FPIS to veFXS Merger

[samkazemian]

FIP-3XX & FPIIP-X
(For vote on both Frax snapshot by FXS voters as well as FPI snapshot by FPIS voters)

Authors:
Frax Core Developers

Summary:
Merge FPIS tokens into the FXS distribution at a fixed exchange rate of 1 FPIS to a 4 year veFXS lock meaning that in 4 years, 1 FPIS can be withdrawn from veFXS as 1 FXS if a user does not extend the lock.

Proposal:
These steps should be taken if the merge option has the higher vote count above quorum:

1. FPI Protocol treasury becomes Frax Protocol treasury, including profits/surplus. FPI stablecoins remain in existence and governed by FXS voters.
2. veFPIS stakers become unlocked and can withdraw their FPIS. veFPIS yield will be deprecated.
3. FPIS tokens can be staked on Fraxtal’s special “veFXS merge contract” through a unique mechanism that locks the FPIS for the 4 year lock date passed by this proposal. The four year lock date is February 21st, 2028.
4. When the veFXS stake becomes unlocked (if a user does not extend the lock) on February 21st, 2028, users are able to withdraw FXS from the veFXS contract rather than FPIS at a 1 to 1 ratio.

To be clear, this proposal does not require or advocate for minting additional FXS at this time even if the merge passes. FXS would only be required to be minted at the end of the unlock period for veFXS when a withdrawal is requested by an unlocked user in 2028 or later. This proposal essentially increases the total supply of veFXS but not FXS until at minimum 4 years from the date of passing.

Motivation & Goals:

1. Absorb FPIS back into the FXS distribution which will allow the core team to focus only on FXS value accrual for all the Frax Finance ecosystem (FRAX, frxETH, FPI [and frxBTC later]) and DeFi infrastructure such as Fraxlend, Fraxswap, BAMM etc. Burn 30,000,000 FPIS tokens in the Frax Finance treasury. Burn all 29,278,846 FPIS in the Frax Price Index Treasury.
2. Make FXS the sole token representing the entire DeFi stack of the Frax universe ahead of Fraxtal mainnet growth and full launch.
3. Reward FPIS holders and stakers that believed in the DeFi vision and innovation of Frax Finance while allowing FPI to continue to exist in its mission under unified FXS governance.

Proposal:

1. Merge FPIS into FXS with a 4 year veFXS lock
2. Do nothing

[Sharkysnakefish]

Suggestion for edit.

Ratio between FPIS and FXS should be changed to 1.5/1 FPIS to FXS with a 4 year lock up. Including possibility of airdrop 6th of March.

To even more align FXS holders and FPIS holders, a boost could be created meaning that only veFXS stakers with enough veFXS can obtain this ratio while non-veFXS stakers have a lower ratio. Suggested for non-veFXS stakers is 4/1 FPIS to FXS.

[0xVanna]

I’m very opposed to this proposal for the following reasons:

1. FPIS to FXS convergence at 1:1 ratio would mean an 800% guaranteed profit from today’s prices.
   Then the response is: ‘but it gets locked for 4 years’. However, during those 4 years, FXS will appreciate in value most likely, and so the waiting period is already being compensated by the price appreciation of the FXS token which FPIS holders are converging to.
   To put a free 8x on top of that is very unfair, ESPECIALLY because:

2. Current veFXS holders who have shown their dedication by locking their FXS for 4 years don’t have the same free 800% gain, whilst locking the tokens for the exact same time (no good deed goes unpunished).

AND

3. The FXS 1:1 convergence ratio will mean the total FXS supply will be diluted when the 4 years have passed and FPIS holders can unlock their veFXS (which they obviously will).

Then there is more unwanted consequences:

4. the amount of FPIS locked as veFXS will have the highest time weight of 4 years, meaning a ton of veFXS will be created in the veFXS pool, which means it will dilute every current veFXS holder by A LOT. Not only missing out on rewards but also on voting power in the future.

Last point to finish off the list of negative consequences:
5. It will benefit convex protocol in potentially unwanted ways by the cvxFXS / cvxFPIS tokens, but I’m not into convex so that is something someone else may expand on.

To be clear: I am not against a merge of FPIS with the rest of the protocol stack. I would vouch for more simplicity and the absorption of the balance sheet of FPIS, but please… let there be a proposal which is acceptable for FXS holders.
My view is that, should this proposal come to pass, the credibility of the FXS token gets a big hit, especially because of the increase of the total amount of FXS in circulation.

Thanks in advance for taking my worries into consideration.

[hollowgrahm]

There’s currently 40M FXS, or $345M of value currently locked, accounting for 88M veFXS. If FPIS were to be converted 1:1, that means that only $54M worth of FPIS value would actually be backing 160M of new veFXS, completely shrinking the current veFXS holders, which would hold 86% of the value locked, down to only having 35% of the governance power. In comparison, previous FPIS holders would only provide 14% of value locked, but have a disproportionate 65% of all the veFXS governance power, and all the protocol profits that come alongside it.

