1. Who is behind f(x) protocol?
The organization behind f(x), Aladdin DAO, operates as an incubator of innovative DeFi protocols. Its primary efforts are aimed at enhancing yield farming efficiency and automation, particularly within the Curve ecosystem. The introduction of the f(x) Protocol marks its venture into the realm of scalable decentralized stablecoins.
So far, Aladdin has introduced three major products: Concentrator, Clever, and the f(x) Protocol. Each protocol introduces novel capabilities for DeFi participants and contributes to the emerging decentralized finance infrastructure.
Concentrator serves as a yield enhancement tool, amplifying returns on Convex vaults by pooling rewards into automatically compounding premium tokens like aCRV (cvxCRV) and aFXS (cvxFXS). Meanwhile, Clever allows users to invest CVX and FXS in lucrative collateral strategies, offering the ability to access future yields immediately. These advanced yields can be further cultivated, re-invested to generate leverage, or utilized in various financial needs, highlighting Aladdin DAO's commitment to pushing the boundaries of DeFi innovation and utility.
And now let’s dive into what f(x) Protocol is.
2. How does F(x) work?
f(x) Protocol introduces two innovative ETH derivative assets, a fractional ETH (fETH) with low volatility akin to stablecoins and leveraged ETH (xETH), which operates like a leveraged long ETH perpetual token without funding costs. These derivatives stem from dividing ETH collateral into a less volatile fraction (β < 1) for fETH, and a more volatile portion (β > 1) for xETH. The design ensures fETH benefits from market growth with minimal volatility, while xETH offers variable leverage through a zero-cost long perpetual future. The backing exclusively comprises pure ETH and selected liquid staked ETH derivatives.
The difference with a CDP model would be fETH's liquidity potential as it surpasses CDP-issued stablecoins on a LTV basis. It is driven by the demand for xETH's leveraged positions rather than CDP's demand, known for maintenance and capital inefficiency.
The protocol's foundation is the stable-leverage pair concept, using a base token reserve, like stETH, to mint stable and volatile derivative tokens. These tokens' market cap equals the reserve's value, allowing for redemption at any share of the base token. The stable token maintains a fixed USD value, and the volatile token's price multiplies in accordance with the reserve token's price changes. A Stability Pool mitigates system volatility, offering yield from the reserve token while balancing the stable and volatile token supply.
A few months after the launch, and under the impulse of Cryptovestor, fxUSD was added as a third mint asset, and truly opened FX’s potential from a unique money lego into a likely candidate as the main liquidity venue for LRTs.
Key features of the f(x) Protocol include a robust peg system, built-in real yield from the reserve's yield (e.g., staked ETH), and instant mint-and-redeem capabilities with zero slippage, enhancing fxUSD's appeal. A notable distinction for fETH/xETH versus fxUSD is the non-liquidity of stable derivatives outside the Stability Pool or fxUSD reserve, ensuring direct support for fxUSD's liquidity and stability.
fxUSD amalgamates stablecoins from various pairs, backed 1:1 by a basket of stables from accepted stable/leverage pairs, facilitating minting through LSD supply or Stability Pool withdrawals. This consolidation aims for a singular USD-pegged stablecoin, streamlining liquidity and offering flexibility across different reserves with distinct yields and leverages, maintaining separate Stability Pools and leveraged tokens for each reserve LSD.
3. Potential
The design of the fxUSD is very specific and allows a scaling solution in a more efficient way than the usual bribe to attract liquidity. In this newsletter and at Paladin we have been focusing on liquidity direction and the cost of liquidity lately which is why we are excited about fxUSD.
The protocol provides a solution that can be adapted to virtually any yield bearing asset as long as there is leverage demand. Additionally, fxUSD might prove to become the most cost efficient liquidity waypoint for all the integrated assets, as every new pool makes all the other pools stronger. Of course, this is as limited, as every minted stable asset is auto-deposited in the rebalance pool. They can then be withdrawn as liquid fxUSD only if allowed by fxUSD risk management and if there is sufficient liquidity in the rebalance pool. (note: stables can always be redeemed back to reserve token)
In terms of actually liquidity efficiency, gauge style FXN emissions have begun this week, and it seems LSD providers will be able to build out liquidity as well as a utility sink with the rebalance pool in a very cost efficient manner.
4. 1st round analysis
The first round of FXN emissions is ending today so we can draw out some initial conclusions from its performance.
First of all, the round towered at 76,476$ of incentives, which is promising for a genesis. Considering the emissions are expected to be around 600,000$ per round, we can only imagine how lucrative being a pioneer will be.
In terms of profitability, since there only are 105,000 veFXN right now, the average payout should net slightly under 20% apr in vote incentives, totaling to 40% apr with the current rev.share. We expect vote incentive revenue to grow by 4-5x over the next few months as the incentive market becomes more efficient. vlCVX voters also enjoyed a 3% increase in weekly revenue, which is a start. As for sdFXN holders, they should be getting around 0.95% (0.027$ per vote) as the delegation address seems to have favored voting for its own gauge instead of incentives.
Incentives were split over three marketplaces as follow:
39,000$ on Votium exclusively for vlCVX voters;
150$ on Votemarket exclusively for veFXN voters;
37,000$ on Quest for all potential voters;
As the round isn’t over we cannot compute the efficiency of the round yet, but we look forward to see early supporter’s incentives pay off in a massive fashion. If you are looking to jump in the game, Paladin is your best shot, give us a ping and we’ll get you set up.