This post seeks to outline a framework for a Frax and Ondo partnership. This partnership would build on Ondo’s Liquidity-as-a-Service offering and enable the use of $FRAX (provided by the protocol itself) as liquidity for token issuers.
We propose that a portion of the future expansion of the FRAX stablecoin be minted into Frax-as-a-Service vaults as needed. This means that Frax will have no upfront costs to participate.
Frax-as-a-Service (“FaaS”) is an offering from Ondo to make it possible for projects issuing tokens to increase the liquidity in their native tokens on decentralized exchanges by providing liquidity themselves. With FaaS, a project can deposit its token into an Ondo liquidity vault with a flexible duration. Ondo and Frax will match those deposits with an equivalent amount of FRAX to form a liquidity pair. In exchange for providing FRAX, the Frax DAO will receive a fixed 5% APR return on its provided liquidity. We plan to leverage Frax’s success at building a multichain ecosystem and hope to deploy on several other chains starting with Polygon.
Ondo provides several advantages over existing liquidity solutions. With Ondo, token issuers earn trading fees and rewards which reduce (or even negate) impermanent loss (IL) risk and the cost of capital. With small adjustments, Ondo vaults are well-suited to facilitating direct listings, establishing the first liquidity for a token. Direct listings could eventually replace or complement IDOs. We would love to work directly with Frax to build out these future offerings.
Framework for Onboarding New FaaS Partners
We propose using the following framework for deciding whether to offer FaaS vaults to new token issuers:
- High Market Cap Protocols: $1B FDV - Up to $25M of FRAX
- Medium Market Cap Protocols: $250m FDV - Up to $10m of FRAX
- Smaller Market Cap Protocols: Minimum $50M Circulating Supply - Up to $5M of FRAX
We propose that Frax incentivize token issuers to use Frax-as-a-Service with FXS rewards. The new Uniswap and Sushiswap liquidity pools in FRAX the program would create do not yet have histories of income from trading fees that investors can rely on for returns forecasting. As such, incentives will help with onboarding new projects to FaaS with FRAX and will help bootstrap a sustainable model going forward, that will not rely on indefinite incentives.
Fei Protocol made a similar commitment of TRIBE incentives for its bootstrapping of LaaS. We recommend that Frax matches Fei’s commitment of providing what amounts today to roughly 500 FXS per week per $1M of liquidity from a participating DAO ($2M total including FRAX) added to FaaS. The amount of incentives provided would max out at 25,000 in FXS per week based on current prices (500 FXS per week per $1M in partner liquidity assuming $50M in total partner liquidity). If more than $50M in partner liquidity is provided ($100M in total liquidity), then the total FXS incentives from the program would be shared pro-rata with partners based on their contribution. For example, if participating projects and their communities provided $100M of liquidity, then incentives would be diluted down to 250 per week per $1M of liquidity. We strongly believe that this initial expense will be well worth it to attract new partners and foster the growth of the FRAX stablecoin.
Benefits to Frax
- A 5% Fixed APR on all FRAX used as FaaS liquidity
- Build out new and strengthen existing relationships with other communities
- Increase the supply of FRAX and expand its reach
- Establish new liquidity pools based in FRAX with a focus on multichain initiatives
Risks to Frax
The fixed tranche side of our vaults (which FRAX would be deposited into) can realize losses if the variable tranche side of the pair experiences about an 80% decline in price.
Smart contract risk with Ondo. We have three audits available for review here. One of our audits is from Quantstamp.