Gauntlet is recommending that FRAX be added as a collateral asset on Compound. FRAX is an exciting new stablecoin that will provide more stablecoin liquidity to the Compound protocol in addition to DAI, USDC, and USDT. By convention, assets are usually listed on Compound with a collateral factor of 0, but given the liquidity and volatility profile of FRAX, the Gauntlet Platform expects to ramp up the FRAX collateral factor post-listing.
Market Risk
FRAX is currently listed on exchanges such as Uniswap, Sushiswap, Solarbeam (on Moonriver), Pangolin (on Avalanche), and more. The liquidity for FRAX has been steadily increasing, with the 90, 60, and 30 day ADVs being $22M, $30M, and $43M respectively.
Note that while the ADV of FRAX is increasing, it is still substantially lower than DAI (roughly 10X lower) and USDC (roughly 50X lower).
FRAX has a 36% annualized volatility over the past month, which is more volatile than DAI (4%) or USDC (2%).
Decentralization
The top 10 FRAX token positions are listed below:
As seen in the chart below, the top 10 positions make up 87.6% of the total FRAX supply. However, the majority of those tokens are either locked in Curve’s FRAX3CRV pool, other exchanges, and bridges.
If FRAX is trading below $1 on exchanges, users are incentivized to burn FRAX in exchange for $1 of USDC and FXS. Conversely, if FRAX is trading above $1 on exchanges, users are incentivized to mint FRAX by depositing USDC and burning FXS, then selling FRAX on the exchange. This way the supplies of FRAX and FXS are controlled while maintaining a peg to the USD. While the FRAX protocol is decentralized, the collateralization mechanism relies on USDC as collateral, which is centrally backed.
Analyzing USDC and FRAX Pegs to USD
Given that FRAX is heavily dependent on USDC, Gauntlet’s platform will carefully analyze how Collateral Factor changes to both USDC and FRAX may affect their respective USD pegs.