Thread by @WinterSoldierxz

1/ How do you build resilience as a stablecoin protocol?

Peg stability, sound monetary policy, and ample liquidity.

What if you could algorithmically program these characteristics AND survive a $900M supply shock?

@fraxfinance did. Here’s how ⬇️

2/ To understand the intricacies of @fraxfinance’s monetary policy, we must first understand the basics of $FRAX as a stablecoin.

3/ $FRAX is a fractional algorithmic stablecoin pegged to USD. It is minted/redeemed through a combination of $USDC and $FXS, @fraxfinance’s governance token.

4/ This means $FRAX is mostly backed by other stablecoin collateral and partially algorithmic. The split between $USDC & $FXS is determined by the protocol’s collateral ratio (CR).

5/ At a 90% CR for example,

Users must deposit $0.9 USDC + $0.1 worth of $FXS to mint 1 $FRAX

Conversely, users receive $0.9 USDC + $0.1 worth of $FXS if they redeem 1 $FRAX

6/ The protocol adjusts the CR based on $FRAX price movement to maintain the peg

If $FRAX > 1, CR is lowered to incentivize minting (Less $USDC per $FRAX)

If $FRAX < 1, CR is increased to incentivize redeeming (More $USDC per $FRAX)

7/ This is known as @fraxfinance’s base stability mechanism. Most stablecoin protocols apply a similar economic lever to control their peg.

But then, @fraxfinance did something unexpected.

They disabled $FRAX’s mint / redeem functions (unless certain conditions are met).

8/ This was a deliberate move to pave the way for Algorithmic Market Operations Controllers (AMOs). Instead of relying on market forces to peg $FRAX, @fraxfinance has found a way to do so algorithmically.

9/ AMOs deploy @fraxfinance’s $USDC collateral and automates $FRAX monetary policy.

10/ Each AMO has 4 features derived from the base stability mechanism

Decollateralize: - CR, + $FRAX supply

Market Operations: Maintain CR & accrue profit

Recollateralize: + CR, - $FRAX supply

FXS1559: Accounting ledger of profits for redistribution to veFXS holders

11/ Think of AMOs as smart contract modules that adjust $FRAX supply based on demand for $FRAX, which is represented by the price of $FRAX. Any deviation from $1 triggers a set of changes to restore the peg.

12/ Some AMOs also accrue profits for @fraxfinance through their operations, commonly known as seigniorage in #TradFi.

13/ @fraxfinance has 4 active AMOs:

Investor: Yield farm with $USDC in whitelisted protocols

Lending: Mint $FRAX into money markets for over collateralized borrowing

Liquidity: Deploy $FRAX & $USDC into DEXes to earn fees

Curve: Deploy $FRAX & $USDC into @curvefinance pools

14/ ~70% of $USDC collateral is deployed in @CurveFinance, where $FRAX’s peg is maintained on the open market.

@fraxfinance’s dominance on @ConvexFinance has allowed them to incubate the $FRAX <> $3crv metapool and $FRAX <> $USDC base pool via $CRV emissions

15/ Whereas the @CurveFinance AMO accumulates protocol owned liquidity (POL) to achieve four key objectives:

(i) Tighten $FRAX peg to absorb larger sell pressure

(ii) De/Recollateralize by minting/burning $FRAX & depositing/withdrawing $USDC into pools based on $FRAX price

16/

(iii) Increase $CRV / $CVX dominance by depositing LP tokens into @ConvexFinance to farm more of both tokens; and

(iv) Redistribute fees & LP rewards to $veFXS holders

17/ To date, @fraxfinance owns approx. 85% of the metapool and 31% of the base pool. The Curve (and Liquidity) AMO(s) have allowed Frax to accumulate a large amount of stable-LPs as collateral, most of which also includes $FRAX.

18/ Out of its 1B market supply, only 390M is outstanding $FRAX at its current CR of 93.75%. The rest of the $FRAX is owned by @fraxfinance as POL.

Think of the outstanding amount as $FRAX that requires collateral backing in case of a bank run.

19/ @fraxfinance holds $399M in protocol collateral, meaning for every outstanding $FRAX, there is $1.023 worth of assets or secondary market liquidity backing the stablecoin.

20/ TLDR; @fraxfinance has successfully implemented AMOs for

✅Algorithmic monetary policy

✅Peg stability & tightening

✅Seigniorage

✅Flywheel maximization

All the while remaining solvent.

21/ This isn’t financial engineering. It’s art. @fraxfinance

22/ If you like my work, pls like and RT the first tweet linked below:

https://twitter.com/WinterSoldierxz/status/1597618624549728256?s=20&t=9KCa3VktPGXSCoChJS87SQ

23/ I will publish my 36 page $FRAX research report for free over the weekend.

Follow me so you don’t miss it.

24/ Thanks to these #Fraximalists for providing great information and insight about @fraxfinance, $FRAX, & AMOs.

@nelsoncryptoman
@ologai
@eli5_defi
@OuroborosCap8
@bmv_explorer
@expctchaos
@NNovaDefi
@chasedevens

Full 36 page research report on @fraxfinance is out!

https://twitter.com/WinterSoldierxz/status/1599035814281121794?s=20&t=7aR7Opuk6gbgVYy3xKBjMA