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In today’s edition, we’ve included one of our Industry Intel reports on Frax.
Frax is far from a stablecoin, from its introduction of inflation-resistant $FPI, to FraxFerry, and more, the protocol has proven itself to be an innovative addition to the DeFi space through up and down markets alike.
Frax’s latest edition? Fraxtal, Frax’s own L2 chain built on the OP stack. We initially reported on Frax’s L2 and its positive impact on the Frax DeFi ecosystem back in June, when the rollup was simply dubbed Fraxchain. This month, more details are being fleshed out heading into its launch. Fraxtal’s $FXTL airdrop, incentives for developers, and the value accrual mechanism for FXS lockers (veFXS) make FXS and Frax, in general, more interesting to observe as the Frax chain gears into development.
Stay alert, stay informed ⬇
Key Points
$FRAX started as the first fractional-algorithmic stablecoin. It has since grown into an entire economy comprising multiple tokens and subprotocols.
Frax has its feet in the LST race, with its unique $frxETH and $sfrxETH model. While less established than the likes of Lido, Rocketpool, and other LST leaders.
The upcoming Fraxtal L2 is also expected to bring in additional revenue via its Sequencer. The chain will use $frxETH as the gas token, with fees potentially burned and distributed to $FXS lockers.
Fraxchain (Fraxtal)
Fraxchain, now dubbed Fraxtal, will become Frax’s EVM-compatible L2. It will be a hybrid rollup that combines an optimistic rollup architecture with zk-proofs. The core properties to be aware of are that $frxETH will be used as gas and the fees can be partially burned and distributed to $veFXS holders.
This will further enhance the supply growth of $frxETH, allowing the protocol to offer more of its core services to users who bridge their assets. By attracting new capital inflows, the goal is to increase the liquidity of the new chain. As more $frxETH is onboarded from other chains into Fraxtal, the supply available to be staked as $sfrxETH will be reduced even more. This is a significant boost for the staking yield that $sfrxETH holders will get.
At this time, $frxETH’s monetary premium (how much of the supply is held outside of the sfrxETH vault and the Curve LP) is largely driven by its demand on other chains. Using Fraxferry, $frxETH is bridged to a multitude of other networks where it can be provided as LP. Assuming Fraxtal gains significant usage and market share, this could result in millions of dollars in extra revenue for the protocol. For reference, Arbitrum has already generated nearly $80M in fees and ~$23M in revenue.
Jack of All Trades
Working on so many things at the same time might seem detrimental to a protocol. It may suggest that none of the product offerings have found product-market-fit (PMF) yet. However, stablecoins are one of the most well-positioned assets for reaching the $1 trillion marketcap maker after $BTC and $ETH. $ETH LSTs (Liquid Staking Tokens) are set to dominate Ethereum and L2s. Fraxtal might be the key that unlocks the monetary premium for $FRAX. Fraxswap, Fraxferry, and Fraxlend enable unique primitives that enhance the growth and adoption of distinct Frax assets.
Another counter-argument may be that the team keeps launching pre-existing primitives and forks. The team may be tweaking the underlying implementation to make $FRAX more robust. This is not necessarily true. The team has shown the ability to ship products fast while still innovating and being at the forefront of new technologies. Take the dual $ETH staking token model or Fraxtal, for example. The fact that $FRAX is the only non-fiat-backed stablecoin after $DAI indicates that their products are being used consistently and generating substantial revenue for the protocol itself.
$FXS – The Road Ahead
$FXS is the governance token of the protocol, but also where the value generated from the ecosystem goes. It has a max supply of $100M and >70% of it is already in circulation.
By relying on a $veToken model, $FXS holders can lock their assets for a maximum of 4 years to receive $veFXS. Lockers can also vote on governance proposals, receive emissions, and benefit from a yield boost. The longer the lock period, the greater the $veFXS balance that will be received. Locking 1 $FXS for 4 years is the equivalent of a balance of 4 $veFXS. This balance will linearly decay until the lock period expires.
As a $veFXS holder, you are entitled to the right of voting on gauges to direct emissions to different gauges, including Curve pools, lending pools, Uniswap positions… However, the greater benefit comes from earning protocol revenue. This revenue includes Fraxswap fees, Fraxlend loans, and revenue from AMOs (Algorithmic Market Operations performed on the open market to keep the peg tight).
It is important to keep track of this revenue in order to come up with fair estimates of the protocol’s valuation. Specifically, it will be worth it to keep an eye on Fraxtal. As an L2 with its own sequencer, this allows for more revenue generation. These fees can be expected to become a new source of income for $veFXS.
In its early stages, it may be difficult to value Fraxchain. Multiple L2s are worth >$1B and $FXS’s FDV is currently ~$550M. The chain is still in development and there might be delays. The buyback is a strategic move by DAO to load up on its $FXS holdings ahead of the launch of its own L2. In fact, the project has a $20M fund for this purpose.
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Our full 50+ page report goes over the various components of the Frax Ecosystem, utility and outlook on $FXS, and more.
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