240] FX Protocol Frax Finance

Unlike the Convergence proposal, this one put forward by FX protocol passed handily, most likely because they asked for 40,000 $vlCVX votes to incentivize their fETH/frxETH LP over a 6 month period. In return, Frax will receive 3,000 FX tokens, 0.15% of the total supply, vested linearly over 12 months.

Flywheel This Week

frxETH v2

We released three pieces on frxETH v2 and Fraxchain following our interview with Sam K.


Abdul Ibrahim found out that Frax burned some FXS

Revest Partners with Frax to Enhance Scaling of frxETH on L2s

Revest has joined forces with Frax with the goal of advancing the scaling capabilities of frxETH on L2s. 

Frax will guarantee upfront payouts for the frxETH-ETH pair on Velodrome. The concept is simple: by locking LP tokens for a month, participants will receive a guaranteed return that matches the projected annual percentage rate (APR). For instance, if the projected APR is 6%, Frax guarantees a 6% return on investment.

Read more on their Twitter.

Best of Twitter

StableScarab writes a post on LSD Summer.

Riley_gmi provides a clean and detailed design of the entire Frax ecosystem

UZD/Frax LP was getting some high APRs.

Fraxchain – The Ultimate Monetary Amplifier

We’ve all heard about what money does a million times. A store of wealth, enables payments, measures value. But what’s arguably more important is how widespread its use is and how people eschew maximizing yield for maximal utility.

A dollar is a dollar, but that money has a cost. Every second that you hold an asset, it has a natural interest rate, the carry. For example, when you hold cash, its a non-productive asset. You don’t get any yield. The cash bills just slowly lose value over time to inflation.

But that’s ok. Everyone loves paper money.

The bodega down the street only takes cash. You tip your bartender for a good drink. The plumber wants to be paid right away for the drain clog. Cash is the grease that helps the economy run.

You don’t have to maximize your yields for everyday events. No one is going to look down on you because you didn’t swap your last $1000 of your paycheck to 5% yielding bonds this month. Cash just works because its the lifeblood of the economy.

The relationship between cash and bonds is between short term utility and long term wealth preservation. Earning a yield is for those who have time to wait. Others may just want a decent haircut.

The utility of cash is what gives the dollar a monetary premium. Real world demand reduces the available amount of money that can flow into bonds, keeping interest rates at healthy levels.

Monetary premium is the primary determinant of success for any payment currency. The more people that use the asset for daily transactions and hold it without yield, the more useful it is.

Reviewing what we wrote back in February after Sam Kazemian’s speech on stablecoin maximalism at ETH Denver:

The success of a stablecoin can be measured by its monetary premium which is the demand for an issuer’s stablecoin to be held purely for its usefulness without expectation of any interest rate, payment of incentives, or other utility from the issuer.

When we judge the success of assets like FRAX, frxETH and FPI, we do so through a lens of its monetary premium. If we can increase it, the entire protocol benefits.

Enter Fraxchain

Yesterday, we released a landmark episode with Sam Kazemian, Founder of Frax Finance. During the course of the interview, Sam brought up that Fraxchain would most likely be launched by the end of the year.

Sam Kazemian said that Fraxchain will not just be another L1/L2 that is a copy of Ethereum with no users and poor development. It’s going to be a value additive core part of the Frax ecosystem that enables future growth and adoption.

Here’s what we know so far about Fraxchain

Fraxchain will be a hybrid-rollup, an EVM compatible L2. Hybrid rollups combine optimistic rollup architecture with zero-knowledge proofs, resulting in transcendent scalability and fast finality, as well as enhanced security. This will provide developers with an easy-to-code environment and users with the finality, security, and decentralization that ZK Rollups can offer.

Frax is most likely choosing a hybrid rollup design for its faster transaction finality, enhanced security through validity proofs that ensure the correctness of off-chain transactions and prevent operators from executing invalid state transitions, increased throughput, capital efficiency, and decentralization capabilities.

All Frax assets will be supported on Fraxchain natively and Fraxferry will be integrated at day 0 to ensure liquidity can be transferred seamlessly.

frxETH’s Monetary Premium

One huge piece of info that Sam Kazemian leaked was that frxETH will be used to pay for gas on Fraxchain. Users will have to swap their native assets on-chain or bridge over frxETH to execute transactions.

Assuming FraxChain gains significant usage and market share, it could result in millions of dollars in extra revenue for the protocol. Arbitrum is by far the most successful L2 to date and, according to DeFiLlama, the network has generated $34m in fees and $8.2m in revenue. And we are still in the early innings for L2 growth. At a more mature state, this could turn into hundreds of millions or billions of dollars in revenue annually.

Frax should definitely try to take a chunk of this market for itself. As frxETH supply grows into the millions, the protocol will be uniquely situated to provide services by means of FraxChain for its LSD holders. All services provided on ETH could be deployed on FraxChain, lowering borrowing costs, while increasing liquidity and access for its users.

One of the biggest value adds Fraxchain will provide is to the monetary premium of frxETH.

Simply put, every frxETH that onboards to Fraxchain reduces the available supply eligible to stake as sfrxETH, increasing the overall yield. This would be the true test of whether frxETH can truly become a form of payment, that holders would forsake yields to pay for transaction execution.

