Proposal to add FRAX Pool

Background

FRAX is a redeemable stablecoin with a dynamic collateral ratio that adjusts based on market demand for FRAX. Frax is unique among recent stablecoin designs in that each FRAX is always redeemable for $1.00 worth of assets from the Frax protocol. This has kept the price of FRAX in a relatively tight band around $1.00, making Frax an ideal asset for a Shell pool.

Since launching in December 2020, the circulating supply of FRAX now exceeds 80 million, with daily volumes regularly ranging from $10-20 million. FRAX pools currently have over $150m of liquidity. The protocol has also experienced a major expansion and contraction cycle without a significant deviation from the $1.00 price target.

Additional Resources on Frax

Whitepaper: Introduction - Frax ¤ Finance

Website: https://frax.finance

Twitter: https://twitter.com/fraxfinance

Codebase: frax.finance · GitHub

Documentation: https://docs.frax.finance/

App: https://app.frax.finance/

Audit: https://certik-public-assets.s3.amazonaws.com/REP-Frax-06-11-20.pdf

Proposed Asset Weights

50% - FRAX
16.7% - USDC
16.7% - USDT
16.7% - DAI

Open to input for suggestions on weights to best maximize liquidity and utility on Shell.

What are the points of centralization / smart contract / financial risk?

While FRAX has shown tremendous stability, it is still early days for the protocol. The team is in the process of transitioning to a fully decentralized governance process. Because USDC is collateral partially backing each FRAX, FRAX also inherits some USDC risk. Future versions of the protocol will diversify and potentially eliminate this risk.

From a smart contract perspective, the smart contracts have been audited and reviewed by community members and leading security experts in the industry. However, as we all know, this is no guarantee that the contracts are flawless. The team continues to follow industry best practices and engage outside experts to remain vigilant for any potential issues.

The main financial risk for FRAX is that the FRAX peg would break. To date, the peg has been resilient. FRAX is designed to always be redeemable for $1.00 of assets and approximately 86% of the outstanding FRAX supply backed by USDC. The Frax team’s overriding priority is to maintain a strong peg for FRAX. Accordingly, other parts of the Frax protocol are designed to absorb volatility so that FRAX maintains the peg. The FRAX protocol also has approximately $20m of capital locked within the system for up to 3 years, which provides liquidity in times of volatility.

How will this pool attract TVL?

Increasing integrations and utility should drive demand for FRAX. Given existing uniswap routing limitations, there is currently limited liquidity connecting FRAX and DAI / USDT. This is an opportunity for Shell. Shell’s tight stablecoin pools also offer an arbitrage tool to help maintain the peg of FRAX. A Shell pool could attract significant arbitrageurs and lead to a deeper integration in the Frax protocol.

What is the project’s vision and how does Shell fit into that?

Frax’s vision is to create a decentralized, stable, scalable, and capital efficient digital money. A Frax pool on Shell could assist Frax by increasing integration in the DeFi ecosystem while also providing an important tool to help maintain the peg. A Frax pool on Shell could benefit Shell by increasing platform TVL, volume and fees while furthering Shell’s objective of creating an internet monetary system using stablecoins.

Please let me know if you have any questions or suggestions.

3 Likes

One thing to consider is that the more tokens you add to the reserve, the thinner the liquidity will become. If all three tokens, (USDT, USDC, DAI) are strategically important, then I think we should include them. But if one or two are more important than the others, then we can either exclude a stablecoin or reduce its weight. For example, if DAI is less important we could so a (FRAX 50%, USDT 20%, USDC 20%, DAI 10%). I don’t have a strong opinion and would defer to Frax team or Shell LPs.

2 Likes

Thanks Kenny. It’s fine to adjust the weights - there are other pools for these three assets that are nearly equal weight - I’m agnostic to the exact weights. I see the Shell with DAI / USDC / USDT / SUSD - the weight says 30/30/30/10 but then the reserves are much more heavily weighted towards USDC and USDT. If that’s the liquidity profile for Shell LPs, then I’m fine being heavier in those two and lighter on Dai.

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Would this pool receive any liquidity mining from FRAX?

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I think this could be an opportunity for strong strategic partnership that would offer differentiation for both Shell and Frax.

I’m not one to speak on technicals, but if Shell had a pool that integrated with all of Frax’ backed collateral, the arbitrage would help maintain FRAX while offering a niche differentiated trading pool for Shell

It would be up to the Frax community, via governance, to decide.

this would be a pool consisting of USDC+aUSDC+cUSDC+yUSDC by the way. Not sure if Shell is optimized for interest bearing stablecoins, but I have no doubt the dev team could pull this off.

I think we need to consider what value we’d be adding to Frax. Pairing FRAX with USDT and DAI kinda goes against their strategy, introducing unnecessary risk into the pool. Whereas adding a pool consisting of the collateral already backing their protocol seems value-added for both parties.

I’m not sure we have decided anything regarding the reserves the assets would be held in - but it is definitely possible to hold the reserves in these other protocols. It adds a lot of gas to any given transaction which would truncate the number of swaps the pool receives, but bears interest for the LPs.

There is also the added risk. Compound and Aave seem like solid bets, but with the recent hack of YFI, which was in effect a basic oracle attack, I’m not that bullish on including them at least for the time being.

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Following up here - an interest bearing pool would be pretty gas intensive. One thing to note - currently there is a lot of liquidity for FRAX/USDC (uniswap) and 3pool is on the way (FRAX/ USDC/USDT,DAI). The shell pool could emulate the 3pool or focus on USDT or DAI and be a source of deeper liquidity for those. I’ll defer to the Shell team / LPs but let’s make a decision soon and get this going.