Frax is truly a juggernaut in the Curve Wars. They were early in accumulating Convex's native token CVX and hold the most of any DAO. They also pay the largest sums in bribes of any protocol to increase the APY of FRAX pools and increase their liquidity. This aggressive strategy seems to be paying dividends for FRAX as their usage continues to soar across DeFi, along with their profits.
Convex, the king of the Curve Wars
Convex has effectively won the Curve Wars by locking up the greatest share of the CRV token (which is used to vote on which pools get the highest APY rewards). They created a symbiotic relationship with Curve where their native CVX token can be locked and used as a proxy for CRV to delegate voting power. Protocols that lock up CVX tokens earn revenue in the form of APY yield and rewards. This is why Temple invested in CVX, and FRAX has as well on a larger scale.
Convex uses a platform called Votium which allows protocols to pay bribes to CVX holders in exchange for their votes to direct APY rewards to the liquidity pool of choice. FRAX pays by far the most bribes on Votium of any other stablecoin protocol. In a recent round, FRAX paid over $6.7m or, almost 42% of the entire voting pool.
Why is FRAX being so aggressive in this space?
As we outlined in our piece on the Curve Wars, protocols that participate in the Curve Wars, particularly stablecoins, receive incentives to do so. This improves the liquidity of their token and its use in the wider DeFi Market. More liquidity means less slippage and lower costs for trading their token.
FRAX bribes other protocols to vote for the FRAX pool on Convex, and this generates more revenue for FRAX while they also receive profit from the bribing scheme. For each $1 FRAX spends on bribes, they earn $1.7 in emissions. So their latest $6.73 million bribe netted them over $4 million dollars worth of profit in the form of gauge emissions. This is likely even higher since they own so much of their own liquidity. Further since they own so much CVX, parts of the bribe are just returned to them as rewards.
FRAX’s activity in CVX is highly beneficial to the protocol. Maintaining large liquidity pools of FRAX with attractive APY rewards helps maintain the coin’s peg to the USD, which is the most important aspect of all. The most significant FRAX pool is the FRAX3CRV pool on Curve. As of this writing, more than 1.5 billion FRAX is stored in this pool, which enables FRAX to be traded in the wider DeFi ecosystem more easily and with less slippage. FRAX can also use its large share of CVX tokens to direct APY rewards to the FRAX3CRV pool.
As a result of FRAX’s recent positive activity and effective strategies, the usage of FRAX has dramatically increased in in recent months. This has also led to a corresponding rise in the protocol’s earnings which have now topped over $750,000 daily.
The FRAX Gauge
FRAX Gauge is a platform that lets users vote with their FXS and veFXS on APY rewards for pools which contain FRAX. The rewards system incentivizes staking, which increases liquidity and thus trading efficiency for FRAX. Protocols will also be able to earn bribes in exchange for delegating their voting power. This will mark the beginning of the FRAX Wars a similar situation to the Curve Wars.
The Frax Wars and Convex
If there is a war going on in DeFi, Convex is sure to be on the front lines. Convex has begun making moves in the FRAX wars, locking up a large share of FXS tokens to begin to implement the same strategy that has been so successful for them on Curve. In fact Convex already controls more than 15% of the veFXS (locked FXS) supply. They have also created the cvxFXS (that have the same function as cvxCRV) token, which users will receive in exchange for locking their FXS tokens on the convex platform. It’s clear that they are looking to join this ecosystem in a big way.
DAOs and protocols will battle for FXS voting power to control the allocation of rewards on the gauge. These rewards are currently paid out in FXS. Over time the FRAX gauge will transition from giving out rewards in FXS to rewarding directly with FRAX. The TEMPLE/FRAX pool on the FRAX platform will help to keep the liquidity of TEMPLE high on the open market.
Locking FXS for more voting power
FXS can be locked to get veFXS at a multiple depending on the time you choose to lock, which increases your voting power. The maximum lock is 4 years and will produce a 4x multiplier, so 1 FXS locked for 4 years will give you 4 veFXS. This is not the same as having 4 FXS however, your veFXS will degrade over time back into 1 FXS by the end of the 4 year period.
FXS is an integral part of FRAX’s two-coin structure, and is used as a revenue capture token, and also as collateral for FRAX in conjunction with USDC and other assets. FXS is currently pumping in price because FRAX have announced they will be making an airdrop of their new token, the Frax Price Index (FPI), for holders of veFXS, staked FRAX-FXS LP, and tFXS on Tokemak. Convex has also said it will distribute the FPI airdrop to hodlers of cvxFXS. The snapshot for the airdrop is set to be taken on Feb. 20.
That's the end of our mini-series on FRAX! We are very bullish on everything their team are doing and feel that FRAX is definitely the right foundation for the Temple to be built on.