“If you ain’t first, you’re last.”
Sam Kazemian, probably
With Terra still recovering from a potential knockout blow, FRAX is ably filling the vacuum. Last week they telegraphed big plans to seize control over the Curve Wars.
The proposal comes in two parts. First is a request to add a FRAX-USDC 2pool which would serve as a base pool. The second would whitelist FRAX to lock $CRV via smart contract.
FraxBasePool
When 4pool was on the horizon, the heavyweight pool promised to use their largesse to the benefit of any pool launched against the 4pool.
With 4pool but a distant memory, FRAX is picking up the slack. FRAX is promising to use their stash of flywheel assets to heavily incentivize any pool that launches with the FRAX-USDC as a base pool. This means heavy liquidity for FRAX, and new pools can get access to pools rewards including $CRV, $CVX, and $FXS.
The success of a FRAX BasePool is likely to bring deep deep liquidity for FRAX. Protocols need not necessarily accumulate the capital to fight the Curve Wars on their own, instead tapping into FRAX’s large treasure chest. In return, FRAX gets major liquidity and pairs with new projects across the ecosystem.
Whitelisting
The other half of the request is to whitelist a FRAX to lock $CRV. For most of Curve’s existence, only Yearn, StakeDAO, and Convex were allowed to lock CRV programmatically. FRAX has historically been interested in a gauge, but it had never happened. So FRAX could do nothing with the massive amounts of $CRV it was farming except to dump it.
This became a point of contention last decade (3 months ago in normie human time).
Since this time, Curve’s DAO has become more receptive to whitelisting $CRV. This month saw the whitelisting of Abracadabra’s $MagicCRV and MakerDAO’s $mkrCRV. Should the FRAX whitelist also pass, a massive amount of sell pressure on the token would disappear.
This sell pressure is substantial. FRAX is a very profitable protocol, largely from turbo-selling $CRV.
We’re generally not of the opinion that token dumping affects prices too heavily — that is, a token should theoretically find a market equilibrium with or without sell pressure. We’re also no longer naive enough to believe crypto markets are terribly rational, so we have no idea what will actually happen if FRAX stops selling en masse.
If the change in token flows does have effects on price, another interesting downstream effect to keep an eye on is if whether Llama Airforce Union dumping less FXS will have an effect on its price.
With FRAX losing its primary income stream, how do they plan to make up the difference?
Like all popular companies, they’re opening a theme park! Get ready for Fraxland, the happiest yields on earth!
Oh wait, typo… it looks like they’re launching Fraxlend…
We could probably launch a whole newsletter covering the ins and outs of Fraxlend, but summer’s here and we want to get some Vitamin D. So if you happen to be launching such a newsletter, ping us about getting the frax.mktcap.eth ENS domain.
Flywheel Effects
We’d mentioned the drop in selling pressure on the $CRV token, but what else might FRAX’s changes mean for the flywheel?
Of course, much of the revenue FRAX was earning from dumping $CRV would flow right back to veCVX lockers in twice monthly bribes. With $CVX traders suffering enough in the bear market, several watchers are afraid the bribes would be drying up.
It’s plausible FRAX has a change of heart, but at the moment FRAX has clearly articulated its intentions to continue the bribes. This revenue, sourced now from Fraxlend and not $CRV emissions, would in fact be extremely bullish for the flywheel.
The theoretical positive effects on CVX are well outlined in this thread by @BarryFried:
Overall flywheel fans are generally heralding this as an extremely bullish announcement for both $CRV and $CVX. The governance forum comments are overall quite positive.
For the case of both $CRV and $CVX, we’re looking at major supply crunches on the horizon. $CRV will be dropping off in August as part of its preset inflation schedule. $CVX is becoming even more scarce.
If you’re shopping the dip, worth keeping an eye on $FXS. This article is of course not financial advice, but strictly educational. Therefore for your homework, we’d have to ask you to weigh how much of $FXS movement lately has been overreaction to algorithimic stablecoin FUD, versus a thoughtful dissection of trends discussed in the big brain Telegram channel.
For more detail, we recommend this great recap Substack by @TheHeathen22
In addition to the @BarryFried1 thread quoted above, this thread by @SalomonCrypto covers the subject in great detail.
amazing work