Frax Finance

Authors Sam Kazemian Dennis @Denett

Summary

Unlock the FRAX-FXS Uni v2 LP pool to deprecate its FXS rewards and deploy a FRAX-FXS Fraxswap gauge.

Background and Motivation

The FRAX-FXS Uni v2 LP token is the oldest FRAX farm started at genesis on December 20, 2020. Other than the 12,500 FXS emitted per day across all gauges, ~8400 FXS is emitted through this single FRAX-FXS LP pair which accounts for nearly 40% of all FXS emissions.

By deprecating this pair and moving FRAX-FXS LPs to Fraxswap under the gauge system, FXS immediately becomes 40% more scarce as the amount emitted per day drops from 12,500+8400=20,900 to just 12,500 across the entire protocol. This is an important step in making the protocol more profitable, capital efficient, and overall consolidating all FXS emissions into the elegant gauge system.

The only potential reason to vote against this proposal is the danger of ~66% of the FRAX-FXS LP locked liquidity being set free. This means about 20m FRAX and 3.6m FXS would be unlocked and able to be sold immediately on deprecation of this pair. It’s important to consider the absolute worst case scenario that 100% of all unlocked liquidity is sold to exit the protocol. When we considered this, we concluded that 20m FRAX sold into Curve/Uniswap is immaterial and completely manageable with no danger to the peg. Selling 3.6m FXS could materially impact FXS price since most of the liquidity would be gone. However, this is mitigated by the protocol deploying FRAX-FXS POL into Fraxswap which it currently already has to the tune of $13m liquidity. The protocol could increase its POL in Fraxswap up to $50m to make the liquidity depth comparable to the FRAX-FXS Uniswap v2 pool. Additionally, the high yield opportunities in veFXS, cvxFXS, as well as the FRAX-FXS gauge that will come with this proposal will immediately give unlocked LPs a lucrative place to continue to earn yield and continue to support the protocol. We believe a sizable portion of early supporters and LPs will move over to the other lucrative staking opportunities for FRAX and FXS rather than exit. Nevertheless, even under the worst mathematical scenario that 100% of unlocked LPs sell both FRAX and FXS, we’ve shown the material impact is nothing to the peg and minimal to FXS price (as long as the protocol increases its FRAX-FXS POL on Fraxswap). In fact, we anticipate this could have a profoundly positive impact+sentiment on FXS price in the short to medium term as a large source of FXS emission is permanently cut from the market.

Overall, we analyzed that this is an incredibly lucrative opportunity for the protocol to cut down 40% of its inflation, make FXS more scarce, add a new gauge, and make use of its ability to deploy FRAX-FXS POL to create a lot of value.

PROPOSAL

For: Unlock FRAX-FXS Uni v2 LP & discontinue its FXS rewards. Deploy FRAX-FXS Fraxswap LP gauge.

Against: Do nothing

AMENDMENT 6/12/22

FRAX-FXS Gauge for this proposal should have a 1 year lock with 3x boost instead of the 3 year lock for 3x boost. This is because we’ve analyzed that we can get a higher amount of liquidity in each gauge and maximize the locking mechanism if we lower the max lock time to 1 year. Thus, gauge proposals will be for deployment of 1 year lock style unless otherwise specified.