Use FXTL to redistribute Fraxtal revenue to users

Authors

@wolfehr

Summary

  • Fraxtal is a new Frax product that will generate revenue via sequencer feeds and MEV.
  • Frax will redistribute 90% of revenue back to users that add value to the ecosystem (as measured by flox blocksapce rewareds), with the remaining 10% going to veFXS and insurance.

Key Principals

  • The FXTL system should incentivize Fraxtal usage, Fraxtal TVL, and building/innovating on Fraxtal.
  • Fraxtal’s revenue should be redistributed to users who add value to the ecosystem (as measured by FXTL). This is a core value of Frax, as seen in the revenue distributed to sFRAX and sfrxETH users.
  • FXTL should not produce FXS inflation
  • FXS should charge a fee for building and maintaining Fraxtal.
  • FXS should remain the governance token and value sink for all Frax products.

Option 1 - FXS Vault

Mechanism:

  1. Use revenue Fraxtal generates via sequencer fees and MEV to purchase FXS. A TWAMM purchase will be made every epoch using the previous epoch’s revenue.
  2. Deposit 90% of FXS into a vault, distribute 8% to veFXS, and reserve 2% for insurance.
  3. FXTL holders can burn FXTL in exchange for a prorated share of what’s in the vault. The payout will take place at the end of each epoch based on the FXTL burned during the epoch.

Option 2 - frxETH Valut

Mechanism:

  1. Use revenue Fraxtal generates via sequencer fees and MEV that’s not already frxETH to purchase ETH. A TWAMM purchase will be made every epoch using the previous epoch’s revenue.
  2. Use ETH to mint frxETH
  3. Deposit 90% frxETH into a vault, distribute 8% to veFXS (can also convert to FXS first), and reserve 2% for insurance.
  4. FXTL holders can burn FXTL in exchange for a prorated share of what’s in the vault. The payout will take place at the end of each epoch based on the FXTL burned during the epoch.

Pros

  • Does not dilute FXS
  • Does not introduce a new token (except keeping FXTL as the accounting system for ownership of the vault holding Fraxtal revenue).
  • Maintains FXS as the center of the Frax ecosystem, which now includes Fraxtal.
  • Redistributes Fraxtal revenue to those adding value to the ecosystem, providing an incentive to use and build on the chain. Since the flox mechanism gives more FXTL to users/contracts, adding more value, more FXTL means the holder added more value.
  • Allows users to speculate on the future value of Fraxtal. For example, someone can buy FXTL for more than the current revenue suggests.
  • Encourages holding FXTL long-term (boosting the value of the below three pros); if someone believes Fraxtal will generate more revenue in the future, there’s an incentive to hold FXTL to get a share of a larger vault.
  • If wallets with FXTL are lost, the share of the Fraxtal vault they represent will never be claimed. That means either FXS is effectively burned (FXS vault) or the frxETH will continue earning staking rewards for Frax and sfrxETH holders (frxETH vault).
  • [Option 1] Helps keep FXS off the market (since it’s in the Fraxtal vault)
  • [Option 2] Grows frxETH TVL
  • [Option 2] frxETH in Fraxtal vault is not staked as sfrxETH, which will boost APY for sfrxETH and veFXS

Cons

  • Fraxtal revenue might not be a sufficient incentive, particularly at first
  • Limits the value veFXS captures from Fraxtal to 8%.

Parameters that can be adjusted in the future via governance

  • Fee split. The proposal starts at 90/8/2 to align with sfrxETH and return most of the revenue to users. However, this can be adjusted in the future. For example, if Fraxtal is bringing in much more revenue in the future, that can be adjusted to 80/18/2 (or whatever number the community agrees on).
  • Vault token. This vote would pick an initial token (FXS or frxETH), but that could be adjusted via governance in the future. FXTL burning would work the same, but you’d get a prorated portion of each token type in the vault.

