p.s. Thanks to Ronin. Ronin is leading the charge in Web3 gaming and consumer adoption, building one of the largest and most engaged communities in crypto. Join the movement—download Ronin Wallet today.
Sponsor: Frax — Fraxtal Ecosystem: Where DeFi Meets AI.
🌅 Ethereum to Sunset ‘Holesky’ Testnet in September.The plan comes after the testnet fell offline due to a faulty test for Pectra.
⛓ Ark Invest's Cathie Wood Wants to Bring Her Firm's Funds Onchain. The buzzy investment firm CEO wants to be at the forefront of asset tokenization.
📸
Daily Market Snapshot: Crypto saw green on Wednesday, with ETH leading the way with a 7% rise. Broader markets breathed a sigh of relief as the Federal Reserve said the economy was still healthy enough to hold interest rates steady, a move which pushed major indices up roughly 1% each.
Prices as of 7pm ET
24hr
7d
Crypto $2.83T
↗ 4.5%
↗ 4.4%
BTC $86,291
↗ 4.5%
↗ 3.3%
ETH $2,044
↗ 6.3%
↗ 7.4%
. . .
DeFi
Is f(x) Protocol Building the Future of Stablecoins?
Stablecoin protocols are nothing new to the crypto industry. However, the methods of pegging these stablecoins to the dollar have evolved over time. Most protocols offer over-collateralized debt positions as a way to issue stablecoins. The newest trend involves creating a delta-neutral position through perpetual futures, where a short futures position is taken, equal in value to the underlying collateral.
However, f(x) Protocol recognized the limitations of some of these stablecoin mechanisms and introduced a completely new type of stablecoin that derives its value from yield-bearing assets.
How does this work, and why should you care? It's about to get technical 🤓
How f(x) Stablecoins Work
The first concept to understand when learning about f(x) Protocol is the f(x) invariant formula, which is the core mechanism behind its native stablecoin and leveraged tokens.
The formula consists of three parts:
ns represents the number of tokens put up as collateral, multiplied by the token’s price, this gives the total value of the collateral.
nff is the total value of the stablecoins minted from the collateral.
nxx is the total value of the leveraged positions.
When you add up the value of the stablecoins and leveraged positions, the sum should always equal the value of the collateral.
This allows the protocol to create synthetic leveraged positions. The value of the stablecoins remains stable because it is pegged to the dollar. However, if the value of the collateral fluctuates, that volatility is passed on to the leveraged token holders.
While the innovation behind f(x)'s stablecoin is impressive, the protocol also offers the ability to gain leverage on tokens like BTC or ETH without worrying about funding rates or liquidations.
Over 227K traders were liquidated, totalling nearly $1B in the last 24 hours, per @coinglass_com.
Meanwhile, f(x) had 81 rebalances and 0 liquidations. 💪
If you want to use leverage, minimise your liquidation risk and stop paying funding fees by trading on f(x)👇… pic.twitter.com/ptFJTEOaJC
While this mechanism could be the future of stablecoins, it introduces some additional risks compared to other stablecoins. Two main risks associated with this system are the potential depegging of the stablecoin and the risk of all leveraged tokens losing their value.
Leveraged Token Depegging
In extreme cases, all xTokens (leveraged tokens) could lose their entire value. This would happen if the price of the underlying collateral were to experience a severe freefall. In such a scenario, f(x)'s rebalancing mechanism could be overwhelmed and unable to maintain the leveraged positions. If the collateral price continues to crash and the protocol can't rebalance quickly enough, the leveraged tokens could effectively go to zero.
Stablecoin Depegging
In a worst-case scenario, this could pressure fxUSD and cause it to depeg, though this would likely require a catastrophic collapse across the entire crypto market. However, f(x) has implemented a stability pool to maintain its pegged value.
If fxUSD is trading below $1, the pool will swap USDC for fxUSD to restore the peg. Conversely, if fxUSD is trading above $1, the pool will swap fxUSD for USDC.
Introduction to f(x) V2
In f(x) V1, users could gain leverage on certain tokens, but the amount of leverage was variable. To address this, f(x) V2 introduced fixed leveraged positions to appeal to users who prefer consistent leverage. This is done through their xPOSITION token model.
The V2 mechanism uses flash loans from Balancer to acquire the necessary amount of ETH for the desired amount of exposure, which is then paid off immediately through newly minted fxUSD tokens. The protocol then uses the f(x) invariant formula to determine the correct amount of fxUSD and xPOSITION tokens to return to the user for their desired leverage.
Additionally, the risk of liquidation is minimal due to f(x)’s rebalancing mechanism. If a user’s position exceeds an 88% loan-to-value (LTV) ratio, the protocol will sell part of the user’s debt position to restore healthier levels.
Over 227K traders were liquidated, totalling nearly $1B in the last 24 hours, per @coinglass_com.
Meanwhile, f(x) had 81 rebalances and 0 liquidations. 💪
If you want to use leverage, minimise your liquidation risk and stop paying funding fees by trading on f(x)👇… pic.twitter.com/ptFJTEOaJC
The stability pool serves a critical role in maintaining the fxUSD peg by swapping USDC and fxUSD, however, it does way more than ensure the peg of fxUSD. A significant portion of the protocol’s revenue is directed back into the pool, providing participants with attractive yields on their stablecoins.
Key Revenue Drivers
The first revenue driver for the pool is through collateral token yield, xTokens. Since the leveraged tokens bear the volatility of the collateral, fxUSD collects all the yield. For example, staking rewards generated from staked ETH are directed to the stability pool while the volatility of the token is passed onto the leveraged token holders.
The next revenue stream comes from the opening and closing of xPOSITIONS. A 0.3% fee applies when a user opens an xPOSITION, and a 0.1% fee applies when they close it – 70% of the revenue from these fees is given back to the stability pool. Additionally, if an xPOSITION needs to be rebalanced, a small fee is charged and directed back to the stability pool.
Lastly, if the protocol needs to implement a funding cost on xPOSITIONS, this happens only when fxUSD depegs from the dollar. In this case, the xPOSITION user must pay a funding rate based on the current borrowing rate for USDC on Aave back to the stability pool since they are borrowing fxUSD for their position.
While finding investment opportunities can be challenging in the current market, any yield on stablecoins is an attractive option for capital allocation. With f(x) offering double-digit yields that aren’t based on native token emissions, it may be a compelling alternative to park some of your liquidity during the current market cycle.
The Fraxtal ecosystem is expanding at lightning speed—this month’s biggest highlight is IQAI.com, the newest Agent Tokenization platform from IQ and Frax. IQ is building autonomous, intelligent, tokenized agents launching on Fraxtal in Q1. Empower on-chain agents with built-in wallets, tokenized ownership, and decentralized governance—all within a fast-growing Fraxtal ecosystem.
Not financial or tax advice. Bankless content is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.
Disclosure. From time to time, we may add links in this newsletter to products we use. We may receive a commission if you make a purchase through one of these links. Additionally, the Bankless team holds crypto assets.
