FIP 45 - fyFRAX

The Issue

The size and complexity of DeFi protocols continues to grow. Continued innovation in how protocols are established, operated, and incentivized has created new classes of sophisticated platforms, with various purposes and business models. These new successful protocols all have one thing in common: they are active users of considerable amounts of capital.

The case for ingesting capital is clear - they need cheap, reliable ammunition to fuel continued growth and remain competitive in this new landscape. Despite this clear and pressing need, the market has yet to respond with an adequate solution. Options for protocols to borrow and lend at fixed rates are limited, expensive, and inflexible.

Protocols could, in theory, use collateralized, fixed rate borrowing on protocols like Aave or Yield Protocol to get fixed rates, but this has certain drawbacks:

  • If not actively managed, a DAO can be liquidated in a sudden fashion
  • Limited ability to set various terms in advantageous ways (tenor, discount, etc)
  • Critically, the need to overcollateralize in highly liquid assets ensures that the DAOs that need this option the most, even when they have strong balance sheets, are unlikely to use this option.

In addition, from the Frax perspective, there have been many proposals from protocols interested in receiving Frax to seed liquidity for their new products or Rari Fuse pools. The risk adjusted returns from these sorts of opportunities have been poor (see the recent Float Protocol incident).

What we’re working on:

To this end, Debt DAO, Yield Protocol, and Frax are working on creating fyFRAX, a primitive for how DAOs can be funded.

  • Debt DAO will allow this loan to be distributed among the marketplace to allow for service providers (underwriting, insurance, collateral management)
  • Yield Protocol will be providing the technology to allow for trading + secondary liquidity
  • Frax will be the initial capital provider, and function as a liquidity backstop.

The existence of deep, liquid, low cost debt markets for protocols could unlock a large number of new use cases, like investing in developers for protocol development, acquiring users, earning significant returns from yield farming, and more. For example, a protocol engaged in liquidity mining could lock in fixed costs for liquidity and distribute stables rather than distribute the project token. Debt DAO is exploring some of these use cases, with this recent Medium post here regarding payroll.

To enable these new use cases for protocols, there is a strong need for an approach to fixed-rate borrowing that is protocol-friendly, allowing protocols to control terms of the borrow, borrowing period, interest rates and more.

Yield Protocol pioneered an approach to fixed-rate debt that uses tokens to represent debt. Yield calls these tokens “fixed yield” tokens or “fyTokens.” fyTokens standardize debt to make it easily tradable to encourage the development of liquid debt markets. fyTokens can be traded in a special purpose automated market maker called “YieldSpace” that is designed to trade fyTokens in an efficient and easy manner. Standardized, tokenized debt may also be excellent collateral for protocols that enable leveraged lending, such as FIAT DAO.

The fyTokens will be denominated in FRAX, with the initial liquidity and a backstop reserve seeded by the Frax protocol.

As an example, let’s consider a hypothetical borrowing DAO, gamingDao, that purchases and loans out in-game assets to generate liquid P2E tokens. Say this DAO is looking to scale up by purchasing additional types assets to loan out, and wants to fund these purchases via debt (assume the DAO has strong revenues and a stable balance sheet denominated in various liquid P2E tokens).

Initially, gamingDAO decides to seek a 3 month loan, capped at 8%, to finance this expansion into land assets in Cryptoland. To begin the bidding process, GamingDAO governance approves the loan and locks the collateral (this can be a mix of their governance token along with stables).

There are two potential lending outcomes. In this hypothetical, for the most borrower-friendly, imagine investors are actively seeking products to increase their exposure to GameFi as an asset class, and the offering is oversubscribed in the Debt DAO marketplace. Competition to service this loan drives down the rate, and gamingDAO is able to receive a strong rate at a 5% APR.

For the outcome where this offering isn’t oversubscribed, the Frax AMO would step in and provide financing at 8% APR, ensuring that the gamingDAO is still able to finance their expansion into land assets in Cryptoland in-line with the pre-approved cap rate.

What we’re proposing

Frax commits to funding $50 million in FRAX for protocols looking to leverage fyFRAX. The initial loan sizes will be single digit millions, with well known protocols, however it is important to signal that Frax is serious about funding these kinds of opportunities.

In addition, Debt DAO will work through Frax governance to provide the risk analysis outlining the risks of the deal and the term sheets provided for the initial deals, such that if the terms of the deal are unsatisfactory, Frax governance can veto the deal.


  • Create liquid markets for Frax denominated bonds, and generate long term demand for FRAX from DAOs
  • Bootstrap a new financial primitive for DAO financing
  • Create a standard process that allows for risk analysis for protocols looking for liquidity from FRAX to bootstrap Fuse pools, or other use cases that reduces the moral hazard involved.


  • Default Risk (mitigated as this is secured lending)
  • Smart Contract risk (we’ll be leveraging Yield Protocol’s contracts, which have been audited, and will also have audits for any new code that is leveraged)

So native tokens will be used as collateral to borrow FRAX?

In fact, it would make a lot of sense for Frax to be the native AMM for a FRAX:XYZ pair in order to monitor pooled liquidity, in the case of a run on the bank. Perhaps native protocols could then implement an interface on their site allowing users to use the AMM right on the protocol’s site, rather than having to go to Uni or Sushi or Curve, unless there were other pools there that the protocol wanted to direct towards.

