[DRAFT] [GF: Phase 1 Proposal] Frax

ARCHIVED & OLD Missions Governance Fund: Phase 1
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Project Name: Frax Finance (Frax Finance App)

Author Name: Metalface (Frax community member)

Number of OP tokens requested: 1,000,000

L2 Recipient Address: 0x0dF840dCbf1229262A4125C1fc559bd338eC9491 (Frax Optimism MSig)

Relevant Usage Metrics: Frax has ~$1.6b TVL and is currently scaling up on Optimism with $6.2m Optimism TVL currently deployed. The FRAX/USDC Uniswap pool is currently the largest on OP Uniswap by TVL and did approximately $200k of daily volume the past week. In the coming weeks, Frax will scale up to $25m of protocol controlled value on Optimism as described below.

Optimism alignment

We believe that Optimism will play a critical role in the long term success of Ethereum. Frax is committed to helping Optimism realize this vision. In the near term, Frax can assist by increasing liquidity and utility on Optimism. Frax has already deployed $6.2m of stablecoin liquidity into the Optimism Frax-USDC Uniswap pool. Frax is in the process of deploying the Curve Frax-Basepool, which will allow for the creation and incentivization of metapools. The current TVL of Curve on Optimism is $11m. Frax will likely double the TVL once the basepool is live.

Frax is also launching Fraxswap and Fraxlend on Optimism. Fraxswap is a native DEX that allows users to directly tap into protocol owned liquidity and offers TWAMM orders. TWAMM orders allow for order execution over time, which would be very helpful for users wanting to average in or out of a Stable/OP pair. Fraxlend will offer lending markets on volatile assets, including OP. For a gauge based incentive approach, Optimism gauges will be proposed via Frax Governance so that FXS rewards will incentivize Optimism liquidity. Finally, Frax is supplying $15m of stablecoin liquidity to the Hop protocol, which will increase liquidity for Optimism users, including fast exits from Optimism to mainnet (not only for FRAX but other stables supported by Hop).

Proposal for token distribution

How will the OP tokens be distributed?

Frax will bring significant stablecoin liquidity to Optimism but needs help building volatile asset liquidity (it is more difficult for Frax as a protocol to be exposed to volatile asset price fluctuations). OP will primarily be distributed via Frax’s gauge system, including incentivizing lending markets on Fraxlend, etc.

How will this distribution incentivize usage and liquidity on Optimism?

All OP received will be directly used to incentivize liquidity and usage of Optimism. Similar to Balancer, Frax has found that gauge incentives are currently the most cost-effective means of incentivizing liquidity. If the effectiveness of gauge incentives decreases over time, Frax may use traditional liquidity mining if that presents the highest liquidity ROI for the OP received.

Why will the incentivized users and liquidity remain after incentives dry up?

Frax protocol owned liquidity is long term liquidity that will remain on Optimism well after the incentives finish. Total Frax PCV is currently $1.35B with only $6.2m currently deployed on Optimism (~0.4%). Frax PCV on Optimism will increase to $25m in the coming weeks and will likely continue to grow with Optimism. All of this liquidity will be available for use on Optimism. By catalyzing adoption on Optimism, Frax will be incentivized to increase long term PCV on Optimism. OP incentives will kick start volatile asset pairs and lending. Frax incentivizes users to lock liquidity for up to a year and will have the same incentive structure for liquidity on Optimism. Gauges (veFXS and veCRV) on Optimism will likely outlast any OP incentives and create a long term liquidity flywheel on Optimism.

Over what period of time will the tokens be distributed?

Frax will seek to sustainably incentivize growth on Optimism. The exact period of distribution will depend on the sequence of product launches, the price of OP and the specific liquidity needs of each pool (it is preferable to target a sufficient but not excessive amount of liquidity over time versus maxing out short term liquidity that exceeds any practical use).

How much will your project match in co-incentives?

Frax will deploy $25m of stable protocol controlled liquidity on to Optimism and keep all revenue generated from this liquidity on Optimism. This is equivalent to a significant incentive (if you assume that stables might require a 10% APR on Optimism, this is roughly equivalent to a $2.5m incentive in the first year), with the advantage of being nearly permanent and likely to grow over time as Optimism scales. We will also advance veFXS gauges for Optimism pools, which will direct FXS incentives towards liquidity and lending on Optimism.

Frax Docs: https://docs.frax.finance/

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Thank you for this proposal.

Could you provide more information on distribution plan.

depend on the sequence of product launches

which product ?

the price of OP and the specific liquidity needs of each pool

How do you expect OP price to impact distribution

Also, any specific Gauge you are planning to target ?
Distribution will be weekly/monthly ?

As as user, what would i need to do to get the incentives ?

Also, please include your application link and related documents if possible.

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Do you have a % split in mind for this distribution?

Frax governance is adding Optimism gauges

has this been confirmed by governance too? if so, can you link it.

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Thank you @OPUser for the feedback / questions!

Distribution / Product
The overall distribution plan is to reward users who provide volatile asset liquidity on Fraxswap and Fraxlend. Regarding the sequence of products, there are essentially three that are forthcoming on Optimism: Fraxswap, Frax-USDC basepool on Curve and Fraxlend. Fraxswap is imminent (a matter of days), the Curve launch should be soon but it also depends on Curve. Fraxlend will likely be the last of the products to go live (the OP market on Fraxlend for example).

OP Price Impact
I could see the price of OP impacting the speed of the distribution because the yield on liquidity is a function of the OP price. If it is preferred, we could propose a very concrete timeline for the distribution of rewards. We will definitely have all of them distribution within 12 months. Having dealt with various liquidity incentives in the past, the situation we want to avoid is one where there are excessive short term incentives for mercenary capital. It basically delivers a vanity win (“wow, look at that huge TVL”) but the liquidity beyond a certain point may not be useful. For example, if we are working to establish pairs that we believe to be strategically important for Optimism (increasing OP liquidity and lending options for example), there isn’t a ton of marginal utility beyond a certain pool size (once you can execute a large transaction with minimal slippage). It seems more efficient to target the OP incentives over time but am very open to feedback if you have a different perspective.

Incentive Distrubtion
We’re envisioning that approximately 70% of the incentives would go towards volatile asset liquidity pools on Fraxswap (with the potential for pools on Curve and Uniswap) and 30% would go towards Fraxlend. We will emphasize establishing liquidity for OP on both. By distribution, do you mean the earning of the rewards or the setting of the rewards? I expect that the rewards will be earned / claimable in real time while the pool incentives would probably be set monthly.

As a user, you would get the incentives by providing volatile asset liquidity (even if it is via a gauge, ultimately the gauge rewards liquidity) and use of Fraxlend.

I’ve added some Frax related links to the original proposal and below (because of the forum link limit)- please let me know if there is anything else you’d like to see and I’ll get it up. I hope this addressed some of your questions, please let me know if I can clarify or provide more info on anything.

Community Built Stats Page: https://stats.frax.academy/
Community Aggregator: FRAX Community

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Hey @Bobbay_StableLab - thank you for the questions. I went into detail in my above response but the split % would be 70% to volatile assets liquidity and 30% to Fraxlend.

Re the gauges, I should have been more precise - I’ve updated the proposal to better reflect this. The Frax gauges need Fraxswap to be live on Optimism before they can be proposed via Frax governance. Fraxswap should be live in the very near term. I will then link to specific gauge proposals. Anecdotally there appears to be widespread support for adding gauges on Optimism. Please let me know if you have any other questions or feedback.

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Just checking in to see if you would like this proposal to be evaluated in Voting Cycle #6 according to the updated grant proposal template?