I am proposing adding FRAX to Compound. I’m a member of the Frax community. I’m hoping to gather feedback, especially around proposed parameters. FRAX’s capital efficiency and lending AMO should make FRAX the least expensive stablecoin to borrow on Compound. As time passes and FRAX proves itself as a useful asset on Compound, I hope FRAX will gradually be treated more like a fully collateralized fiat stablecoin on Compound.
FRAX is a redeemable stablecoin with a dynamic collateral ratio that adjusts based on market demand. Frax is unique among recent stablecoin designs in that each FRAX is always redeemable for $1.00 worth of assets from the Frax protocol. This has kept the price of FRAX in a relatively tight band around $1.00, making Frax an ideal asset to borrow and lend against on Compound. Frax is already integrating with Compound and is currently the 17th largest cUSDC holder (~$30m) and growing, demonstrating a strong synergy between the communities. As the FRAX supply increases, additional collateral will be deposited into Compound. The Frax community has also chosen to hold all COMP rewards received to be an active participant in Compound governance.
v2 of the Frax protocol recently launched and introduces a lending module that can be built directly into Compound. This would enable the Frax protocol to supply large amounts of FRAX to Compound on demand. FRAX could become the lowest borrowing cost stablecoin on Compound, which would be quite attractive for Compound borrowers. The first step towards this integration is the addition of FRAX as an asset on Compound.
Since launching in December 2020, FRAX has held a tight band around the $1.00 price target. Below is a chart showing FRAX price history since launch:
Each FRAX is collateralized by approximately $0.86 USDC (including interest bearing equivalents) and $0.14 of the Frax governance token, FXS. When the price of FRAX is at or above $1.00, the protocol gradually lowers the collateralization ratio of USDC to FXS. When the price of FRAX is below $1.00, the protocol gradually increases the ratio. FRAX can always be minted or redeemed by the protocol for $1.00 of assets, which counterbalances significant price deviations from the $1.00 target. Frax emphasizes a highly autonomous approach with no active management of the price stability function. More information about the mechanisms behind FRAX can be found in the links below.
FRAX is not an algorithmic stablecoin. There are algorithmic aspects of FRAX (the protocol uses FXS as a tool to stabilize the price of FRAX) but it is better understood as a capital efficient collateralized stablecoin. Given that the Compound collateral factor of FRAX is likely to be well below the current collateralization ratio of 86.5%, FRAX as a collateral asset on Compound would effectively be over collateralized by a healthy margin. It is also worth noting that there is also approximately $60m of Uniswap, Sushiswap and FRAX-3Pool LP tokens locked within the Frax protocol. A significant portion of this is locked for greater than 2 years. This provides guaranteed liquidity for FRAX and provides significant benefits to the stability of the protocol in times of volatility.
Frax has built a lending contract (AMO) that will integrate the Frax protocol directly into Compound to supply FRAX on demand for borrowing. This would be somewhat analogous to the Fed discount window, where borrowers could borrow directly from the FRAX protocol via Compoound. A direct integration with Compound will also make supplying FRAX more attractive to other market participants because there is a guarantee of FRAX liquidity directly from the protocol, avoiding the pitfalls of high utilization rates in DeFi money markets.
Misc. Project Info
There is approximately $102m of FRAX liquidity currently on Uniswap. The main venue for FRAX is slowly shifting to a Curve FRAX-3pool; the stableswap curve is so much more capital efficient at holding the $1.00 price target. FRAX volume was averaging about $9m volume in March - Coingecko is currently under reporting the volume as it does not include the Curve pool or Sushiswap. Given that FRAX can always be minted and redeemed at the protocol, daily volume is less of a factor in my opinion. Frax has undergone extensive code reviews and was audited by Certik with additional audits upcoming.
Input on Proposed Parameters
I’ve spoken with the Frax team and they are happy to help any with oracle / contract deployment needs. I’d appreciate some Compound community input on the Collateral Factor and Reserve Factor. Given that each FRAX is backed by approximately $0.865 of USDC, cUSDC, aUSDC and yUSDC (obviously on chain), it would make sense to me that FRAX’s Collateral Factor and Reserve Factor would look more like DAI than USDT - perhaps a CF of 60% and RF of 15% to start. I also understand if a more conservative approach is desired as things get off the ground - please let me know what you think!
Thank you for your time and participation. Please let me know if you have any questions or concerns. As I receive input, I’m happy to revise the proposal to incorporate it. Reference links are below.
- Project: https://frax.finance
- Whitepaper: Introduction - Frax ¤ Finance
- Twitter: https://twitter.com/fraxfinance 1
- Codebase: frax.finance · GitHub
- Documentation: https://docs.frax.finance/
- App: https://app.frax.finance/
- Audit: https://certik-public-assets.s3.amazonaws.com/REP-Frax-06-11-20.pdf
- FRAX token contract: https://etherscan.io/token/0x853d955acef822db058eb8505911ed77f175b99e
- Telegram: Telegram: Contact @fraxfinance
- Discord: https://discord.gg/eKXUxaKJXT