Bessie Liu

Native on-chain asset issuance blockchain, Noble, has partnered with Frax Finance to bring decentralized stablecoins FRAX and sFRAX into the Cosmos and IBC ecosystems.



Other Frax Finance tokens, including the Frax Price Index (FPI) and FraxEther (frxETH), are expected to be available at a later date.&nbsp;



FRAX itself is a USD pegged stablecoin, meaning that it is worth 1:1 to the US dollar. Each stablecoin has an 100% collateralization ratio and the stablecoin uses Algorithmic Market Operations (AMO) contracts and non-custodial subprotocols to maintain the peg to the dollar.



Read more: <a href="https://blockworks.co/news/frax-v3-stablecoin-0xresearch">Frax v3 offers ‘all-weather stablecoin,’ founder Kazemian says</a>



sFRAX is a staked version of the FRAX token. In order to receive the token, a user must lock their FRAX with a <a href="https://blockworks.co/tag/staking">staking</a> provider. This will then allow them to earn yield exposure on their <a href="https://blockworks.co/tag/stablecoins">stablecoins</a> that are otherwise sitting idly.&nbsp;



According to DeFiLlama, FRAX is the eighth largest stablecoin based on market capitalization. It currently has a market cap <a href="https://defillama.com/stablecoin/frax">of</a> $388.2 million, lower than popular stablecoins USDC and DAI, which have market caps <a href="https://defillama.com/stablecoins">of</a> $32.116 billion <a href="https://defillama.com/stablecoins">and</a> $4.881 billion, respectively.&nbsp;



Sam Kazemian, the founder of Frax Finance, noted that bringing native FRAX into the <a href="https://blockworks.co/tag/cosmos">Cosmos</a> ecosystem had been a priority for the team for a period of time.



“We look forward to FRAX and sFRAX being available and are excited by the potential of innovative use cases and incentives developed by us and our partners as well as by the broader community of Cosmos appchains and users,” Kazemian said in a press release reviewed by Blockworks.



This process is made possible by Noble, the digital asset issuance chain and the <a href="https://blockworks.co/news/noble-circle-usdc-cross-chain-transfer-protocol-cosmos">native asset issuer of USDC</a> in the Cosmos ecosystem. Through Noble, all major Comos chains that are integrated with IBC — including Osmosis, dYdX, Celestia, Sei, Injective and others — will be able to access FRAX and sFRAX natively.&nbsp;



Read more: <a href="https://blockworks.co/news/noble-solve-cosmos-liquidity">Noble comes out of stealth to solve Cosmos liquidity</a>



“We are excited to partner with Frax Finance in bringing a market leading asset to the wider Cosmos ecosystem,” Noble founder Jelena Djuric said. “FRAX’s integration supports Noble’s vision of bringing liquidity, interoperability and seamless UX and allows Noble to ultimately provide more value to asset issuers and end users.”



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Noble brings FRAX and sFRAX to Cosmos and IBC ecosystem

Darren Kleine

Sam Kazemian says Frax protocol’s v3 iteration offers an “all-weather” stablecoin that “completes the dollar-pegged stablecoin design.”



The goal is for the stablecoin to behave “like real US dollars in every kind of market condition,” including both high and low rate environments, he explains.&nbsp;



On the 0xResearch podcast (<a href="https://open.spotify.com/episode/7A4YgFgtE1CYnctihzw4d9">Spotify</a>/<a href="https://podcasts.apple.com/us/podcast/inside-frax-finance-designing-the-end-game-stablecoin/id1651683074?i=1000631854605">Apple</a>), Kazemian says the team took what’s already working with Frax “exactly as designed before,” but added “a few new unique innovations” to the protocol’s functionality.



An important enhancement that Kazemian mentions is the incorporation of traditional market <a href="https://blockworks.co/news/frax-v3-stablecoin-sfrax-treasury-yields">dollar yield curve dynamics</a>, caused by short-dated Treasurys and the IORB (interest on reserves balances) rate — often referred to as the Federal Reserve rate.



Read more: <a href="https://blockworks.co/news/frax-v2-permissionless-validators">Frax v2 enables permissionless DeFi validators</a>



“We wanted to design a <a href="https://blockworks.co/tag/stablecoin">stablecoin</a> that brings all of those things on-chain in as decentralized but proper manner as possible, as well as have all of the innovations that the Frax stablecoin has had in v2.”&nbsp;



Frax v3, he says, “neatly places all of those in an elegant way that — we think — no one&#8217;s done before.”



<h2 class="wp-block-heading">Fully collateralized</h2>



Safety — a characteristic that has sometimes appeared to be an afterthought in <a href="https://blockworks.co/news/one-year-since-terra">certain stablecoin solutions of the past</a> — is key to successful long term growth, Kazemian says. “If you want to create a very large stablecoin,” he says, “you want to basically become safer as you get bigger.”



“You don&#8217;t want to become riskier as you get bigger,” he adds. “That&#8217;s not a recipe for a good ending.”



If the stablecoin industry is to ever grow into a multi-hundred billion dollar sized market, Kazemian says the technology’s design has to become more reliable. “You can&#8217;t have the same exact structure.”



“You want it to be safer,” he says. “You don&#8217;t want that to possibly go ‘poof’ overnight.”