Example (applies to both scenarios; replace FXS with frxETH)

  • Epoch 50 starts with 1,000,000 FXS in the Fraxtal vault and 10,000,000,000 FXTL.
  • During epoch 50
    • Fraxtal earns $1m in sequencer fees and MEV.
    • Alice burns 1,000,000 FXTL, and Bob burns 2,000,000 FXTL.
  • At the end of epoch 50
    • Fraxtal starts a week-long TWAMM purchase of FXS using the $1m in sequencer feeds and MEV, which is deposited into the Fraxtal vault.
    • Alice is delivered 100 FXS (1,000,000 FXTL burned / 10,000,000,000 FXTL supply * 1,000,000 FXS in the vault), and Bob is delivered 200 FXS (2,000,000 FXTL burned / 10,000,000,000 FXTL supply * 1,000,000 FXS in the vault)

Vote

  • Approve Option 1 - FXS Vault
  • Approve Option 2 - frxETH Vault
  • Reject
2 Likes

This proposal comes with some strong points and weaknesses.

Strengths of the Proposal:

  1. No Dilution of FXS: The proposal avoids creating a new token, maintaining FXS as the central governance token and value sink.
  2. Revenue Redistribution: It redistributes 90% of Fraxtal revenue to users who add value, providing clear incentives to use and build on Fraxtal.
  3. Flexibility in Rewards: FXTL holders can exchange their points for FXS or frxETH, depending on the chosen option, providing immediate value.
  4. Incentive Alignment: The proposal aligns incentives by rewarding those contributing to Fraxtal’s growth, which could drive higher engagement and innovation.

Weaknesses of the Proposal:

  1. Initial Revenue Incentives: Fraxtal’s initial revenues might not be enough to attract significant interest or provide substantial rewards. Naturally, this may vary very soon, with more revenue streams from new projects deploying on FRAXTAL.
  2. Complex Mechanism: The conversion and distribution mechanisms might be complex, potentially requiring clear communication and thorough explanation to ensure community understanding.
  3. Limited veFXS Benefit: The proposal limits the veFXS capture from Fraxtal to 8%, which might be seen as insufficient compared to other Frax products.
  4. Implementation Details: Key details about the fee collection and conversion process are still to be determined, which could affect the proposal’s effectiveness and community acceptance.

Overall, I like this proposal since it provides a thoughtful alternative to tokenize FXTL while maintaining FXS’s central role, addressing potential dilution concerns, and offering a structured incentive model.

1 Like

Generally speaking i like the proposal but i would like to add feedback to some points.

If each FXTL is allocated an amount of FXS then lots of FXS will end up stuck in the pool unclaimed. This is ARP that active users could be earning.

I think this can be fixed by having a set time frame of 2 weeks to opt-in to a reward pool, at the end of the two weeks every FXS in the pool is split between everyone who opted in. This can be repeated every 2 week. Some FXTL holders will choose to not opt in so they can collect a bigger share of the rewards pool at a later date if they think the rewards will grow in value later.

I think everyone would agree on the 2% insurance but i would like to see more options for the 90/8 split.

  1. 90/8
  2. 80/18
  3. 70/28
1 Like

I like the idea of creating a dynamic system by which FXTL Point holders can be incentivized for their usage of the fraxtal ecosystem.

We can see this similar to how Frax ecosystem revenue is used to incentivize sFRAX.

Making this system dynamic is also helpful to change the incentives over time for when fraxtal becomes more mature and it can start contributing revenue to FXS instead.

Things i would consider to do differently though:

