Set borrowing rate range for Fraxlend sfrxETH/FRAX AMO

Governance Proposals Fraxlend
1

Authors:
Michael Henry

Summary:
The sfrxETH/FRAX Fraxlend pair is a core pillar of the Frax ecosystem, in order to keep it liquid I propose using a borrowing rate range to decide when the Fraxlend AMO adds and removes liquidity.

Nomenclature:
For the remainder of this proposal, I will be referring to the current yield of sFrax visible here: Frax Finance as SFY.

Details:
I propose “automating” the process of adding and removing liquidity from the sfrxEth/FRAX Fraxlend AMO. I propose the following minimum and maximum range bounds: SFY + 0.5% and SFY + 2.5%. Specifically, I recommend that whenever the borrowing rate has been below the minimum range bound for over 24 hours the AMO removes FRAX from the pool until the borrowing rate hits the mid-point between the maximum and minimum range (SFY + 1.5%). Additionally, whenever the borrowing rate has been above the maximum range bound for over 24 hours, the AMO should add FRAX to the pool until the borrowing rate hits the mid-point.

Limits and Constraints
Traditionally, AMOs have been unable to mint additional FRAX when FRAX is below-peg. I recommend that we remove that constraint from the sfrxETH/FRAX Fraxlend AMO and when FRAX is depegged, look elsewhere for assets to liquidate. The AMO however will remain constrained by the AMO Allocation Cap which is currently set to 69,000,000 FRAX.

Closing Thoughts:
I believe that committing to keeping the sfrxETH/FRAX pool liquid and relatively cheap to borrow from will result in increased Fraxlend TVL and frxETH TVL, while remaining profitable to the protocol at large.

Question For The Team:
Should rebalancing be limited to just workdays (Monday-Friday) or is the team able to rebalance on the weekends as well?

Voting:

  • For: Add sfrxETH/FRAX Fraxlend AMO commitments at SFY + 0.5% and SFY + 2.5%. Rebalance the pool strictly as-per the the above. Remove the peg-constraint from the sfrxETH/FRAX Fraxlend AMO.
  • Against: Keep existing sfrxETH/FRAX Fraxlend AMO.
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Thank you for your detailed proposal regarding the automation of liquidity management for the sfrxETH/FRAX Fraxlend pair. We appreciate your initiative to enhance the efficiency of our AMOs and the thoughtful approach to balancing the borrowing rate.

Our team is available nearly 24/7 for emergency situations, and we are committed to managing key Frax Finance pools and subprotocols all days in a week. However, for routine adjustments, we prefer to update our allocations on a weekly basis rather than making real-time changes.

We would also like to point out that realtime controlling the interest rate through AMO allocation may undermine the purpose of our current Variable Interest Rate contract, which was designed with specific mechanisms in mind. Instead of manually adjusting the rate by controlling AMO allocation, it might be more effective to propose a new interest rate model that aligns with the sFRAX rate, preserving the intended functionality of our existing system.

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Thanks for the response. Understood on the AMO allocation timelines. As this is something the core team is opposed to, I propose we not proceed forward with a governance proposal at this time.

However, I do think it’s important that we start a discussion about how we can transition away from manual market operations to truly autonomous, pre-programmed operations like the one I detailed above.

1 Like