<h2 class="wp-block-heading">Locked liquidity</h2>



As of now, the Frax stablecoin has a collateralization ratio (CR) of 92%, podcast host Dan Smith observes. Kazemian explains that Frax is “fully transitioning to 100 percent CR of exogenous collateral,” primarily through protocol revenues.&nbsp;



“We have an LSD [<a href="https://blockworks.co/news/liquid-staking-derivatives-shanghai-upgrade">liquid staking derivative</a>],” he says. “We like to call it an [ether] <a href="https://blockworks.co/tag/eth">ETH</a>-pegged stablecoin. We have <a href="https://blockworks.co/news/frax-finance-launching-l2">Fraxchain coming at the end of the year</a>.”



Frax earns between $30 to 40 million of annual revenue via their current market offerings, Kazemian says. “Hopefully that will be even higher with Fraxchain [<a href="https://blockworks.co/tag/layer-2-2">layer-2</a>] and these kinds of things.&#8221;



Because of “locked liquidity” in Frax, a “bank run” is mathematically impossible with the protocol, according to Kazemian, barring smart contract risk “or something really unexpected happening,” he says.



“If you actually just go on-chain and look at it,” he says, “you don&#8217;t have to trust me.”&nbsp;



“There&#8217;s actually years — <a href="https://blockworks.co/news/frax-ditches-algorithm-backing">one to two and a half years of locked liquidity</a>.”



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“That&#8217;s why Frax has been super stable,” he says, “because we&#8217;ve been very transparent. We have actually a live balance sheet of all the Frax collateral that literally updates every block.”



“Markets are efficient,” Kazemian believes. “We actually try to help and tend towards efficiency by pushing out as much information as possible,” he says, “and because the information is good, you know, things are good.”

Frax v3 offers ‘all-weather stablecoin,’ founder Kazemian says

Jack Kubinec

With Federal Reserve interest rates at their highest level in 22 years, FRAX announced the launch of sFRAX — a staking vault meant to tap the corresponding hike in Treasury yields.



FRAX is in the process of deploying a raft of “Frax v3” products, and today is launching sFRAX, or “staked FRAX,” alongside a bond product that converts to FRAX’s stablecoin on maturity. Frax founder Sam Kazemian told Blockworks that starting Monday, users will be able to deposit sFRAX and receive 10% yield — which would then shrink to around 5.4%, the Fed’s current IORB rate.



Kazemian said once Federal Reserve interest rates started rising, he realized most stablecoins on the market were only built for low-rate environments — and Frax (<a href="http://blockworks.co/price/frax">FRAX</a>) needed to track interest rates to stay relevant.



“Otherwise, no one will treat your <a href="https://blockworks.co/tag/stablecoins">stablecoin</a> as real dollars. They&#8217;ll just think of them as play money, and then they&#8217;ll sell them for real dollars, or real stablecoins or real T-bill projects,” Kazemian said.&nbsp;



sFRAX is partly the fruit of FRAX’s August <a href="https://gov.frax.finance/t/fip-277-onboard-finrespbc-as-frax-v3s-offchain-rwa-partner/2492">partnership</a> with FinresPBC, which connected FRAX with Kansas City-based Lead Bank to open a brokerage account and begin purchasing Treasury bills.



Frax’s sFrax seems similar in motivation to <a href="https://blockworks.co/news/dai-savings-rate-us">MakerDAO’s DAI Savings Rate</a> (DSR), a bear market success story that has helped Maker increase its <a href="https://defillama.com/protocol/makerdao?revenue=true&amp;groupBy=monthly">revenue</a> for five straight months by giving DAI holders exposure to Treasury yields, per DeFiLlama.&nbsp;



But Kazemian thinks Frax’s design is ultimately more sustainable than Maker’s.



DSR rates are akin to a “marketing spend to increase the profits of the DAO,” Kazemian told Blockworks, arguing that Maker’s rates don’t track with the Fed’s. Kazemian said FRAX is perfecting the Treasury-exposed stablecoin.



“It&#8217;s not like, ‘hey, let&#8217;s just dump a bunch of yield into it and compete with DAI.’ Our view is we want to complete this design,” Kazemian said. “In order to complete a dollar-pegged stable coin, you need a way to bring the <a href="https://blockworks.co/tag/federal-reserve">Fed</a> yield on-chain.”



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FRAX taps Treasury yields with new staking vault

The Frax ecosystem, according to the company <a href="https://frax.finance/">website</a>, “is a self-sufficient DeFi economy utilizing stablecoins as currency.”



While many elements of the ecosystem are already “self-sufficient,” the core team currently runs the validators, Frax Finance founder Sam Kazemian says. “It&#8217;s a curated list,” he says, rather than a permissionless setup.



Speaking to Blockworks on the Bell Curve podcast (<a href="https://open.spotify.com/episode/270pLFkTjtF1RazxOoOi3p?si=b28cb349640a4f86">Spotify</a>/<a href="https://podcasts.apple.com/us/podcast/how-frax-is-decentralizing-trust-and-integrating-defi/id1641356619?i=1000624506779">Apple</a>), Kazemian explains that <a href="https://blockworks.co/tag/frax">Frax</a> Ether V2 will eliminate this trust limitation, instead allowing anyone to run validators “in a permissionless way.”



The main way to become a validator in the next iteration of Frax will be to post ether <a href="https://blockworks.co/price/eth">ETH</a> as collateral, Kazemian says. Users will then “borrow” a validator and control it “as long as they&#8217;re paying this interest rate, which is an open market interest rate of what the market&#8217;s willing to pay to run validators and get the rewards.”



