Add Gauge for FXS/ETH

Hey guys,

Just wondering what peoples thoughts are on adding a FXS/ETH UNI/Sushi gauge are. We haven’t had a new gauge in a while and this is a pool I would personally love to provide liquidity for. Looking forward to hearing your opinions.

there are still 9 more pairs on the waiting list to be added because of the G-uni vote.

  • FRAX-alUSD

I don’t think it means we should stop discussing new gauges. We can deploy new ones as the Gelaot ones go up. But I question the need to pay FXS rewards for an FXS-ETH gauge for 1 main reason:

The protocol is accruing ETH on the balance sheet and can add FXS-ETH liquidity without the need to pay out so much FXS to others for providing it. If we want to pay out FXS for liquidity from here on, it should serve a strategic purpose within the gauge system imo.

Well the great thing about the gauge system is that the market determines how much FXS would be used to incentivize this pool. Didn’t you say pretty much any LP or other type of pool should be a gauge to maximize adoption?

The main benefit I see from having more FXS liquidity is in strengthening the algorithmic absorption during a downturn. The stronger our pools are for FXS the more we can expand the algorithmic portion of the protocol and make it even more efficient/decentralized. I see it as actually more beneficial than locking up FXS in veFXS since its actually being put to use as liquidity instead of doing the exact opposite. Right?

One thing to take into account is by having this pool it will make the price of FXS more correlated with Eth. I think this is a positive thing since it would be a little strange to be bullish on FXS and not be bullish on crypto as a whole but it is something to consider.

Quick explanation why: say we only had 1 main pool and it was FXS/Eth. This would effectively price FXS in Eth so that with no buying or selling the % movement of FXS’s price would track Eth’s exactly. By default with no market participation when Eth’s price goes up FXS’s price would go up, when Eth’s price goes down FXS’s price would go down.

With 2 pools this effect lessens due to arbitrage however it doesn’t disappear entirely. With 2 large pools absent any buying or selling as the price of Eth rises the FXS in the Eth pool’s price increases while the FXS in the FXS/Frax pool is static. We now have a price mismatch which arbitragers will take advantage of by buying FXS from the FXS/Frax pool and selling it into the FXS/Eth pool. Thus although it’s a diminished effect, the price of FXS will still rise and fall with Eth even without any non-arbitrage based market participation.

Also it’s actually always preferable to have users lock into veFXS vs locking in an LP position all things being equal. When the user is buying into the system in both cases the same amount of $ will move into the LP pool however in the case where they lock into veFXS the price will increase more. Similarly if the user has FXS they received as a reward if they lock into veFXS the amount of liquidity and price will stay neutral while if they move it into an LP position the amount of pool liquidity will stay the same but the price will decrease.

Right now our main FXS liquidity comes from FRAX/FXS. This has several problems. Some routers STILL don’t rout properly to this pool so some users can receive massive slippage. Secondly, like you said, FXS is mainly correlated with FRAX(USD). So the protocol is kind of correlated with itself instead of exogenous tokens (neutral value) and it also doesn’t benefit from the deflationary nature of ETH. We all know over time the value of ETH will increase (especially after the merge) so it makes more sense from a protocol value perspective to have more correlation with ETH (imo), especially since most people use ETH as the main trading pair across Ethereum.

I’d prefer to make a FRAX/ETH uniswap v3 gelato pool, because it is a more ‘natural’ pool (with dollar), which probably will make it more demanded than an fxs/eth pool, and more demand of frax means the protocol grows. Also, automated uni v3 usd/eth pools are profiting at ~30% APR, which probably will be more attractive.

Though I support the idea of the protocol owning shares of a fxs/weth pool, a-la OHM, to act as a reserve asset, and also to work as a ‘tax’ to any buy or sell of fxs, if the pool gets deep enough then probably it would route a big percentage of the fxs volume.

Ya the routing problem is a real issue. It’s not just the FXS/Frax pool either, I’m still not able to swap Eth for IQ directly at the best price, have to do a manual step to Frax first. I don’t know what the solution is to this, has anyone reached out to 1inch or uniswap directly?

I’ll be honest I would have supported having an Eth denominated pool from the start but now that the main pool is denominated in Frax I’m not sure it makes sense trying to build a second pool. The core question seems to be will this bring in incremental users who wouldn’t have otherwise staked in veFXS or in the existing FXS/Frax pool? The answer for me is I’m not sure. Just that the pool attracts some liquidity isn’t enough, if it’s cannibalizing veFXS or the Frax/FXS pool it’s not a success.

