Thread by @WinterSoldierxz

1/ @fraxfinance’s staked $ETH performance has been nothing short of spectacular in the past 30 days.

~500% TVL growth. 9.3% APR (vs 3% on @LidoFinance). All this during one of the worst months in crypto history.

Here’s how they did it.

#FraxFinance #LiquidStaking #Ethereum

2/ @FraxFinance launched its $ETH liquid staking protocol in Oct 2022.

To understand the basics of its mechanism, check out my tweet below ⬇️

https://twitter.com/WinterSoldierxz/status/1583418700123688960

3/ In the liquid staking landscape, two token models are predominantly adopted.

- Single token design with either a rebase model to represent value accrual or value appreciation

- Dual token mechanism separating the ether-pegged derivative asset & the interest-bearing token

4/ @LidoFinance is the market leader implementing the rebasing mechanism.

$stETH is minted at a 1:1 ratio. Users’ $stETH balances increase every 24 hours to earn rewards.

5/ There are shortcomings with Lido’s model which Frax’s two-token model has eliminated.

6/ Frax’s Ether strategy comes with two tokens:

$frxETH - A stablecoin loosely pegged to $ETH. 1 $frxETH = 1 $ETH

$sfrxETH - A staking accrual token for profit generated from Frax Ether validators

7/ Under its unique two-token model, $ETH holders have two ways to earn yield:

i) Be an LP on @CurveFi (or other #DeFi protocols) for the $frxETH <> $ETH pair

Or

8/ ii) Stake their $frxETH for $sfrxETH to get 90% of rewards earned from validating,

@fraxfinance takes a 10% haircut of which 80% goes to Frax Treasury (for distribution to $veFXS holders) & 20% to an insurance fund.

9/ The value of $sfrxETH appreciates over time when the accrued staking reward is added to the vault, allowing users to redeem $sfrxETH for more $frxETH than originally deposited, which removes the drawbacks of rebasing

10/ The offerings of $frxETH & $sfrxETH are more advantageous over Lido’s $stETH, which adopted the rebasing model out of necessity

11/ As validator rewards accrue, the intrinsic value of 1 staked $ETH would gradually exceed 1 $ETH.

However, maintaining the peg at 1:1 ensures adoption of $stETH as collateral, which makes lending & borrowing more capital efficient.

12/ Thus, the peg is maintained through rebasing by calculating the amount of $ETH accrued & sending the equivalent amount of $stETH to token holders.

13/ However, rebasing tokens are not supported in many leading #DeFi platforms, including @uniswap, @1inch, & @sushiswap.

In other words, users forfeit Lido’s rebasing rewards (5% APR) from $ETH validating when they deposit $stETH as an LP.

https://twitter.com/definikola/status/1503168860668760068

14/ @fraxfinance recognized these inefficiencies and developed a dual token model to maximize yield AND capital efficiency. They leveraged their resources to build a robust liquidity structure as strategically as possible for $frxETH.

15/ To start, @fraxfinance leveraged its dominant position in $CVX to bootstrap liquidity for $frxETH <> $ETH pool and offered boosted LP rewards via $CRV, $CVX, $FXS.

16/ With Curve’s $frxETH <> $ETH pool supercharged, users were enticed to swap $ETH for $frxETH and provide liquidity for the Curve pool.

A $frxETH <> $ETH LP can earn up to 15% APR by + depositing their LP tokens on @ConvexFinance + locking $FRAX for $veFXS boosting

17/ By redirecting $frxETH holders to be LPs on @CurveFi, @fraxfinance successfully “incubated” $sfrxETH’s staking yield by increasing its $ETH holdings for validator rewards without diluting the rewards distribution

18/ @fraxfinance also built a solid foundation of liquidity for its $ETH derivative tokens on @CurveFi in the process.

19/ There are currently 24,018 $frxETH tokens but only 7,897 $sfrxETH tokens, meaning ~7k $sfrxETH is earning validator rewards from 24k $ETH.

$sfrxETH’s APR is around 9%, up from the 3% APR initially offered when I first covered the protocol a month ago.

20/ The dual-token strategy will ultimately enable Frax to bootstrap enough liquidity for higher APR rewards from liquid staking.

21/ I anticipate a convergence of the APRs between the @CurveFi pool and $sfrxETH in the near future.

$frxETH is just getting started. If you have spare $ETH, 9% ~ 15% yield paid in more $ETH is a no brainer. Get in while you’re still early.

22/ Here’s a list of KOLs who have shared in-depth analysis & insights on Frax’s liquid staking you should not miss:

@Crypto_McKenna
@0xCrypto_doctor
@CryptoGrills
@defi_mochi
@Subli_Defi
@DAdvisoor
@zerototom
@napgener
@CompleteDegen
@CryptoDragonite
@Crypto_Bandits

23/ @TheDeFISaint
@archipelabro
@Only1temmy
@fraxbull1
@flywheelpod
@CryptoGrills
@DeFiDave22
@samkazemian
@ElBarto_Crypto
@ATTRIUS_

24/ Like RT & follow if you enjoy my content

25/ Correction: Staking APR on Lido Finance is 5.4%. Not 3%.