Add $sFRAX as Collateral to $USDT Markets on Ethereum Mainnet

Proposals
1

Frax Finance proposes listing staked Frax ($sFRAX) as collateral on USDT markets on the Ethereum Mainnet. With a substantial total supply and significant demand on the Ethereum Mainnet, we anticipate that this addition will stimulate borrowing activity among Frax users, who can leverage their $sFRAX holdings.

Motivation

Staked Frax is an ERC-4626 staking vault that distributes part of the Frax Protocol yield weekly to stakers denominated in the $FRAX Stablecoin. The current APY for $sFRAX is 7.50% while there’s a supply of 56,966,022 $sFRAX. This makes it an attractive asset to be used as collateral, offering users the opportunity to loop it for leveraged positions, thereby enhancing their potential returns.

Frax Finance has consistently demonstrated its resilience in the stablecoin market, successfully maintaining the peg of its decentralized and permissionless token, $FRAX, to the USD even during turbulent market conditions. This achievement is attributed to the robust AMO smart contract, which ensures the token’s stability. Guided by the following core principles, Frax Finance incorporates into the development of all its products.

  1. Decentralization: Frax Finance is committed to decentralization, progressively working towards full on-chain governance to ensure that control is distributed among its community.

  2. Permissionless: Anyone can participate in Frax Finance Governance Process and make proposals

  3. Transparency: All operations, including yield distribution and protocol updates, are conducted transparently and on-chain, with the community having full visibility into the protocol’s actions and decisions through Frax Facts real time dashboards.

  4. Economic Rationality: $sFRAX APY attempts to roughly track the interest on reserve balances (IORB) rate of the United States Federal Reserve using the IORB oracle, keeping the yields competitive yet sustainable

The $sFRAX would help bring real yield to the Compound markets and allow for users to borrow against an asset providing yields higher than their borrow rate.

Risks

The $sFRAX token represents pro rata deposits within the vault and is always withdrawable for FRAX stablecoins at the pro rata rate at all times, meaning that $sFRAX can be instantly redeemed for $FRAX at anytime.

Relevant Links

Frax Finance Website: https://frax.finance/

Docs: sFRAX | Frax ¤ Finance

Staking Vault Address: Frax Finance: sFRAX Token | Address 0xA663B02CF0a4b149d2aD41910CB81e23e1c41c32 | Etherscan

Frax Facts: https://facts.frax.finance/

Frax Finance Audits: Audits | Frax ¤ Finance

AAVE’s Risk Analysis: [ARFC] Remove Frax from Isolation Mode and onboard sFRAX to Aave v3 Mainnet - Governance - Aave

3 Likes
2

I think this is a great idea! This will benefit both Frax and Compound by bringing demand to sFRAX (Yield bearing asset) and adding TVL to Compound on mainnet.

3

[Gauntlet] sFRAX Asset Listing on Compound V3 Ethereum USDT market

If the community decides to list sFRAX on Compound V3 USDT markets on Ethereum, Gauntlet recommends the risk parameters below.

Ethereum USDT Comet

Asset Collateral Factor Liquidation Factor Liquidation Penalty Supply Cap
sFRAX 88% 90% 5% 10,000,000

Analysis

FRAX is a stablecoin that maintains its peg to the U.S. dollar through a partially algorithmic and collateralized system, but it faces risks from market volatility, smart contract vulnerabilities, and governance challenges.

sFRAX, a staking derivative, inherits these risks and has additional concerns related to liquidity and smart contract issues within the staking ecosystem.

The sFRAX redemption process allows users to redeem sFRAX for FRAX at the pro rata rate, as long as liquidity is available. The vault operates on a weekly cycle, with newly minted FRAX added every Wednesday at 11:59:59 UTC, ensuring liquidity aligns with protocol earnings (Frax Docs). While instant redemptions are typical, high-demand situations may introduce minor delays, which are typically resolved in the next epoch.

Liquidity Sources

FRAX

Since sFRAX is 1:1 redeemable for FRAX, assuming FRAX liquidity for sFRAX is reasonable. The following table summarizes the major liquidity sources for FRAX across various decentralized exchanges (DEXs) on Ethereum:

pool_name pool_type pool_url pool_tvl_usd volume_24h_usd
sDAI / FRAX curve Link $199.60M $3.11M
USDe / FRAX curve Link $80.70M $2.52M
FRAX / USDC 0.05% uniswap_v3 Link $62.31M $1.25M
PYUSD / FRAX curve Link $19.68M $225.38K
FRAX / USDC curve Link $12.78M $626.55K
DAI / FRAX 0.05% uniswap_v3 Link $11.68M $62.46K

Total DEX TVL (Ethereum): $386.75M

Total DEX Volume 24H ($) (Ethereum): $7.79M

sFRAX

The following table summarizes the major liquidity sources for sFRAX across various decentralized exchanges (DEXs) on Ethereum:

pool_name pool_type pool_url pool_tvl_usd volume_24h_usd
crvUSD / sFRAX curve Link $437.77K $43.02K

Total DEX TVL (Ethereum): $437.77K

Total DEX Volume 24H ($) (Ethereum): $43.02K

Volatility Analysis

FRAX → USDT

Metric Value
Min Price Change Log -0.50%
Max Price Change Log 0.54%
Daily Log Volatility 2.60%
30D Log Volatility 1.10%

The volatility metrics for FRAX indicate that it deviates from the price of USDT with a 30-day volatility of 1.10%, indicating minimal deviations from the mean price over the past month.

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Screenshot 2024-09-02 at 10.53.00 AM3002×747 114 KB

Onchain Market Cap

sFRAX has ~$51M onchain market cap on ethereum.

Supply Cap and Liquidation Penalty (LP)

Based on the available liquidity, we recommend setting a supply cap that would cause 5% slippage, ensuring that the total slippage, should the entire supply get liquidated, remains less than the Liquidation Penalty.

Given the nature of the sFRAX redemption process, it is reasonable to consider FRAX liquidity as a basis for determining the sFRAX supply cap.

Based on the available liquidity sources, a supply cap of 50,000,000 is reasonable. However, to gauge initial market demand, Gauntlet suggests setting a supply cap of 10,000,000 for Ethereum USDT Comet, with the option to raise it if market demand increases.

Screenshot 2024-09-07 at 10.27.08 AM
Screenshot 2024-09-07 at 10.27.08 AM450×516 23.1 KB

Liquidation Factor (LF) and Collateral Factor (CF)

Gauntlet recommends setting the Liquidation Factor at 90% and the Collateral Factor at 88% for Ethereum USDT Comet to balance risk management with capital efficiency. The 2% buffer between the Liquidation Factor and Collateral Factor on the USDT Comet ensures a safety margin that guards against sudden market fluctuations, while still allowing users to leverage their assets effectively.

Oracle

Gauntlet would like to receive more clarity on the choice of Oracles; if sFRAX would use the underlying FRAX exchange rate along with FRAX/USD Chainlink price feed.

Next Steps

We welcome community feedback on the proposed risk parameters for sFRAX Asset Listing on Compound V3 Ethereum USDT market.

Note: The data provided in this document is accurate as of the publication date. Market conditions and liquidity levels may change, and it is advisable to regularly review these parameters to ensure they remain appropriate.

4

Add sFRAX to cUSDTv3 on Mainnet

PR - Add sFRAX as collateral to USDT market on Mainnet by MishaShWoof · Pull Request #932 · compound-finance/comet · GitHub

Actions

  1. Run Slither. Fails. :x:. Add sFRAX as collateral to USDT market on Mainnet · woof-software/comet@fe637ad · GitHub
  2. Forge test. Success.:white_check_mark: Add sFRAX as collateral to USDT market on Mainnet · woof-software/comet@fe637ad · GitHub
  3. Gas Profiler. Success.:white_check_mark: Add sFRAX as collateral to USDT market on Mainnet · woof-software/comet@fe637ad · GitHub
  4. Scan. Success.:white_check_mark: Add sFRAX as collateral to USDT market on Mainnet · woof-software/comet@fe637ad · GitHub
  5. mainnet-usdt Scenario. Success.:white_check_mark: Add sFRAX as collateral to USDT market on Mainnet · woof-software/comet@fe637ad · GitHub
  6. Unit tests. Success.:white_check_mark: Add sFRAX as collateral to USDT market on Mainnet · woof-software/comet@fe637ad · GitHub
  7. Eslint. Success.:white_check_mark: Add sFRAX as collateral to USDT market on Mainnet · woof-software/comet@fe637ad · GitHub
  8. Contract linter. Success.:white_check_mark: Add sFRAX as collateral to USDT market on Mainnet · woof-software/comet@fe637ad · GitHub
  9. Prepare migration. Success.:white_check_mark: Prepare Migration · woof-software/comet@fe637ad · GitHub
  10. Enact migration with impersonate. Success.:white_check_mark: Enact Migration · woof-software/comet@fe637ad · GitHub

Description we use:

Add sFRAX as collateral into cUSDTv3 on Ethereum\n\n

Proposal summary\n\n

Compound Growth Program [AlphaGrowth] proposes to add sFRAX into cUSDTv3 on Ethereum network. This proposal takes the governance steps recommended and necessary to update a Compound III USDT market on Ethereum. Simulations have confirmed the market’s readiness, as much as possible, using the Comet scenario suite. The new parameters include setting the risk parameters based off of the recommendations from Gauntlet.\n\n

Further detailed information can be found on the corresponding proposal pull request and forum discussion.\n\n\n

Proposal Actions\n\n

The first proposal action adds sFRAX asset as collateral with corresponding configurations.\n\n

The second action deploys and upgrades Comet to a new version.