“Sounds a lot like just taking out a loan, right?” Kazemian says. “Except the difference is, instead of taking out a loan of dollars or something, the loan is the right to control a validator.”



Kazemian believes this approach is “the most general way” to provide the service as an “open-ended lending market.”



<h2 class="wp-block-heading">It’s really just a lending market</h2>



Kazemian points out that this is ultimately how decentralized lending works, using the example of <a href="https://blockworks.co/tag/rocket-pool">Rocket Pool</a>. “People come and they give their ETH, and then they mint <a href="https://blockworks.co/price/reth">rETH</a> tokens, which is their <a href="https://blockworks.co/tag/liquid-staking">[liquid staking</a> token].”



“The rETH token is basically like a lending receipt,” he explains.&nbsp;



“If you go to <a href="https://blockworks.co/news/aave-curve-exposure">Aave</a>,” he says, “and you deposit ETH into Aave, what do you get?”



“You get aETH,” he says. “Someone borrows the ETH and then they start paying interest. Your aETH that you got for lending into Aave — it slowly goes up in value.”



“You&#8217;re earning the interest someone else is paying,” he says. “This is exactly what a decentralized lending or [liquid staking token] system is. It&#8217;s just a lending market.”



“So then we asked,” Kazemian continues, “how do you optimize this in such a way that it is perfectly optimized for [liquid staking token] markets, for people to borrow validators?”



Validators can be borrowed by anyone, from anywhere, he explains. Rather than needing any degree of trust or curation, a market mechanism “makes sure that these people are always at the cutting edge.”



“There&#8217;s some incentive for people to be actually competent and run these things at a good market scale. There’s an efficient market there,” he says.



“As long as you&#8217;re a competent validator,” Kazemian says, “and you are okay with paying the interest rate, you get to keep borrowing them and you keep running them profitably. You take a lot of the profit yourself and you pay whatever the interest rate is at the market.”



“You want to basically reward people that are the most efficient, as part of the design.” 



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Kazemian explains that <a href="https://blockworks.co/tag/lido">Lido</a>, a rival liquid staking platform, uses a “<a href="https://blockworks.co/news/lido-v2-whats-new">curated list of validators</a>” for the ETH that is accrued by users minting stETH.&nbsp;



“Lido has to take that,” he says. “The lender is whoever&#8217;s minting <a href="https://blockworks.co/tag/steth">stETH</a>.” Lido has to hope, he says, that the validators are “not malicious or compromised.”



“You have that specific trust assumption in that model, so that&#8217;s the main difference,” he says.



“Frax ETH V1 is like Lido right now. Frax ETH V2 is like Rocket Pool in the sense that it&#8217;s totally decentralized — and there&#8217;s no more trust assumptions.”



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Frax V2 enables permissionless DeFi validators

Following the exploit of decentralized exchange Curve, many DeFi participants are trying to make sense of the landscape — and figuring out what to do next.



<a href="https://blockworks.co/news/curve-suffers-exploit">Curve was hacked</a> for over $70 million last Sunday after a bug was discovered in its coding language, Vyper.&nbsp;



Concerns about the ripple effects of the Curve exploit were apparent. The price of Curve’s native token, <a href="https://blockworks.co/price/crv">CRV</a>, fell dramatically immediately after the exploit, from $0.73 to as low as $0.50. CRV is trading at $0.60 at the time of writing.&nbsp;



Of top concern for many ecosystem participants was Curve founder Michael Egorov&#8217;s loan, worth an estimated $70 million USDT, which he <a href="https://blockworks.co/news/aave-curve-exposure">borrowed using CRV</a> as collateral on Aave v2.&nbsp;



Read more: <a href="https://blockworks.co/news/curve-egorov-exit-defi-positions">Curve’s Egorov turns to notable counterparties to bail out his DeFi positions</a>



As might be expected, the Curve exploit has reshaped the DeFi landscape, at least for now.



Nick Cannon, the vice president of growth at Gauntlet, a crypto-financial risk management company, told Blockworks that one side effect of smart contract exploits is a drying-up of market liquidity.



“Post FTX, [liquidity] on DEXes and centralized exchanges completely evaporated, and when that happens, it&#8217;s not surprising that changes the risk profile of not just CRV, but the entire market,” Cannon said.



<h2 class="wp-block-heading">Where is the liquidity going?</h2>



Between July 30 and roughly 7 pm ET on Thursday, an estimated $452.4 million had been withdrawn from Aave v2 accounts, Cannon told Blockworks.



That figure includes:



<ul>
<li>$90.7 million to an unspecified location</li>



<li>$52.4 million staked in stUSDT</li>



<li>$166.2 million held in wallets</li>



<li>$128.8 million migrated to Aave v3</li>



<li>$7.3 million moved to Compound</li>



<li>$7 million moved to Binance</li>
</ul>



An additional $26 million in withdrawals from Morpho, $32.7 million from Egorov, and $12.1 million from Falmincome Protocol were not included in these calculations, Cannon notes. 



To prevent liquidation, Egorov has engaged in a series of over-the-counter (OTC) deals with various ecosystem participants to pay off his loans on lending protocols Aave, Fraxlend, Inverse and Abracadabra.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Wintermute Trading has officially joined the Curve OTC deals, acquiring 12.5M CRV ($5m USDT). To date, Curve Founder has sold 84.5M CRV, in exchange for $33.8M. <a href="https://t.co/2zpX0INOgv">pic.twitter.com/2zpX0INOgv</a>&mdash; Sandra (@sandraaleow) <a href="https://twitter.com/sandraaleow/status/1687191897171972096?ref_src=twsrc%5Etfw">August 3, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<h2 class="wp-block-heading">Lending protocols propose to purchase CRV with USDT</h2>



Both Aave and Fraxlend have governance proposals in motion that suggest purchasing CRV with <a href="https://blockworks.co/price/usdt">USDT</a>.



