Investing in FXS: Frax Share Tokenomics and Potential
In January 2023, a lot of crypto assets experience significant rallies. Bitcoin rallied to $24,000 and many altcoins increase by more than 100%. One of them was Frax Finance (FXS). FXS or Frax Share gain the attention of the community with the launch of frxETH, a liquid staking token for Ethereum. Frax Finance successfully creates an ecosystem that benefits both the protocol and FXS holders. In the previous section, we talked about what Frax Finance is and how it works. This article will explain the important role and function of the FXS token and its potential as a crypto investment asset in 2023.
Article Summary
- 🏦 Frax Finance is a stablecoin protocol that offers various financial products on a single platform. Frax aims to create a decentralized financial ecosystem with an economic model that benefits its participants.
- 🪙 Frax Share or FXS is a utility and governance token whose role is to regulate the burning and minting of FRAX, keep the stability of FRAX, and absorb revenue and excess collateral that enter the Frax ecosystem.
- 🧠 FXS has a maximum token cap of 100 million FXS with a burning mechanism. Currently, there are 74.4 million FXS circulating in the market. FXS has a halving mechanism that cuts FXS emmision every year.
- ⚙️ The design of FXS stands to benefit long term FXS holders who participates in the Frax governance system. FXS owners get all the profits and revenues of Frax Finance through veFXS.
- 💸 The two main ways to gain yield from FXS are to become an FXS liquidity provider on DeFi platforms or to convert FXS into veFXS.
- ⚖️ Fundamentally, Frax Finance and FXS have many advantages over other tokens from the LSD sector. However, many other factors can affect the token price such as the crypto market situation and technical chart.
About Frax Finance and Frax Share (FXS)
Frax Finance is a stablecoin protocol that offers various financial products on a single platform. Frax is also multi-chain and runs on multiple blockchains at once. The main pillars of Frax Finance are the two stablecoins, FPI and FRAX. FPI is a stablecoin whose value is pegged to a basket of consumer goods whose prices follow the inflation rate and FRAX is a stablecoin pegged to the US dollar.
Read the first part diving into what is Frax Finance and how it works.
Currently, Frax Finance is an important protocol with considerable liquidity. Frax’s goal is to create a decentralized financial ecosystem with an economic model that benefits its participants.
In early 2022, Sam Kazemian (co-founder of Frax) mentioned that he wants Frax to become a “DeFi Trinity”, the go-to platform for all things DeFi. This can be seen with Frax creating Fraxswap, Fraxlend, and also Frax ETH.
Frax Share or FXS is a utility and governance token that plays an important role in the Frax ecosystem. It regulates the burning and minting of FRAX, keeps the stability of FRAX, and absorbs revenue and excess collateral that enter the Frax ecosystem.
FXS Tokenomics
FXS has a token cap of 100 million FXS. Currently, the total supply of FXS is 99.8 million with around 0.17 million FXS already burned by the protocol. Of this total, 74.4 million FXS are circulating in the market. In addition, FXS also has a burning mechanism that could potentially make it deflationary like ETH. Its community can govern all aspects of FXS through a decentralized governance system.
In terms of token distribution, the majority of FXS are allocated to incentive rewards for users and liquidity pools. FXS also has a unique mechanism taken from the Bitcoin model of halving. FXS halving occurs once a year and it cuts the amount of FXS emission from incentive rewards. For example, in 2022 the FXS emission is 12,500 FXS per day and in 2023 this figure is cut to 6,250 FXS.
Frax Share (FXS) Incentive Mechanism
The main advantage of Frax Share that sets it apart from other DeFi governance tokens is its incentive mechanism. The majority of Frax Finance revenues and profits are captured by FXS. Sam Kazemian (co-founder of Frax) explained that he wanted to provide significant incentives to long-term FXS holders rather than those who simply speculate and trade.
The design of FXS tokenomics will benefit long tem FXS holders that participates in the Frax governance system. Here are two ways Frax incentivizes FXS holders:
- FXS token holders will earn additional interests if they become liquidity providers in pools like FRX-USDC on Curve or Convex. This is because Frax holds a lot of CVX tokens that are used to incentivize yield for all its liquidity pools.
- Users who convert FXS to veFXS have the right to benefit from protocol revenue and Frax’s various financial products such as frxETH.
Convex and Curve are the pillars of the DeFi industry infrastructure, especially in liquidity. Both are useful for users looking to make a profit as well as crypto apps looking to add token incentives and deepen the liquidity of their asset (especially new tokens).
The role of veFXS in the Frax Finance Ecosystem
Users who wish to participate in Frax Finance governance must lock FXS into veFXS. So, this is similar to the traditional staking mechanism but it is also for the governance of the protocol. Users can lock FXS and earn veFXS multiplied by the duration of the lock (100 FXS locked for 4 years will earn 400 veFXS). In the Frax governance system, one of the important uses of veFXS is for the gauge system that governs the allocation of FXS emission to each liquidity pool.
