FIP 77 - $20m FXS buyback program using TWAMM

Authors
Sam Kazemian
Travis Moore

Summary
Propose using 20m FRAX to buyback FXS using Fraxswap FRAX-FXS TWAMM pair over a period of minimum 3 days or up to 30+ days (exact period at core team’s discretion).

Background and Motivation
Over the past month, the crypto markets have indisputably become bearish and prices have dropped anywhere between 40-90% for most major tokens. However, FXS has been particularly hard hit. FRAX’s peg is indisputably resilient, has never been in doubt, and has held perfectly since inception. The protocol as a whole has been in excellent shape. Thus, the core team does not believe the significantly worse performance of FXS compared to other tokens is justified any longer and feels confident to propose a large $20m FXS buyback using the TWAMM should the community+token holders approve.

FRAX still makes over $80m annual revenue while FXS has dropped out of the top 100 Coingecko rankings. Thus, FXS seems to be the most undervalued out of all other volatile assets FRAX could hold on the balance sheet. At these prices, it is probable that using capital/profits to purchase FXS is the best use of capital dollar for dollar spent. It’s important to highlight that this is not something that is often true. This is only the case when the community and core team believe that FXS is the most undervalued across all assets that the protocol can allocate capital to. For example, a $20m FXS buyback (and burn) at $4 FXS would retire 5% of the total supply of FXS. An incredible return of value to token holders at such prices. Such a scenario would effectively make the total supply of FXS less than 95m.

But at this time, we personally believe that to be the case. Thus, we are proposing this extensive buyback program. FRAX is strong and profitable enough to take advantage of the market irrationality on its governance token. While other protocols are liquidating volatile assets and their tokens for stablecoins, FRAX has a formidable warchest and cash flows that it can do the exact opposite and take advantage of this mispricing.

Should the proposal pass, the FXS bought back can be burned entirely, placed in veFXS yield, or retained in the treasury until future governance allocates uses. This specific proposal is simply for the clearance to initiate this $20m TWAMM FXS buyback.

PROPOSAL

For: Approve 20m FRAX to buyback FXS using Fraxswap TWAMM of 3 days or up to 30+ day period.

Against: Do nothing

19 Likes

I support this idea. It will be priced in to the FXS pretty quickly. Acting as a supportive floor. The longer period the better, this way it would be a smaller % of daily volume. It will also incentivize stakers (APR) through a relatively higher FXS price. I don’t see the protocol owning a large amount of FXS in the long run. My preference is to burn the FXS.

2 Likes

seems like a move that would help in the short run the price
I would leave it to the market to properly price fxs and focus on allocating the budget to accumulate tokens that can bring yield and stability to the protocol in the long run

1 Like

What about stepping in only when the price of FXS is below $5?

1 Like

value must be brought up when seen!

This should be an ongoing thing and not just a once, maybe we just give the team permission to spend upto x amount per month. doing this will avoid what we are seeing today, where to price has pumped just because this has gone up in the governance threads.


edit .
im not 100% sure that current me agrees with past me who said that bit up there^ .

i need to see more points of view before i vote.

2 Likes

I agree with the proposal

LFG. But what would be corrective course of action, if markets were to fall further ?

Hi Sam,

Can you Please expand on the proposal, in particular, where the $20m would come from?
I believe on tg you endorsed using profits, and not lowering the cr, though I can’t find it at the moment.
Assuming that’s the case, will frax be selling the farmed cvx rewards in addition to crv? would this be instead of the vefxs yield?

Thanks

from protocol profits, don’t need to sell cvx/crv. The reason to sell crv because it is useless for Frax, not because needs cash

I believe farmed cvx and crv are the majority of protocol profits

1 Like

I believe such a buyback should happen only when FXS price is less than $4, as in the example mentioned in the proposal. When there is not such a mechanism in buybacks, people just front run it and then dump during/after buybacks, which is harmful for the treasury especially considering that $20M can be a big chunk of yearly protocol revenue when the prices of the assets that protocol earns keep decreasing.

We should also clarify where this $20M would be coming from and what the actual action with the bought FXS would be.

I support this idea,It will be priced in to the FXS pretty quickly.