Marc Zeller, the founder of delegate platform Aave Chan Initiative, <a href="https://governance.aave.com/t/arfc-acquire-crv-with-treasury-usdt/14251">noted</a> that this approach could allow Aave v2 to support the DeFi ecosystem and incentivize <a href="https://blockworks.co/price/gho">GHO</a> liquidity.&nbsp;&nbsp;



“A 2M USDT worth of CRV acquisition would send a strong signal of DeFi supporting DeFi, while allowing the Aave DAO to strategically position itself in the Curve wars, benefiting GHO secondary liquidity,” Zeller wrote.



A similar proposal has been suggested by <a href="https://twitter.com/traders_insight?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor">Samuel McCulloch</a> on Fraxlend.&nbsp;



“To bolster the health of our lending market, as well as foster increased liquidity across all Frax assets, the DAO should use this opportunity to acquire CRV,” McCulloch wrote.



Cannon, however, notes that Gauntlet will continue to recommend that lending protocols disable, freeze, or similarly adjust their CRV and prevent additional collateral right now.



“Does the DAO want to get stuck holding one of the biggest positions in this collateral if the liquidity dries up for CRV?” Cannon said.



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How DeFi users are navigating post-Curve exploit landscape

Frax Finance, known for creating decentralized stablecoins, announced the launch of its own layer-2 blockchain. The introduction of Fraxchain is scheduled to take place by the end of 2023.



The Frax team is most well known for frxETH, a loosely pegged algorithmic ETH stablecoin that is partially collateralized.&nbsp;



According to <a href="https://www.blockworksresearch.com/">Blockworks Research</a>, frxETH has been the fastest-growing liquid staking product since its launch; it has grown from $0 to $378 million in less than eight months.&nbsp;



It also has a unique staking model that is made possible through sfrxETH — an ERC-4626 vault that accrues staking yield for frxETH validators.



“One key differentiator in the protocol&#8217;s staking model is the frxETH and sfrxETH dynamic, where liquidity provider incentives for frxETH entice holders to forgo staking for sfrxETH,” Blockworks Research said.&nbsp;



<h2 class="wp-block-heading">The launch of Fraxchain</h2>



Fraxchain will be Frax Finance’s very own EMV-compatible layer-2. It will likely launch the chain before year’s end, Frax Finance’s founder Sam Kazemian said on the Flywheel DeFi <a href="https://www.youtube.com/watch?v=u10Gs_-KDnw&amp;t=6s">podcast</a>.&nbsp;



The solution will be a hybrid rollup consisting of both optimistic rollup architecture (used by Optimism and Arbitrum) and zero-knowledge proofs. It will also utilize frxETH as its gas token, giving the token more utility.&nbsp;



This will enable faster transaction finality and decentralized sequencer capabilities, Blockworks Research noted.&nbsp;



&#8220;The chain can elect to implement an EIP-1559 type mechanism where transaction fees can be burnt and this value can accrue to veFXS holders,” Blockworks Research said.&nbsp;



VeFXS (Vote-EscroweD FXS) is a token designed to earn long-term token holders yield. Users can lock in FXS tokens for up to four years and earn four times the amount of veFXS.&nbsp;



“VeFXS holders may also elect to introduce a bribe market for sequencers,” Blockworks Research said. “Frax is no stranger to bribe markets in DeFi and continues to hold the lion&#8217;s share of CRV and CVX, which enables the protocol to drive deep liquidity and incentives to its products.&#8221;



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Frax Finance plans to launch its own L2 by end of year

Sebastian Sinclair

Ether (<a href="https://blockworks.co/price/eth" target="_blank" rel="noreferrer noopener">ETH</a>) is witnessing its highest levels of staking activity following a critical update earlier this year.



The network’s <a href="https://blockworks.co/tag/ethereum-merge" target="_blank" rel="noreferrer noopener">transition to Proof-of-Stake</a> (PoS) late last year, coupled with Ethereum&#8217;s &#8220;Shapella&#8221; network upgrade in April, which enabled withdrawals of staked ETH as well as rewards, has led demand for new validators to reach its highest level in two and a half years.



Previously, users could stake their ETH to the Beacon Chain as early as December 2020, but it wasn’t until Shapella was fully implemented that it became possible to withdraw.



As a result, over 1 million ETH was withdrawn shortly after the upgrade, sparking temporary concerns as to whether demand would simply rush to the exit indefinitely and cause the price of ETH to dip.



Yet, this rush has been balanced by an influx of eager validators waiting for activation, indicating a sustained demand for Ethereum staking, an analysis by <a href="https://coinmetrics.substack.com/p/state-of-the-network-issue-208#new_tab" target="_blank" rel="noreferrer noopener">Coin Metrics</a> shows.



“The entry queue has reached its highest level since the Beacon Chain’s genesis in December 2020, with a total of 64,000 validators eagerly waiting to participate,” Coin Metrics said.



In contrast, there are effectively <a href="https://beaconcha.in/validators#exiting" target="_blank" rel="noreferrer noopener">zero validators</a> wishing to withdraw, that are stuck in the queue. That’s a <a href="https://blockworks.co/news/ethereum-validators-withdraw-620m-eth">stark contrast</a> to withdrawal queues just last month, which stood at roughly 17,500.



