Introduction

Fundamentals for FRAX/FXS can be split into two separate categories: intrinsic and value. Intrinsic being the value attributed to FXS by serving as "collateral" to FRAX issued beyond collateral-ratio, and value being its potential to produce income.

Table of Contents

Intrinsic

• FRAX system can be viewed as a digital bank, where:
  • Liabilities = FRAX issued → Buyers of Frax can redeem their invested value at any time
  • Assets = Holdings of Frax → These are generally current assets as the protocol doesn't take any illiquid positions
  • Equity = FXS market cap → Holds all financial (and governance) rights over assets PnL
• FRAX Protocol Balance sheet at current state:
  • Assets: $ 1,384,163,941
    • Frax USD Denominated Treasury: $891,294,915
    • Frax Crypto Assets: $31,754,415
    • FXS Market CAP: $461,114,611
  • Liabilies: $ 1,419,810,672
    • Frax issued redeemable for 1 USD: $ 1,419,810,672

Frax USD Treasury Value - Dune→ ‣

Frax Crypto Treasury Value - Dune→ ‣

How the value of FXS changes

• As demand for FXS expands/contracts the value (market cap) of FXS moves accordingly.
• Since supply supply is capped (100MM) and deflationary (FXS1559), market cap can only be adjusted by price.
• Intrinsic value is tends zero as collateral ratio approaches 100%, thus yielding a fair value equation:

$intrinsicValue = Frax Market Cap * (1-collateral Ratio)$

• The market generally attributes a premium to IV
  • Currently we are trading at a 60% premium or on the 5.8 percentile of all observations

Full series FXS vs IntrinsicValue - ‣

FXS Supply

Zoomed last 200 days - ‣

FXS short pricing mechanics to be aware

• Frax v2.0 allows the treasury to enter into open market operations issuing FRAX and lending (distributing) it through debt markets supply (i.e. FRAX Lending)
• This allows Frax Lending AMO to essentially control the borrow market rate for FRAX

AAVE Frax Variable Borrow Rate

• As described in the documentation:
  • When conditions are good the AMO will apply almost subsidized rates to drive usage and integration.
  • When conditions are bad the AMO may restrict supply driving rates higher, increasing the cost of shorting FRAX.

Value

• FXS collects the full economic benefit of the Frax ecosystem, and can be viewed as a digital bank
• Value is derived from cash-flows generated from open market operations

Revenue

• V1 established the first use case and value drivers:
  • Usage fees (minting and redeeming)
  • Profit from open market operations (liquidity & lending)
• V2 expands on V1 by providing a framework for community implemented Algorithmic Market Operations or AMOs.
• Currently the protocol generates an average of $ 93.65-MM Annually, yielding a deflation rate of ~20% p.a.
  • Market Making (LP): $ 90,000,000
  • Yield on USD: $ 3,650,000
  • Fees: negligible
• Income is transmitted to FXS holders in the form of buybacks then burns → supply reduction (deflation → ~20%)

LP revenue - https://dune.com/seba/Frax

USD Yield - https://dune.com/seba/Frax

Growth

• Revenue growth is directly related to usage and use cases
• Frax has expressed priority number one to be stability of FRAX, which builds trust in the mechanism and drives adoption
• The community has driven several integrations and use cases, the main ones being:
  • Curve 3pool
  • AAVE
  • stakeDAO
  • templeDAO
  • olympusDAO

FXS Holders growth - https://dune.com/seba/Frax

FXS Holder distribution - https://dune.com/0xouija/0xOuija

• The cost of growth is in the form of FXS issuance (dilution) in gauges, which provide rewards for liquidity providers.
  • Current gauges issue a total of 87.5k FXS per week (https://app.frax.finance/gauge)
  • At current FXS price $32MM yearly or ~30% of revenue
  • Adding 4.5% inflation pressure, decreasing deflation to ~15.5%