Do you mind sharing some of your modeling?
I agree with the goal of trying to get more long term stakers but I’m not sure if I support this. Currently veFXS is mostly for holders who plan on holding anyway with the additional yield mostly being a bonus. Let’s be frank, whether APR is 12% or 30% neither is great in return for a multi-year lock. There’s about 1000 ways you can get better yield in defi if that’s what you’re looking for. What veFXS does provide is:
- A bit of a bonus if you were going to hold regardless
- A boost to rewards if you stake in the other Frax farms
I think we’ll get more long term stakers if we focus on delivering to these value props (or add new benefits to veFXS). Prop #2 is easy, just increase amount of boost per veFXS held. #1 comes by increasing confidence FXS will be more years in the future.
At least this last month protocol profits have actually exceeded the $ value of FXS distributed as farming rewards right? If this was sustainable, and revenue was used to buyback FXS all new selling pressure would be absorbed and FXS would already be deflationary from a farming perspective and fully deflationary once team/investor vests are done. I think this is a great pitch why FXS will be more valuable in the future than it is now, again if this is sustainable and especially if we can show attractive projections.
What I’d really like to better understand is what we can do to effectively decrease the collateralization ratio with the goal of being able to deploy more Frax per $ of USDC locked. At the end of the day the price of FXS will rise if the protocol is able to efficiently generate revenue, specifically more revenue than the protocol pays out in rewards which are effectively expenses. Right now how Frax makes revenue is through earning a return on deployed capital. Obviously anyone can do this, but what Frax can do that individual investors can’t, and why Frax should be able to earn excess profit, is because of the fractional reserve model. If Frax can effectively deploy a multiple of Frax per USDC it holds into yield generating markets it should with that earn excess profit above other market participants who have to just deploy their USDC or equivalent directly. This is similar to how banks are able to make an excess profit by leveraging the deposits they receive. Regular investors can’t do on this on their own the same way they can’t fractional lend in tradfi which implies they only way they capture Frax’s above average risk adjusted returns is by becoming a holder of FXS themselves- the aren’t going to be able to compete so the only thing they can do is become the bank to get a piece of the pie.
The interesting thing is I think one of the keys to being able to deploy more capital per USDC is by increasing the amount of locked FXS. By locking FXS the chance of a bank run type scenario decreases, Frax becomes more secure and hopefully a classic virtuous circel is created- because Frax is more secure more Frax can be printed and deployed, more deployed Frax leads to more revenue, more revenue leads to more FXS burning and higher prices of FXS, higher prices of FXS means more users willing to lock their FXS which makes Frax more secure and more able to be printed, etc.
Honestly I think this model is a much better candidate for something Defi 2.0 like than the bond/protocol owned liquidity model which has been getting a lot of attention recently. This also would be an example of something like you mentioned in your recent twitter thread Sam where the protocol or firm is creating value above just the value of the assets it holds by themselves.