The surge of new validators has helped drive the active validator count to a new high of nearly 584,000, <a href="https://beaconcha.in/" target="_blank" rel="noreferrer noopener">data shows</a>. This number has more than made up for the transient decrease in complete withdrawals that occurred when withdrawals were initially introduced.



As the number of active validators approaches the 589,000 mark, an internal protocol parameter, known as the Churn Limit, will rise, allowing for the daily activation of an extra 225 validators.&nbsp;



However, even with this increased pace, individuals or staking pools spinning up new validators to join the queue today would still need just over a month to become active, Coin Metrics noted.



<h2 class="wp-block-heading">Liquid staking tokens predicted to fuel staking value</h2>



A budding narrative in the decentralized finance (DeFi) world underscores the escalating demand for Liquid Staking Tokens (LSTs).&nbsp;



These tokens, representative of staked assets, bring a new level of liquidity to the traditionally <a href="https://figment.io/assessing-staking-risks-illiquidity-and-price-volatility/" target="_blank" rel="noreferrer noopener">illiquid PoS model</a> by allowing staked assets to participate in DeFi applications while still contributing to the network&#8217;s security. 



They provide a bridge between staking and DeFi by offering liquid tokens that represent staked ETH, allowing holders to freely interact with DeFi protocols while still earning staking rewards.&nbsp;



The growing prominence of LSTs within DeFi is intricately linked to Ethereum&#8217;s staking ecosystem. Behind every LST, there is a staking operation, providing the required security and validation for the Ethereum network.&nbsp;



Some of the established decentralized players are jockeying for market share, such as Lido DAO (<a href="https://blockworks.co/price/ldo" target="_blank" rel="noreferrer noopener">LDO</a>), Frax (<a href="https://blockworks.co/price/FXS" target="_blank" rel="noreferrer noopener">FXS</a>) and Rocket Pool (<a href="https://blockworks.co/price/RPL" target="_blank" rel="noreferrer noopener">RPL</a>), alongside centralized staking providers such as Coinbase, and a slew of others, with new offerings cropping up regularly post-Shapella.



In essence, <a href="https://blockworks.co/news/liquid-staking-derivatives-tvl">the explosion of LSTs within DeFi</a> implies a parallel increase in Ethereum staking activity. As the role of LSTs becomes more integral to DeFi&#8217;s future, it may inadvertently fuel the demand for ETH, Blockworks was <a href="https://blockworks.co/news/liquid-staking-derivatives-shanghai-upgrade">previously told</a>.



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Ethereum Staking Demand Skyrockets Following Network Upgrade

Macauley Peterson

If you start dropping references to &#8220;Ethereum request for comment” in polite conversation, you can expect some blank stares. But sometimes innocuous technical lingo like ERC-20 (tokens) and ERC-721 (NFTs) can become the crypto-equivalent of a household name.



Proponents of the tokenized vault standard ERC-4626 — specifically those in the advocacy group 4626 Alliance which announced an expansion to 11 members Thursday — hope that this little pull request, finalized in March 2022 will find its place in a future ERC hall of fame.



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<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1/🌟 The 4626 Alliance is thrilled to announce a stellar lineup of new members joining forces to propel the ERC-4626 standard: <a href="https://twitter.com/yearnfi?ref_src=twsrc%5Etfw">@yearnfi</a>, <a href="https://twitter.com/fraxfinance?ref_src=twsrc%5Etfw">@fraxfinance</a>, <a href="https://twitter.com/sommfinance?ref_src=twsrc%5Etfw">@sommfinance</a>, <a href="https://twitter.com/AlchemixFi?ref_src=twsrc%5Etfw">@AlchemixFi</a>, <a href="https://twitter.com/Blockworks_?ref_src=twsrc%5Etfw">@Blockworks_</a>, <a href="https://twitter.com/MorphoLabs?ref_src=twsrc%5Etfw">@MorphoLabs</a>, and <a href="https://twitter.com/joey__santoro?ref_src=twsrc%5Etfw">@joey__santoro</a> <a href="https://t.co/vgTl4fs1Rq">pic.twitter.com/vgTl4fs1Rq</a>&mdash; 4626 Alliance (@erc4626) <a href="https://twitter.com/erc4626/status/1654121022201950208?ref_src=twsrc%5Etfw">May 4, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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Disclosure: Blockworks is among the members of the 4626 Alliance.



The standard was first <a href="https://eips.ethereum.org/EIPS/eip-4626">proposed</a> by <a href="https://blockworks.co/tag/fei-protocol">Fei</a> co-founder Joey Santoro in late 2021. Within months, it sparked the <a href="https://twitter.com/joey__santoro/status/1504603906726240258">interest</a> of developer teams from major DeFi protocols such as Balancer, <a href="https://blockworks.co/tag/yearn-finance">Yearn</a> and <a href="https://blockworks.co/tag/frax">Frax</a>.



That prompted Blake Richardson and Vikram Arun, co-founders at Superform, to champion the standard, forming the 4626 Alliance alongside mStable, Balancer and Aztec.



“Our thesis is that 4626 creates the new DeFi summer,” Richardson told Blockworks. He predicts it will be as important as the ERC-20 token standard that led to <a href="https://www.blockworksresearch.com/glossary#initial-coin-offerings-icos">the ICO boom</a>.



