I. OVERVIEW
Since the debut of dUSD and dLEND on Fraxtal in December, dTRINITY has grown to $4.5M+ TVL by the end of Q1 '25, becoming the largest native dApp and lending protocol on Fraxtal. Our subsidized stablecoin model—the first of its kind in DeFi—quickly gained adoption from the Fraxtal community, with strong product/market fit proven through superior stablecoin rates and consistently high utilization.
This growth was achieved even prior to AMO liquidity deployment from Frax to support dUSD markets, per FIP-416 which was approved in December.
In continued collaboration with Frax, dTRINITY will soon expand to the Sonic network where Frax has already launched frxUSD and sfrxUSD. To catalyze both projects’ early adoption in this fast-growing ecosystem, we’re proposing to reallocate Frax’s liquidity support from FIP-416 ($2 million) toward dUSD markets on Sonic.
Additionally, the liquidity will come from the sfrxUSD vault instead of Frax’s AMO in order to align with the Frax North Star Vision’s strategic mission. Therefore, this is now a DeFi Strategy Proposal to deploy $2M frxUSD from the sfrxUSD vault into dUSD markets on Sonic in Q2 ’ 25.
II. STRATEGY PROPOSAL
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$1M frxUSD will be used to mint and supply dUSD on dLEND—an Aave v3 fork. dTRINITY will then stake the frxUSD with Frax, receiving sfrxUSD as reserve backing for dUSD
– Benefit 1: Frax earns lending yield + dT Points from dTRINITY
– Benefit 2: sfrxUSD supply increases + frxUSD is returned to the vault via staking
– Benefit 3: dUSD gains reserves + sfrxUSD underlying yield to fund subsidies
– Benefit 4: dUSD lending supply increases, providing fuel to enable credit expansion -
$1M frxUSD will be LP in the frxUSD/dUSD pool on SwapX—a leading Sonic DEX
– Benefit 1: Frax earns pool fees + dT + emissions from Swapx
– Benefit 2: dUSD price stability is strengthened as credit utilization increases
– Benefit 3: dUSD credit velocity and expansion become more sustainable
DeFi Flywheel Effect:
- sfrxUSD secures dUSD + funds dUSD borrowing subsidies + provides dUSD credit supply
- Subsidies lower dUSD Borrow APR + increase borrowing demand + raise credit utilization
- Higher utilization raises dUSD Supply APR to above-market rates + attracts lenders, providing more credit supply
- sfrxUSD helps stabilize dUSD + sustain credit velocity as dTRINITY’s TVL expands
- sfrxUSD APR increases, powered by dUSD Supply APR + pool fees/emissions + dT
- More users acquire sfrxUSD to earn better yield, growing Frax’s TVL
- Repeat from Step 1 (as applicable)
III. ALPHA GENERATION
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Sustainability: dUSD borrowing subsidies are funded exogenously by sfrxUSD—ultimately coming from Frax’s stablecoin reserves, CDPs in Fraxlend, and cash equivalent RWA assets held at custodians. Therefore, the subsidy flow is renewable and sustainable.
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Lower Rates, Higher Yields: dUSD borrowing subsidies shifts the demand curve upward to the right, creating a higher equilibrium of supply/demand on dLEND vs. unsubsidized stablecoins on other lending protocols. In other words, users are willing to borrow and pay MORE in raw interest expenses if they receive subsidies (interest rebates). This means dUSD lenders also earn more yield—including the sfrxUSD vault. Effectively, what’s given away as subsidies to the demand side eventually comes back to the supply side as above-market lending rates.
Below is a classic supply/demand chart illustrating the effect of borrowing subsidies.
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dT Points: dUSD lenders—including the sfrxUSD vault—earn points from dTRINITY which will convert to utility tokens at the future TGE. They are endogenous supply-side rewards designed to complement exogenous demand-side subsidies, balancing incentives to attract more lenders and enable further credit expansion.
