RWA Launch Imminent Frax Future Product Planning and Potential Impact

FXS has been well received by the market in the midst of the CRV turmoil due to FraxLend’s dynamic interest rate design that protects borrowers; at the same time, Frax Protocol founder Sam’s governance proposal to promote RWA business on August 4th has also attracted some market attention. This article aims to outline Frax’s future product plans (FRAX V3, frxETH V2, and Fraxchain) and analyze their potential impact.

1. Frax V3 – Focus on the development of RWA business (to be launched within August)

Currently, Frax founder Sam has proposed on the governance forum to expand RWA business through FinresPBC, which is expected to be launched within August. The key points are as follows:

1. FinresPBC is a non-profit company established earlier this year, so all the profits generated by the assets held by FinresPBC on behalf of Frax Protocol, except for operating costs, will be returned to the protocol;

2. FinresPBC does not participate in the development, operation, and governance of the Frax protocol, nor does it engage in any other profit-making activities (such as mortgage, lending, pledging, or other business activities) to ensure the purity and stability of the business;

3. The current partner bank of FinresPBC is Lead Bank, which provides compliant financial services for crypto protocols, and FinresPBC is also actively expanding more crypto-friendly financial partners;

4. The future business scope of FinresPBC includes: minting/redeeming USDP and USDC; earning interest on USD deposits in IntraFi savings accounts insured by the Federal Deposit Insurance Corporation; purchasing US Treasury bonds in independent accounts to earn interest;

5. FinresPBC will publish asset details, reserve reports, and operating costs monthly. FinresPBC can provide 7*24 access to custodial assets for the Frax protocol and use reserves on-demand to repurchase and destroy FRAX or mint USDP and USDC to send to the Frax Protocol AMO.

There is no official disclosure of more architecture details for FRAX V3 business, but some information released by the team in Telegram, forums, and interviews is summarized as follows:

1. Sam pointed out that the operating costs of FinresPBC will be significantly lower than Maker or other RWA protocols. If FinresPBC holds $500 million in assets for the Frax Protocol, the annual fee is expected to be no more than $200,000.

2. Sam mentioned in an interview with Ourodoros Capital on July 28th that Frax V3 will be launched within 30 days. Considering the current establishment of FinresPBC and basic banking relationships, it is speculated that its RWA business will also be implemented in August. Currently, we are waiting for the DAO to vote on proposals and determine initial parameters.

3. FraxBonds will be introduced in FRAX V3: Frax Protocol will issue four bonds continuously, allowing anyone to purchase them. After the bonds mature, they will automatically convert into FRAX stablecoins. Through FinresPBC, there is no limit to the scale expansion of FraxBonds. At the same time, FraxBonds will be standard ERC20 tokens, and Frax Protocol will deploy liquidity for them on Curve, enabling trading on the secondary market.

4. In FRAX V3, the Borrow-AMM design for FRAX liquidity does not require an oracle price feed, eliminating oracle risks.

Possible Impact:

1. The scale of the FRAX stablecoin is currently being squeezed by Maker’s strong promotion of RWA business, especially with the current Maker DSR deposit rate as high as 8%. Some market participants are turning to holding Dai for interest. The reason for the high returns in the current DSR compared to U.S. Treasury yields is the difference between Maker’s bond purchases and the interest on Dai deposit on the protocol side, and this return rate is currently unsustainable. The specific details of Frax’s RWA business have not been disclosed, but based on its similarity to ETH collateral business structure and current known information, it is speculated that Frax can achieve high returns in the early stages of RWA business due to the combination of bond yields and Crv incentives. In the medium to long term, if, as Sam said, the operating costs of FinresPBC are much lower than those of competitors, then Frax’s RWA business may have long-term competitiveness and help expand the market share of FRAX stablecoin.

Frax’s market value recently dropped from 1 billion to 813 million.