<h2 class="wp-block-heading">DeFi’s “ERC-20 moment”</h2>



To date, DeFi has failed to be adequately composable and easy to understand, and has suffered from security risks as a result of a lack of standards, Richardson said. Projects have been forced to author bespoke adapters in order to link up with each other, adding complexity and time to deploy dApps safely.&nbsp;



“Instead of all these isolated groups of people building things that don’t interact with each other, we can build entirely unique composable projects,” Richardson said.



One example is Sommelier — also a member of the 4626 Alliance — which <a href="https://blockworks.co/news/defi-multichain-sommelier-axelar">announced its launch on Arbitrum</a> this week. Co-founder Zaki Manian lamented the standards problem in DeFi, and said that 4626 could speed up his team’s work.



“We’re actually talking to lots of other people in [Ethereum] DeFi about trying to work better [with 4626],” Manian told Blockworks. “If DeFi could collectively all adopt 4626, Sommelier could be everywhere and plug into every protocol in like a few days.”



Yield generating strategies are able to become more complex while also being harder for ne&#8217;er-do-wells to attack. Provisioning audits and ensuring safety has been a major obstacle&nbsp; because each individual protocol implementation has brought its own unique, often complex risks. 4626 — standardizing the tokenized vault — is expected to make the auditors’ job much easier.



But it’s not just about improving speed to market and helping projects become less <a href="https://blockworks.co/tag/hack">hack-prone</a>, the standard also enables new DeFi primitives such as tools for customizable yield exposures, like those developed by Sense Finance, Richardson said.



“Composability is one of the key value props of decentralization in the first place — the whole money Lego pitch for DeFi is one of it’s most critical for adoption,” according to Richardson, who thinks the types of applications that will be built using the standard, is set to rise dramatically.



For instance, <a href="https://blockworks.co/news/gearbox-is-releasing-v3">Gearbox uses 4626</a> to let levered yield strategies be included seamlessly into existing strategy vaults, such as those planned by Yearn Finance in its upcoming V3.



Increasing adoption within DeFi is the primary goal of the alliance, and once met, members will decide on the next steps, such as raising awareness of its benefits to the public.



“Most investors aren’t particularly standard conscious — if they buy an NFT with 1155 versus 721 it’s not changing their perspective a ton,” Richardson said. “However, I think the compound benefit of standardization will lead more people to adopt DeFi because they can start to trust it more.”



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Tokenized Vault Standard on Ethereum Set to ‘Kick Off New DeFi Summer’

The community governance for stablecoin issuer Frax has voted to increase the collateral ratio for its stablecoin to 100%, removing the small algorithmic component which contributed to its value.



Frax, once known as a protocol that partially backed its stablecoin with collateral while stabilizing the rest with smart contract algorithms, it’s now gradually moving towards full collateralization.



“The costs of being slightly undercollateralized now far outweigh the benefits – especially because it can undermine the perceived safety of FRAX,” Frax finance admin <a href="https://gov.frax.finance/u/hameed/summary" target="_blank" rel="noreferrer noopener">Hameed</a> wrote in a <a href="https://gov.frax.finance/t/fip-188-increase-cr-to-100/2147" target="_blank" rel="noreferrer noopener">proposal</a>.



Quorum for the proposal, which was set to <a href="https://snapshot.org/#/frax.eth/proposal/0x6d43531f54de3d52ad439dcb6c56e3eae1b833fceb4d484dcb3b20be070ca25d" target="_blank" rel="noreferrer noopener">7.2 million FXS</a> ($81 million), was well surpassed by 43 million FXS ($484 million) in total. Over 98% of community members voted in favor of implementing the changes.



Following the <a href="https://blockworks.co/news/terra-collapse-could-spell-end-for-algorithmic-stablecoins">collapse of algorithmic-backed stablecoins such as UST</a>, there has been a wide perception that they are less safe assets for users to hold.



“UST’s failure tainted the algorithmic stablecoin concept (whether fairly or unfairly). There is very little benefit in maintaining the current CR of 92%,” Hameed wrote. “Gradually shifting the protocol to 100% CR is the best path forward for the long-term health and growth of the protocol.”



The Blockworks Research team agrees.



“With Frax&#8217;s gradual transition to a 100% backing for its stablecoin, the token becomes less risky from a regulatory point of view,” they said. “This is a step closer to Maker&#8217;s model, where DAI is overcollateralized, which prioritizes safety.”



The proposal was designed to focus more on the end result — increase the credit ratio to 100% permanently — but does not touch on how the community plans to achieve this.&nbsp;



“There is no imminent need to increase the CR and there are many ways of reaching the target CR,” Hameed wrote. “Ideally growth, asset appreciation and protocol earnings will increase the CR to 100% over time.”



It is important to note that minting FXS to increase the credit value is not under consideration.&nbsp;



“This is effectively an investment in the future of Frax that will increase protocol assets and remove the need for FXS emissions towards locked liquidity,” Hameed wrote.



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Frax Ditches Algorithmic Backing, Citing Terra Failure

Index Coop, a company that designs structured products on Ethereum, has launched a Diversified Staked ETH (dsETH) index — a tokenized strategy that proponents say will provide its users with a more sustainable and less risky yield.



