Move 100% of FXS1559 to veFXS Yield

NOTE: This proposal has no FIP number since it is a minor smart contract parameter change.

I’ve been doing some economic modeling and strongly believe that for the current growth phase of FRAX, we should change the FXS1559 50-50 burns to 100% veFXS yield rather than burning 50% with AMO profits.

This is for a few reasons:

1.) Higher veFXS yield will lead to more FXS demand and new fraximalists entering the ecosystem to stake and lock veFXS which aligns long term incentives together. Doing this should at minimum double the current veFXS yield to 25-30% APR, significantly higher than veCRV yield which is about 8%.

2.) Burning FXS this early in the protocol’s growth phase gives exit liquidity to farmers/short term sellers when we could be re-investing the profits into creating long term veFXS stakers. Using the profits for veFXS is not the same as burning FXS because burning gives sellers a chance to exit, while increasing veFXS yield incentivizes users to become fraximalists for multiple years. In fact, Tetranode is famous for advocating for less burning of tokens (in any protocol) and more staking yield as it creates a positive sum scenario for long term holders (and not short term dumpers).

3.) Doing this should also lead to short/medium term FXS price appreciation which would make our expansion/growth faster. Although conducting monetary policy based on FXS price should be held to a minimum since governance token speculation is not something we should focus on, it is still likely a positive effect of this move.

4.) We can always re-adjust this ratio back to 50-50 (or a new ratio) per another governance discussion+vote so this is not meant to be something that cannot be reassessed.

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Let’s put it up for voting. I was for this the first time it got brought up. veFXS is not as sexy anymore atm with 8% apy and also boosting only a fraction of the $value you have to lock away. increasing APY for veFXS yield should definitely motivate more people to lock up again.

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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:

  1. A bit of a bonus if you were going to hold regardless
  2. 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.

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This is very well said and I tend to agree with almost everything.

There’s a few things I want to highlight. While, I agree that a small ramp up of veFXS yield to ~30% is not going to have a dramatic effect in itself for increasing veFXS staking, it will give veFXS stakers more FXS to compound which increases their long term alignment even more. Additionally, the yield came from burning FXS which means that the value is going to ONLY people who are long term in the system, not people who are dumping today. I think that’s important. Even if it’s a small increaase in yield, the yield is created by shutting off dumping liquidity for farming dumpers.

Secondly, yes I agree about the boosts. We could look into that as well. Why not both though? I agree we should look at the boost ratio but also we can vote this proposal though. I think we are in agreement about exploring the boost ratios.

Lastly, indeed we are working on veFXS perks as I was mentioning in a prior governance thread. That is actively being developed. It is difficult to design such features in a sustainable and coherent manner so it is taking a bit longer than we thought.

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Yes. Let’s vote and get this done.

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I believe if we can upgrade veFXS yield + increase the boost ratio it’s going to have a very positive effect on locking up FXS. I’d personally buy a lot more FXS of the market and lock them up in that case. Right now I’m already quite exposed and it’s not as sexy anymore to lock up more in the current conditions. I look forward to see what we can come up with.

I was on board with this before and am now as well. Lets make sure this one goes to a vote!

I disagree with this proposal, I doubt the increase in veFXS APR will be substantial enough to increase lockers, considering that an increase in FXS price will reduce the APR to the same levels again. I think a better alternative would be to incetivize FRAX usage, specifically on L2s where everything is beginning to move to. I think that the best way to attract long-term supporters is to build an awesome product, this raises the question though if simple liquidity mining incentives are the adequate strategy to help this awesome project grow, or if we need to come up with better strategies. I support a combination of both.

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Ya, I mean even if in some markets there’s a clear tipping point where you see a dramatic change in behavior once a certain price/reward level is reached in some sense all incentives operate on the margin. There are some users that a 12% APR wouldn’t be sufficient but a 30% APR would.

Think this is especially true when you take into account Frax farm boosts. If the user was staked in all veFXS boostable farms they’re getting an additional APR increase of ~59% from staking veFXS assuming a FXS price of $6.50. So best case scenario this would take a maximally staked farmer’s APR from ~71% → 89% which very might be a tipping point for some on the fence about staking.

I don’t know, overall I’m having trouble coming up with a fundamental argument against this since I am onboard with trying to increase long term staking. I guess my only hesitation is I wish I had better insight into how the market is actually behaving in the real world right now. If these burns were actually helping absorb sell pressure and if veFXS stakers in practice do tend to just sell off most of the rewards they receive then could lead to a situation where the appearance is the price of FXS slowly trends down week over week. This can create a dangerous dynamic where not so much short term farmers but long term stakers start to lose confidence that their holdings are going to be worth more in the future and everyone just sells everything they farm, leading to further price decreases, etc.

You can actually this this pattern in a lot of yield farms that offer high rewards, including ones that offer significantly higher rewards for long term stakers. Everyone knows there’s going to be lots of inflation which is going to lead to a future lower price so everyone just dumps all the tokens they receive which leads to future lower prices becoming a self fulfilling prophecy. These projects still have long term stakers but for these users it just seems to be a game of can they cash out more than they put in, it’s almost assumed their original stake will go to something close to 0.

I think I would vote yes on this but a question I’m asking myself that I can’t quite come up with an answer to is what is the limiting principle? If it’s correct that moving more rewards to veFXS is a good idea why not move 100% of all rewards to veFXS? What does the tradeoff curve look like and where is the optimal point? If anyone else has thoughts on this would be very interested to hear.

I agree that the best way to increase price (and attract long term stakers) is to build a great product and provide real value. That the APR will reduce as FXS price increases is incorrect though, both the input and the output is in FXS so these should increase 1-1. As the price goes up it becomes more expense to acquire veFXS but the $ value of the FXS paid out as rewards increases at the same rate.