Personally I’d prefer to stake in an Eth denominated pool but what I think is more relevant in attracting liquidity is the amount of rewards. The current FXS/Frax pool already has an APR higher than any gauge pool and I don’t know why we’d expect FXS/Eth to be any different. If so I don’t know how many incremental users we’d be bringing in, it seems unlikely there will be many who were previously uninterested and even though rewards are lower are willing to do so now just because they want the counterpair to be in Eth.

Also want to say there are real downsides to having 2 major pools. Having liquidity split will always be less efficient than having 1 large pool. Arbitrageurs do provide a service but they also aren’t costless- the profits they gain do actually get removed from the system.

Thinking about it what might be interesting would instead be to include the current FXS/Frax pool in the gauge. I’m not proposing replacing its rewards, just supplementing them. Whatever vote it got from the gauge would be added to its current rewards.

Although like I said veFXS stakers are preferred by the protocol to LP providers both are very valuable and both contribute to TVL. There also is real differentiation here- I’m not totally convinced there’s a huge user preference between staking FXS/Frax and FXS/Eth but I’m sure there are user preferences between single-stake veFXS and LP staking. That is to say I think by increasing rewards we can probably bring in new incremental users to the system, we’re not just cannibalizing users who would have staked anyway.

we just ended a ETH/FXS pool on uni with the idea that the protocol would use its own assets to fund a new ETH/ FXS pool.

i would like to see an ETH/FXS pool but there are many different ways and places that it could be launched or funded.

i think many people would like to provide liquidity and this would cause some buying of both FXS and ETH, but i also agree that the protocol could fund this liquidity itself and would therefore be cheaper for everyone if it was protocol funded.

but there is already some discussion about ending the ETH buying and this could limit the protocols options for funding a pool.

I thought the whole point of gauges was to add everything and let the free market decide efficiency of liquidity. I’m sure if we added some type of FXS/ETH pool it would be very popular and net beneficial to the protocol. All this hesitancy to just add another gauge doesn’t really make sense to me. Yet another reason governance minimization is important because otherwise it just stifles progress with naysayers.

the point of the gauges is to let the market choose what liquidity gets rewarded.

the point we are making is that the protocol can provide this liquidity for free, so why pay for it ?

Can it? Are we doing that?

At the end of the day I just want there to be more FXS liquidity. Whether thats from incentivized gauges or bonds or protocol purchases I don’t care. It’s important for price defense of FXS to have more liquidity, especially if we expect the algorithmic portion of the protocol to continue expanding. We don’t want to become like Iron or UST in a downturn and having ample liquidity makes sure that won’t happen.

we just voted to add up to $220m of FXS + FRAX in liquidity from the protocol (see FIP-26) and it is starting to be deployed. so yes we can and yes we are.

Right, I see that extra liquidity is being spread out across 11 chains which is a great start. I’d also love to see more concentrated liquidity on Ethereum.

not sure what you mean by wanting to see more concentrated liquidity on ETH, 99% of the liquidity is on ETH now, thats why we are trying to spread it out to other chains

Fair enough. I concede my proposal.

Very much in favour of increasing FXS liquidity and especially by bonding FXS to ETH. ETH is one of the few truly permissionless and liquid collateral assets. Also it has enormous upside potential, which would make it an attractive asset to bond our price to.

Not sure if we really need a gauge for this, as “rented liquidity” is kinda expensive. It would be in the long-term interest of the protocol to own this liquidity as PCV rather than rent it.

How about using a bond mechanism similar to Olympus? For example issue FXS at a market-determined discount (with a 3-14 day lock) in return for providing the protocol with permanent liquidity shares (S)LP FXSETH.

Ideally we would launch such a bond program once our FXS token has left its underappreciated valuation behind. We are ranked 150 or so in Coingecko for Christ’s sake.

How about launching such a bond program from say $100 FXS?

I support the idea of the protocol beginning to amass FXS/ETH liquidity. A fundamental part of the Frax mechanisms relies on FXS being able to maintain its value, one of the best ways to do it is by owning its own liquidity, and ETH is probably the best asset to pair it to.

Some time ago i made a related proposal, where i proposed to sell bonds of the protocol-owned convex shares. I think it still is an option, but given the current situation of protocols minting assets out of thin air to the detriment of their users, i think we would have to be very careful and analyze if it can have negative impact to the frax supporters. The other option is to sell FXS bonds through Olympus Pro, the program is still running, currntly has amased $1.6M, I think that if we choose this way, we should set a target of how much we are aiming to collect and ask ourselves why we aren’t collecting as much through Olympus and how could we do it.

Regarding adding a gauge for a FXS/ETH pair, maybe some users really like FXS, really like ETH, want an exposure to both, and i’d support rewarding them with liquidity rewards, since they are contributing to the protocol robustness.