Right now frxETH’s monetary premium is purely driven for its demand as liquidity on other networks. Using FraxFerry, frxETH is bridged to a multitude of other networks where it can be provided as LP.

Since being added to FraxFerry, the monetary premium or, rather, the amount of frxETH held outside of the sfrxETH vault and the Curve LP, has hovered around the 9% mark. This provides an inherent boost for sfrxETH, driving up its APR.

Using Arbitrum as a comparison, if Fraxchain is able to achieve similar size, then most likely 300-500,000 ETH would reside on the protocol’s L2, which is 1.5x more frxETH than the current supply right now. All of that ETH would not earn rewards and contribute to sfrxETH yield, to the effect of 15-25k ETH a year in rewards. The subsequent growth potential for frxETH is enormous as a result.

Everything you need to know about FrxETH v2 w/ Sam Kazemian

In this week’s episode, we had on a fourth time Frax Finance Co-Founder Sam Kazemian, who gave an in-depth interview on the upcoming deployment of frxETH v2 as well as some hints on what we should expect from Fraxchain. Flywheel has covered FrxETH v2 in depth and you can catch up with our explainer guide.

Kazemian’s Thoughts on frxETH

According to Kazemian, frxETH v1 has “come a long way objectively,” and is “currently the fastest growing LSD in history.” In just 8 short months, frxETH saw tremendous growth, growing to 238,000 at its peak. While the recent market selloff recorded the first outflows, overall its success is undeniable and showcased yet again how Frax’s AMOs can safely maintain peg in times of retraction.

One of the reasons frxETH v1 has grown so fast is that Core Dev team understands the importance of running high performing systems possible. Sam K said that frxETH validators boasts the highest overall rating on, as well as the highest 30 and 7 days rating, that measures uptime, rewards earned and more.

When designing frxETH v2, Sam K was faced with two key questions. The first question was how to choose the best entities to run nodes if everyone can run one. Sam K wanted a market mechanism that would prioritize “the most performant, sophisticated, and knowledgeable entities that know how to run good nodes.” This market mechanism could be based on several factors, including “MEV revenue, lowest hardware costs, highest internet speed, block propagation, attestation responses,” and more.

The second question that Sam K wanted to answer was how to reduce the capital costs associated with decentralization. When you fully decentralize and don’t KYC or attach IRL reputation to node operators you have to ensure there is some collateral on-chain acting as a bond. This prevents node operators from acting maliciously, but it lower the capital efficiency of the protocol, and as a result, the reward yields suffer. Some networks even require a worthless governance token to be used as a bond in addition to ETH, further reducing capital efficiency.

The end result is frxETH V2, that redefines what it means to run a node by creating a fully trustless lending market between ETH stakers and node operators. Sam K explains that all Liquid Staking Derivatives (LSD) are essentially “lending markets.” They operate in a similar fashion to lending platforms like Fraxlend or Aave where users can deposit collateral and borrow something in return.

For example, when someone deposits ETH into Aave, they receive aETH back. In order for someone else to borrow the deposited ETH, they must first deposit their own collateral. Once they take the loan, they pay an interest rate based on the utilization function.

With frxETH v2, node operators deposit ETH as collateral in the smart contract, they then can borrow ETH supplied to the lending market to run a validator. As long as the node operator pays the interest rate, the frxETH loan can remain open, similar to Aave. Connecting to the existing frxETH v1 system, the sfrxETH yield is the dynamic interest rate paid by the node operators borrowing the ETH to stake.

Sam said “If you treat it like a lending market [frxETH v2 is] basically the most efficient LSD protocol because everyone that is good at running a validator will want to borrow our ETH” at the lowest rates.

The cool thing about frxETH v2 is not only will it have the most competitive rates, but additionally, Sam K thinks that only 4 ETH will be needed to post as collateral to borrow 28 ETH. Rocketpool, a competitor, requires 8 ETH plus an additional bond of RPL. This makes frxETH v2 “twice as efficient.” While this does raise slashing risks, veFXS holders will eventually have to make that decision.

Fraxchain, Fraxtal, or Fraximalism?

Sam Kazemian dropped some fresh alpha regarding the future release of Fraxchain (name TBD, the episode featured DeFi Dave and Sam going back and forth on whether to name it Fraximalism (like Optimism) or Fraxtal (pronounced “fractal”)). He stated the upcoming L2 is set to launch by the end of the year and that the team’s really been focused building a truly innovative solution that benefits the protocol, rather than just launching the 200th EVM based rollup. Sam said that it would use frxETH as gas.

Fraxchain will be designed as a “hybrid-rollup” that uses frxETH as gas. As people use the system, frxETH would be burned for transactions, which can be distributed to veFXS holders. veFXS also will get to vote on which entities or addresses can operate the sequencer batches and push proofs to the Fraxchain rollup contract. Sequencers can even auction their services, paying veFXS holders, creating a brand new bribe market. Sam thinks this could be very profitable for the protocol; Arbitrum is currently making millions in fees

Account Abstraction

Sam K said that account abstraction is interesting because it allows for a host of possibilities, such as smart contract accounts, gas abstraction (gas does not need to be paid and can be outsourced) and social recovery wallets. The Core Dev team is currently researching the subject on potential use cases.

