frxETH TVL plummets, variables hidden behind LSD points war

Written by: StableScarab

Compiled by: Tyler

As the highest-yielding ETH LSD, why did frxETH launched by Frax Finance suddenly reduce its TVL by 100,000 ETH in the past 3 months? ?

This article aims to help everyone understand the highly competitive ETH staking market and the deep-seated factors behind Frax Finance.

What is frxETH?

frxETH is an Ethereum stablecoin launched by Frax Finance. It is generated by direct pledge of ETH, and frxETH (sfrxETH) adopts a dual-token design, which also helps it become the current ETH liquidity pledge with the highest yield. Derivatives (LSD):

Because in addition to traditional staking forms, other use cases for frxETH will also increase the annualized yield (APY) of sfrxETH, so since its launch in November 2022, the yield of sfrxETH Not only is it 24% higher than stETH in the same period, it is even 40% higher than rETH.

So why does the TVL of frxETH still fall sharply under the high yield rate?

It’s very simple, points, points, or TMD points!

The re-staking craze has swept the LSD market - Eigenlayer provides bonus points to users who lock ETH, attracting a huge amount of TVL, and the liquidity re-staking yield is even higher.

So judging from the data chart, the time node when Eigenlayer opened deposits on February 5 happened to be the highest point of frxETH TVL.

Arbitrage balance between frxETH and sfrxETH

Why do some frxETH users not choose to pledge twice and are willing to transfer their profits to sfrxETH users?

Because Frax Finance provides frxETH users with another income option - deposit frxETH into Curve's frxETH/ETH liquidity pool and reap LP income.

From a user perspective, Frax Finance actually provides two income paths for frxETH:

• First pledge ETH to frxETH, and then deposit it into the frxETH/ETH liquidity pool. Curve income, and at the same time transfer your own frxETH pledge income;
• Pledge ETH first as frxETH, and then pledge it again as sfrxETH, so that while getting your own pledge income, you can also get the first part of the user transfer. frxETH pledge income;

Theoretically speaking, choosing the frxETH/ETH liquidity pool (frxETH) in Curve and choosing the secondary pledge (sfrxETH) will gradually form a dynamic arbitrage due to the difference in yield. Balance, so that the returns of two different options are always within the same range.

According to data from Frax Finance’s official website, as of June 12, the yields of the two are indeed relatively close: Curve’s frxETH/ETH liquidity pool (frxETH) is 2.72%, and the secondary pledge (sfrxETH) is 2.72%. 3.42%, the two proportions are basically close.

Behind the LSD points war

In LSD’s competitive landscape, points belong to the “incentive” category, which is a temporary bonus used to attract investors to participate in the project. Bonus, this is useful for starting a project but is not meant to be permanent.

Everyone also knows that points will not last long, and all points models are an unsustainable strategy - points will eventually be converted into other assets, resulting in users attracted by high incentives. Move on to other projects.

However, re-pledge itself is a very effective technical narrative that can provide users with additional benefits, and Frax Finance also plans to provide native re-pledge services directly in frxETH v2.

In this process, whether a suitable incentive system can be designed determines whether the service can continue to function. This is the underlying reason why Frax Finance designed the Flox mechanism. ——Flox is a block space incentive plan for Frax Finance’s new L2 Fraxtal, which is mainly distributed along with FXTL’s tail tokens.

Since Flox checks users’ assets and on-chain interactions, any user can easily earn FXTL simply by holding frxETH on Fraxtal.

According to the latest official document information, Fraxtal, as an L2 network, is also a modular Rollup blockchain with a roadmap of "fractal scaling". Its functions and features include:

• EVM equivalency. Fraxtal uses the OP stack as its smart contract platform and execution environment, allowing project parties to deploy applications as fast, secure and low-cost as Optimism and Base;
• Modular Rollup. Fraxtal will have multiple components and middleware for other chains and networks to use, connect, deploy and build on L3. Currently Fraxtal uses a separate Data Availability (DA) module developed by the Frax Finance core team;
• Blockspace incentives (called Flox). This feature is used to reward users and developers - any account and smart contract that spends Gas and interacts with any smart contract on the network will be rewarded with "Fraxtal Point System" (FXTL) points based on the Flox algorithm, which can later be Convert to token;
• frxETH as Gas payment token;

Additionally, according to official disclosures, Fraxtal will launch with major Ethereum infrastructure providers, including Etherscan’s Fraxscan and Various DeFi related services such as Safe, Chainlink, Axelar Network and LayerZero.

So why do I think frxETH will recover? In addition to the native re-staking feature, frxETH v2 will also introduce the following new features:

• Decentralized validators;
• Higher node capital efficiency;
• Node Operator Performance Incentive;

The most important thing is that Fraxtal will use frxETH as Gas fee, and burning frxETH can increase the annualized rate of return (APR) of sfrxETH.

Good things come hard. Whether frxETH can become an anomaly in the Ethereum liquidity staking track is worthy of in-depth observation.

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