Earlier today, we discussed the idea to direct a part of AMO revenues towards an ETH-FXS LP Share that is part of the Frax Treasury. Currently, AMO revenues are $20k/day. Currently, 50% of AMO revenues ($10k/day) is used to buy FXS which is rewarded to veFXS stakers (esp long-term lockers). The other 50% of AMO revenues is currently being used to buy and burn FXS, thereby capturing some value for FXS (apart from principal driver that is FRAX adoption). The idea earlier today was to stop this FXS buy and burn and to invest this money in ETH-FXS LP shared. This LP share would not be staked within frax and would not be eligible for any FXS incentives/rewards.
To aid the exchange of ideas within our community, I have collected, summarized and added to the arguments for and against this idea.
1. Deepens FXS liquidity (ties FXS liquidity to ETH upside, increases absorption capacity of FXS sells)
2. Diversifies Treasury with more ETH (as part of LP share), which is a permissionless asset that functions as a store of value / yield generator / gas
3. ETH is arguably an undervalued asset
4. ETH could help gaining more recognition within the wider Ethereum / DeFi community which could help adoption of stablecoin FRAX (which is the main FXS value capture mechanism)
5. A large Treasury can be a good moat that protects against forks
1. Comes at the expense of reducing FXS burns (and all else equal lower FXS price)
2. FXS already has decent incentivized liquidity through FXS-FRAX & FRAX-USDC
3. Convolutes (currently very clear!) incentive structure
4. Increases scope for required governance (->larger attack vector)
5. Implicit signal that ETH is more valuable than FXS
This proposal triggers some fundamental questions:
1. What (permissionless) collateral assets do we want to transition to long-term (besides USDC)? ETH / RAI / OHM / iETH-sETH / …
2. Resources are always scarce and should be directed to our top priorities:
(a) FXS Value accrual - addressed through buy & burn (using 50% AMO revenues currently) + adoption of FRAX longer-term
(b) FXS Backstop - addressed through veFXS (as FXS price drops, the dollar-denominated cash yield on veFXS rises)
(c) Liquidity of FXS and FRAX - addressed through incentivized pools
(d) Adoption of stablecoin FRAX - should come naturally over time once LINDY and leveraging our unsurpassed capital efficiency. Or could we do anything here to accerate adoption?