The <a href="https://indexcoop.com/blog/faq-the-diversified-staked-eth-index-dseth" target="_blank" rel="noreferrer noopener">dsETH index</a> allows holders to distribute their assets across various liquid staking protocols. ETH liquid staking tokens listed in the index’s initial launch include Lido’s stETH, Rocket Pool’s rETH and StakeWise’s sETH2.&nbsp;



Additional tokens will be considered if they meet certain <a href="https://gov.indexcoop.com/t/iip-171-launch-the-diversified-staked-eth-index-dseth/4389#h-60-methodology-15" target="_blank" rel="noreferrer noopener">public inclusion criteria</a>.



This latest product is a way for “all of the liquid staking protocols [to band] together against the centralized exchanges, who are also big players in the staking industry,” ecosystem growth lead at Index Coop, Crews Enochs, told Blockworks.



“We want to reward protocols that are more decentralized with a higher share of that index,” Enochs said.



For this reason, Coinbase’s cbETH which has a non-competitive fee of 25% and Frax’s frxETH, whose node operators are all run by the Frax core team, have been excluded from the Index.



<h3 class="wp-block-heading">A move to decentralize Ethereum staking</h3>



Since the successful completion of the <a href="https://blockworks.co/tag/ethereum-merge">Ethereum Merge</a>, the ecosystem has been concerned about the gradual <a href="https://blockworks.co/news/flashbots-has-a-new-plan-make-tradfi-look-embarrassing">centralization of its blockchain</a> — Lido, Coinbase, Kraken and Binance hold a total of 55% of all staked ether, according to <a href="https://www.rated.network/?network=mainnet&amp;view=pool" target="_blank" rel="noreferrer noopener">data</a> from Rated Network.



“We hope dsETH will positively influence the liquid staking market by rewarding the most efficient and decentralized protocols with higher allocations in the index token,” Dev, Index Coop’s head of growth, said in a statement.



Rocket Pool’s rETH currently <a href="https://dune.com/index_coop/dseth" target="_blank" rel="noreferrer noopener">tops the list</a> in the index token basket — making up 41.20% of the token’s allocation.



“We want liquid staking protocols to focus on their core products, decentralization and low fees, and not worry so much about marketing and business development and all those integrations,” Enochs said. “If you just have a good-looking staking product, you will get included in this index.”



Once a staking token is included in the index, it can be used as collateral on lending platforms such as Aave — protocols will not need to look for integrations themselves, Enochs added



In the case that a staking token in the index becomes vulnerable to an exploit, Enochs notes that only that particular token’s share of the index will be affected.&nbsp;



“I think a misconception some people have is they think if one of these liquid staking tokens has some sort of exploit and the price starts going to zero, the whole index will go to zero. But that&#8217;s not the case, because it&#8217;s not continuously rebalancing,” Enochs said. “It’s not like a liquidity pool — so in that sense, you do get that risk mitigation.”



The dsETH token will not be made available by Index Coop to users with US IP addresses, out of regulatory concerns. The tokens will, however, be trading on decentralized exchanges (DEXes) such as Uniswap.



<h3 class="wp-block-heading">Finding a market</h3>



Index Coop has a history of launching new and innovative DeFi tokens, but not all are successful in the market. Several indexes were discontinued last month, <a href="https://docs.indexcoop.com/index-coop-community-handbook/products/legacy-products/market-neutral-yield-eth-mnye" target="_blank" rel="noreferrer noopener">including</a> the recently launched <a href="https://blockworks.co/news/earning-yields-just-became-easier-with-index-coops-latest-token">Market Neutral Yield ETH (MNYe)</a> product.



Other tokens moved to <a href="https://docs.indexcoop.com/index-coop-community-handbook/products/legacy-products" target="_blank" rel="noreferrer noopener">“legacy” status</a> were the Web3 Data Economy Index (DATA) and half a dozen leveraged index products launched on Polygon.



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Fresh Ethereum Staking Index Wants To Promote Decentralization

David Canellis

<div id="highlights-block_62a1c10bb98e8" class="highlights">
 <ul>
 <li>Terra’s UST’s fate hasn’t deterred traders from experimenting with TRON-powered algorithmic stablecoin USDD</li>
 <li>Bitcoin dominance has risen 15% to almost half of the entire crypto market</li>
 </ul>
 
</div>



It’s been a month since Terra’s algorithmic stablecoin UST <a href="https://cms.blockworks.co/?s=Terra" target="_blank" rel="noreferrer noopener">de-pegged</a> from the US dollar. At the time, Terra’s native token LUNA and UST were the ninth and 10th largest cryptocurrencies by market capitalization — together valued at $42 billion. Both tokens have since evaporated almost entirely, begetting a major market shakeup.



Bitcoin dominance is on the rise and most cryptoassets are in decline, yet one exchange token has bucked the downtrend. While algorithmic stablecoins may not be completely dead, UST’s demise has changed the stablecoin landscape dramatically.



Tether (USDT) is still the largest stablecoin ($72.5 billion versus USD Coin’s $53.9 billion), but the past month was its most significant dollar-denominated reduction across its seven-year history. USDT’s supply is down 13% over the past month, the equivalent of nearly $11 billion, after big money traders flocked to redeem their tokens throughout May’s market chaos.



“The drop in USDT since the UST collapse is a reflection of the relative market confidence in its issuer Tether (based in the British Virgin Islands) compared to that of USDC (issued by the US-based Centre Consortium, founded by Circle and Coinbase),” Genesis Trading wrote in its May <a href="https://info.genesistrading.com/hubfs/monthly-reviews/2022/May-2022-Monthly-Report.pdf" target="_blank" rel="noreferrer noopener">report</a>.