As mentioned, veFXS holders will benefit from all Frax products including Fraxswap, Fraxlend, and Frax ETH (veFXS holders get 8% of Frax Finance’s ETH validator profits). So, all veFXS holders will earn protocol income from transaction fees, seigniorage, and AMO profits. Basically, veFXS profits are directly correlated with the growth of Frax Finance.
There are 2 ways to earn profits through frxETH liquid staking: being a liquidity provider on Curve or locking frxETH into sfrxETH to earn yield from Frax Finance ETH validator.
Finally, the FXS1559 Update (taken from Ethereum’s EIP-1559) brings a new policy that benefits veFXS owners. Normally, 50% of Frax protocol profits when conditions are above CR (collateral ratio as explained in the previous Frax articles) are used to buy back FXS and burn it while the remaining 50% goes to veFXS owners. FXS1559 changes this to 100% for veFXS owners. Basically, FXS1559 makes FXS holders get all the profits and revenue of Frax Finance through veFXS.
Frax Share (FXS) as an Investment
The Frax Share price chart shows that it is in a correction after rallying in early January 2023. The price of FXS increased by more than 100% to around $14 since the beginning of January 2023. However, Bitcoin is also experiencing correction (March 7, 2023) and almost all altcoins show similar price movements.
FXS’s rally was partly driven by the hype around Ethereum’s Shanghai Upgrade. In short, Shanghai allows the withdrawal of ETH in staking. This gives great flexibility to investors who want to add and withdraw ETH. Assets in the liquid staking derivatives or LSD sector (LDO, RPL, FXS, FIS) have risen alongside the news of Shanghai.
Ethereum's Shanghai Upgrade has just been pushed back to April 2023, find out about this update in Pintu Academy.
So, what sets FXS apart from other LSD sector assets? What makes Frax better than other platforms like Lido or Rocket Pool? This is a question you need to answer before investing or trading FXS.
Fundamentally, Frax Finance has many advantages over its competitors. Frax wants to create a DeFi financial ecosystem in one platform. It does this through its FRAX and FPI stablecoins and apps like Fraxlend and Fraxswap. Frax also has an incentive mechanism to ensure FXS holders benefit more from locking their assets. Frax has a big focus on keeping users on its platform for the long term.
With their platform advantages, Frax and FXS are fundamentally stronger than tokens such as LDO which has limited functionality, and RPL which only provides a liquid staking platform. However, other aspects such as hype and significant news often affect an asset price. Good fundamentals do not mean that the price of FXS will continue to rise. So, always consider your risks and investment strategy before buying Frax Share.
Frax Finance Roadmap
Sam Kazemian explained that Frax Finance’s long-term goal is to obtain a Federal Reserve Master Account license. The Master Account license will make Frax Finance officially registered in the United States and make FRAX the first decentralized stablecoin to be licensed. It will also make FRAX and FXS attractive to many institutional investors looking for interest and returns.
Frax will likely issue a new stablecoin like frxUSD if it manages to secure the license. However, the uncertainty of the US legal landscape in crypto is a major obstacle.
How to Buy Frax Share (FXS) in Pintu
You can start investing in FXS tokens by buying them in the Pintu App. Here’s how to buy crypto on the Pintu application:
- Create a Pintu account and follow the process of verifying your identity to start trading.
- On the homepage, click the deposit button and top up the Pintu balance using your preferred payment method.
- Go to the market page and look for the FXS token.
- Click buy and fill in the amount you want.
- Now you have FXS token as an asset!
Besides FXS tokens, you can also invest in various crypto assets such as BTC, BNB, ETH, and others safely and easily through Pintu.
Pintu is also compatible with popular wallets such as Metamask to facilitate your transactions. Download the Pintu app on Play Store and App Store! Your security is guaranteed because Pintu is regulated and supervised by Bappebti and Kominfo.
In addition to executing transactions, in the Pintu Apps, you can also learn crypto through various Pintu Academy articles which are updated every week! All Pintu Academy articles are made for educational purposes, not financial advice.
References
- Research Decks by @wintersoldierxz, accessed on 6 March 2023.
- Frax Finance Co-Founder Sam Kazemian Makes His Case For Stablecoin Maximalism at ETHDenver, Flywheeloutput, accessed on 6 March 2023.
- Why Frax and Curve Are Inevitable w/DeFi Cheetah, Flywheeloutput, accessed on 6 March 2023.
- Frax Proposal: Move 100% of FXS1559 to veFXS Yield, Snapshot, accessed on 6 March 2023.
- Jake Pahor, “Part 9 of my deep dive research series will be on $FXS”, Twitter, accessed on 7 March 2023.
- Thor⚡️Hartvigsen, “Frax Finance has been crushing it lately And with their growing ecosystem of DeFi products, $FXS has a TON of upside in 2023.”, Twitter, accessed on 7 March 2023.
- DeFi Cheetah, “[$FRAX & $DAI] Why are stablecoins of @fraxfinance, @CurveFinance more regulatory-resistant than @MakerDAO?”, Twitter, accessed on 7 March 2023.
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