Summary
This proposal seeks to add the sFRAX market to FiRM, Inverse Finance’s fixed-rate lending protocol. Yield-bearing stablecoins, such as sFRAX, represent an emerging strategy for a growing number of DeFi users. sFRAX adheres to a compliant ERC4626 token standard, enabling integration into various protocols, bridges, cross-chain applications, and more. Integrating sFRAX into FiRM will enable users to borrow leveraging a high collateral factor while concurrently receiving sFRAX interest, currently yielding appealing 14.5% APY.
Background
sFRAX is an ERC4626 staking vault which, on a weekly basis, circulates a portion of the Frax protocol revenue denominated in FRAX, generated from governance approved AMOs/strategies and/or RWA strategies from off-chain sources, to stakers. Representing pro-rata deposits within the vault, sFRAX can be seamlessly withdrawn anytime. The sFRAX vault APY is based on a utilization function that can be set by the frxGov governance module and aims to at least match the interest on reserve balances (IORB) rate of the U.S. Federal Reserve, AKA the “risk-free rate” of the US Dollar. However, the yield can be much higher. The commitment of the sFRAX vault is to pursue this rate, although it does not guarantee adherence.
The integration of sFRAX presents a significant market opportunity for both FiRM and Inverse Finance. It allows us to tap into the growing user base and liquidity of Frax Finance, which has exhibited substantial on-chain liquidity and stability. Furthermore, no competitors have integrated sFRAX into their lending markets, presenting a first-mover advantage for FiRM and potentially attracting a new user base seeking to earn stable yields on their holdings.
Risk Assessment
A comprehensive risk assessment was conducted by the Risk Working Group (RWG) to evaluate the implications of integrating sFRAX into FiRM and led to recommendations for market deployment parameters, presented below. The risk assessment document can be accessed here. Key considerations include:
- Governance: Frax employs a decentralized model through its Frax Governance (frxGov) module, overseeing protocol proposals, AMO management, protocol parameters, Real World Assets (RWA) strategies, and FXB (Frax bonds) management. The sFRAX vault APY is based on a utilization function that can be set by the frxGov governance module. Decision-making is significantly community-driven, involving on-chain voting and Snapshot temperature checks.
- Security: A holistic bug bounty program and multiple audits (including from reputable firms like Trail of Bits and Certik, as well as independent auditors) underscore Frax’s commitment to security. The protocol has managed repercussions from a recent Curve Finance exploit effectively, demonstrating resilience.
- Regulatory Risks: The involvement of FinresPBC as a custodian handling real-world assets and traditional financial mechanisms within a DeFi framework could attract regulatory attention.
- Collateral & Liquidity: FRAX showcases substantial on-chain liquidity, ensuring low slippage in larger transactions. The protocol benefits from Chainlink oracles, and maintains a focus of >=100% Collateralization Ratio (CR) to stabilize the FRAX USD peg.
- Competitive Edge: No competitors have yet integrated sFRAX into their lending markets, though an initial proposal has successfully passed through Aave’s snapshot voting.
The Total Asset Score (TAS) of 8.97/10, derived from a meticulous evaluation, indicates the asset’s strength and low-risk profile.
Conclusion
The integration of sFRAX into FiRM aligns with our objective of expanding our offerings and showcasing FiRM’s unique features. Overall, the RWG believes the strong governance and security measures in place by Frax Finance, alongside the promising market opportunity, make sFRAX a compelling addition to FiRM.
On-Chain Actions
- Add sFRAX Market to DBR contract
- Set borrowController of Market to FiRM BorrowController
- Set FiRM Oracle price feed for sFRAX to the deployed sFRAX PriceFeed contract
- Set market supply ceiling to 5,000,000 DOLA
- Set daily limit in BorrowController to 250,000 DOLA
- Set Liquidation Factor to 48%
- Set Collateral Factor to 80%
- Set Liquidation Incentive to 5%
- Set MinimumDebt in BorrowController to 3000 DOLA
- Set stalenessThreshold for sFRAX market to 86460
- Approve sFRAX market on the DBR Helper