For example, if all the accounts on Fraxchain at genesis can actually be smart contract accounts, the whole ecosystem could use account abstraction. Sam notes that it’s difficult to transition from EOAs, which everyone uses, to smart contracts where everything is account abstracted for account-based systems. In this system, Fraxchain would be a “fully programmable bank account.”

Sleeping on Frax

At the end of the episode, Sam gave his thoughts on recent market conditions, saying that “people are sleeping on what’s to come for Frax.”

frxETH v2, BAMM, Frax v3, more decentralized, self-serving FXS gauges, and a new staking system are all in the works.

veFXS holders will should see a ton of new income streams coming online soon: equencer auctions, BAAM trading fees, lending and borrowing fees from FRAXlend, frxETH V2 protocol fees.

Sam thinks the protocol is growing a “global economy” one step at a time and that it will eventually become all-encompassing and unstoppable.

What is Liquid Staking and How is frxETH V2 Radically Changing It?

In just two years, Ethereum-based liquid staking has become the largest asset class on-chain, eclipsing all decentralized exchange TVL in April 2023. Liquid Staking Tokens (LST’s) is the hottest narrative in crypto right now with hundreds of different teams working on different versions and integrations of them into DeFi.

In this guide, we’re going to start with the basics of staking and why LST’s were created. Then were going to look at the different options for liquid staking. Last, we’re going to show you why all LST markets are just lending markets and share recently released information about the upcoming design of frxETH v2, Frax’s near perfect model for creating ETH-validator lending markets.

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What is Ethereum Staking?

Staking is a mechanism used in Proof of Stake (PoS) blockchains where participants lock up their tokens to secure the network and validate transactions. For the Ethereum network, it means depositing 32 ETH to activate a validator. Validators are responsible for processing transactions, storing data and adding new blocks to the blockchain.

Validators keep the Ethereum network secure.

The point of staking is to create both monetary incentive and disincentives for validators to process blocks properly. Good node operators earn ETH, bad operators lose ETH. It’s very simple.

If a validator, or a group of validators ever acts in a malicious way, their stake is “slashed” and they lose part of their ETH.

As a reward for properly validating transactions new ETH is distributed to node operators.

What is “The Merge” and when did it happen?

In December 2020, the “beacon chain” was launched in parallel to the main Ethereum blockchain. At the time the beacon chain only allowed users to stake ETH, no other functions were allowed.

On September 15, 2022, the Ethereum network successfully executed “The Merge,” transitioning from energy intensive Proof-of-Work to environmentally friendly Proof-of-Stake. The Merge change the way that transactions are validated. Previously, Ethereum’s consensus mechanism was similar to Bitcoin; millions of computers competed to solve a mathematical puzzle, called a hash, and the winner was rewarded with new token issuance. With the merge complete, transactions are now confirmed by validators staking ETH, processing transactions, and earning a reward for their services.

What are the ways I can stake my ETH?

There are four main ways that you can stake your ETH:

  1. Centralized exchanges

  2. Solo staking

  3. Staking-as-a-Service

  4. Pooled staking aka LSTs

Centralized exchanges (Binance, Coinbase, Kraken)

Up until recently, one of the most popular ways to stake your ETH was on a centralized exchange. Well known CEX’s like Binance, Coinbase, and Kraken all had 1-click easy to use staking solutions. Simply buy some ETH through their exchange and then immediately stake using their custodial services.

These centralized offerings were wildly popular, Coinbase’s Wrapped Staked ETH (cbETH) topped out with more than 1.25m ETH staked, Kraken at 1.3m and Binance at 1.1m.

The problem, unfortunately, is that while these centralized venues provide an easy way to stake your ETH, the trade-off here is that they have high trust assumptions and, more importantly, are a huge target to regulators.

The SEC is on the warpath to shut down all staking in the United States. In February 2023, the US regulatory agency settled with Kraken, who shuttered its program for US customers and paid a $30 million dollar fine. And in May, they filed suit against Coinbase and Binance, claiming their staking programs are unregistered securities offerings.

With no clear regulatory laws in the United States, staking through a centralized exchange should be considered one of the riskier methods covered in this guide.

Solo staking

With solo staking, you host the equipment, maintain the software and also stake a full 32 ETH. Solo staking is by far the most decentralized and secure way to support Ethereum network security.

But solo staking does have its risks. If you cannot effectively maintain good uptime, the software or hardware, you could be putting your principal at risk and get slashed.


These are third party companies that handle all of the hardware and software maintenance for you, so that you only need to deposit your assets. These services are typically run for those who don’t want to solo stake, but don’t want to swap their assets into a liquid staking token.

Pooled staking aka Liquid Staking

The simple description of liquid staking is that you swap your ETH for another ERC-20 token, the LST, which then captures the staking reward yield generated by a set of node operators.

In short, an LST is a loan made by ETH holders to node operators.

Whenever you swap your ETH for an LST, you are effectively loaning your assets to the validator node operators. You trust them with your loaned assets to provide sufficient security guarantees, exceptional operational uptime and interest paid in the form of rewards yield. The loan is closed when you redeem the LSTs. If validators are slashed, the loan collateral is reduced globally for all token holders, so it’s imperative that LSTs performance is world-class.