So if FPIS wants to convert to FXS, I think it should be at a 14% ratio, which is slightly higher than the 8:1 (12.5%) conversion rate that’s been thrown around the Telegram channel. Just to clarify, I am in favor of the merge, but just at a ratio that can be supported by the numbers.

[universalyield]

I don’t think it’s fair to measure FPIS’s value by comparing market cap as the current numbers are an indication of how left out FPIS has been compared to FXS.

As mentioned, the point of the proposal is to reward FPIS holders that believed in Frax through FPIS. It’s easy to be bullish on Frax through FXS as all the incentives are already laid out. FPIS holders on the hand have been feeling left out since launch.

There was a grand vision to FPIS that some people believed in and the bottom line is it looks like that’s no longer going to be pursued. This proposal seems like a fresh take from the Frax Finance team to make things right and finally provide value to FPIS holders other than inflationary staking rewards.

[SUBGURU]

Guys could you pls specify whether 4 lockup of FPIS will have the same effects/benefits as veFXS right after entering the merge contract? Eligibility for airdrop, fraxtal points and so on…

[ssmccul]

As a large FPIS holder, I would love this proposal to go through, but it would be a bad deal for FXS and veFXS.

In every merger, deals must be funded with either cash, debt, or equity. This steel proposes using close to $200 million worth of Frax equity (FXS) To absorb FPIS. Justification for this is that the participant will have a four year lock.

Frax could also use cash to acquire FPI at a certain market rate, but this would only increase the CR in a time where significant actions are being taken to bring it to 100.

A third option, which I think would be best for both Frax and FPIS Would be to offer a buyout using FXB. This would be done with the 2026 maturity date, or if possible a new maturity date in 2029. By going down this route, Frax can create a brand new liquidity source for the FXBs, Putting the buyout cost on the balance sheet, so that it can be slowly paid off with protocol revenues over time.

The further the maturity date into the future the closer to the spot market price frax can provide. With a five year maturity, frax could potentially even offer a premium over the one dollar market price of 10 to 20%.

Two of these options could be paired together, with some people taking the veFXS At a rate of four to one, while another cohort takes the route of FXB for immediate liquidity

[0xstrife]

Honestly, this proposal is the first time in years I’ve been genuinely concerned. This proposal has very drastic implications if approved as is:

-a large increase on a previously fixed supply
-massive dilution to vefxs holders
-vesting the supply further pushes governance centralization into liquid wrapper issuers

Decisions like these are etched into protocol history. Once supply is increased once, the perception of a fixed supply is forever broken imo. Does this really seem like a worthwhile proposal to change investor optics on that subject?

Throughout my time in the frax community, the difference between fpis and fxs has been stated multiple times from the core team.

“FXS is modeled as sort of the “L1” token of the Frax universe while FPIS is kind of like a dapp built on top. You can kind of think of FXS as ETH and FPIS as an ERC20 token like CRV to give a metaphorical example.”

“The way the 2 tokens are designed is that FXS will always accrue value if FPI grows no matter what. FXS is like the aggregate growth of the entire Frax economy as a whole” … “If you think the Frax economy is undervalued as a whole, you should want to own more FXS. If you think people are undervaluing FPI growth specifically, you should increase more exposure to FPIS”

It’s been quite clear what FPIS was - a bet on FPI adoption. If this were to pass, it instead turns into a leveraged bet on FXS.

Alternative solutions for merge I would support:
-A % of buybacks for vefxs yield being distributed exclusively to fpis converters until a ratio is met
-A reduction in conversion ratio & issuance without increasing max supply of fxs
-supplementing with fraxtal points instead of veFXS (we don’t have any pre-conceived supply constraints here). Although this whole proposal has given me pause on the concept of the points
-A buyout based on the 90 day moving average of FPIS
-Some combination of the above - or even a new, non dilutive proposal

If nothing else, I’m curious if a 4 year lock is the right move, or if it will further concentrate governance power into fewer hands.

[0xVanna]

I can understand that feeling and frustration of feeling left out, but FXS holders cannot be punished for the hopes and dreams of another cohort of holders from a DIFFERENT token that did not come to fruition. Should be resolved in a different, better way which stays far away from diluting the FXS supply and getting an absurdly favorable ratio to convert.

[XGODOFWARX]

I agree with this FPIS to veFXS merger. We have to be unified to push FXS forward. If we dont there will be in fighting between both. That is not good for outside people looking in. 1 to 1 locked veFXS conversion is the only way. FPIS should be given voting rights due to being consumed in to FXS. If this doesn’t happen there will be bad blood. Trust me i have seen the happen during big business mergers and takeovers. We don’t need this now.