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Consistent Utilization: Demand-side subsidies typically outperform supply-side rewards. Although incentivizing lenders may attract more supply to reduce the borrowing cost, it could only go down to as low as 0% Borrow APR. On the other hand, subsidizing borrowers directly produces negative Net Borrow APRs when there’s low utilization (i.e., getting paid instead of paying to borrow). In addition, dUSD Net Borrow APR is often lower than its Suppy APR thanks to subsidies—a completely opposite dynamic vs. other lending markets. Hence, borrowing subsidies can effectively “guarantee” a higher than average level of supply utilization for dUSD vs. unsubsidized stablecoins.
Below is a subsidized Net Borrow APR curve example. Note that subsidies greatly amplify negative borrowing rates at low utilization because there is less debt vs. available subsidies.
Below is a recent screenshot of dLEND on Fraxtal, showing a negative dUSD Net Borrow APR.
Historical examples of superior dUSD rates vs. unsubsidized stablecoins (Q1 '25):
- January: https://x.com/dTRINITY_DeFi/status/1883384581019312442
- February: https://x.com/dTRINITY_DeFi/status/1892412298028847314
- March: https://x.com/dTRINITY_DeFi/status/1900987616532767159
IV. POTENTIAL RISKS & MITIGATIONS
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Liquidity & Depeg Risk: dUSD is not redeemable directly and can only be exchanged for available liquidity in the frxUSD/dUSD Curve pool. This could lead to liquidity constraints when there is more dUSD selling pressure, causing it to depeg. If dUSD trades at a large discount below $1, the sfrxUSD vault could experience unrealized losses. Potential risk mitigations include:
– Arbitrageurs: Market participants (e.g., existing dUSD borrowers, LPs, market makers) can add liquidity or buy dUSD when it trades at a discount to restore stability and capture arbitrage opportunities
– Liquidity Incentives: dTRINITY and Frax can co-incentivize the frxUSD/dUSD pool on SwapX to attract more LPs, bolstering liquidity and peg stability
– Stability Market Operation (SMO): dTRINITY can use its reserves to buy back dUSD on the open market through SMOs, restoring stability and liquidity in the frxUSD/dUSD pool. To date, dTRINITY has successfully executed 6 SMOs since its launch, most recently yesterday: https://x.com/dTRINITY_DeFi/status/1910742827023356341 -
Bad Debt Risk: If the collateral securing dUSD debt on dLEND is not adequately liquidated, the sfrxUSD vault’s lending position on dLEND could potentially experience losses from bad debt. Potential risk mitigations include:
– Lower LLTV Ratios: dLEND’s LLTV is 85% for stable/yieldcoin collateral (e.g., sfrxUSD, sUSDe) and 65% for volatile assets. This is lower than other lending protocols which often set LLTV for stable/yieldcoin collateral to 90-95%. Thanks to borrowing subsidies, dLEND users don’t need high leverage to achieve similar returns like on other protocols
– No Collateral Rehypothecation: Collateral securing dUSD debt is not relent in order to prevent cascading liquidations and potential contagion across other dLEND markets -
Smart Contract Risk: Vulnerabilities in dTRINITY’s smart contracts, including dUSD and dLEND contracts, could lead to potential exploits and, in turn, losses for the sfrxUSD vault. Risks include bugs in the code, governance manipulation, or attacks on integrations with external protocols (e.g., SwapX). Potential risk mitigations include:
– Audits: dTRINITY has completed 3 separate smart contract audits with leading security firms including Halborn, Cyberscope, and Verichains. A 4th audit is also planned for this quarter
– Bug Bounty: dTRINITY will soon release a public bug bounty program to reward white-hats with dUSD + dT Points for identifying and addressing potential vulnerabilities -
Risk Disclaimer: Risks include but are not limited to the ones mentioned above. None of this information should be considered financial advice. Past performance is not indicative of future results. Digital assets and DeFi protocols carry significant risks, including the potential for complete loss of funds. View our full risk disclaimer here
V. VOTING
- For: Approve the above proposal as a DeFi strategy for the sfrxUSD vault, with a maximum authorized allocation of $2M initially
- Against: Do nothing