There are two primary ways that the reward yield and slashing conditions can be transmitted to token holders, the price of the token can be adjusted or the supply can be rebased. DeFi prefers number go up, so even if a token rebases, it’s typically wrapped (wstETH) for wider usage.

Outside of these differences in liquid staking token mechanics, the trust assumptions, bond requirements and security of the validator set comprise all major variations between protocols. Let’s look at Lido’s stETH, RocketPool’s rETH and Frax’s frxETH to see how each operate.

stETH (Lido staked Ethereum)

Lido is a liquid staking protocol launched in 2020 that supports Ethereum staking and other Proof-of-Stake networks. Lido is currently the largest staking protocol by TVL, with over 6m ETH staked.

When you use Lido, you are swapping ETH for stETH, Lido’s liquid staking token. You send your assets to their minting contract, and then a set of node operators borrow your ETH and stake it on your behalf.

All of Lido’s validators are public, centralized, have undergone KYC/AML checks, signed legal contracts with the DAO and have an off-chain relationship with Lido.

Use the loan analogy as a lens, Lido node operators are able to borrow ETH with zero collateral requirements, with the strict assumption that all ETH rewards earned from staking, minus fee, are returned to lenders (stETH holder) as interest through rebasing.

rETH (Rocketpool Ethereum)

RocketPool is a decentralized Ethereum staking pool founded in 2016. RocketPool pairs people with less than 32 ETH with node operators who stake on their behalf.

When using RocketPool, you can either swap ETH for rETH, their native LST, or you can borrow ETH from the protocol and be a node operator.

When you swap ETH for rETH, a 0.05% fee is deducted by Rocket Pool. The conversion rate is determined based on your proportional entitlement to the ETH in the Rocket Pool protocol.

Node operators are decentralized and anonymous. In order to create security guarantees, node operators must post either 8 or 16 ETH as collateral. Additionally they must also purchase Rocketpool’s token RPL and then bond it as collateral. In case of slashing, the RPL is sold to backstop the loan collateral.

Rocket Pool operates with a fixed 15% commission rate that provides node operators with a share of the rewards earned on the ETH assigned to them by the protocol. This setup allows node operators to earn rewards on their own ETH deposit as well as a commission from the loaned ETH.

Rocket Pool node operators have a higher LTV than Lido competitors and also charge higher fee to rETH stakes. Node operators must post 8 or 16 ETH and a minimum RPL value of 10% compared to collateral. Due to the higher LTV, RocketPool yields almost always are lower than Lido’s.

frxETH & sfrxETH (Frax Ethereum)

The core mission of the Frax Protocol issues cutting-edge, decentralized stablecoins and incorporates supporting subprotocols to bolster their functionality. Currently they issue 3 stablecoins, FRAX, FPI, and frxETH. They are pegged to the USD, the US CPI, and ETH, respectively. We’re going to focus on the latter in this article.

Taking our description from our Frax 101 article on frxETH:

frxETH and sfrxETH are the two tokens comprising Frax’s liquid staking system.

Frax Ether (frxETH) is an ETH-pegged stablecoin. It receives no rewards from staking and it always should remain highly correlated with ETH. As a comparison, it is most similar to Wrapped Ether (WETH).

sfrxETH is frxETH that is staked in a ERC-4626 vault. sfrxETH receives all of the staking rewards earned by validators. sfrxETH is non-rebasing and its price goes up slowly over time as rewards are earned.

In Frax’s system, swapping ETH for frxETH, you loan your assets to the Frax protocol, which are then staked in validator nodes that the Core Dev Team currently manages. As the nodes are currently centralized, no collateral or tokens are required to bond

Loan interest is only paid out to sfrxETH holders. frxETH receives no native incentives. Instead, frxETH can earn rewards from other DeFi protocols, most notably Curve where Frax uses its CRV/CVX power to vote for its pools.

When a frxETH holder wants to close the loan and claim their ETH, they simply sell the frxETH into the Curve LP.

A Loan By Any Other Name

In all three of these cases, the general concept behind every model is that ETH is lent out to node operators who stake and earn rewards. Interest is passed back through to LST holders in the form of staking rewards. The only difference between all three protocol is the LTV of the node operator, the trust assumptions of the protocol, and the security guarantees provided by the node operators.

Given all this, the best mental model for liquid staking as a protocols is that they create an ETH borrowing market for node validators.

The best LST protocol is the one that provides:

  1. Best rates for borrowing ETH.

  2. Highest decentralization, strongest trust assumptions and security guarantees from node operators.

  3. Deepest swap facility for trading

  4. Optimal token construction for integration into DeFi

Based on the above conditions, Frax designed frxETH v2 to excel above every other LST protocol. Let’s dig into how it works.

How frxETH V2 Sets Itself Apart


frxETH v2 creates a decentralized, agnostic, peer-to-pool ETH lending market for node operators.

The best way to think of it is in the context of am isolated lending pool, similar to Fraxlend or Aave, where node operators can borrow ETH at dynamic rates to fund their validators. Node operators do not charge any fees or commissions.; the only fee is what the lending market charges.