2. Maker has earned a lot of profits through the strategy of U.S. Treasury RWA, and the on-chain repurchase of MKR has become the main reason for the recent rise in MKR. Frax currently uses part of the stablecoin collateral and protocol income to increase the collateralization ratio CR of FRAX stablecoin. If the RWA business can bring additional income to the Frax protocol and accelerate the replenishment of collateral, it will redirect the protocol income to veFXS holders or use it to repurchase FXS, which will provide support for the price of FXS. Currently, FRAX has a collateralization ratio of 94.5%; Frax Protocol holds idle USDC worth $280 million, which can generate $14 million in income per year at a 5% interest rate, accounting for 75% of Frax’s current annual income.

The current collateralization ratio of FRAX is 94.5%.

II. frxETH V2 – Focus on Decentralization and Attracting Collateral (to be launched in 50 days)

Sam mentioned on Twitter sLianGuaice that frxETHV2 is expected to be launched in about 50 days. In the current frxETH V1, users’ ETH is staked by the team-operated nodes, and the protocol charges a 10% fee. The advantage of frxETH V1 lies in its use of the advantages of Curve’s governance rights, which can effectively guide the liquidity of frxETH. At the same time, the design of the dual coin model of frxETH and sfrxETH allows the Frax Ether system to have the highest yield in the market. This helps Frax Ether to rank among the top three LSD protocols in the LST field.

frxETH V1 staking process diagram:

In the future release of frxETH V2 version by the Frax protocol, the team will strive to ensure high annual returns while addressing centralization issues. The overall design logic of frxETH V2 is similar to Rocket Pool, but it also has its own unique features. The key difference is:

1. In Rocket Pool, the ETH deposited by users is accumulated in the deposit pool and cannot generate profits until the validation is activated. This will drag down the overall yield of rETH. Currently, the deposit pool has a limit of 18,000 ETH. On the other hand, in the design of frxETH V2, the user’s deposit will first be allocated to Curve AMO and then distributed to the Lending Pool when the node needs to pair with the user’s ETH. As a result, idle ETH can earn transaction fees and mining rewards in Curve AMO, which will increase the overall yield compared to Rocket Pool.

2. After the Atlas upgrade, Rocket Pool’s node commission is basically fixed at 14%, while frxETH V2 plans to determine the node commission ratio through market adjustment. In frxETH V1, Frax is the most efficient and stable team in the market for node operations, and it will also join frxETH V2 to compete for node commission through marketization. The introduction of competition mechanism and the joining of efficient teams are expected to further benefit users and increase their yield.

Currently, Frax Ether has the most efficient staking.

Product flowchart of frxETH V2

Regarding the frxETH product, in addition to paying attention to frxETH V2, attention should also be paid to the launch of the redemption function. Currently, while sfrxETH has the highest yield in the market, its growth rate in the past month has lagged behind Lido+5.17% and Rocket Pool’s +7.47%, mainly because frxETH cannot be redeemed at present and can only be exchanged for ETH through Curve in the secondary market. This has amplified the concerns of whales and some users, causing them to turn to Lido or Rocket Pool.

III. Fraxchain – Pay attention to its ecological development and the consumption of frxETH (to be launched in early 2024)

Fraxchain is a Layer2 network based on Ethereum, which plans to adopt a hybrid rollup solution (a combination of op rollup and zk rollup). It can provide developers with an easy coding environment brought by op and provide users with final determinism, security, and decentralization brought by zk. As one of the top three LSD protocols, Fraxchain and frxETH will also generate synergistic effects. Fraxchain adopts frxETH as GAS fees, which will reduce the conversion of frxETH to sfrxETH and help the Frax protocol compete for a higher stake yield in the market. In the future, the complete DeFi product matrix of the Frax protocol will be migrated to Fraxchain to reduce Gas fees and bring initial traffic and funds to Fraxchain. It should be noted that Fraxchain is not an application chain. While supporting the current stablecoin ecosystem of Frax, it also aims to expand the ecosystem and increase adoption to better contribute to the protocol’s native ecosystem.

In summary, Frax has a compact and capable team, efficient execution, and rapid product implementation. It is worth paying attention to the launch of FRAX V3 and frxETH V2 at the moment.

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