Sam Kazemian, founder of DeFi protocol Frax Finance, announced plans to launch Fraxchain, its very own layer-2 chain. Find out more about how it works!
Introduction
In mid-2019, Sam Kazemian, Travis Moore and Jason Huan founded an algorithmic stablecoin protocol, initially named Decentral Bank. The protocol was later rebranded to Frax Finance and centered around their native, USDC-collateralized stablecoin, FRAX and their governance token, Frax Share (FXS).
Little did everyone in the decentralized finance (DeFi) space know, Frax Finance would eventually grow to become one of the strongest teams in crypto, expanding and consistently shipping their suite of products across various DeFi sectors and across chains in the next 4 years.
What Is Frax Finance?
Frax Finance is considered by many as one of the most innovative builders in DeFi. Its main product, the FRAX stablecoin, is the first partially collateralized and partially algorithmic stablecoin. Although this was later changed to a fully collateralized model in 2023 following the collapse of algorithmic stablecoin, UST, it showcased Frax Finance’s willingness to innovate and push the boundaries of the industry.
Frax Finance’s native decentralized exchange (DEX), FraxSwap, launched in June 2022, becoming the first live implementation of the Time-Weighted Automated Market Maker (TWAMM) on the market. This was based on Paradigm’s research piece and allowed large orders to be processed over time without resulting in significant price fluctuations. FraxSwap is also utilized for the buyback of FXS tokens from the market, using the profits from Frax Finance’s algorithmic market operations (AMO). These AMOs are used to generate returns using collateral in Frax Finance, which form part of the yield for FXS stakers.
Frax Finance deployed FraxLend shortly after as a money market platform to support the borrowing of FRAX against assets as collateral. This boosted the adoption of FRAX, which was also furthered by Frax Finance’s active participation in the famous Curve Wars to drive users to FRAX through directing rewards to FRAX pools.
Source: Frax Finance Docs
To support their multichain expansion efforts, Frax Finance also later introduced FraxFerry to assist with the seamless bridging of Frax assets across their supported chains.
Finally, perhaps one of the most important Frax products, Frax Ether (frxETH) signaled Frax’s entry into the liquid staking derivative (LSD) space, going up against market leaders like Lido and Rocket Pool. While frxETH was only launched in October 2022, it quickly grew to become one of the protocol’s most important products, as the LSD narrative gained traction leading up to the Ethereum Shapella upgrade this year.
In May 2023, Frax Finance took frxETH one step further with frxETH V2. FrxETH V2 essentially framed all LSDs as lending ETH to validators to earn “interest,” where the yield received by stakers is the interest payment. With this in mind, frxETH V2 takes deposited ETH in Frax to be lent out to Ethereum node operators, who will put up the required collateral and pay a certain interest rate in order to borrow the ETH from Frax Finance. The interest payments on this loan will be paid out to frxETH stakers as yield.
Source: Frax Finance Docs
Today, Frax Finance spans across 16 different chains, with more than $797 million in total value locked (TVL) across the verticals it covers.
Source: DeFiLlama
Fraxchain
On a recent podcast episode with Flywheel DeFi, Frax Finance founder, Sam Kazemian, once again unveiled another set of major upcoming developments for the protocol. Frax Finance will be building their own Layer 2 (L2) solution, Fraxchain.
Unlike the current L2s on the market, Fraxchain will be a hybrid rollup, combining the technologies of both Optimistic rollups and zero-knowledge rollups (zk-rollups). Fraxchain would be built on Optimistic rollup architecture but with zero-knowledge proofs integrated. It claims that this would enable better scalability, faster finality and enhanced security against its competitors.
Perhaps more interestingly, Fraxchain will use frxETH as the gas token on the chain, rather than ETH, like its counterparts. FraxFerry will be integrated with Fraxchain from launch to ensure sufficient liquidity of frxETH on the chain.
The use of frxETH for gas is significant for Frax Finance as these fees are paid out to holders of vote-escrowed FXS (veFXS), which is obtained through locking FXS tokens. This accrues further value to FXS stakers, who are already earning through FXS buybacks funded by FraxLend and FraxSwap fees.
Additionally, the greater the amount of frxETH held for gas and used on the chain, the lower the staked supply of frxETH, which would increase the overall yield for staked frxETH (sfrxETH) holders, hence increasing the attractiveness of frxETH against other LSD solutions. Finally, a successful Fraxchain could potentially cement the dominance of frxETH in the market, which could help Frax Finance secure market share against the other LSD protocols.
Fraxchain has also been hinted to be completely utilizing account abstraction contracts instead of Externally Owned Accounts (EOAs). Account abstraction opens the doors to increased programmability for users on the chain and, as Sam explained, makes it like a “fully programmable bank account.”
Fraxchain is currently expected to launch at the end of 2023.
Conclusion
While Fraxchain is still in its early days and the details will only likely be confirmed closer to the launch of their testnet and mainnet, Fraxchain looks to be a promising step forward for Frax Finance.
Source: DeFiLlama
Taking a look at the revenues of the current leader in Ethereum L2s, Arbitrum has generated more than $34 million in fees on their chain and $8 million in revenue since August 2022. If Fraxchain could successfully push their chain to mainstream adoption in the crypto space, this development could significantly increase Frax Finance’s revenue streams.
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