If the ETH borrowing rate is low (low ETH utilization in the lending pool), node operators are economically incentivized to borrow ETH at sub-market rates relative to the staking rate, arbing a higher spread. They pay interest to sfrxETH while keeping all MEV profits, tips etc… If the interest rates jump up to the point of unprofitability (high ETH utilization) the node operators can eject from the beacon chain, repay their debt, and then wait for an interest rate that is more to their liking.

Dynamic interest rates reward the best performing validators who can earn the highest amount of yield relative to the borrowing rate. The best performing validators will draw the most economically optimal amount of ETH to maximize their profits. Subpar validators are disincentivized, as they will be subjected to higher borrowing costs and potential operating losses.


Node operators that borrow ETH as collateral for their validators enter into an explicit loan with the protocol.

When taking the loan, the node operator must register their validator public key and set the withdrawal addresses to the protocol lending market. This ensures withdrawn funds can only go to a Frax protocol controlled address once ejected.

As with any loan, node operators are required to maintain a specific Loan-to-Value ratio. If the validator engages in malicious behavior and is slashes, its LTV will be reduced and eventually enter into liquidation. At this point, the Frax protocol forces a full withdrawal to eject their collateral back to the lending pool. Node operators may always top up their collateral amount in the lending market to remain healthy.

Permissionless validators

As mentioned in our previous article Frax 101: frxETH and sfrxETH:

In its current model the Frax Core Team completely controls all validator nodes using a 3/5 multi-sig. While this has been necessary for initial growth and launch, now at a more mature state this control is dangerous and threatens the health of the entire Frax protocol.

Once frxETH v2 is live, it will allow any validator to borrow ETH from the lending market. In turn, this will fully decentralize the frxETH system and enable it to scale and grow in a healthy manner without placing excess risk on the Frax multi-signers.

To borrow a validator, a node operator must provide a minimum amount of collateral (for example, 8 ETH) to gain access to the lending market. As mentioned before, the ETH is constrained to only be staked in validator nodes that set their withdrawal address to the Frax lending market. Borrows can’t just post 8ETH and then run off with 24 ETH, the 32 ETH can only be used in the protocol issued validator.

The beauty of this system is that none of the node operators have to be trusted and can remain anon. Trust assumptions about the security of the ETH are instead held by an oracle system that tracks the health of all loans.

Currently, it is not possible to read Ethereum’s Beacon Chain state using smart contracts. Because of this, the use of an oracle is necessary to update the performance of the validators. Frax’s Beacon Oracle uses ZK technology to prove that the computations are actually valid. If a validator is ever found to have an unhealthy loan, the oracle will update and eject the collateral back to the lending pool.

So there is a trade off. Instead of trusting node operators not to run off with your capital or get slashed, you instead have to trust that the oracle system is able to maintain loan balance information across the network.

How Idle ETH Goes to Work in the Curve AMO

Any ETH that is left idle in the frxETH v2 lending market is sent directly to the Curve AMO contract that balances the protocol-controlled liquidity. frxETH holders can use this extremely deep liquidity pool to enter and exit back to ETH.

FrxETH V2 markets operate similar to Fraxlend markets, the interest rate is determined by the utilization rate. As more and more ETH is borrowed by node operators, the utilization rate with rise. Once it passes the “vertex utilization,” increases to rates sharply rise until they hit a max rate when full utilization occurs. The vertex utilization rate should be the natural resting point in a healthy market system.

Interest Rates - Frax Finance ¤

For frxETH v2, the vertex utilization point is set so that excess ETH in the lending contract can be used by the Curve AMO.

In v1, 10% of all ETH is retained and paired with frxETH in the Curve LP. The frxETH/ETH pair has the second largest TVL on Curve for all ETH pairs and the highest liquidity profile relative to its market cap for all LSTs. The Curve AMO is unmatched at providing liquidity. Refer to our in depth guide to see how this AMO works.

What’s interesting about the market is that its self balancing between the two products. Let’s take a look at an example.

When node operators are not borrowing ETH, utilization will remain low and interest rates will drop. At the same time, the ETH/frxETH Curve LP will imbalance heavily towards ETH and the peg will drop in favor of new buyers of frxETH.

Node operators should be incentivized at this point to borrow more frxETH and sell it into the Curve LP to arbitrage the price spread.

If node operator demand is high, ETH utilization rate will be higher than the vertex utilization, an interest rates will spike. One of two outcomes will occur. First, traders will swap more ETH to frxETH and deposit into the sfrxETH contract, where yields will be higher than other LSDs. Second, node operators will eject and withdrawal their borrowed ETH and repay the loan, increasing the available ETH to borrow and lowering rates.

The whole system is designed to self balance around the natural ETH reward rate. Node operators will not take loans with interest rates that exceed their profits. Conversely, cheap ETH loans relative to rewards should always draw in new operators who want to increase their profits.

Bringing It All Together

Frax’s greatest strength is building from a first principles perspective and in the case frxETH, that perspective is “what must the rational economic incentives must be to build an LST that scales with the least possible trust assumptions”. Whether it’s the peer-to-pool lending model or Curve AMO, frxETH is leveraging primitives in the most efficient way possible in order to both bring the highest yielding product to LST holders while offering the highest upside to node operators. If everything operates as expected, node operators will naturally be lured to frxETH and the highest performing ones will be incentivized to stay. frxETH is one of several developments on the horizon for the Frax ecosystem and as the core team continues to skate where the puck is going, we are here patiently observing what they have in store for us next.

