March 29, 2023: $WETH Replacement Program ππ
Frax pushes $frxETH / $WETH flippening, teases v3 plans
If you like reading thoughtful reports on DeFi (and if youβre reading this newsletter we certainly hope thatβs why youβre here), check out this piece on the USDC depeg by EigenPhiβ¦
$WETH β $frxETH
βBy my hand, $WETH will witherβ
βSam Kazemian, probably
We hope youβve been following Frax Finance closely. The ambitious team has a habit of dropping all its alfa in public and then delivering on their lofty promises. Why waste time hunting for alfa leaks elsewhere when itβs handed to you on a silver platter?
For example, we mentioned a month and a half ago Sam Kazemianβs plans for $frxETH to conquer $WETH.
We are late to the party on this particular topic⦠the Frax Telegram group has been buzzing about replacing $WETH since at least October of last year.
So it should come as little surprise that Frax Finance is following through on its plans to replace $WETH with $frxETH. Sam dropped step one of his master plan onto the Curve governance forums.
If youβve been following along at home, youβll note their LSD comes in a clever two token design. The $sfrxETH gets the most attention as the yield-bearing half of the pairing. Plain $frxETH, on the other hand, was designed to be little more than a 1:1 wrapper for raw ether, akin to $WETH.
The proposal involves creating several liquidity pools containing $frxETH to provide easy routing among all other major LSDs, which Frax would bootstrap using Votium bribes as theyβve done to successfully push FraxBP to dominance.
As a plan, itβs solid. We canβt see any particular reason the DAO would reject these gauges. We also know liquidity always flows parallel to incentives.
As for displacing $WETH, we imagine thereβs a touch of hyperbole to the statement. The total supply of $frxETH is around 125K, while over 30x the amount (3.8MM) $WETH exists. Users will require significantly more $frxETH liquidity before they could consider it as a replacement, which Fraxβs latest moves is undoubtedly designed to address.
Non-devs may not appreciate the importance of $WETH to the ecosystem. Absent $WETH, devs are forced to write separate logic for handling raw ether and ERC-20 tokens. Instead, itβs commonplace to simply wrap $ETH β $WETH and handle everything as an ERC20 token. Wrapping to $WETH is easy, trustless, and gas-efficient. The process has been enshrined into innumerable smart contracts that serve as the base layer of DeFi, including newer Curve contracts.
Last November, in a fit of gallows humor, Twitter took to humorously dishing out FUD about the $WETH peg.
Of course, the $WETH peg is just about the strongest in the business. Althoughβ¦ fun factβ¦ the peg is not precisely 1:1. $WETH is technically overcollateralized by exactly 1 wei ($.000000000000002) due to an unusual βhackβ.
$frxETH is designed to be similar to $WETH in that itβs a fairly predictable 1:1 pegged token. However its mechanics are necessarily different from $WETH due to design considerations.
The potential for even infinitesimal depegs of $frxETH from the price of ether may scare off enough developers to prevent it from ever flippening $WETH. However, itβs entirely possible that $frxETH could gain sufficient adoption within DeFi, such that it serves as a preferred base token utilized so frequently it was considered a more useful alternative to $WETH.
Weβve learned to never underestimate the Frax team, so weβre here for it.
This power was on display as Sam shook the world by simply tweeting just βFRAX v3β
Is this alfa? By itself, knowing that β3β comes after β2β is only really alfa to Microsoft.
But as usual, the alfa is in plain sight if you take the time to do your homework. The Telegram is chock full of information.
The peg to USD instead of $USDC is interesting, and if you read through the subsequent Telegram messages youβll notice this is not in reference to a potential Fed Master Account, but rather a pure crypto design.
Frax Finance has a tremendous talent for making big moves to reshape DeFi while everybody else struggles to stay afloat amidst the bear market. The only other person with comparable ability is Gensler, but his efforts are singularly destructive, whereas Fraxβs efforts are constructive. We know who weβre rooting for.
Disclaimers! Author has exposure to $FRAX and $FXS