[Sharkysnakefish]

The more this discussion have evolved, the more I disagree on this stance. 1:1 conversion overly favours FPIS holders and don’t make sense for FXS. FXS don’t need FPIS. FPIS need FXS to grow. For ecosystem simplicity, one token would be nice but not necessary.

There should be a balanced mechanic. Do a 180 day average price of both, and make that the ratio. Long term holders of both tokens will probably accept that, and opportunists buying FPIS will not. But those are not who we are trying to please. If a premium is discussed , it should be locked with FXB or veFXS for 4 years. However, there are strong arguments for why both FXS and FPIS should get premiums so in my opinion a flat conversion makes the most sense for me.

If a premium is discussed, the best argument for it I think is if FPIS holders have to lock for 4 years. This buys time and delays issuance. So its a premium for having to wait.

[Croom]

So after through everything on TG, as a pure FXS holder I do feel like I understand the FPIS side a bit better. But the thing that still bothers me is that all of the points in favor of the proposal would seem to have the same level of validity if the proposal had instead come out with an even more generous ratio of something like 1 FPIS : 2 FXS. Other than those that bought FPIS after the proposal, I think it’s silly to try to connote long term alignment based on whether they still hold FPIS or not. I received some FPIS, and decided to sell it for more FXS because I believed that it would accrue more value, and plan to hold for years to come. That’s what the market is for, any speculation as to FPI being important in the future should already be factored in to the market price.

That doesn’t mean I’m entirely against any premium at all, but I do think that any mention of what’s “fair” that doesn’t start based on market price and expected revenue or emissions feels tenuous. If we were discussing a token unrelated to frax that none of us held, I think we could all agree that holders shouldn’t be compensated solely based on their long term belief in it or because the amount of work put towards it from the team turned out differently then they expected. Just want to make it clear that regardless of the future success of FXS, a holder like me that has decided to only hold FXS will be worse off in the case of a premium / favorable ratio as opposed to a potential merge at market price, whether it’s in future FXS dilution or paying through revenue / some other method.

That said I think the method discussion is just as important as the ratio. Seen some good alternatives to the FXS supply cap increasing, the veFXS voting power dilution does feel concerning to me.

The problem is that the parties that hold both tokens have a clear perverse incentive, as voting in favor of FPIS will benefit them relative to those that only hold FXS, assuming the protocols integrity and eventual value doesn’t take a hit as a result.

Not saying that all these details are the case for FPIS, but I think an extreme example can help illustrate my point. Imagine a completely worthless rock token with no function that was randomly given to 60% of veFXS holders. A vote to then convert that token into FXS, or use protocol revenue to buy it out would be a clear win for those holders if the eventual value of FXS was unaffected. Hell, let’s make it 1 rock : 2 FXS, even better. If I’m a rational rock holder, it’s an easy passed vote as long as I’m convinced that the merge wont impact future FXS price.

Now in the real case, as a pure FXS holder I do see value in merging FPIS, such that I’m open to a deviation from market price in favor of FPIS according to the estimation of value I expect it to bring to FXS. My motivation and rationale is only based on what I believe will help to grow the entire pie. But what concerns me is that there is incentive for fpis holders to instead act in ways that only increase their relative share of the pie (although I do think there are also many on the FPIS side arguing in good faith, and even some FPIS holders that seem just as opposed to the stated proposal as I am).

Again, no matter how we feel about the proposal, if we can all agree that the potential perverse incentive does exist, then I think any mention of what’s ‘fair’ needs to be based on market price + all of the value of a successful merge (whether that’s FPIS revenue, emissions, or even just appeasing holders. If that is a component that we are factoring in, then it should be explicit.)

[bob]

Just reposting some thoughts from telegram for consideration.

This has been a thoroughly interesting discussion around the absorbing of FPIS into the FXS system. Wonderful case study. My two cents worth is it is almost impossible to artificially agree some ratio in advance as a proposal and then roll out as some people will always be unhappy and others will be unhappy in 4 years time. Im not smart enough for this but do believe in the freedom of markets and demand / supply arriving at a sensible price. Would it not make more sense then to have 4 lock up contracts - @1 year, 2 year, 3 and 4 so FPIS holders can commit their FPIS to one of the lockers to be burned for VeFXS but the ratio is more dynamic and will fluctuate according to how many people commit to each pool. See how people will actually commit to a 4 year lock up say paying a 1:1 ratio versus lower ratios at earlier unlocks. The supply side needs to be dictated by FXS coming (a) from a community unlock of x FSX and (b) FXS holders willing to sell their FXS into the lockups paying out an instantaneous Frax/stable coin incentive. OK all rough and ready and Im not really an expert on the protcols but just thinking you need some 'market adjusting mechanism that will value the ratio accordingly between the demand for ‘burning of FPIS’ by FXS holders and supply of FPIS.