  1. Implement a time component into FXTL ownership of the vault
  • basically dont incentivize older FXTL holders into perpetuity, either dillute them in favour of current users of Fraxtal or issue them less incentives dependent on how old their FXTL points are. If the goal is incentivizing usage and growing fraxtal then new joiners should be favoured to some extent.
  1. Maybe remove the FXTL middlestep
  • Currently users earn FXTL and in this design that makes them owners of potential future rewards, this almost makes FXTL a veFXS like token just without governance rights. This means its still somewhat dillutive to FXS as people might favour farming FXTL over buying FXS. If we remove the FXTL middlestep and just issue rewards to specific pools or activities it might work better (although thats also easily gameable)
  1. Provide veFXS ownership to FXTL burners
  • It might make sense to reward FXTL burners with veFXS instead of FXS. Basically converting Fraxtal users over-time into long term FXS aligned users. The veFXS will generate them FXS/Fee rewards long into the future instead of short term cashflow/rewards to be dumped.
  1. There needs to be an end-date to this campaign
  • This so that FXTL doesnt become some form of a long-term hold token anyway because the APR might be higher than on FXS itself. At some point all FXTL points need to be converted to their ownership of the rewards pools or the program just stops for the users. This so that when Fraxtal becomes self-sustaining we are not left with the baggage of FXTL points but everything is about FXS again.

Besides that, id definitely favour buying FXS and distributing that over buying Eth.

Thanks for the starter proposal, its an interesting design. Much better than giving FXTL points holders a true different token and dilluting the ecosystem.

Best,
Ertemann

1 Like

Thank you so much for the thorough feedback! I’m about to draft an update and will do my best to include your points.

Implement a time component into FXTL ownership of the vault

I actually had a different perspective. Incentivizing longer-term holding would lead to the reward token (FXS or frxETH, though it seems community sentiment is more towards FXS) in that contract for longer, providing a mechanism for keeping FXS off the market.

Assuming Fraxtal is successful and grows, new users, while not favored, are farming more valuable fxtl than early farmers (since fxtl revenue is greater for each fxtl emitted).

  1. Maybe remove the FXTL middlestep

I think the benefit of FXTL is that it’s distributed based on the flox blockspace incentive, so should help make sure rewards/revenue is based on value added to the fraxtal ecosystem How Blockspace Incentives Work | Fraxtal Docs

That being said, you should update the mechanism to just pay out based on FXTL earned and get rid of the burning mechanism. I thought the FXTL burning mechanism could provide an incentive to keep FXS/frxETH off the market in a vault.

What are your thoughts on just using FXTL points to deliver rewards directly instead of depositing into a vault to be burned?

  1. Provide veFXS ownership to FXTL burners

There’s been a lot of discussion around giving our veFXS instead of FXS, or a bonus for locking (e.g., 1.25x rewards if you lock). While I agree that would lead to more locked FXS and therefore potentially more aligned users, I think it’s counter to the primary goals of incentivizing fraxtal usage, tvl, and building. Knowing that part of my payment for adding value to fraxtal will be a token I can’t access (beyond the veFXS revenue) for 1-4 years is going to be a disincentive. So while we’ll likely end up with more locked FXS, I think we’ll have less fraxtal usage and tvl, which was my primary goal when writing this proposal.

  1. There needs to be an end-date to this campaign

If rewards are in FXS, I think long-term holding is actually beneficial… it means the FXS is in the Fraxtal vault instead of on the marketing or locked as veFXS (i.e., higher APY for the locked veFXS).

Even with ETH, I think long-term holding is good. It means we have frxETH in the Fraxtal vault earning staking rewards, boosting sfrxETH and veFXS apy.

I think the benefit of ending FXTL rewards would be allowing veFXS to capture 100% of fraxtal revenue. However, I don’t think that aligns with my vision and values (personally, you might feel different). I think fraxtal will be most successful long term if it’s viewed as an open, permissionless blockchain that’s “owned” by the people that add value; I think the shelling point for blockchains will be to those that are more open and return the most value to users. Frax chugs along in the background, earning 10% of a very large pie.

I just edited the proposal to try and capture all the feedback I’ve heard.

FWIW, I think option 2 (frxETH vault) is better for Frax long term. I completely understand the arguments for FXS, but I think having a vault of frxETH that’s returning staking rewards is better for Frax long-term for the below two reasons:

  1. I think the frxETH in the vault will earn more over its life in staking rewards than the price boost purchasing FXS for the vault would provide.
  2. If wallets are lost, having frxETH earning staking rewards in perpetuity is more valuable than burning the equivalent FXS.
1 Like

I can no longer edit this post, so I made a new one based on the feedback received so far