This Week in Frax – June 9, 2023

FrxETH v2 Details Announced

In what turned out to be a huge week, Sam Kazemian gave a presentation to kick off the Dorahacks-Flywheel-Frax Online Hackathon. With the slightly innocuous title of “Frax Build LSDFi Technical Worskshop.” Over 30 minutes he laid out a high level overview of the upcoming frxETH v2 system.

Here are some of the juicy bits.

  • FrxETH v2 creates a fully decentralized borrowing market for validators.

    • Validators post collateral and take ETH loans.

    • The sfrxETH yield APR becomes the interest rate paid by validators for their ETH loans.

    • Validators will have to post 2-8 ETH collateral to maintain their loan. If they get slashed and their loan health declines, they can either eject or add additional collateral.

    • The best performing validators benefit the most, as they will be able to maximize their returns versus the base borrowing cost.

  • FrxGov is an integral part of FrxETH v2 and will be released before its launch.

  • The code base is almost done (end of June) and will then go off for audits.

We’re really excited to share more info about the upcoming launch of Frax ETH v2 with you next week. We’re going to have an exclusive interview with Sam Kazemian next on the main pod where we will go super in depth about the new product.

Sam goes on the RocketPool Discord

Sam K went into the “Lion’s Den” aka the RocketPool Discord channel immediately after the Dorahacks stream. Suffice to say… it was not initially a warm reception.

Sam then dropped in to ask for clarification on their claims

They gave their best shot

Some members put together some great analogies.

Sam would go on to explain how RPL works.

They kept probing.

And then the tide began to turn.

Slowly… then all of a sudden.

And then the lightbulb goes off.

Haters kept on trying…..

Editors note: This was our personal favorite comment.

Annnnd that’s all folks..

What’s going on with the Collateralization Ratio?

It’s been six weeks since the CR has moved upwards towards its goal of 100%. We asked Sam K this week and his answer was elightning.


So the news is that since FXS is down only for the last month, it’s requiring Frax to increase its contributions to FXS/FRAX protocol own liquidity.

Once the CR hits 100%, though, we are going to have to have a discussion in the DAO about what to do with the revenues.

MoneySwitch provides a 1 year update on Frax’s investments

Over a year ago, the Frax DAO approved investing $250k worth of FRAX in MoneySwitch’s seed round. This week, the liquidity-as-a-service platform specializing in cross-border payments came back to the forum with a yearly update regarding their progress. Some of the most notable highlights from the post is that even when adversity struck in the collapse of UST with MSBs backing out, they were able to persevere and achieve full regulatory approval and compliance in Switzerland. In the near term, they are aiming to launch Q2 this year with partners such as Ava Labs and are seeking to integrate with their Banking-as-a-Service (BaaS) layer of their fintech stack. For those curious to learn more about Money Switch, follow them and check out their resources on Twitter.


The long-awaited Frax Japan merch has finally hit the store! These special editions long-sleeves were approved of by the Frax DAO and initially given out during ETHTokyo week. These will be a limited run of 100 shirts, get yours today!



Meet Jon Walch, the Newest Frax Core Team Dev Who Built frxGov

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This week, we had the pleasure of interviewing Jon Walch, the latest addition to the Frax Core Dev team. Jon join the team right before ETHDenver, and has since been the lead on building the protocol’s novel governance module. In this episode he walked us through all of the changes proposed with the new frxGov system, which we covered in a recent Frax 101. We learned a bit more about Jon and his experiences working with the Frax devs.

What’s Jon’s TradFi Background?

Jon is a decade-long experienced software professional with a background in finance, startups, and crypto. He started at Morgan Stanley, where he worked on the algorithmic trading services team. He dabbled in TradFi, assisting hedge funds and other clients with trading. After his experience in the investment bank, Jon joined an Insurtech startup called Ladder Life. But the TradFi life was not for Jon, he had other plans.

How Did Jon Get Involved In Crypto?

In 2012, while still in college at Rutgers, Jon came across Bitcoin and began mining in his dorm room. At the time he was a big PC gamer and had spare GPUs lying around that he decided to use for mining. Unfortunately, like many others, while Jon continued mining Bitcoin until mid-2013, he was a broke college student and so he sold off his stash to cover some bills.

How did Jon Start Working Professionally in Crypto?

When Jon was gaming he noticed the high value of certain in-game items, particularly skins in the game Counterstrike: Global Offensive (CS:GO). Steam was the ultimate dictator of these skins, and reaps massive fees from transactions. When NFTs came around, he realized that digital goods, like gaming assets, could hold real-life value and be great trading assets.

So he did what any other aspiring degen would do, he founded a gaming startup called Whiplash with a close friend in 2019. His company integrated gaming and betting, so users could watch Twitch streams and place real-time prop bets on specific outcomes within the game, such as whether the counter-terrorists would win a round or if a streamer would achieve a certain number of headshot kills in a round. To facilitate the betting process, Jon and his team developed an in-house currency called Whipcash. While it wasn’t a crypto token, the platform gained a sizable following. leading him further in to DeFi.

