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  • RFC - Direct the DAO to deploy $2M FRAX to Fraxlend GOHM/FRAX pair

Author

Agora Contributors

Summary

Deposit $2M FRAX into the GOHM/FRAX pair on Fraxlend

Motivation

Fraxlend is the largest mainnet destination for borrowing against gOHM and is an isolated lending pair market. 

The gOHM/FRAX Fraxlend pair currently has: 

  • a current approval of the Frax AMO to deploy $5M FRAX to be borrowed

  • a current deployment of ~$4.5M FRAX

  • a utilization of $3.3M

  • a borrow APR of ~8% over the last 30 days; and 

  • a lend APR of ~6% over the past 30 days

More facts about the pool here.

OHM’s value as a reserve asset is greatly increased when it can be borrowed against - allowing holders to pursue other opportunities in the market while maintaining their exposure to the pristine collateral that is OHM. This will also earn an attractive interest rate on the deployment of the FRAX. 

Fraxlend docs are available here.

Risk Assessment

Fraxlend is an isolated lending pair market built by Frax and audited by Trail of Bits - it has been running in production since September 2022 and has a current TVL of >$160M. The likelihood of an exploit is considered minimal.

If there is an exploit of the Fraxlend protocol it will likely affect the backing of the currently held FRAX in the Treasury & the portion of that FRAX which is proposed to be deployed in this proposal. To the extent we consider the effect of an exploit - the community should also consider that, to at least a degree, that exposure is already inherent to the very act of holding FRAX.

Given Fraxlend allows partial liquidations, the LTV of the pool at 75%, and that OHM is currently trading below backing the likelihood of bad debt is minimal.

Deployment Parameters

The proposal directs the Treasury to deploy the FRAX in two transactions two weeks apart (or other schedule deemed appropriate & communicated to the community) as soon as practicable after the passing of the proposal. The tranching of deployments is done in consideration of exploit risk.

The proposal also includes authority for the Treasury to migrate liquidity to Fraxlend V2 which is currently under audit by Trail of Bits at a rate or schedule deemed appropriate.

Proposal

For: Direct the DAO to deploy $2M in FRAX to Fraxlend GOHM/FRAX pair as described above

Against: Do nothing

Hi @Mark11 thank you for your post.

Couple of remarks from my side:

In general, we have been very careful with deploying into lending markets on a one-off basis because it adds several risks:

1. Contract Risk: As we have seen with Fuse, it isn't without risk to deploy in these lending markets, and although I personally have more confidence in the Frax team's code, I do think it is important to take into consideration.

2. The elephant effect: We basically provide capital to 9,9 again, which could add fuel to the market once the market turns positive/euphoric again. Unwinding this might not be the easiest since there is no maturity/callback mechanism

I see an improvement (especially to the second point) in a dynamic lending AMO (more on this soon) where we could potentially provide capital when trading below LB and decrease exposure when above it. This could bring an interesting stability mechanism in play.

We have been in talks with the Frax Risk team to increase the amount of Frax in Fraxlend from their side, which is something still in the works.

    Wartull Thanks Wartull - very considered as always - in reply I would say:

    1. This is always a risk for any deployment and is considered in the proposal

    2. I don't think $2M is an amount that could be considered to fuel a 9,9 cycle at the current 7% rebase rate - unwinding it would involve removing liquidity either all at once, or over a period, and letting the borrow rate move up to the max 9,969% APY

    3. Sure very supportive for the deployment to be switched to this AMO model in future

    4. The current cap is at $5M for AMO liquidity from the Frax side - but if you look closely this is being targeted to a healthy apy take for the Frax protocol and not fully being deployed


      The issue is we urgently need holders to be able to borrow at useful rates - otherwise they will be forced to liquidite holdings of OHM in order to pursue opportunities - this is a top concern for community. This proposal would be a stopgap while the DAO's other plans come online (I am sure there are plans but atm there isn't communication about them). In this proposal it is highlighted that in addition to addressing a issue for holders, that the very act of holding FRAX provides an opportunity cost of not deploying it to native Frax products like Fraxlend (I understand there is movement in the DAO to get our idle FRAX to the Fraxbasepool which is great and somewhat diminishes that opportunity cost).


      The other cool way would be to get a gauge for the Fraxlend pool and vote for it with our FXS or bribe veFXS holders to direct rewards for providing liquidity to the gOHM/FRAX Fraxlend pair - I know this was at least on JaLa's radar.

      2 months later
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