Seasons are relative to your position in space and time. A freezing January evening in Vancouver coincides with a blistering afternoon in the Australian desert. While the bears up north are left hibernating, those down south rampage about.
The same can be said of DeFi and CeFi. As highlighted over the past few posts, innovation in decentralized finance continues at a blistering pace, much of which is due to the seminal “Gauge System” pioneered by Curve Finance.
The idea is simple: instead of emitting inflationary tokens to arbitrary liquidity pools, the DAO decides which pairs are most warranted to receive rewards. Furthermore, one can only participate in this governance process if they “vote-escrow” their tokens, locking away the liquidity for a period of time. The longer you lock, the more power you get.
The result? A healthy “gauge economy” on Curve, filled with many different liquidity pools that each vie for a share for CRV emissions.
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This model was quickly borrowed by other major protocols, one of which being Curve’s biggest stablecoin: Frax Finance.
DeFi’s First Fractional-Algorithmic Stablecoin
There is already a coterie of stablecoins in DeFi. So ubiquitous are these tokens that fiat-pegged assets have provided the rails for fiat-to-crypto transactions since as early as 2014, cementing their role as key intermediaries between DeFi and TradFi. But Frax is unlike any other.
Frax combines the established mechanisms of algorithmic stablecoins, which rely on smart contracts to maintain their peg, and collateralized stablecoins, which rely on hard “dollar-assets” as collateral to do so. It leverages a governance token, FXS, to mediate its peg while holding USDC to supplement its reliance on digital assets. With a dynamic collateral ratio, Frax has the highest capital efficiency of any stablecoin, while remaining trustless, scalable, and true to on-chain decentralized finance.
Governance Liquidity
Like any stablecoin, Frax needed liquidity to swap between its governance token, FXS, and the dollar-pegged FRAX token. It derived this liquidity from the FRAX-FXS pool on Uniswap v2. Obviously, this pool is instrumental to the peg (and success) of the protocol, so its liquidity is deeply incentivized. In fact, it’s so incentivized that it accounts for 40% of Frax emissions alone. The remaining 60% of emissions are distributed per the gauge system described above.
However, now that the protocol has built deep integrations with the Curve ecosystem, its need for a dedicated emissions pool has passed.
The Unlockening
On June 9, 2022, Frax proposed a game changer on its governance forums. Rather than retaining an inefficient LP that severs Frax emissions from its gauges, the protocol released a proposal to unlock the liquidity pair, migrate the FRAX-FXS liquidity mechanism to its new DEX, Fraxswap, and convert the pool into a gauge. The inflationary rewards will be turned off, reducing emissions by 40%.
**We repeat: 40% reduced inflation, 40% increased scarcity, and materially more capital efficiency. **
On Fraxswap, FRAX-FXS liquidity will be controlled by a gauge to democratize and streamline emissions allocations. Now, the power lies with the voters to determine what proportion of Frax emissions the gauge may earn, and with the new one-year lock period proposal, liquidity providers will be afforded more flexibility than ever before.
FRAX-FXS Incentivization
Pitch has been processing vote-incentives for Frax’s gauges for almost six months now, and the Frax-FXS Fraxswap gauge will be no different. The gauge’s magnitude will transform the reward landscape, and Pitch will be at the cornerstone of that pivot point, working in tandem with Frax to incentivize deep liquidity on the pair. Moreover, the unlocked FXS will also give token holders the ability to stake for pitchFXS, boasting three digit APR figures with unparalleled access to governance yields and liquidity. This is a major win for veFXS and pitchFXS, both of which directly earn yield from the Frax governance economy. More about pitchFXS’s rewards can be found below:
Last week we pointed our sights toward the Frax summer. Some called us delusional. Others joined us in our excitement as we embraced the growing stablecoin and governance landscape. Things are only Ghoing to get bigger from here. The thawing has only begun; for we now see the sunshine that radiates so brilliantly from the iconic flywheel.
Learn More
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