What is it like working on the Frax Core Dev Team?

Jon describes Frax as effectively a startup, but with the distinction of managing a multibillion-dollar pool of cash. As a Core Dev, he has to find a delicate balance between moving fast and not breaking the code and losing billions of dollars in invested capital.

After his gaming startup, Jon joined an auditing firm, where he learned a ton about smart contract development for DeFi. It radically changed his mode of thinking, forcing him to relearn all of his developer skills within this burgeoning industry. Auditing, he explains, requires meticulous attention to detail and an affinity for dissecting and understanding complex systems.

End to End Governance Process

What is Jon excited about for frxGov?

In the episode, Jon said that the audit for frxGov was finished last week and that it would soon be deployed in 2-3 months. Pairing it with frxETH V2, Frax will completely remove the multisig trust assumptions the team has held..

He’s also excited to see the rollout of frxGov’s delegation system. Entities like yours truly can form “large coalitions” and gain significant control over the protocol by having others delegate veFXS. We have to say that we are as well, and can’t wait to see its deployment.

Congrats to Jon for successfully joining the Core Dev Team and we’ll be excited to see his future work with BAMM and other Frax products.

Thank you for reading Flywheel DeFi. Share this post with someone who you think would like learning about Frax and Jon.


Have more questions for Flywheel or Jon? Come join our Telegram channel.

Frax 101: frxETH and sfrxETH

THE FIRST WORD IN LSD IS LIQUID – Sam Mc randomly on a podcast

What is Liquid Staking?

Liquid staking allows users to earn rewards from Ethereum Proof of Stake (PoS) consensus without the hassle of operating a node. With traditional staking, users lock up 32 ETH in a contract, becoming validators and participating in the network’s consensus mechanism to help secure the network and process transactions. In return, these stakers receive rewards in the form of new ETH issuance. However, once ETH is staked in this way, it is locked and cannot be used until its fully withdrawn from the staking process.

Liquid staking, on the other hand, allows users to keep their assets “liquid” by receiving a tokenized representation of their staked ETH, in the case of Frax: frxETH and sfrxETH. This token can be traded, used in DeFi applications, or otherwise utilized while the underlying ETH continues to be staked and earn rewards

What is frxETH and sfrxETH?

FrxETH and sfrxETH are the two tokens comprising Frax’s liquid staking system.

Frax Ether

Frax Ether (frxETH) is an ETH-pegged stablecoin. It receives no rewards from staking and it always should remain highly correlated with ETH. As a comparison, it is most similar to Wrapped Ether (WETH).

sfrxETH is frxETH that is staked in a ERC-4626 vault. sfrxETH receives all of the staking rewards earned by validators. sfrxETH is non-rebasing and its price goes up slowly over time as rewards are earned.

Why two tokens?

The first question most people ask about Frax’s model is “Why is frxETH necessary if it earns no reward yield?”

Every frxETH that exists outside of the sfrxETH vault earns no yield and increases the yield for others.

However, there is a good reason why DeFi needs an ETH-based stablecoin.

Every Ethereum-based LSD has two components: principle and yield. The principle is the ether is deposited into a validator, and the yield is the rewards earned from successfully providing validation services.

Other protocols like Lido and Rocketpool designed their token architecture to primarily capture and distribute yield. Pooled staking is the core functionality and external integrations and use cases are left to the open market.

There are two main token designs: number go up, re-basing, two token system.

NUMBER GO UP – in this model, when you swap your ETH to the LSD, you are given a fixed supply of tokens. These tokens do not change in amount, but their value goes up steadily as rewards accrue. Rocketpool’s rETH use this model.

REBASING – Rebasing is an onchain operation that increases or decreases the number of tokens in a user’s wallet based on staking rewards or slashing penalties on the Beacon chain, and execution layer rewards. A rebase happens when oracles, which is a third-party service used by blockchain networks to provide external data, report beacon stats.

The problem with rebasing tokens is that they break DeFi. Most, if not all dAPPs assume that token balances remain constant relative to deposits. As rebasing adjusts this number up and down, it screws with the internal math, causing critical potentiality for critical exploits. This is why the wrapped version of stETH is the only asset used in DeFi, while vanilla stETH is not.

In both cases, Number-go-up and Rebasing, neither LSD model is a substitute for ETH or WETH. Lido, Rocketpool, and Stakewise all implement token models that focus on the yield aggregation primarily. However, they fail to adequately incorporate the characteristics of the underlying principle. This is important, as both assets are an enormous part of the Ethereum DeFi ecosystem and are the most typical asset paired against on DEX’s.

While there are benefits to these systems, they neglect the “liquid” in LSD. The entire point of LSDs is the ability to swap, borrow, or lend your assets. Rebasing is suboptimal for DeFi and rETH’s yield is often the lowest against its peers.

LSD + Curve = Win

The beauty of crypto is that builders have a lot of design space to try out new ideas. We saw this in the lead up to Frax’s launch as a plethora of algorithmic stablecoins with various peg stability models, all which failed spectacularly. Frax nailed the right idea and has been the only algo stable to survive this long, and it’s learned a lot along the way.

