Intro
In the last few years, liquid staking investment strategy has become quite popular. In 2024, there are a huge number of different platforms and protocols offering users opportunity to deposit their assets to receive passive rewards.
The advantage of liquid staking is that the user can receive income without active asset management and large initial capital.
Liquid staking is an excellent option for beginners and those investors who do not want to get involved in more complex investment strategies such as yield aggregation. Thus, by providing their assets to the liquidity pool, users can not only receive rewards but also continue to use their funds.
By depositing funds into pools, investors receive additional tokens in return indicating their share, which can be used in the crypto space to generate additional income.
At the moment, the decentralized finance market has a huge number of options for investing in liquid staking, each of which has its own advantages and disadvantages. In today's article from Notum, we will take a detailed look at the Frax Finance platform and its distinctive features, and also pay attention to investment strategies that will bring you a stable income from liquid staking.
Source: Frax Finance
FraxFinance: The Essentials
- TVL: $947,680,000
- Average APY: 3.79%
- Risk Level: Low
- Blockchains: Ethereum, Dogechain, Avalanche, Fantom, BSC, Polygon, Arbitrum, and Moonbeam
- Foundation Date: 2019
In fact, FraxFinance is a fairly large ecosystem with its own infrastructure. Moreover, the platform even has its own DeFi economy where its own stablecoins are used as currency.
The platform is governed through two utility tokens - Frax Share (FXS) and Frax Price Index Share (FPIS).
The Frax infrastructure includes several sub-protocols, each of which has its own tasks and integrates with the platform's stablecoins. The main ones include:
- FraxSwap. Fraxswap is the first AMM in the DeFi space that has an embedded time-weighted average market maker (TWAMM) allowing large trades to be made over a long period of time. This AMM is built on Uniswap V2 and is completely permissionless, which allows traders to execute large orders.
- Fraxlend. Fraxlend is a reliable lending platform that aims to provide lending markets between pairs of ERC-20 tokens. Since each such pair represents an isolated market, this offers each user the opportunity to borrow or lend cryptoassets.
- Fraxferry. Another popular Frax Finance product is Fraxferry, which is a non-custodial method for transferring protocol tokens across many blockchains. The advantage of this method is that it does not require any third-party applications or bridges to perform the permissionless transfer.
Speaking of liquid staking, the platform offers users Frax Ether which can be described as a liquid ETH staking derivative as well as a stablecoin system created to uniquely leverage the Frax ecosystem. In other words, Frax Ether is designed to maximize staking rewards and smooth out ETH staking, allowing users to earn interest on Ethereum in an easier and safer way.
Source: Frax Finance
Frax Stablecoins
- FRAX. The Frax is the platform’s own stablecoin pegged to the US dollar. This on-chain currency has pretty high scalability and is an excellent investment asset. The supply of the FRAX coin is constantly changing in order to maintain the price of FRAX at $1 due to its fractional-algorithmic monetary policy. FRAX stablecoin can be used for swaps, staking, lending and other DeFi activities.
- FPI. Frax Price Index or FPI is another cryptocurrency of the platform, which is the first stablecoin “pegged to a basket of consumer goods (CPI) creating its own unit of account separate from any nation state denominated money” - Frax Finance. Thus, Frax Price Index is fully backed by cryptocurrency and can also be used in various DeFi operations.
- frxETH. The third cryptocurrency of the platform is Frax Ether, which is a stablecoin pegged to Ethereum and LST system. The main use cases of frxETH are replacing WETH in smart contracts and using the coin in the Frax ecosystem. As with FPI, frxETH is fully backed by cryptocurrency and can be used in all platform activities.
Source: Frax Finance
Why Invest in Liquid Staking with Frax?
Frax Finance is an innovative platform offering users a huge number of opportunities in the field of decentralized finance. Buying and using FRAX for liquid staking also has several advantages that are important to pay attention to before you start investing.
- Algorithmic stability. Since the platform maintains FRAX stability using an algorithmic model, there is no direct peg to a single collateral asset. This is what contributes to the adaptive maintenance of price stability and protects FRAX holders from losing money.
- Additional rewards. By using liquid staking with Frax Finance, users can maximize their earnings as the additional tokens provided for depositing assets to the liquidity pool can also be used in the crypto space for generating income.
- Platform’s decentralization. Since Frax Finance works on decentralized blockchain networks, any financial operations on the platform are censorship-resistant and do not require a central authority’s involvement.
- Governance. FRAX token holders can participate in the governance of the protocol and influence changes and updates regarding Frax Finance and its future.
- Relatively low risks. Since Frax Finance uses several risk mitigation mechanisms, such as collateralization of its stablecoins, users receive some assurance that Frax's native currency will not lose its value.
Investment Strategies on Frax
As known, Frax Finance offers users a wide range of different financial instruments, from swaps to staking. Today we'll look at two popular investment strategies on Frax that allow users to earn rewards for investing their assets in liquidity pools.
FXS-FRAX on Ethereum
FXS-FRAX on Ethereum
Total APY – 7.82%, TVL – $40,9m
This investment strategy allows users to deposit their FXS and FRAX tokens into the liquidity pool on Ethereum to earn rewards. Often the APY for providing liquidity ranges from 7 to 8%, while the pool's TVL exceeds 40 million. Thus, Total Value Locked for this pool indicates excellent performance and low risk, which will be an advantage for novice investors who want to receive a stable income.
Source: Notum
FRAX-WETH on Ethereum
FRAX-WETH on Ethereum
Total APY – 4.01%, TVL – $4,21m
Another popular investment strategy on France Finance is the FRAX-WETH liquidity pool on the Ethereum network. By investing their FRAX and WETH assets, users earn from 3.5% to 4.5% APY. FRAX-WETH pool also has a fairly large TVL, which makes it relatively safe for investment. However, before depositing assets into this pool, users should pay attention to its risks, such as impermanent loss.
Source: Notum
Frax Finance: Risks and Disadvantages
Like any other decentralized finance platform, Frax Finance has its own risks. Despite the fact that from 2020 to 2023 the platform has undergone a large number of audits, the last of which was Trail of Bits, it is important to pay attention to some points before using it:
- Market volatility. As is known, the cryptocurrency market is subject to fluctuations in asset prices, which can affect not only he value of investments, but also the interest received from depositing funds.
- Risk of smart contracts. Any DeFi platform, including Frax Finance, operating on smart contracts is subject to certain risks. Since smart contracts may have bugs or vulnerabilities, this can lead to potential financial losses.
- Platform’s complexity. Since Frax Finance is an entire ecosystem with multiple protocols and a large number of financial opportunities, this platform can be quite difficult for inexperienced crypto users. Lack of a clear understanding of how the system works can lead to choosing the wrong strategy and potentially losing money.
Notum’s Verdict
Frax Finance is a fairly large innovative ecosystem with sub-protocols using the project’s native cryptocurrency. The Frax's infrastructure includes a large number of features, such as Fraxswap, Fraxferry, and Fraxlend, which allow users to perform various financial operations. The project's naive cryptocurrency, FRAX, is a stablecoin pegged to the dollar, whose price is supported by a fractional-algorithmic monetary policy.
The platform invites users to deposit their assets into liquidity pools to receive passive rewards without actively involved in the process. For example, the FXS-FRAX liquidity pool, which consists entirely of Frax Finance cryptocurrencies, has an average APY of over 6.5%. However, before investing with Frax, it is important to pay attention to the risks associated with liquid staking, such as smart contract risk and market volatility.
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Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.