frxETH's 100-day Rush: Where do high yields come from?

2023-02-02 18:44

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Frax's influence on Curve gives frxETH a competitive edge over stETH and others.

原文标题：《 frxETH 百日突进：高收益究竟从何而来？》

Original article by Frank, Foresight News

On October 21, 2022, frxETH, the Ethereum liquidity pledge product launched by Frax Finance, a hybrid algorithm stabecoin protocol, went online. As of today, exactly 100 days after the launch, frxETH has grown from zero to over 81,400 pieces with a value of about $1.3 billion.

The rapid growth of frxETH is driven by its high pledge yield of 8% or even over 16% on average in the past two months (in the same period, Lido was only around 5%). So where does Frxeth's high yield come from?

"Same and Different" in frxETH

Like Lido's stETH, frxETH is a liquidity pledge Token offered by Frax Finance to users who pledge Ethereum.

However, unlike stETH's direct rebase of pledge incentives to stETH users, frxETH users do not directly receive pledge incentives -- frxETH users need to repledge frxETH to sfrxETH if they want to obtain Ethereum pledge revenue.

However, the accumulation method of pledge reward is still frxETH, but not all users choose to pledge frxETH again as sfrxETH, so sfrxETH will accumulate more frxETH over time.

This means that when sfrxETH users exit, they can share in the entire frxETH reward pool, thus achieving a higher yield than similar products. For a simple example:

Assuming a total of 100 ETH in the Frax contract are pledged as frxETH, and only 30 of them are cast as sfrxETH through secondary pledge, the 30 sfrxETH will be divided proportionally among the 100 ETH pledge incentives (in frxETH form).

In short, the users who did not choose to pledge frxETH again to sfrxETH transferred their share of pledge incentives to sfrxETH users.

Arbitrage balance between frxETH and sfrxETH

So the question is, why do some frxETH users not choose the secondary pledge and are willing to transfer their benefits to sfrxETH users?

This is because Frax Finance offers frxETH users another revenue option -- deposit frxETH into the frxETH/ETH liquidity pool of Curve and reap the LP revenue.

From a user perspective, Frax Finance offers frxETH two revenue streams:

First pledge ETH as frxETH, then deposit in frxETH/ETH liquidity pool to eat Curve income, and at the same time transfer their own frxETH pledge income; First pledge ETH as frxETH, and then pledge it again as sfrxETH. In this way, the first part of frxETH pledged by the user can be obtained in addition to its own pledge income.

In theory, choosing frxETH/ETH liquidity pool (frxETH) and choosing secondary pledge (sfrxETH) in Curve will gradually form a dynamic arbitrage balance due to the difference in rates of return, thus keeping the rates of return of two different options in the same range.

According to Frax Finance's website, as of February 1, yields are indeed close: Curve's frxETH/ETH liquidity Pool (frxETH) at 8.24% and sfrxETH (sfrxETH) at 7.17%.

The Curve War behind the broken dream of 4pool continues

Then again, why was Frax Finance able to incorporate Curve pool revenue differentiation into its liquidity pledge product? How to keep the frxETH/ETH liquidity pool high yield?

一言以蔽之，因为 Frax Finance 持有最多的 Convex 治理 Token CVX（20.5%），而 Convex 控制着一半以上的 Curve 投票权（veCRV），这就给了 Frax 利用巨额汇率影响 Curve 的奖励排放，进而创造更高收益的可能（延伸阅读《读懂日益激烈的「CRV 争夺战」，Convex 如何「挟 Curve 以令稳定币诸侯」？》）。

At this point we might start with a bit of history.

In April 2022, Terraform Labs released a new proposal to launch UST, FRAX, USDC and USDT 4Pools on Curve, directly referring to the 3Pools (USDT, USDC and DAI) that were at the core of the Stablecoin market at the time.

To some extent, DAI's success in maintaining its hooks is due to the deployment of 3Pools on the Curve.

Therefore, Terraform Labs originally conceived that Terra and Frax Finance, as the two largest agreement holders of CVX, could influence the incentive policy of Curve through the huge bribe of vlCVX to maintain the deep liquidity in the 4pool. This makes 4pool the most liquid and frequently used cross-chain stablecoin pool.

This not only means to realize the subversion of 4pools to 3 pools, namely UST and FRAX to replace DAI in the market, but also can further change the track pattern of Stablecoin track.

However, UST/Terra's collapse in May 2022 put an abrupt end to the idea and Frax Finance's plans.

But six months later, Frax Finance cashed in on its impact on Cureve with the launch of frxETH.

To sum up, Frax Finance has found a differentiated competitive advantage for frxETH, which is different from stETH and other similar products, through its influence on Curve -- a choice of higher returns under the arbitrage balance between frxETH and sfrxETH. More hidden behind the frxETH/ETH anchoring regulation and other complex product logic.

100 days, from 0 to $1.3 billion, with the approach of Shanghai upgrade node in March, whether frxETH will become a different number of Ethereum liquidity pledge track, it remains to be seen.