One part of the recent RFC with Frax Finance was the addition of their stablecoin, FRAX as a new collateral asset for alUSD. The RFC document was to gauge sentiment about both the addition of an alUSDFRAXBP AMO and FRAX as alUSD collateral. Therefore, the passing two separate proposals for each the AMO and collateral are required to enact them both.
Frax is currently the second largest decentralized stablecoin by market cap. When FRAX first launched, the only way to generate FRAX was via a dual deposit of both their governance token, FXS, and USDC, with the ratio generally being 80% USDC and 20% FXS. In this setup, FRAX is a semi-algorithmic stablecoin with a portion of its backing being in the form of its native governance token. Frax had mild success with this formula, generating over 100m FRAX via this method, however their protocol found a safe avenue for hyper-scaling via the introduction of the AMO (from which the Alchemix AMO was modeled).
While Frax has several AMOs deployed, their main one historically has been the FRAX3CRV AMO. This mechanism works by setting a minimum accepted price for the FRAX stablecoin. Currently, they target a peg of 1 FRAX per USDC. If FRAX is at or above this peg, then the protocol can directly mint FRAX into the liquidity pool, and conversely, if it is under the peg, Frax can withdraw and burn FRAX from the AMO to restore its peg. Then this Protocol Controlled Value (PCV) is put to work earning yield in Convex, with the farmed assets going to bolster the FXS price and increasing their voting influence on Curve gauges. This strategy then created a flywheel effect, where their liquidity incentives became ever more profitable for the protocol while also increasing their market share, making FRAX the second largest decentralized stablecoin.
While some people may understandably have some hesitation around a semi-algorithmic stablecoin, especially after what had happened to Luna and other algo-stables, since the Frax protocol owns the vast majority of the FRAX in circulation, they are able to gracefully expand and contract with the market. While every other decentralized stablecoin saw a somewhat elongated period of depegging following the psychological damage done to LPs after the Luna meltdown, FRAX’s peg was stable because their AMOs properly contracted by removing and burning the right amount of FRAX.
Because of this, the risk assessors in the Alchemix core team felt confident enough in FRAX to present this proposal to the DAO. Some risks do exist for it much like all other stablecoin assets in the ecosystem, but none any more severe than any of the other accepted collaterals.
With the rollout of the Vesper and AAVE adapters, there are currently two different strategies we can readily plug into for FRAX.
The Alchemists on mainnet will be updated to include the following initial parameters for FRAX:
Accepted Collateral
FRAX, aFRAX, vaFRAX
Max LTV
= 50%
Initial Deposit Caps
aFRAX = $100k
vaFRAX = $100k
Repayment and Liquidation Caps
FRAX = $100k per 60 minutes
Maximum Loss
aFRAX = 5 bps (0.05%)
vaFRAX = 5 bps (0.05%)
In addition, we will deploy a FRAX transmuter that will follow the standard parameters of the other alUSD transmuters.
After the initial launch with the above parameters has proven to be stable and safe, Alchemix DAO will increase the capacity of FRAX strategies based on how the DAO votes on the following choices:
Choice 1: Conservative
Initial Deposit Caps
aFRAX = $1m
vaFRAX = $1m
Repayment and Liquidation Caps
FRAX = $500k per 60 minutes
Choice 2: Moderate
Initial Deposit Caps
aFRAX = $3m
vaFRAX = $3m
Repayment and Liquidation Caps
FRAX = $1m per 60 minutes
Choice 3: Aggressive
Initial Deposit Caps
aFRAX = $5m
vaFRAX = $5m
Repayment and Liquidation Caps
FRAX = $1m per 60 minutes