If you read our first Frax 101 on the FRAX stablecoin, you’ll have learned that Curve/Convex became an integral part of all design choices following deployment of V2 and AMO’s. Curve combines liquidity with a novel incentive layer to encourage liquidity provision. By staking your LP, you can earn CRV. By locking CRV as veCRV, you can multiply the rewards. With this knowledge Frax used its liquidity magic to acquire nearly 10% of CVX’s supply and build dynamic products leveraging its power.

We’ve talked about the two tokens (frxETH & sfrxETH), now Curve adds a third component, liquidity pools. Once you mint frxETH, you have an immediate choice to make, stake in the vault or provide liquidity. Vault rewards are paid in ETH, Curve LP rewards are CRV,CVX, and FXS. This choose your own adventure game is how frxETH finds any demand, but more importantly, how Frax maintains exit liquidity.

Frax does not provide a public way to execute a full withdrawal of an ETH validator. The only way to exit frxETH is to sell into the Curve frxETH/ETH LP. If the pool ever has a large imbalance, the protocol can unstake their ETH nodes and wait to rebalance the pool.

Additionally, Frax sets aside 10% of ETH swapped for staking to pair against frxETH in Curve. For every 10 ETH staked, 1 ETH is held by the AMO, it pairs it with newly minted frxETH and then deposits both into the ETH/frxETH Curve LP.

And while it might seem strange that Frax is create new frxETH for the Curve LP, it can only ever enter circulation when people buy or sell into it. If someone buys frxETH, it only enters circulation right then and there. If sold, the AMO can burn excess frxETH until the proportions become healthy again. If too much frxETH is sold and the peg breaks, the protocol can either buy frxETH at a discount and wait until the ETH validator exits, arbing the difference in price between the two.

A screenshot of the Curve LP imbalance.

For everyday operations, the Curve LP typically is imbalanced 60:40 frxETH/ETH. This allows the protocol to increase its TVL, while still maintaining the peg, and increasing its farming yields from Curve.

Sam Kazemian describing why 60:40 is normal for the Curve LP

Based on how frxETH was designed, its liquidity will always be unmatched comparatively. On Curve, it is able to retain a much higher depth versus its market cap, with TVL of 160m versus a total TVL of 426m.

Screenshot of Curve’s ETH LPs

Traders benefit as they can swap larger amounts with lesser slippage. Even if 10% of the frxETH supply is swapped to ETH in 1 transaction, the trader would only lose .5% to slippage.

Exchange rate for swapping 10% of the total supplyof frxETH to ETH

Monetary Premiums

The beauty of frxETH’s design is that it forces holders to choose between earning yield from 3 options: sfrxETH, the frxETH/ETH Curve LP and third party dApps and exchanges.

As sfrxETH provides a baseline yield that is the risk-free rate, yields opportunities must be higher to incentivize deposits. If the yield ever goes below the sfrxETH rate, liquidity will naturally be drawn back to the core staking product.

But for every ETH not in the sfrxETH contract, it means a higher base yield. This ever changing dynamic yield chase is clearly seen in the charts. sfrxETH and frxETH Curve yields track each other tightly. Additionally, as frxETH is used is more dApps, its monetary premium has also risen. As of writing more than 20k frxETH is used outside of Curve and sfrxETH, nearly 10% of the supply.

Conclusion and what’s to come with frxETH v2

Since launch the Frax model has successfully achieved a total market share of 2.5% and is growing faster than any other competitor. However, there are centralization risks in frxETH which will be remedied soon.

As we wrote in Frax 101: Governance 2.0 – What is frxGov?

The Core Team also possesses complete control over the Frax’s assets. Currently, a 3 of 5 multisig, consisting of Sam Kazemian, Travis Moore, Jason Huan, and Justin Moore, and veFXS holders manages approximately $690 million of Frax assets. Drake Evans is planned to be added to the multi-sig once the new Gov module is launched. This multisig, along with a timelock contract, also holds administrative rights over other Frax contracts, including a wallet holding $524 million of Frax assets on Curve. In total, over $ billion is managed by the core team.

The Core Team is public and well known, which reduces the potential for collusion and theft. Currently, Sam, Travis, Drake and Justin are US citizens and residents, raising additional risks.

In its current model the Frax Core Team completely controls all validator nodes using a 3/5 multi-sig. While this has been necessary for initial growth and launch, now at a more mature state this control is dangerous and threatens the health of the entire Frax protocol.

Last week, Kazemian announced in a Dorahacks presentation as well as a Twitter thread the coming of frxETH v2 which essentially creates a dynamic lending market for validators to run “frxETH nodes”. This peer-to-pool model is similar to how Aave and Compound operate as lending markets, allowing for market forces to determine the interest rate for lenders and borrowers.

In frxETH v2, interest from borrowing validators is paid directly to sfrxETH holders while operators keep the rest. It is likely that the LTV (Loan-to-Value) ratio will be 75% to start with governance being able to adjust when needed as well as decide on collateral. Liquidations occur when validator operators are slashed and ultimately ejected from the system. The frxETH v2 model is designed to reward the most competent validator operators deploying sophisticated strategies to earn levered yield.

Full article and podcast episode about frxETH v2 coming soon!