Frax and Ondo | Frax-as-a-Service Partnership Proposal

Governance Proposals Miscellaneous
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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.

About Frax-as-a-Service

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

FXS Incentives

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

  1. A 5% Fixed APR on all FRAX used as FaaS liquidity
  2. Build out new and strengthen existing relationships with other communities
  3. Increase the supply of FRAX and expand its reach
  4. Establish new liquidity pools based in FRAX with a focus on multichain initiatives

Risks to Frax

  1. 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.

  2. Smart contract risk with Ondo. We have three audits available for review here. One of our audits is from Quantstamp.

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This is a neat proposal at first glance.

A few questions:

  1. Is there really a need to incentivize other protocols with $FXS? We’d essentially be providing major support in bootstrapping (the smaller ones in particular), so I’m not convinced we would need to use $FXS as an incentive.

  2. In order to hedge ourselves, could we ask for over-collateralization to offset any potential IL caused by a younger less stable protocol? It would only be used to offset IL and not kept permanently, so it should seemingly not be an issue for the partner protocol. Perhaps this is a point of negotiation (i.e. split on trading fees changes, but we are more well insulated from IL).

  3. 5% APR seems reasonable.

FRAX is large enough now that it seems we’d likely be helping smaller protocols with initial liquidity, which is obviously a major part of early growth, so I feel the terms may be able to be buttoned up more in our favor given the value being provided.

Do you have a link to the Fei commitment you mention?

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Thanks for chiming in!

  1. This is proposed just at the start as we bootstrap the FaaS offering. It’s to help align ourselves with new projects and build out our relationships with other communities. Ideally, the offering will stand on its own without incentives and hopefully trading fees make up for the IL risk that the token issuer takes on. We propose that Frax matches Fei’s rewards.

  2. This is really interesting. I’d love to hear the core team’s thoughts. It’s something we haven’t built the infrastructure for but could potentially be arranged. Something worth noting is that we won’t accept everyone that applies for FaaS. We’d work directly with the Frax core team to approve/deny projects.

Thanks for your feedback. I linked Fei’s proposal. It’s a bit confusing because they use something called AP to distribute rewards but it comes out to roughly the same dollar value of incentives as what we proposed.

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I also want to add @dds that the fixed tranche position (in this case FRAX) is effectively already overcollateralized. The FRAX loan is collateralized by the LP tokens worth twice as much as the FRAX loan. This leads to 2x overcollaterization currently.

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That’s seemingly plenty then and perhaps, if not already included, there is some provision for FRAX adjusting the required collateralization ratio should the partner’s token change % in value from the last checkpoint. Again, just to ensure that we are protected.

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:ocean: :ocean: :rainbow:

Thanks for putting this together Justin. This looks good. Keep up the great work with your content also. Happy your in the FRAX community

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Thanks for the kind words!

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@JustinBram, any update on this? Just trying to stay abreast.

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Yep, just waiting for the obligatory 5 day comment period to pass before bringing to Snapshot. Should be posted on Monday.

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$FRAX is in tokemak already, this deal is not very attractive to Frax. But $FEI does need it.

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Just to clarify AFAIK, $FXS is on Tokemak, not $FRAX. What we’re proposing is entirely different.