What is Frax Ether (frxETH) - Rating & Analysis

What is Frax Ether?

Frax Ether (frxETH) is a liquid staking derivative issued through Frax Finance's new liquid staking product, pegged 1:1 to $ETH.

What is Staking?

With the completion of the Ethereum mainnet Merge, Ethereum has officially transformed from a PoW-based blockchain to a PoS-based blockchain. Staking in PoS (Proof of Staking) is the process of locking the blockchain-native assets for a certain period of time in order to receive the corresponding rewards.

To become a validator of Ethereum, users need to stake at least 32 $ETH, and also need to prepare a device with a certain hardware performance. The validator randomly acquires the chance of block generation and receives validation rewards. The larger the stake amount, the greater the chance of getting the block reward. Moreover, the larger the total stake amount on the PoS network, the higher the network security.

What is Liquid Staking? What are Liquid Staking Derivatives?

Liquid Staking aims to solve the drawbacks of traditional staking. In traditional staking, the $ETH staked by the validator will be locked in a smart contract and cannot be used for other purposes. By staking $ETH on the liquid staking platforms, users can receive 1:1 $ETH-pegged derivatives (for example the frxETH on Frax Finance) that correspond to the staked $ETH as proof of participation in the liquid staking. Meanwhile, users can use these derivatives in other DeFi protocols to earn an additional profit, in addition to staking rewards through the liquid staking platform. These 1:1 $ETH-pegged derivatives are known as Liquid Staking Derivatives (LSD).

As mentioned above, due to the high barrier to becoming an Ethereum validator, users will choose to use a liquid staking platform like Frax Finance to indirectly participate in network validation and earn rewards. As with other liquid staking platforms, Frax Finance charges a protocol fee. Frax's fee structure is similar to that of Lido Finance, where the platform charges 10% of the staking rewards as a service fee. Among these, 8% is distributed to $FXS holders; 2% is distributed to Frax Finance's fund. (Related reading: $LDO's Governance Influence Over Ethereum)

What Is TokenInsight's Rating for Frax Ether?

TokenInsight has rated Frax Ether's current performance with a BB and a stable outlook.

The breakdown of the rating results is scored as follows.

• Underlying Technology & Security 64.55%
• Roadmap & Progress 65.33%
• Token Economics 81.33%
• Token Performance 38%
• Ecosystem Development 39.25%
• Team, Partners & Investors 65.4%

Underlying Technology & Security (64.55%)

According to Frax Finance, frxETH shares most of its code with Frax Finance's stablecoins, $FRAX and $FPI. Frax Finance has also made its frxETH-related code publicly available on its GitHub, including frxETH and sfrxETH.

Meanwhile, Frax Finance has conducted an audit for frxETH. The Frax-stake Security Audit Report was performed by the Callisto Security Audit Department. The report shows that there are no security issues were found in frxETH's code. In addition, Frax Finance also has a bug bounty program for frxETH.

As of January 9, 2023, Frax Ether has not experienced any crisis that would impact its security.

Token Economics (81.33%)

The number of issued frxETH is the same as the number of staked $ETH within Frax Finance. Therefore, there's no token distribution plan or vesting plan for frxETH. In this section, we will focus on frxETH's unique staking model and analyze why it can attract users.

frxETH Staking Model

First, the frxETH staking model is quite unique. Like other liquid staking platforms, users staking $ETH will receive an equivalent amount of frxETH as a certificate. But, frxETH holders cannot receive any staking rewards directly. frxETH holders need to further stake their frxETH to get rewards, and Frax Finance offers two options.

Continue to stake frxETH and receive sfrxETH as a certificate to earn staking rewards.

Deposit frxETH into the frxETH/ETH pool on Curve Finance to become a liquidity provider and earn LP rewards.

Option 1 allows frxETH holders to stake their frxETH and earn staking rewards. The rewards will be distributed to sfrxETH holders in the form of frxETH, thereby increasing the user's revenue.

Option 2 allows users to provide liquidity to the frxETH/ETH pool on Curve Finance and earn $CRV, $CVX, and $FXS. The pool is deployed by Frax Finance. Due to the advantages that Frax Finance gained in the previous Curve War, it was able to use its governance rights to pass the $CRV and $FXS gauge proposals on Curve DAO and Convex Finance, thus enriching LP rewards to attract more users. (Related reading: Curve Finance - DEX Designed for Stablecoins)

frxETH APR

Compared to other protocols in the current liquid staking narrative, what are the advantages of the frxETH staking model?

