FIP 18 - Update FraxPool to match AMO Specifications

Governance Proposals FIPs
1

Summary:

Re-deploy the USDC Frax Pool to only allow minting of FRAX when the price is above the peg window, and redeeming when the price is below the peg window.

Background & Motivation:

The current version of the Frax Pool released at genesis allows for minting and redeeming of FRAX at the collateral ratio. As the system has grown over the past 8 months while holding the peg perfectly, the demand and depth of liquidity for FXS has increased respectively. Since mints and redeems offer the swap of FRAX to FXS + USDC at no slippage, arbitrageurs may profit off of FXS volatility by arbitraging against the Frax Pool.

To fix this, we are proposing to update the Frax Pool implementation to match the AMO specs listed in the documentation so that minting and redeeming are able to be called by the public only when the FRAX TWAP deviates outside of the peg. FRAX will still be able to be traded at the peg in the curve pool, which will act as the first and primary source of liquidity for the protocol. This proposal protects the FXS price long-term.

Additionally, we are implementing the passed FIP-15 update to buyback with this new Frax Pool improvement.

Lastly, the recollateralize function will also target the new CR by minting FXS and selling it for FRAX thus increasing the CR. This is the exact symetrical specs to FIP-15 for the buyback function.

For: Update FraxPool Implementation

Against: Do nothing

5 Likes
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This FIP is important for two reasons:

1.) This makes redeeming FRAX to generate FXS during large price movements infeasible because no rational market actor would redeem FRAX when the peg is sound at a premium (due to the redeem fee) rather than getting a 1 to 1 redemption through UNI V3 or Curve. This FIP stops any big FXS TWAP arbs that are costing the protocol value without gaining anything in return.

2.) This FIP helps the original functions conform and standardize to a single spec which all the AMOs run on where each function is only applicable whether the protocol is above, at, or below the peg. There should not be a reason that all mint/redeem functions be available at all times since no one should technically be calling them unless they are unnecessarily profiting at the expense of the protocol.

I strongly support this FIP to improve the protocol.

4 Likes
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I’m in full support of this. I’m excited to see the impact should this pass. Pretty amazing to watch this project grow from day 1.

1 Like
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Thanks for writing this up Jason. This is a great upgrade to the protocol and should be passed. Frax keeps shipping and it shows.

1 Like