As other people have mentioned, this proposal should include:

  • Very specific language on where the frax comes from

  • An upper price limit

Other things to consider if 20m is to be spent:

  • Is fxs buyback only short term? What long term effects are there? (Example: at $4 a 1m fxs purchase costs 4m frax, if fxs is later $40 then it can output $40m worth of redemptions)

  • Are there other uses that could provide more long term functionality? (For example, crv once whitelist passes)

1 Like

I fully support this move for 2 reasons:

  1. If you compare the price to earnings ratios of FXS to major well-established banks you’ll frequently see these major well-established banks hit PE ratios of 6 during their worst moments (for example when every economy around the world halted due to Covid JP Morgan hit a ratio of 7.3 at its low, Goldman Sachs hit a low of 7.1, Bank of America hit a low of 6.3, Wells Fargo hit a low of 6.2). FXS is currently at a ratio of 5.2, this alone is an indication we’re at our low, and yet this doesn’t account for the most important point (see reason 2).

  2. When you compare FXS to major well-established banks, FXS is not well-established, meaning its potential for exponential growth is still there. For example Bank of America operates with $2 trillion Assets Under Management (AUM), Bank of America cannot grow its AUM 100x from here to increase their earnings further (because they cannot allocate $200 trillion effectively). On the other hand Frax has $1.5b AUM and can increase its AUM 100x from here, this of course means earnings have incredible room to grow. Therefore FXS should have a much higher PE ratio than a baseline of 6 in order to price in its enormous growth potential, which currently is not the case (my opinion after looking through historical data on new banks is that FXS should, at the VERY minimum, have a PE ratio of 30, even during bear markets - As for why FXS currently has a PE ratio far below expected I’ll leave for another discussion).

To summarize, FXS is at its low without even accounting for potential growth therefore this is the sweet spot to begin a buyback program, these circumstances are the exact reason buybacks are used in traditional finance - Benefits both the short and long term holders, great proposal. I would support this buy back program up to $15-18 per FXS (PE ratios of 13 to 15.6 respectively in order to optimize the use of the $20m).

I would also like to add a few words in regards to other peoples ideas about setting a low buying floor, such as $5, to buy FXS at anytime it hits. To this I will say that there is no ‘perfect’ way to do a buyback, the art to a good buyback is to ride that equilibrium between utilizing all available funds ($20m) against getting the cheapest price possible. Setting a buyback limit too low, like $5, is a mistake of the greedy and risks us not being able to deploy the $20m in its entirety to capitalize on the low PE ratios presented to us - It is much more preferable to set upper buyback limits, not lower. This is another reason why I support buybacks of FXS up to $15-18 (PE ratios of 13 to 15.6 respectively) despite myself reasoning above that a PE ratio of anything less than 30 still technically considered a good buying opportunity. Our goal is to ride that equilibrium, not straying too far above or below it. Setting buybacks limits higher than the existing price guarantees that we at the very least utilize some of the $20m in funds, opposed to buyback limits set lower than the existing price, which may not be hit at all. I would also support no buyback price limits, simply buybacks at regular intervals over the course 3 days to 1 month as Sam suggested, as this removes the risk of not being able to deploy all of the $20m.

2 Likes

Agree we need a little more specificity on the which pot the funds it comes out of. I imagine we can approve parameters for action in a similar manner to how Olympus policy team’s management of their current inverse bonds program is operated within a framework.

For example we could have it thus - a program that is to target absorption of FXS from the market - given it is below fair market value in the opinion of the Frax community. It must accord within the following parameters in its execution:

  1. Program should target engage to extract FXS from the market in a consistent manner over a material number of weeks
  2. Program should not use more than $2mm per week globally
  3. Program should not use more than $1mm per week if previous week’s 7 day time weighted average price is above $7.50
  4. Program should not use more than $500K per week if previous week’s 7 day time weighted average price is above $10
  5. Program should not use more than $250K per week if previous week’s 7 day time weighted average price is above $15

In relation to this point @C2tP-C2tP

I agree it is important to consider other avenues, but while I am open to being convinced otherwise, it seems to me that increase in price of FXS and thereby encouraging the flourishing of the Frax gauge system is more of a current priority than increasing our Curve holdings. We also need to be careful to not become unassailably dominant in the Curve wars and allow the opportunity for other players to rise

Why we shouldn’t spend $20m to buyback FXS

Hi, I’m strongly against this proposal and in this rebuttal I’ll present why.