Algorithmic stablecoins such as Magic Internet Money (MIM) and Frax are also significantly smaller. MIM’s total supply has shrunk 87% while Frax’s has fallen 43% — with $3.6 billion altogether leaving those two protocols.&nbsp;



MakerDAO’s DAI, while not strictly algorithmic, has given up 18% of its supply since UST de-pegged — even though it is <a href="https://daistats.com/#/" target="_blank" rel="noreferrer noopener">overcollateralized</a> on-chain by more than half. In fact, Circle’s USDC and Binance’s BUSD (issued by Paxos) are the only top 12 stablecoins not to lose market share following UST’s demise.&nbsp;



Clearly, market participants now favor asset-backed tokens — just not Tether (USDT). USDC has seen its circulating supply surge $5.4 billion, an 11% boost. BUSD grew by $555 million, about 3%.&nbsp;



But it seems some still trust algorithmic stablecoins. TRON’s Decentralized USD (USDD), launched by blockchain founder Justin Sun just days before UST crumbled, has attracted $491 million over the past month — a 230% increase in supply.



USDD holders have been able to lock their tokens inside lending platform JustLend for double-digit yield all month, a prospect which has been a <a href="https://cms.blockworks.co/every-top-cryptocurrency-is-down-except-justin-suns-tron/" target="_blank" rel="noreferrer noopener">boon</a> to TRX’s price. USDD’s market value is now $703 million, ranking it the 10th biggest stablecoin behind Waves’ Neutrino USD and ahead of Paxos’ gold-backed asset PAXG.



According to Genesis: “The jury is out on whether the UST collapse will turn out to be proof that algorithmic stablecoins are a flawed concept, or whether different design choices could be successful in the future.”



<blockquote class="wp-block-quote">“The event has highlighted the importance of understanding nuances in this space and that not all stablecoins are created equal.”</blockquote>



Still, the collective supply of the top 12 stablecoins at the time of UST’s de-pegging — not counting UST itself — is down by $9 billion.



<h3 class="wp-block-heading">Bitfinex’s LEO most resilient cryptoasset</h3>



According to price data reviewed by Blockworks, Bitfinex’s Unus Sud Leo (LEO) token was the best performing top 100 token (excluding stablecoins and wrapped tokens) by market value — the only token to increase in value over the month, albeit by half a percent.



Bitfinex raised $1 billion of USDT in 10 days with LEO’s private token sale in May 2019. The idea was to replace $850 million lost when the exchange’s embattled third-party payment processor Crypto Capital Corp was raided by authorities.



Bitfinex rebuys and burns LEO to reimburse investors who contributed to the sale, while regular Bitfinex users receive discounts on fees when holding LEO in their accounts. The company committed to eventually burning all one billion LEO tokens, of which it has already destroyed around 6.5% of the supply.



Crypto exchange tokens <a href="https://cms.blockworks.co/native-crypto-exchange-tokens-hint-at-first-sign-of-broader-market-recovery/">outperformed</a> much of the market in May. Many have burn mechanisms similar to LEO’s as a way to reward holders. KuCoin’s native token KCS has been the third-best top 100 crypto asset post-Terra, falling only 3.5%. But FTX’s FTT and Binance’s BNB weren’t so hot — both tanked 20%.



LEO’s price doubled earlier this year when US authorities revealed they <a href="https://cms.blockworks.co/couple-arrested-as-government-recovers-3-6b-in-stolen-bitcoin/" target="_blank" rel="noreferrer noopener">seized $3.5 billion in bitcoin</a> stolen from the exchange back in 2016. Bitfinex has said it will commit at least 80% of the recovered net funds to repurchase and burn LEO tokens within 18 months of the date of recovery.



A Bitfinex spokesperson told Blockworks LEO’s performance should be viewed as a measure of its customers’ confidence and trust in the platform.



<blockquote class="wp-block-quote">“We have also begun to see what may be a correlation between the performance of LEO, and the prospects of Bitfinex receiving the stolen bitcoin that was seized by the US authorities earlier this year,” they said.</blockquote>



Other top-100 tokens performing relatively well in Terra’s wake include TRX (down 3.5%) and monero (down 9%). Bitcoin came in at number five, falling 14% from nearly $35,500 to $30,400. BTC is currently range bound with no clear momentum.



Ether, on the other hand, sank 30% over the month — about average for the top 100. Bitcoin dominance rose almost 15% to now represent nearly half of the digital asset market, while ether dominance fell almost 9% to just under 18%.



On Wednesday, the second largest cryptoasset by market cap took an important step toward its planned Merge, as the Ethereum Ropsten testnet <a href="https://cms.blockworks.co/ethereum-ropsten-testnet-successfully-merged-to-proof-of-stake/" target="_blank" rel="noreferrer noopener">successfully transitioned</a> to proof-of-stake.



As for the losers: LUNA aside, the native digital asset for Terra-powered lending protocol Anchor was the worst hit, down 91%. Tokens for lending platform Convex Finance and privacy blockchain Secret Network collapsed 66% and 62% respectively, while move-to-earn project StepN fell 60%.&nbsp;



Alternative networks Oasis and Avalanche both drained by 55%, decentralized finance governance token Yearn lost 54% of its value, while metaverse project ApeCoin and layer-11 assets NEAR, MINA and solana all halved in price.



While crypto markets fell throughout April in the lead up to UST’s de-pegging, all digital assets are worth 20% less since the stablecoin went kaput, representing $336.6 billion in value lost.



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