Last week, we hosted our discussion on the Stablecoin and Synthetic dollar Landscape, with the teams from Ethena, and Liquity (read our notes here). Of course, there is a plentiful amount of builders in this sector. One such example is f(x) Protocol. The protocol, which launched in August of last year, has seen a steady and sustainable upward TVL trend, at least for crypto.
The protocol lives on ETH mainnet, and offers an ‘amplified ETH’. At its core, ETH is provided as collateral and then split into a dual-token system, with one token representing a stable or pegged version of ETH and the other a leveraged ETH position.
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Background on f(x) Protocol
f(x) Protocol is a dApp that creates a new class of decentralized low volume asset paired with a new leveraged long $ETH perpetual token. The protocol stems from Aladdin DAO, a decentralized builder and incubator of cutting-edge DeFi protocols.
f(x)’s uniqueness comes from its dual token model derived from ETH collateral. This could be thought of as somewhat similar to Pendle, which separates the principal token from the yield. f(x) protocol's origin from the $USDC crisis, aiming to create a stablecoin not pegged to any specific dollar-denominated unit, using a design that separates tokens into stable and volatile versions, with $fETH tracking 10% of ETH's volatility and $xETH absorbing the rest.
This model comes with some advantages. fETH absorbs a small amount of ETH volatility, which is already usually one of the least volatile assets in the space as it holds the 2nd highest marketcap. This allows users to still experience some upside on their ~stablecoin, while also significantly limiting downside. fETH’s primary use case for many is probably to hedge against other positions while still having a possibility for some profits as the crypto market trends upwards.
xETH on the other hand, functions as a perps position. But since it is simply a token, funding fees are not a factor, and leverage is variable. There are also no liquidations, users can wait out periods of volatility if they think the market value of ETH will eventually return to their open/mint price.
The collateral backing both fETH and xETH is made up of standard ETH as well as prominent LSTs like stETH and frxETH (xstETH and xfrxETH, respectively). In this format, leverage is limited, and crazy amounts of leverage aren’t really available, for better or worse. The amount of leverage applied to xETH varies and the maximum is 4-4.3x.
When it comes to using the platform, users can deposit a variety of USD stablecoin and ETH derivative assets. From there, the protocol’s native tokens can then be minted (or redeemed), and simply held in a wallet to gain varying levels of exposure to ETH. Now, users also have the option to mint fxUSD, a USD stablecoin not affiliated with ETH.
Background on fxUSD
The f(x) Protocol design evolved to eventually introduce the stablecoin asset in fxUSD, aiming for a 1:1 peg while transferring all volatility to the x-token side. This design uses an invariant formula for stability rather than relying on external incentives or complex strategies. novel peg mechanism and the upcoming inclusion of two Liquid Staking Derivatives (LSDs), $stETH and $frxETH, at launch. fxUSD is decentralized compared to competitors like USDC and USDT, while also having a native yield. The protocol also aims to maintain a strong peg.
fxUSD is still in its infancy; in fact the seeding event for the stablecoin was just completed on March 6th. Cryptovestor, contributor at f(x) Protocol, draws a semi-comparison with Ethena, as the protocol doesn’t describe itself as a stablecoin perse, but rather a Synthetic dollar/ tokenized basis trade. fxUSD is different in the sense that its returns are derived from ETH staking yield. The yield for fxUSD is expected to range from 7-15%, depending on ETH base staking rate as well as token holders who forfeit their yield.
Future Plans
f(x) Protocol has another upcoming product, a $fxUSD auto-compounding vault on Concentrator, which enhances yields through a clever leverage system and possibly a looping mechanism, potentially doubling the investment and significantly increasing the effective yield on stablecoins.
The other aspect of the f(x) Protocol equation is FXN, the native governance token. Ethereum staking yield is distributed to the f(x) treasury as well as $FXN stakers and foreshadows the development of new products like LRTs for stable/leveraged pairs. There are plans for an immediate launch of LRTs following $fxUSD's introduction, aiming to offer a stable farming environment without Ethereum price risk exposure, a novel approach in the field. The team has also teased the potential creation of a lending market, FXLend, utilizing $fxUSD as its primary point of stability, with anticipation for future developments.
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