Sell FXB and Purchase FXS/wfrxETH for FLE

Governance Proposals Miscellaneous
1

Authors:

@wolfehr

Summary:

  • Auction $10m worth of FXB. Use the proceeds to purchase $10m FXS/FrxETH for FLE.

Motivation:

  • Leverage FXB to exchange weaker assets for stronger assets and increase TVL and FLE liquidity. In other words, trade USD based debt (i.e., frax) for assets like eth, btc, and fxs with the goal of building a strong treasury of high quality crypto native assets.
  • Pilot to see if it makes sense to implement something more structured and repeatable. For example, sell bonds whenever a designated asset is X% below it’s trailing average over the past Y weeks as long as the CR is above 100%.

Mechanism:

  1. Sell FXB. I don’t know exactly how this works, but the auctions would be created using the existing FXB mechanism. The core team has the best knowledge and experience on appropriate parameters (e.g., duration and interest rate), so it would be left to them to determine those details.
  2. Use 50% of the proceeds to purchase FXS and 50% to purchase ETH. The core team can determine the best purchase strategy (e.g., market buy all at once, two-week twamm) but should keep in mind a goal is to take advantage of beneficial market conditions.
  3. Use the ETH to mint frxETH
  4. Deposit the FXS/frxETH into the FLE FXS/wfrxETH [Fraxtal] pool.

Pros:

  • Exchanges USD debt (i.e., frax) for FXS and ETH (i.e., trade a weak asset for a strong one), helping build a strong treasury of high quality crypto native assets.
  • Increases frxETH TVL
  • Increases FXS/wfrxETH liquidity
  • Improve sfrxETH returns. The ETH purchased will used to mint frxETH, but won’t be staked. This should decrease the % of frxETH staked (all else being equal) and, therefore improve the returns for sfrxETH holders.
  • Removes FXS from the market. The only way FLE would enter the market is via buy-pressure

Cons:

  • Assets are volatile compared to how the debt is denominated, increasing the risk that Frax won’t be able to cover the FXB at maturity without impacting the CR.
  • Less impact on FXS price than buy and burn.

Parameters For Debate:

  • Size of the auction for this pilot. Is $10m right
  • Duration and interest for FXB to be auctioned
  • Duration of the FXS and ETH purchases. Is two weeks the right duration?
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2

I made some edits to the initial post based on feedback in telegram. Quick summary of the updates:

  • Clarified the purpose and motivation
  • Left it up to the core team to determine the auction parameters and purchase strategy
  • Added a pro of improved sfrxeth apy.
  • Fixed an error where I said to purchase $40m of assets with $10m of bonds (both should have been $10m)
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