ETH-FXS LPs funded by (part of) AMO Revenues

Hey everyone,

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?

Let’s discuss!

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Thanks for making this proposal! I originally discussed this with the community because I saw YFI doing the same thing here: Own The Land (Eth) On Which We Operate - Finance -

I want to address a legitimate and common criticism of this idea that the ETH-FXS liquidity that the protocol controls might take farming yield away from other farmers. This wouldn’t be true. First of all, there is currently no ETH-FXS incentivized pools for FXS tokens. If there was, we can make sure to code the AMO in such a way that it would not claim (or simply return) the FXS it would have earned back to the farmers in some mechanism so that it is not taking away rewards from anyone. Since the protocol’s own gov token is FXS, it would not make sense for this AMO to farm itself. I want to make it clear that if this proposal passes, we’d strongly recommend that the protocol does not farm itself for its own FXS tokens if there is an FXS pool in the future.

I am fully supportive of providing liquidity to a FXS-ETH pool - as YFI says own the land you work on!

if this passes then the LP’s for this new pool should have no voting rights and no farming rewards.
LP’s should be locked for 10+ years.

personally i would rather have the rewards split like so

veFXS = 50%
FXS-ETH LP = 25%
burn = 25%

The protocol itself would be the LP of the ETH-FXS pool. Are you proposing that the LPs be normal users instead?

The protocol LPing the ETH-FXS automatically makes it ineligible for farming rewards so no need to worry about FXS reward dilution.

my worry would be the voting power,

if this passes then the amount of FXS in the new pool will slowly build up over time and this will mean the owners will slowly gain more voting power and could create an issue when one person / team has a controlling vote due to the the size of their FXS holdings.

im not saying the voting power will be misused , but imo its best to keep things simple and just not let that pool have any voting power

The ETH-FXS AMO is controlled by the system though…which is all FXS+veFXS voters. It’s not possible for anyone to singlehandedly control the pool’s FXS. The FXS in that pool wouldn’t affect any governance actions.

Interestingly, I like how you can see the FXS liquidity building up enough to bring up governance considerations. That sounds bullish for the entire concept itself. But to be clear, this wouldn’t be a governance problem since AMOs can’t vote in governance.

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