Summary

  • Frax Protocol shouldn’t spend 20M to buyback FXS
  • It is a short term relieve, we need to build for the long term
  • Frax is not profitable
  • There are enough funds for the proposal, but that is not how we should spend them

1. Does Frax have enough money to fund it? Yes

There are currently 1.5 billion circulating Frax, of that number, Frax protocol (FraxP) controls:

  • ~660m in stable liquidity positions (Curve, Saddle, UniV3, others)
  • 120.3m accross several wallets and chains
  • 8.2m lent mainly on Rari (plus 15m uncertain depending on FeiRari’s compensation plan)
  • 29.2m in volatile liquidity positions (Frax/FXS on Sushi, and others)

Additionally, FraxP controls the following external (not Frax or FXS) assets:

  • 569.7m in stable liquidity positions (306.7m in USDT)
  • 23.8m in stable assets across several wallets (practically 100% USDC)
  • 49.3m in volatile assets (20m in CVX)
  • 17.6 in volatile liquidity positions (Frax/Eth, others)

When we substract the pure-stablecoin protocol owned value, we are left with 118.3m outstanding Frax that are backed with a combination of 28.2m owned Frax in volatile liquidity positions, 66.9m of volatile assets (in wallets or liquidity positions) and the algorithmic (FXS emissions) part.

To further ensure Frax’s stability, the liquidity locked for more than 1 year corresponds to:

  • 4m in StakeDAO sdETH-FraxPut Strategy
  • 11m in StakeDAO Frax3Crv Strategy (Possible to unlock early do migration to the FraxBP)
  • 7.5m in Temple/Frax
  • 4m in Frax/agEUR Uni V3 pool
  • 20m in Frax/Dai Uni V3 pool
  • 88m in Frax/USDC Uni V3 pool
  • 1m in Vesper Orbit Frax

Totaling 135.5m in value locked for at least 1 year, and more than 90% of the just listed funds are locked for more than 2 years.

Given the present information, we can see that there is pratically zero economical risk of Frax depegging in the near term and the expenditure of 20m can be easily handled.

2. Is Frax profitable? Not really

For this analysis I will only present information of the Convex farming rewards which accounts for practically all FraxP’s revenue and the information can be accessed here.

Since September FraxP has spent 3.735m FXS in bribes, 975k in May and 2.86m in 2022, if we take the prices at the time they were spent, it corresponds to $11.4m in May.
In total FraxP has farmed 13.4m CRV and 2.584m CVX. If we look at May and the prices at which they were farmed it corresponds to $5.42m in CRV ($4.38m at the time of writing + $1.04m projected for the remaining weeek) and 313k CVX ($5.4m with prices at the time it was farmed). We can see that for May it is not certain it will break even.

From an historical POV, if FraxP sold the CRV it farmed immediately for stablecoins (which often occurred but not always, other times it was used to buy Eth for example), it would have received $44.1m + the 2.584m farmed CVX, a very good deal for 3.735m FXS, but unfortunate situations like the Luna collapse and Cream and Rari’s hacks have resulted in >$25m lost and >15m Frax currently unwithdrawable, for these reasons FraxP has to be very careful how it spends it funds in the future.

We can see that bribes are struggling to breakeven and how critical it is to be specially careful with how funds are spend. For this reason we should take a look into the present and future of Convex and Curve economics and analyze how they will evolve, and more specifically their value.
Currently CVX value comes from its high APR, which comes from the bribes it allows it holders to receive, important question now is, what happens if bribes decrease substantially? Since CVX APR would decrease significantly, we could see its value taking a hit, the situation comes down to this:

  • FraxP’s high bribes are justified by Convex high yield farming
  • Convex yield farming rewards comes from high CRV<->CVX value
  • High CRV<->CVX comes from high bribes

We can see the cycle here, and the conclusion is that CRV and CVX will mantain their current value as long as the people sponsoring the bribes, the FXS holders, think they are acquiring-CVX-selling-FXS at a fair valuation, we just have to keep in mind that if eventually FXS holders decided to begin selling the CVX it farms or reducing the bribes, both CVX and CRV would take a hit.

Finally and unfortunately, we also have to consider that currently FraxP is distributing 20k FXS per day in its own yield farming program, so this additional expense makes FraxP certainly not profitable.

3. What does profitability have to do with buying FXS

The reason why FraxP is not profitable is because it has not found a market, its only use case is yield farming, and the ones paying for the emissions used to yield farm are FXS holders.
If we want for Frax to have a future we should be looking into building real and sustainable use cases for it, for this reason I think that any big expense should be with this in mind and using $20m to buyback FXS won’t be more than a temporary relieve and an opportunity for non-committed investors to sell their FXS. The long term investors, the ones that locked liquidity for years, won’t benefit at all from this. Most importantly this buyback does not benefit Frax at all, does not help build a market nor use cases for it, and towards this goal is how we should spend funds.

4. FraxP has been consistently buying over $2m FXS per month for the last half year

FXS1559 was introduced to buy FXS with the protocol revenue, and has beign doing so consistently, buying more than $2m monthly in FXS for several months , buybacks are fine as they are and there is no need to allocate more capital to it. Even further, these buybacks are performed with the revenue generated from Convex bribes, which means that we are emitting (selling) FXS for CRV+CVX, which is then used to rebuy FXS, seems counterproductive.

Closing

As a sumary, FraxP shouldn’t use an additional $20m to buyback FXS because: (1) FraxP can be seen as an early stage startup which has not found market yet, expenses should be focused in finding this market, (2) FraxP is not profitable, so although it is able to afford a $20m expenditure, it should be very weary of how to use it because it has a decreasing runway, (3) it is a temporary relieve that does not benefit long term investors, (4) FraxP is already spending big amounts of its revenue in FXS1559 buybacks.

Ideas of how FraxP should use its funds

These proposals are just to answer the natural question of what should FraxP use its funds for then? that arises from what I just talked about. The following are in my opinion some of the best options for FraxP:

  • Follow 0xHamz proposal and deposit hundreds of millions of Frax collateral (How to sell our USDT is another topic) into uncollateralized lenders for sustainable high yields.
  • Launch a Frax build program and partially subsidize protocols that build real use cases for Frax that do not rely on emissions, like StakeDAO’s Frax-Eth-Put strategy. For example if someone builds a 4% yield strategy for Frax and amasses 100m TVL, FraxP could sponsor another 4m per year, which would result on an 8% APR, but most importantly, this 100m of Frax demand means that FraxP has an additional 100m of collateral which it can use to invest in uncollateralized loans strategies that yield >6% per year.
8 Likes

Incredibly well written rebuttal @seba, and I wholeheartedly agree with much of what you said re this not being a great use case due to ongoing emissions; a buyback is really just dampening ongoing emissions. This is similar to a buyback by public companies, who then turns around and raises capital, thus re-diluting. It rarely has the expected effect.

FraxP really needs to find its next $1b of expansion, imo. That could certainly be FraxBasePool, given the incentivization model. 0xHamz’s suggestion of getting into lending could be another. Buying back $20m of FXS would work well for a net profitable protocol that was quite a bit more mature and had a rock solid balance sheet, but as it stands Frax is none of those things.

2 Likes

I partly agree with what @seba wrote. FraxP must expand but it also needs a strong impulse to get out of the strong “negative” speculation that was created after the crack of Terra. The idea of the buyback has already given its first effects, now not completing it would mean falling back into prices and speculation bringing prices to perhaps new lows. The buyback will demonstrate the strength of the protocol and the ability to buy when other protocols sell assets to survive.
To avoid front running that is too easy, you should avoid putting maximum or minimum buyback execution prices.

The ideas proposed by @seba are interesting. We can create another discussion with related proposals.

Like your writing, but even you are not sure frax is profitable or not. I think that is depends on definition of profitable.
But I do see Frax in disaster after both fip-77 & 79 at current market condition.