FIP 84 - FRAX <> Gamma Strategies (Revised^2)

Summary

Add the Gamma FPI-FRAX 0.05% Uniswap v3 pool to FRAX gauges on Optimism

Background

Gamma is an active liquidity manager and market making platform that is currently building on Uniswap v3. It has been managing liquidity on Uniswap v3 since the launch of Uniswap v3 and has undergone multiple audits with the most recent one completed by ConsenSys Diligence. Currently, Gamma is managing over 50 pairs on Mainnet, 9 pairs on Polygon, and 5 pairs on Optimism.

Motivation

The main advantage of adding a Frax gauge for the FPI-FRAX Uniswap v3 pool is to increase market coverage and trade volume for FPI and FRAX on Optimism. Uniswap currently has majority market share of all trading volume on Optimism (as of 6/21/2022). The capital efficiency and breadth of assets on Uniswap will allow for efficient trades from ETH, WBTC, and exotic assets to FPI and vice versa. This combined with Uniswap’s top-of-mind awareness amongst traders and LPs ultimately allows for greater exposure to FPI.

The advantages of using Gamma to manage the FPI-FRAX pool is that it will manage the range to more tightly maintain the peg to the CPI-U as indicated here Bureau of Labor Statistics Data as well as generate profitable yield for LPs.

Unlike prior gauges for Uniswap v3 FRAX-USDC and Uniswap v3 FRAX-DAI, the gauge for FPI-FRAX will likely require active management due to the slowly drifting peg of FPI. For example, the current Uniswap V3 FRAX/USDC position was easier to make a gauge for because one could simply specify the min and max price at 0.995 and 1.005 respectively without ever having to change the ranges for the position. Because FPI will increase against FRAX over time, some active management of the position will be necessary.

Gamma is currently managing the rETH-THETA / ETH pair for Ribbon Finance, which similarly deals with an increase in rETH-THETA price against ETH of around 0.3% per week. Our algorithm dynamically tracks the price per share of rETH-THETA and manages the liquidity to maintain peg to the Net Asset Value of rETH-THETA. Similarly, we will track the value of the CPI and automatically manage the liquidity ranges to maintain peg to the CPI-U.

An added benefit of having a manager is that we will also compound fees that are collected outside of the LP position back into the LP position, further increasing the liquidity for FPI-FRAX.

FRAX/FPI Specs

  • Fee Tier: 0.05%
  • Position ranges: Maintain a +/- 5 tick distance from the current price as indicated by the CPI-U
    • Example if CPI-U price is 1 FRAX per FPI, then lower range will be 0.9956 and upper range will be 1.0056.

Gamma Specs

  • Gamma takes 10% of fees claimed to pay gas fees for rebalances
  • The position manager contract allows for limited admin functionality, namely with regards to rebalancing the position as the FPI drifts gradually upward. There is no functionality or admin rights to withdraw any liquidity.

Last audit was performed by blue chip auditing firm, ConsenSys Diligence Audits on 3/28/2022. All audit details can be found here: https://docs.gamma.xyz/gamma/learn/audits

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Hey brian, I really like Uniswap and Gamma so my view here is biased, with that on the table, I’m really in favor of this proposal. If I understood correctly the modification was to take back the token swap? I’m in favor of this change, I lean on the conservative side of token swaps.
This gauge would be launched on mainnet? What do you think of launching in a L2 (I’m thinking Optimism) as an experiment? Frax is already supplying FPI liquidity on mainnet and volume is low, I think making it accessible to small fish and observe if this drives a different behaviour would be a nice experiment.
What do you think of also launching a Frax/Eth pool gauge on Optimism? Liquidity there is still relatively low with about 10m between Eth/USDC-DAI pools, I think it’d be a nice endeavour for Frax to try to take Optimism by storm and become the largest stablecoin on the L2, it is already integrated on Perp so I think we should push to build momentum there.

2 Likes

Hi seba!

Appreciate the response here. I think given the CPI metrics that was just released today, I think FPI and FPI liquidity will become more top of mind for folks. Please see below for the answers to your questions.

If I understood correctly the modification was to take back the token swap?

Yes, the modification was to take back the token swap at the suggestion of @C2tP-C2tP as well as language regarding capital efficiency metrics of Curve. The data is now outdated in that Curve has lower price impact on larger trades due to the variances in liquidity.

This gauge would be launched on mainnet? What do you think of launching in a L2 (I’m thinking Optimism) as an experiment?

We are open to suggestions, and we would absolutely be open to launching on Optimism. Our Phase 1 governance proposal is under review, so there is a potential for liquidity providers in Optimism to receive OP ecosystem rewards along with FXS rewards.

The thought was to add more liquidity on Mainnet given that was where the current liquidity pool is, but now that you mention it, I think Optimism would be a fantastic choice.

What do you think of also launching a Frax/Eth pool gauge on Optimism?

We would certainly be open to a FRAX/ETH pool on Optimism as well. For the purposes of simplicity however, we will reserve the governance proposal here to just FPI/FRAX; however, we would certainly be open to having another governance proposal for the FRAX/ETH pair on Optimism

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i have no problem in adding more pools to the gauge and see this as a fair contender for consideration.

This pool would likely add to FRAX and FPI adoption, but i would expect the pool to start on the small side due to the capped supply of FPI as we try to do a slow (low risk) launch of the token.

i think launching on mainnet first would work best , and i think adding ETH pairs to the gauge is simpler / faster to do (dont quote me on that tho)

If this pool is created and run well for a few months then we could take a look at adding other pools, personally i think a FPI/FPIS pool would be the next step as the FPI ecosystem is an area we will be trying to expand once the core foundations of the system go live.

3 Likes

Sure, the main reason that I thought Optimism was a good idea was that (1) we could potentially incentivize this pool with OP rewards and (2) there currently isn’t a market for FPI on Optimism already, but there is one for Mainnet on Curve.

Perhaps a series of polls can make this easier.

Are you favor of a Frax gauge for FPI/FRAX?

  • Yes
  • No

0 voters

On what network would you like to have the Frax gauge for FRAX/FPI Uniswap v3 pair?

  • Mainnet
  • Optimism

0 voters

What fee tier would you like to have for the FRAX/FPI Uniswap v3 pair?

  • 0.05%
  • 0.3%

0 voters

Keep in mind that the current FPI/FRAX pool on Mainnet already has $2.62M of liquidity in the 0.3% fee tier, so we would be able to leverage that fee tier on Mainnet. On Optimism, I would suggest 0.05% as the right fee tier.

2 Likes

There seems to be a preference towards Optimism on the polls. Also, @C2tP-C2tP has pointed out that Optimism may be the better option here. The gas fees are cheaper and the potential for OP rewards and FRAX/FPI adoption on Optimism would go a long way! Thank you everyone for their input

2 Likes

Awesome! Just brainstorming here about the Eth pool, do you think it could be possible to make a FRAX/SNX strategy. Synthethix is getting huge on optimism and tightening relations may be beneficial for both protocols, in the future could be really cool if we convince them to use the fraxbp. But in the meantime, the SNX pools have kinda small liquiditiy, but are doing huge volumes, and they may be open for more incentivized liquidity.

Edit: Although thinking a little bit more about it it would make more sense for them to pair with sUSD

1 Like