Authors
Frax Core Team
Summary
This proposal seeks to authorize the sfrxUSD strategy framework to allocate up to 1,000,000 frxUSD into the Royco SLP. The objective is to provide redemption liquidity for sr-srRoyUSDC while earning yield generated by the underlying srRoyUSDC strategy, expanding sfrxUSD’s portfolio of governance-approved yield strategies and strengthening frxUSD’s role within the Royco ecosystem.
Background & Motivation
As sfrxUSD continues to expand its benchmark-rate strategy, the protocol seeks to diversify across governance-approved opportunities that combine attractive risk-adjusted returns with strategic ecosystem growth.
The Royco SLP serves as the primary redemption mechanism for srRoyUSDC and enables users to enter and exit positions through deep onchain liquidity. Supporting this pool allows frxUSD to become a core liquidity asset within the Royco ecosystem while generating yield from the underlying strategy.
This proposal establishes an initial allocation cap for the strategy while allowing the Frax Core Team to deploy capital prudently based on market conditions and ongoing risk assessment.
Proposal Details
Strategy Overview
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Protocol: Royco
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Strategy: SrRoyUSDC SLP
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Network: Ethereum
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Maximum Allocation: $1,000,000
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Strategy Type: Liquidity Provision
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Every Royco market splits a single yield source into three tranches: a Junior tranche that absorbs first losses, a Senior tranche that is protected and liquid, and a Senior Liquidity Provider tranche that provides secondary liquidity for Senior holders. This market’s strategy base asset is srRoyUSDC, so the Senior tranche is sr-srRoyUSDC and the SLP tranche is the pool this proposal concerns.
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Pool Composition: The initial pool is a Gyroscope E-CLP deployed on Balancer, seeded at approximately 90% frxUSD and 10% sr-srRoyUSDC.
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Pool Rebalancing: As sr-srRoyUSDC holders sell into the pool for frxUSD the price moves below fair NAV, which creates an arbitrage: third parties buy the discount and push the pool back toward peg.
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Redemptions: Exit by redeeming the SLP token, which returns its proportional share of the pool. The sr-srRoyUSDC portion can then be converted to frxUSD by selling it into the pool at the prevailing price, or redeemed natively on srRoyUSDC’s 30-day epoch. Redemptions are processed on demand and settle after a T+1 delay. Redemption is paused only in two states: while the market is in an Observation Period, or while it sits below its Minimum Liquidity requirement.
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How LPs Participate: LP’s can acquire the SLP token through Royco by depositing either frxUSD alone or a mix of both pool assets (frxUSD and sr-srRoyUSDC). Deposits route through the EntryPoint, which mints the SLP token against the LP’s contribution; underlying that token is the Balancer BPT for the E-CLP, staked into the SLP tranche. Thus, a single SLP token represents both the pool position and its accrued yield. Positions can be entered and exited on demand, subject to a T + 1 settlement delay, and the two pause conditions noted above. The T + 1 delay helps prevent front-running, defend the protocol against exploits, and ensure fair ordering.
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Expected Lifecycle: There is no fixed term. The SLP token accrues yield continuously and can be held indefinitely or exited whenever the pause conditions above do not apply.
Yield Generation
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SLP return is calculated as follows:
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Liquidity Premium + (sr-srRoyUSDC Yield * sr-srRoyUSDC Pool Shares) + (frxUSD T-Bill Rate * frxUSD Pool Shares) + Trading Fees − Impermanent Loss
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Liquidity Premium: A share of Senior yield paid to SLP in exchange for providing secondary liquidity.
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Trading Fees: Swap fees earned when arbitrageurs and traders swap between frxUSD and sr-srRoyUSDC in the pool.
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Yield compounds automatically. Value accrues to the token’s exchange rate rather than being distributed, so no manual reinvestment is required.
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The figures below are modeled outputs of the market’s Yield Distribution Model at target utilisation, not a promised or guaranteed return. Against a 6.00% srRoyUSDC underlying, the model produces an LT yield of approximately 6.30% at target utilisation, with the Senior at 3.80% and the Junior at 8.90%.
Asset & Risk Profile
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srRoyUSDC is an ERC-4626 USDC vault, curated by Dialectic, that allocates across the Senior tranches of Royco markets. It is diversified by mandate: no single capital source can exceed 20% of the vault, and every position it holds is itself a protected Senior tranche.
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sr-srRoyUSDC is the Senior tranche of a Royco market built on srRoyUSDC, sitting above a 20% first-loss buffer. The two numbers are matched by design: the buffer is 20%, and the most any single srRoyUSDC source can ever represent is also 20%. So even if an entire position goes to zero, the buffer absorbs it in full and sr-srRoyUSDC stays whole. Each underlying position is itself a Senior tranche with its own junior protection beneath it, so sr-srRoyUSDC is protected on two independent levels. This ensures that no single failure can touch it.
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Redemption Mechanics: The SLP token can be redeemed through Royco on demand, receiving its proportional share of pool assets after a T+1 delay, and is paused only during an Observation Period or below Minimum Liquidity. The frxUSD portion is liquid, and the sr-srRoyUSDC portion can be sold into the pool for frxUSD at the prevailing price or redeemed natively on srRoyUSDC’s roughly 30-day epoch cycle.
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Liquidity Profile: The SLP token can be redeemed through Royco (T+1, subject to the two pause conditions) or held indefinitely while it accrues yield. The SLP has no fixed term duration. The sr-srRoyUSDC portion received on redemption can be sold into the pool instantly or redeemed natively on srRoyUSDC’s roughly 30-day cycle.
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Counterparty/Custody: Dialectic acts as curator, making allocation decisions through a scoped vault multisig. Withdrawals can only be made to pre-approved addresses. Vault custody infrastructure runs through Makina and Concrete. The Royco Foundation holds governance and deployment authority under timelock.
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Price and oracle assumptions: Market drawdowns are detected by established oracle providers, Chainlink and RedStone. Tokenised real-world assets held in underlying markets are priced from NAV, and vault-level pricing is reviewed daily on NAV update. srRoyUSDC’s oracle determines price from its ERC-4626 exchange rate, updated as the vault’s net asset value is marked. The E-CLP uses a rate provider for sr-srRoyUSDC so that pool pricing tracks the Senior’s accruing exchange rate rather than treating it as a static-value token.
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Primary risks and mitigations:
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Smart contract risk: Royco Day has been audited by Tomer Ganor (audited Aave v4 and Lido v3), as well as Certora and Hexens. Royco also runs a $250,000 Immunefi bug bounty and uses Hypernative for real-time monitoring.
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Impermanent loss: The pool trades between two assets that both hold close to $1, so price movement can cause a minor amount of impermanent loss. The E-CLP design, as well as liquidity premium and trading fees are designed to mitigate and offset this.
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Exit timing: In rare stress conditions, the protocol may enter a temporary Observation Period, where redemptions are paused. This affects liquidity, not the value of assets.
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Underlying risk: The portion of the pool held in sr-srRoyUSDC is a strongly protected senior asset with a large minimum coverage, diversified across many sources with no single source above 20%.
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Counterparty risk: The portion of the pool held in sr-srRoyUSDC relies on several infrastructure providers: Makina and Concrete. Concrete’s vault core, Concrete Earn v2 (Standard and Async implementations), was audited by Halborn. Makina’s smart contracts have been audited by multiple top-tier firms: ChainSecurity (Makina Core and Makina Periphery), Sigma Prime, and OtterSec, with a Cantina bug bounty program.
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Strategic Benefits
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Supports frxUSD adoption within the Royco ecosystem.
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Diversifies sfrxUSD yield sources.
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Strengthens strategic collaboration between Frax Finance and Royco.
Voting
For: Approve adding the Royco SLP Redemption Pool as an sfrxUSD strategy with a maximum allocation of $1,000,000.
Against: Do nothing.