PDP 26: Add Frax/mUSD Feeder Pool on Polygon

Posted on behalf of the mStable ProtocolDAO

Simple Summary

It is proposed to add a Feeder Pool as specified in MIP 9 for Frax Finance Frax/mUSD on Polygon. Frax describes itself as the “first fractional-algorithmic stablecoin”. A Frax Feeder Pool on Polygon would offer an efficient swap on Polygon that is yet unmatched and benefit mStable as the first mover with this experimental asset. Additionally, a co-incivitization of the Feeder Pool would offer an attractive yield, and bootstrap more users to mStable on Polygon.

Abstract

Frax is a protocol that describes itself as the “first fractional-algorithmic stablecoin”. This means, that the minimum collateral ratio is driven algorithmically. A user can mint Frax with USDC and FXR (Frax Share). The amounts that are needed to mint and/or burn Frax is determined by the demand for Frax (the price). More details can be found in the Frax documentation.

This Pool would be the first Feeder Pool implementation on Polygon and together with Frax there is the possibility to offer liquidity mining. Since its inception, Frax has held consistently the peg on Ethereum mainnet around 1 USD and only deviated by about ±0.01 USD. On Polygon, however, the liquidity is not as deep as compared to Ethereum mainnet and the swap is only available via Quickswap and SushiSwap, resulting in higher slippage and higher price deviation. The mStable swap is a much more capital efficient implementation and can potentially generate the majority of swap volume for Frax on Polygon. This would potentially benefit the position of mStable in the Polygon ecosystem.

Motivation

This proposal aims at increasing the utility of mStable on Polygon and at capitalizing the combined incentives provided for this Feeder Pool. This would position mStable as the most capital efficient swap protocol for Frax on Polygon.

Frax is mainly deployed on Ethereum mainnet, the protocol has at the time of writing around 250 Million locked in value. There are currently around 10 Million Frax circulating on Polygon, with the majority being deposited in SushiSwap. With mStable, the capital deposited into the Feeder Pools would offer much lower slippage and increase the capital efficiency for liquidity providers greatly. This would result in mStable generating the majority of swap volume for Frax on Polygon. With the basket Assets together, a user could easily swap from or into Frax with any of the popular stable coins on Polygon, with a much lower gasfee than on Ethereum mainnet and a better price potentially than current swap solutions on Polygon.

This step would earn MTA holders, savers and, liquidity providers swap fees and help Frax to trade closer to its intended peg. After the successful initial implementation of the Frax/mUSD Feeder Pool on Polygon and after sufficient demand, a Frax/mUSD Feeder Pool on Ethereum mainnet would be proven viable.

Next Steps

Pending no significant changes to its content, this proposal will be taken to snapshot vote on Monday, 28th June 2021. Voting will be open for a 5 days window to give adequate time for a concurrent discussion. Governors can change their vote at any time should the discussion sway their decision. We look forward to hearing what MTA token holders have to say and seeing how they cast their votes.

I am a little bit concerned about FRAX as a fractional-algorithmic stablecoin. I wonder what would be the consequences for FRAX/mUSD Feeder Pool’s liquidity providers, mUSD holders, MTA holders, and, more generally, the mStable protocol when FRAX loses its peg.

The recent collapse of Iron, a former fractional-algorithmic stablecoin experiment, is quite daunting. Iron lost its peg to dollar. It also imposed severe damage to Titan, acting both as its collateral and as its protocol’s token.

It would be great to know what would happen for various mStable stakeholders in case a similar event occurs.

Great points! Thanks for voicing your concerns.

Feeder Pools are designed to be less risky for MTA and mUSD holders. Meaning that, unlike the basket Assets, Feeder Assets are not part of the mUSD basket. The risk is isolated to that Feeder Pool alone. So only LPs of the Frax/mUSD Feeder Pool bear the risk.

Hope that explanation makes sense, let me know if you need any more clarifications.

2 Likes

Thank you for getting back to me. If the risk can be contained to the feeder pool, I am more than excited to support this initiative.

It’s important to explore unbeaten paths while ensuring the changes in line with their different risk appetites :grinning:

1 Like

Voting is live: Snapshop

voted in favour of this :man_astronaut: