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

[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.

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.

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.