November 6, 2023
6 min read
In the ever-evolving DeFi landscape, the search for stability and efficiency remains a top priority for investors and users. To address this challenge, a groundbreaking solution known as Frax Ether has emerged, offering an innovative approach to combining the benefits of stable assets with the power and flexibility of the Ethereum network.
In this article, we will delve into the principles behind Frax Ether, exploring its unique features, advantages, and potential implications for the rapidly expanding world of decentralized finance. We will examine how Frax Ether achieves stability, its collateralization model, and the economic underpinnings that solidify its place as a promising addition to the DeFi ecosystem. So, let's embark on this journey into the world of Frax Ether and unravel the revolutionary potential it holds for the Ethereum network.
Frax Ether (frxETH) is a liquid ETH staking derivative that utilizes the Frax Finance ecosystem to enhance staking yield and simplify the process of earning interest on ETH. frxETH acts as a stablecoin loosely pegged to ETH. 1 frxETH always represents 1 ETH. It's achieved by the fact that the amount of frxETH in circulation always matches the amount of ETH in the Frax ETH system.
When ETH is sent to the frxETHMinter, an equivalent amount of frxETH is minted. Holding frxETH on its own is not eligible for staking yield and should be thought of as analogous to holding ETH. Frax ETH Minter (frxETHMinter) allows to exchange ETH for frxETH, bringing ETH into the Frax ecosystem.
In the Frax ecosystem, there are two forms of ETH: frxETH (Frax Ether) and sfrxETH (Staked Frax Ether).
sfrxETH is an ERC-4626 vault that earns staking yield from Frax ETH validators. By depositing frxETH into the sfrxETH vault, users can earn staking yield. Over time, staking rewards lead to additional frxETH being minted and added to the vault. Users can redeem sfrxETH for more frxETH than originally deposited. The exchange rate of frxETH per sfrxETH increases with added staking rewards, and holding sfrxETH gives a proportional share in the vault's frxETH and staking rewards, similar to auto-compounding tokens like aUSDC and cUSDC.
Frax Finance is a fractional-algorithmic stablecoin protocol that creates the decentralized stablecoin FRAX using collateralization and algorithms. It adjusts the collateral ratio based on the market situation and currently accepts stablecoins as collateral, with plans for more volatile collateral in the future.
Before Frax, stablecoins were either collateral-backed or algorithmically minted. Frax combines the best of both worlds to create the first fractional-algorithmic stablecoin protocol.
The project started in May 2019 as Decentral Bank and was founded by Sam Kazemian, Travis Moore, and Jason Huan.
frxETH is an ERC-2612-compliant stablecoin that shares code with Frax and FPI stablecoins. sfrxETH is an ERC-4626 compliant vault, obtained by approving the sfrxETH contract as a frxETH spender and using mint() or deposit() functions. Validators generate staking yield, minting frxETH sent to the sfrxETH contract. Rewards are synced, allowing the redemption of sfrxETH for more frxETH. Reward distributions are smoothed over time cycles to prevent malicious users from stealing from the vault. frxETHMinter mints frxETH when it receives ETH and automatically spins up new validators with deposits. The withdrawal address is set to the Frax treasury contract. Funds may be withheld when ETH is submitted for market-making purposes.
Frax Ether, as mentioned above, is an asset known as Liquid ETH Staking Derivative (LSD). LSDs are designed to allow users a different way (sometimes a simpler way, sometimes - more profitable) to stake their ETH. As its name implies it's a derivative that represents the ETH locked in the staking contract.
Rocket Pool is one such project in the Ethereum ecosystem. It aims to create a decentralized Ethereum staking mechanism by connecting independent node operators with ETH stakers. With Rocket Pool, only 16 ETH is required to run a node instead of the standard 32 ETH, as the remaining 16 ETH needed to set up the node is provided by rETH liquid stakers. The rETH liquid stakers earn rewards over time and pay a 15% commission to the Rocket Pool node operators, who benefit from higher profits compared to regular staking yield.
Lido is currently the leading staking service provider, handling 29% of all ETH staked. Their model is simple: users provide ETH to be staked and in return receive stETH. Lido then directs the users' ETH to staking institutions for it to be staked on the Ethereum network. Lido charges a 10% fee on staking rewards, with the proceeds split between node operators and the DAO Treasury. This model has garnered significant adoption in the DeFi ecosystem, with users staking 4.8 million ETH (worth around $5.8 billion) through Lido. Lido's main liquidity gateway is the Curve protocol, specifically the stETH-ETH pool, which provides high liquidity and builds trust among depositors.
However, one potential drawback for Lido is that its model lacks alternatives for users seeking to maximize staking yield. This could pose a threat as new models emerge and the Shanghai fork simplifies arbitrage opportunities for liquid staking tokens. If Lido fails to offer higher-yield options, it may lose market share in the future.
The top cryptocurrency exchanges for trading in Frax Finance are Uniswap v3 (Ethereum), Curve (Ethereum), THENA FUSION, Ramses V2, and Wombat Exchange. It's logical to assume that as the coin's popularity continues to rise, more exchange platforms will implement tools for exchanging frxETH.
Since frxETH is an ERC-20 token, the options for storage are truly plentiful. Most wallets (regardless of whether it's a cold wallet, hot wallet, etc) offer support for these tokens. Atomic Wallet is no exception! Atomic Wallet supports all ERC-20 tokens, even if some of them are not enabled by default.
At the time of writing this article (13.07.2023), the price sits at $1,881.41.
Frax Ether price chart according to CoinGecko.com
Over the last 24 hours, the trading volume for Frax Ether (frxETH) was $8,028,233.
frxETH has a market cap of $474,592,484.
The Frax Ether (frxETH) all-time-high of $2,134.61 was reached on April 16, 2023.
At the time of writing this article (13.07.2023), the circulating supply of Frax Ether is 238,027 frxETH.
Just like Ethereum itself, Frax Ether does not have a predetermined maximum supply.
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