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1/8 It's no secret that I love @fraxfinance's design. Even today, when FXS price plummeted, Frax remained stable
But there remain some design flaws that need shoring up—maybe one of the most obvious of these is the fact that Frax is (partially) collateralized by USDC. https://twitter.com/benjaminsimon97/status/1351717383182970880
But there remain some design flaws that need shoring up—maybe one of the most obvious of these is the fact that Frax is (partially) collateralized by USDC. https://twitter.com/benjaminsimon97/status/1351717383182970880
2/8 Using USDC as the non-FXS collateral has allowed for easy scalability thus far, and it also enables Frax to avoid the cap inefficiency caused by over-collateralization.
But it also means that Frax is far from decentralized in its current forms.
So what are the alternatives?
But it also means that Frax is far from decentralized in its current forms.
So what are the alternatives?
3/8 Well, Frax could use other crypto assets like ETH or (wrapped, ren, t)BTC, or even allow for a basket of crypto collateral (like Dai).
The problem is that these assets are all highly volatile and highly correlated.
The problem is that these assets are all highly volatile and highly correlated.
4/8 Frax would need to become over-collateralized like Dai to keep its peg, and even then, it would also face similar dangers as Dai did last March (b/c of the high degree of correlation).
So this approach is probably a no-go.
So this approach is probably a no-go.
5/8 What options are left?
Here's what I think is the most compelling one: Frax remains partially collateralized algorithmically (i.e. by FXS) and partially by crypto collateral, but the crypto collateral is perfectly hedged.
Here's what I think is the most compelling one: Frax remains partially collateralized algorithmically (i.e. by FXS) and partially by crypto collateral, but the crypto collateral is perfectly hedged.
6/8 Imagine, for example, that instead of using FXS + USDC to mint Frax, you needed to use FXS + a 50/50 combo of @synthetix_io's synthetic ETH and iETH. Or BTC and iBTC. Or some other combination of hedged (non-synthetic) collateral using on-chain options/futures.
7/8 Using hedged collateral would enable the protocol to free itself from its reliance on permissioned assets while also avoiding the hyper-correlation and over-collateralization that plagues Dai.
Plus Frax would still be fractionally algorithmic—that part doesn't change.
Plus Frax would still be fractionally algorithmic—that part doesn't change.
8/8 h/t to @Rewkang and @samkazemian for thinking through some of these ideas w/ me.
I haven't fully thought through the implications of this design yet, please do share any comments/feedback/criticism/concerns.
cc @kaiynne @zhusu @hasufl @ConvexMonster (synths/options gurus)
I haven't fully thought through the implications of this design yet, please do share any comments/feedback/criticism/concerns.
cc @kaiynne @zhusu @hasufl @ConvexMonster (synths/options gurus)
Also CC @KyleSamani, who shared with me some helpful thoughts on hedged collateral and stablecoins a little while back.
