DeFi service Frax Finance is gaining momentum amid Ether staking narrative, FXS in focus

Decentralized finance (DeFi) application Frax Finance is rapidly gaining favor with investors thanks to its strong product suite as liquid staking derivatives (LSD) heat up ahead of the Shanghai upgrade of the Ethereum blockchain.

The Frax Protocol is a two-token system consisting of the FRAX stablecoin and a governance token called Frax Shares (FXS). FRAX maintains a peg to the US Dollar by being partially collateralized by USD Coins (USDC) in addition to regularly buying and selling FXS to maintain its market capitalization.

Frax’s staking ether product, launched in October, is attracting capital. Users deposit Ether (ETH) and receive the Frax Ether token (frxETH) backed 1:1 with Ether. frxETH token can be freely traded or stacked in other DeFi applications or in Curve’s liquidity pools – where stakers earn up to 10% annually.

As of Tuesday’s press time, FrxETH is holding just over $100 million, data from DefiLlama shows. That’s an increase of nearly $50 million since early January and four times the amount since November.

Frax’s frxETH product has grown fourfold over the past few months. (Deflama)

Frax offers annual returns of over 6% to 10% for users who stake Ether on the platform. These rewards are paid in CRV, FRAX, and FXS depending on which liquidity pool a user places their tokens in.

In contrast, Lido, the largest DeFi application by total value locked, offers users 5.2% returns.

The withdrawal of capital into Frax’s ether pools has led to greater demand for FRAX and FXS tokens, with FXS’ price up over 62% over the past week, according to CoinGecko. And with some liquidity pools paying out in FXS, the rise in price theoretically means higher rewards for stakers – which in turn could drive more ether towards Frax and even more demand for Frax’s tokens.

According to some observers, Frax’s Treasury holdings of curve and convex tokens result in outsized returns for some stakers.

“FRAX has an advantage over other LSD platforms right now due to their outsized CRV/CVX hoards,” said Hal Press, a partner at crypto fund North Rock Digital, in a tweet this week. “This allows them to stimulate a higher ETH staking return for their ETH staked derivatives product than the rest of the market.

The story goes on

“Sentiment among traders rose amid increased utility for FXS tokens. These tokens receive value from the newly minted FRAX stablecoins and fees from Frax Finance,” Press added.

understand curve

Knowing how Curve works is helpful to fully understand the reason for the high returns on Frax.

Curve offers an efficient way to trade stablecoins while maintaining low fees and low slippage, according to Curve Finance. Pools hosted on Curve are backed by centralized or decentralized stablecoins, wrapped tokens – such as Wrapped Bitcoin (WBTC) – or a basket of various assets.

Depositors on Curve earn annual returns of up to 4% from one of the many pools on the platform.

High trading volumes in liquidity pools on Curve that Frax participates in help ensure the FRAX token retains its intended dollar peg. Additionally, Curve allocates CRV tokens as rewards for liquidity providers to select pools, known as gauge rewards, resulting in higher returns for liquidity providers.

“The long-term effect of the Curve AMO is that Frax could become a large governance participant of Curve itself,” Frax technical documents read. Holding over $6 billion worth of tokens as of Tuesday, Curve is one of the few “blue-chip” DeFi protocols.

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