The most obvious difference between Frax Finance's liquid staking and other similar products is that frxETH has a relatively higher staking yield. As you can see from the chart below, frxETH's APR is well ahead of all protocols.

The reason for frxETH's high APR is from the frxETH staking model mentioned above.

So why does this unique staking model help Frax Finance to outperform other protocols in terms of APR? First, we need to make it clear that only sfrxETH holders will receive $ETH staking rewards, and neither frxETH holders nor LPs on Curve Finance are eligible for staking rewards. In frxETH staking model, becoming an LP on Curve is equivalent to giving up the staking rewards and choosing to earn $CVX, $CRV, and $FXS instead. Meanwhile, although they give up their staking rewards, the deposited $ETH will still be used for network validation and block rewards. This portion of rewards will be distributed to sfrxETH holders, thus increasing the APR of frxETH.

According to Frax Finance's official Dashboard, Frax Facts, the comparison of sfrxETH and Curve LP APR shows that the APR of the Curve LP is higher than the staking APR of sfrxETH in most cases. Thus, the APR of frxETH can remain relatively high all the time. On January 9, 2023, the APR of the Curve LP was 2.09% higher than the staking APR of sfrxETH, so the number of people choosing to become Curve liquidity providers were slightly higher than the number of sfrxETH holders.

Token Performance (38%)

Currently, the secondary market trading volume of frxETH is relatively low. On January 9, 2023, frxETH only has a 24h trading volume of around $50,000. On the other hand, $stETH, a liquid staking derivative issued by Lido Finance, has a 24h trading volume of around $18m. The trading volume of frxETH is only about 2.8% of that of $stETH.

frxETH is mainly traded through Curve Finance, namely the frxETH/ETH pool mentioned above, which accounts for over 90% of frxETH's 24h volume. In addition to Curve Finance, frxETH can also be traded on Uniswap V3, but the trading volume is relatively low.

The price of frxETH fluctuates around the $ETH price as it is loosely pegged to $ETH. As of January 9, 2023, the price of frxETH is relatively stable and no significant decoupling has occurred.

According to the data on Etherscan, frxETH is currently held by a relatively small number of people at 206. While this is somewhat related to frxETH's short operating time, it is mostly due to the fact that frxETH holders alone cannot earn any staking rewards. frxETH holders need to deposit their frxETH into Curve Finance's liquidity pool or continue stake (exchange for sfrxETH) to receive the rewards. As of January 9, 2023, there are 606 sfrxETH holders on Etherscan. In addition, as a certificate of frxETH, sfrxETH has not yet been developed for other DeFi protocol-related usage scenarios.

Ecosystem Development (39.25%)

Frax Finance itself was originally an Ethereum-based DeFi protocol focused primarily on algorithmic stablecoins, frxETH is only one of its many products. While Frax Finance has been in operation for a relatively long time and is more mature in its development. However, frxETH is a relatively late starter for the entire liquidity staking narrative. Its LSD, frxETH, was launched on October 21, 2022. It has been in operation for less than 3 months. Despite its late participation, frxETH is actually performing quite well at the moment. According to Dune Analytics, Frax Finance ranks first among the following projects in terms of $ETH staking growth, although it holds a relatively small market share. Among them, the 30-day gain of 40.87% is largely related to frxETH's high APR.

Closing Thoughts

Overall, Frax Finance has leveraged its strengths from the Curve War to successfully built its frxETH staking model that is based on sfrxETH and the frxETH/ETH liquidity pool on Curve Finance. The unique design of the staking model has helped frxETH stand out in the competition for yield on Ethereum liquid staking. From the perspective of the long run, if the Curve liquidity pool does not suffer drastic fluctuations, then frxETH's staking yield will continually remain at a relatively high level, thus attracting more users.

On the other hand, the relatively late start of frxETH has led to a lack of liquidity, which is the obvious drawback of frxETH at the moment. In addition, frxETH somehow cannot be called a true "liquid" staking derivative yet. The only scenario in which it can be used in DeFi is to provide liquidity to Curve. This cannot really help users release liquidity. Therefore, we believe that Frax Finance should attract more users and liquidity in its next development step, while thinking about how to add more usage scenarios for frxETH on DeFi protocols such as AAVE and Compound, just like Lido Finance.

Based on the above information, TokenInsight has rated Frax Ether's current performance with a BB rating and a stable outlook.