I may be missing the point due to my obsession with the idea that Frax should establish itself as the go-to base pair for new and existing protocols, helping them reduce farming emissions while continuing to establish Frax’s dominance.

Native tokens will likely be the most common asset, but not necessarily.
For the gamefi example, the protocol might have a significant position of Jewel that they’d like to lend against.

With the introduction of the spigot, they’ll also be able to collateralize with their future cash flows.

Regarding the point about the synergies with the Frax swap, incentives (a sweetheart rate, etc) can be put in place to incentivize borrowers who are leveraging fyFRAX to add liquidity to their FRAX:XYZ pair.

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Yeah, my main interest is in seeing new protocols go directly to FRAX for base pair liquidity, largely skipping USDC, ETH, etc. I get why some DAO would want to borrow against idle assets, but I am just compelled by the idea of protocols using FRAX to massively reduce their emissions during growth and us being their base pair.

I get the rest, just mostly bullish on seeing us gaining adoption as a base pair so we’re in more pools with more new protocols.

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I think this is a great opportunity to expand that footprint of activities that are denominated in FRAX and later FPI when it comes out. Crypto-native protocols will realize it is much more capital efficient to take out debt in Frax than anything else, as long as we make that clear and make Frax the primary choice for this, I support this completely.

this bit will be an issue. we struggle to get people to vote on basic stuff. getting people to do hours of research on each deal simply wont happen unless there is a reason for people to do it thats non-bias eg people will want to be paid for the work no matter what they say about the deal.

This is more of an optimistic measure. There isn’t any expectation that people are putting hours to do a deal. The idea is that we’ve engaged an external risk analyzer (e.g. Gauntlet, Credmark, etc) to put in the leg work to show to Frax governance “hey this is what we’re doing, check over our work these first few times.”

If you think this will be unnecessary, we can remove it.

will you be lending to anon teams ? or doxed only ?

Also, I’d state this is actually one big selling point to why a solution like fyFRAX is necessary. The current system of asking governance to do risk analysis and evaluate whether a protocol is worthy of receiving Frax liquidity is less than optimal.

If there is intermedial layer of having collateral, PMF, and security analysis, the work of governance would only be to ensure that the Risk adjusted Returns fit the return profile needed.

Obviously receiving funding through Frax governance would still be possible, but having this alternative outlet which can have its debt ceiling raised(and performance reviewed) periodically would be much more scalable, esp given the recent discussions around quorum.

so FRAX takes on the loans that other people dont want? wont this only happen when other people see the risk / reward to be not worth it ?

i dont mean to keep point out the bad bits, i like the idea of FRAX becoming a liquidity provider and i see this as a big part of FRAX going forward.

but , we must be aware of the risks involved before we vote.

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This is more for bootstrapping initial liquidity. There is a big chicken and egg issue - DAOs want a backstop for what price they take on so that the APY they pay isn’t going to be terrible, and speculators want good DAOs to take out loans.

It’s not that there are people who don’t want it, it’s just that in the initial stages, it might be difficult to find initial participants.

lets say a protocol put up 10% of its governance token and some stables to back a loan, but the value of their coin dumped 50% in a month, how would the loan position be liquidated without causing the protocol borrowing the money to implode?

Good Q: this is why we would have a focus toward denominated the assets in stables, majors, LP tokens, and project tokens (in that order). If its is project tokens, we would overcollateralize by a significant amount.

If it’s just a token price dip, we would allot a grace period where protocol can add tokens to restore the collateral to full health.

In the scenario of a default where the grace period elapses, we would undergo an arbitration process which would determine the course of least impact for the token - e.g. working with a MM like Wintermute to OTC, or paying out the principal in project tokens.

why would a protocol put up stable coins as collateral so they can borrow stable coins and spend them? wont they just spend the stable coins they have and borrow less in the loan ?

if the full amount of funds cant be recovered, who takes the hit?

Lots of protocols have aDAI or other productive versions of stables for the purposes of treasury management that they would be more than happy to put as collateral.

but if a protocol has $1m in stables and wanted to spend $500k to expand, why would they lock up the $1m in stables to borrow $500k , then pay interest on the $500k?

not only have they increased there costs, they also have less access to funds as its locked in collateral.

this leads me to think most loans that other investors dont want to fund will be backed by higher risk assets, meaning the FRAX funded loans will take on the biggest risks.

maybe there should be something in place to lower the risk, Eg the first $x amount of losses in any loan default are absorbed by Debt DAO

A LTV ratio of 50% on stables is not what we’d be looking at, and is pretty unreasonable, even for a normal lending protocol like Aave. It’ll look closer to protocol wants 500k? they put up 100k in aDAI, 700k in project tokens, and 200k in LP tokens.

I’d counter the point about Frax backed loans taking on the most risk - we’ll be releasing some more details in the coming weeks about our borrower analysis framework, along with how it gets applied to our first cohort of DAOs.
Especially in these initial stages, we’ll be looking at very reputable DAOs for lending.

have any DAO’s expressed interest in borrowing ?
will private investors be able to add to the FRAX fund as a staking option?
will protocols with anon devs be able to get a loan ?