Six Catalysts for the Growth of Algorithmic Stablecoin Frax Finance

6 Catalysts for Growth of Stablecoin Frax Finance

Ouroboros Capital believes that the algorithmic stablecoin project Frax Finance is making multiple efforts in adoption, Layer2 layout, and revenue, and its buyback plan also limits its downside.

Authored by: Stacy Muur, CMO of Spin

Translated by: Felix

Ouroboros Capital outlined its investment thesis on Frax Finance, believing that the FXS token has great growth potential in the next 6 to 12 months. This article is a summary by Stacy Muur, CMO of Spin, of the original post.

On June 16th, Frax launched its FXS buyback program, with a budget of $2 million for 6 months. Ouroboros Capital suggests increasing buybacks during lower price periods, but stopping buybacks once the price exceeds $5.

On June 30th, the proposal was approved. This sent a clear signal to the market that FXS has a minimum value (floor) when it falls below $5. In addition, FXS offers attractive opportunities in the $5 to $6 range, as there is still limited downside risk.

In addition to discussing potential downside trends, upside trends were also explored. Ouroboros Capital believes that FXS will experience exciting moments in the next six months, driven by six key catalysts. The six key factors are:

Adoption of frxETH

Ouroboros predicts that frxETH (an Ethereum derivative) will experience significant growth and has demonstrated impressive growth since its launch. According to the approved proposal, sfrxETH will be incorporated into the Aave platform. This move is expected to be a growth catalyst, reflecting the success of stETH on AAVE.

In addition, frxETH v2 will focus on optimizing validator rewards, attracting the best validators, and bringing better returns to users. It will introduce competitive fees and leverage options for validators.

Collateralization Ratio (CR) > 100%

Once the collateralization ratio reaches 100%, the fee allocation of FXS will be restored, and any concerns about FRAX stability will be eliminated. The current collateralization ratio is slightly below 100%, but Frax has volatile assets + revenue to maintain stability.

Fraxchain

Fraxchain, a Layer2 network, is a hybrid rollup that will support all Frax assets and enable seamless liquidity transfers. Fraxchain is expected to be ready by the end of this year. Frax and liquidity staked derivatives, such as fraxEther, will be used to pay transaction fees on Fraxchain. In addition, Frax founder Sam Kazemian has stated that fees generated by the rollup network can be partially burned or redirected back to the Ethereum mainnet, to be distributed to holders of the FXS governance token. This will have a positive impact on the yield of frxETH and potentially increase its valuation.

Frax v3

Frax v3, an update to the Frax stablecoin, aims to reduce risk and make it more resistant to de-pegging. This will enhance the bullish prospects for FXS.

FRXGov

Although veFXS holders manage the protocol, proposal execution depends on a multi-signature smart contract. But what if signers are unable to sign due to legal issues or other reasons? The launch of frxGov aims to address these issues. When Frax creates a signature, they fully submit it to the on-chain FRXGov contract, and after a certain period of time, FXS holders can vote on or veto the signature. Then, after a certain period of time, the smart contract itself allows the signature to be executed on-chain.

Accrued Value

Frax founder Sam Kazemian has publicly stated that Frax generates an annual revenue of approximately $20 million, ranking it in the top 30 in terms of revenue generation. As for frxETH, 90% of staking rewards are distributed in the form of frxETH to sfrxETH stakers. This will bring an estimated $2 million in revenue to FXS holders, which could potentially grow to $8 million if Frax reaches rETH’s TVL.

The Algorithmic Market Operations (AMOs) are the biggest revenue drivers for Frax. They serve a dual purpose of maintaining stability of Frax’s asset pegs and generating revenue by utilizing protocol liquidity.

The main AMOs, including Curve/Convex AMO, frxETH AMO, and FraxLend, are expected to generate approximately $14 million in revenue, with total revenue for all AMOs expected to be around $16 million.

Fraxchain is a driving factor for future value accumulation for Frax Finance. Fraxchain will allow for the use of native Frax assets as gas fees. Conservatively, Fraxchain’s gas fees are estimated at approximately $1.8 million per year.

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