Alchemix Finance

FRAX Finance, a distinguished partner within the decentralized finance ecosystem, has recently launched their innovative ETH2 liquid staking derivative (LSD) called Frax ETH (frxETH). This unique solution is characterized by a two-token system, wherein users depositing ETH into FRAX ETH receive frxETH, representing 1 ETH locked with FRAX’s validators. To earn ETH2 rebases on their frxETH, users are required to stake it in sfrxETH.

This novel approach offers multiple benefits. Unlike stETH (wstETH) and rETH, frxETH staked in sfrxETH remains within that contract, distinguishing it from tokens that receive ETH2 rebases regardless of their utilization. Rocketpool and Lido currently face challenges as a significant portion of their token supply is being used for liquidity provision, complicating liquidity support and increasing associated costs. Furthermore, as the imbalance leans towards more LSD ETH, the rebases intensify these imbalances.

The dual-token system of frxETH addresses these issues by reducing the cost of incentivizing liquidity provision pools. FRAX supports it with convex bribes and fxs emissions, offering a specific yield at any moment. Moreover, frxETH holders can opt for simple staking or liquidity provision. This strategy eliminates the need for FRAX to incentivize the entire liquid supply of frxETH. Additionally, as liquidity providers do not earn ETH2 rebase rewards, the effective rebase rate for frxETH is higher compared to other LSDs.

We propose introducing an frxETH strategy to the Alchemix protocol. Considering its novelty and alpha vault status, we advise caution initially and suggest implementing a deposit cap of 100 frxETH for the vault. While the yields are considerably higher than stETH’s, it is essential to carefully approach new contracts. In Part B of this governance proposal, we will explore increasing the frxETH cap.

A vote “for” approves adding the frxETH strategy to Alchemix with an initial 100 fxsETH deposit limit A vote “against” rejects adding frxETH to Alchemix.