[gaugamela]

I caught Sam Kazemian’s Fraxtal interview the other day, and he briefly digressed at one point on how there will always be some people that complain when 100% of the value doesn’t accrue to them personally. So we’ve got a live example now…

I see a lot of calculations above regarding how asymmetrically unfavorable this is to FXS holders, but if you really believe your own math then shouldn’t you just buy some FPIS, vote the proposal through and capture the asymmetry yourself?

We live in a world of false duality, and it can be easy to get pulled in one direction or the other but there is a better path. This vote is not really FPIS versus FXS, but rather it will be decided by the people who own both FXS and FPIS simultaneously. I suggest you consider how this last group will vote, the ones that have already self-actualized the merge via their own holdings.

[universalyield]

I don’t understand why the incentive is being labelled as “perverse” for holders of both tokens or “concerning” for holders of only FPIS, but I guess, in the end, all of us have our own personal agendas that benefit only the tokens we hold.

Value cannot be created out of nothing. Giving value to one token means dilution for the other, that’s just how it is in the case of a merge. I could be wrong, but I was under the impression that FPIS has always been a part of FXS from the moment the initial supply was airdropped to FXS holders.

[Sharkysnakefish]

I propose we first do a vote on whether to allow the FXS supply to change to above 100m.

After such a vote, current and future actions, possibilities and outcomes will become more clear.

If FXS is king, that should be voted on.

[Croom]

Agree with your second paragraph.

Perverse probably isn’t the best term, only meant to point out that a holder like me who has chosen just to hold FXS has different motives than one who still holds both. The latter stands to gain from as good of a deal as possible for their FPIS, at the direct detriment to the former. This wouldn’t matter if both types of holders had to come to consensus for the vote to pass, but what worries me is that just the latter type might control both the FPIS and the FXS side of the vote.

[Westwood]

I’m fine with anywhere from 1-4 FPIS to 4 year veFXS (preferably 1-2 ).

[hollowgrahm]

Now that the topic of veFXS revenue share has been brought into the equation, I believe it’s imperative to account for this when deciding on a fair ratio.

https://x.com/fraxfinance/status/1761102567667548277?s=20

FPIS conversion needs to be settled before a decision on revenue share. I think it’s already been established that the 1:1 ratio conversion is definitely not happening (though it helps to illustrate for context), but if that had actually gone through, then FPIS holders would have been instantly entitled to 65% of the veFXS profits, diluting the existing 88M of veFXS down to just 35% of profits and governance power.

So even though the preexisting 88M of veFXS is backed by 40M FXS, or $342M of value, the newly minted 160M of veFXS backed by 40M FPIS, or about $45M of value (pre merge pump), would be receiving two thirds of the revenue share. This is also after veFXS has been seeing basically no profits while paying down CR100, while FPIS has been receiving sizable profits for their product. Again, 1:1 is not happening, but I think this example of what the original proposal would have done is precisely why FPIS conversion needs to be settle before veFXS revenue share.

Using the post merge FXS vs FPIS revenue share from veFXS is gonna be the most quantifiable factor in deciding what conversion ratio is actually fair once it’s all said and done.

[FraxiG]

I fail to see the need for any premium at all.

As it stands, FPIS has 1.2M liquidity and a mcap of 44M. FPIS holders have no way to exit in size at the current price.
Hence, offering a conversion to FXS even without any premium would already be a win for FPIS holders. They would no longer be stuck in an illiquid coin with 1 product that isn’t making any groundbreaking adoption or revenue.

Even at a non-premium conversion, FXS holders are already losers who get diluted.

It’s sad to see FXS holders lose but I can agree that it would be an ethical move to absorb FPIS into FXS (if done without premium). Rather than have them stay stuck in FPIS with FPI as sole product with a future outlook that, let’s be real here, doesn’t look very positive?

The notion of it being locked for 4years is irrelevant as CVXFXS exists and thus positions would be liquid. CVXFXS liquidity might not be able to support everyone exiting at once but it’s actually way more liquid than FPIS is.

Convex is also well known to keeping pretty tight pegs for their liquid wrappers and even aside from that, many people would be more than happy to scoop up CVXFXS if it were to severely depeg. Thus, peg would always be restored to a certain range.

IMO a premium makes no sense and only comes across as some kind of cashgrab/opportunistic move.

Please be careful and consider the precedent and narrative that gets sets if any significant premium gets pushed through. Sole FXS holders are about to get burned hard in that case. I know people tend to vote for whatever is best for their own bags, but I always liked to believe that in Frax governance, concern about overall health of the protocol and community sentiment takes lead over selfish, short-term viewing cashgrab desires.