The Week Ahead - W/C 09/10/2023

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TLDR;

• Frax ($FXS) - a stablecoin protocol, released documentation over the weekend outlining specific parameters of their V3 release which is now ongoing.

• $AVAX continues to be volatile in the aftermath of the Stars Arena hack. $3m was taken from the protocol - representing 100% of their total TVL.

• Arbitrum’s incentive Scheme is ongoing, with several projects waiting for confirmation of $ARB rewards to use to drive project growth.

Frax Finance V3 Rollout

Over the weekend, Frax - a stablecoin protocol, released documentation outlining specific parameters of their V3 release. This is a heavily anticipated update and lays out several features surrounding FRAX V3.

We’ve covered Frax extensively in our investment thesis, and this roll-out solidifies our view that FRAX is well-placed to become the leading Defi stablecoin protocol.

What is Frax v3?

FRAX v3 is a dollar-pegged stablecoin that uses automated market maker (AMM) smart contracts and permissionless, non-custodial subprotocols to maintain stability. The two internal subprotocols used for stability are Fraxlend, a decentralized lending market, and Fraxswap, a special AMM. The external subprotocol used for stability is Curve. Additional subprotocols and AMMs can be added through governance, allowing FRAX v3 to seamlessly incorporate future stability mechanisms as they are discovered.

FRAX v3 introduces the following concepts and benchmarks:

• Full exogenous collateralization of FRAX: The protocol aims to maintain a collateralization ratio (CR) of >=100% at all times. This means that the value backing each FRAX token is >=1 USD. FRAX v3 achieves this through AMM contracts and certain real-world assets held by partner entities approved by the Frax Governance module (frxGov). The FRAX CR is calculated as the value of exogenous collateral held on the FRAX balance sheet.

• Sovereign USD peg: Once the FRAX stablecoin reaches 100% CR, its value tracks the USD using a combination of Chainlink oracles and governance-approved reference rates. Even if other assets like USDC, USDT, or DAI fluctuate, FRAX v3 aims to remain at $1.000.

• IORB oracle integration: FRAX v3 ties in the Federal Reserve's Interest on Reserve Balances (IORB) rate. When the IORB rate rises, the Frax Protocol's AMO strategies will react to heavily collateralize FRAX with treasury bills, reverse repurchase contracts, and/or USD deposited at Federal Reserve Banks that pay the IORB rate. If the IORB rate decreases, the AMO strategies will begin to rebalance FRAX collateral with on-chain, decentralized assets and overcollateralized loans in Fraxlend.

• Removal of multi-signature trust assumptions: FRAX v3 smart contracts operate entirely on-chain using the frxGov module.

• Non-redeemability: FRAX stablecoins are non-redeemable, similar to fiat currencies that do not give the holder a right to specific assets. Holding anFRAX stablecoin does not guarantee you the right to redeem it for any specific financial instrument or token at any particular time. The Frax Protocol's only function is to use AMO contracts, real-world assets (RWAs), and governance actions through frxGov to stabilize the FRAX price to $1.000 by using USD oracles as a reference.

Given that the deployment of FRAX v3 is an ongoing process, expected to take several weeks, this catalyst makes $FXS a token to watch whilst the rollout is ongoing.

Stars Arena: A SocialFi Project That Crashed and Burned

The big news of the last week was the emergence of Stars Arena, a SocialFi project built on Avalanche. Seen as a more user-friendly alternative to the popular Friendtech platform, the team managed to achieve huge short-term success - increasing TVL to $3m in the space of a few days, and becoming the fastest-growing protocol of the month.

In order to participate in the project, users had to first buy $AVAX, which resulted in significant outperformance over the week, with Avalanche adding over $1bn to its market cap due to the jump in popularity.

However, on Saturday morning, users learned that the protocol had been hacked and 100% of the TVL was taken due to a reentrancy issue in the smart contract - leaving the user's holdings completely worthless.

Almost immediately, this caused $AVAX to fall as traders assessed the potential outcomes of the hack. Quick updates from the team initially failed to stem the selloff, and the token remains down over 15% from where the news hit.

In the short term, we can expect to see continued volatility in the price of $AVAX. Traders will be watching closely to see how the team responds to the hack and whether they are able to come up with a viable solution.

In the longer term, the impact of the hack will depend on the outcome. If the Avalanche team steps in and bails out the project, it is likely that Stars Arena will be able to recover and continue to grow. However, if the project is abandoned, it will have a negative impact on the reputation of the Avalanche ecosystem and could deter future investment.

Possible outcomes of the hack:

• The Avalanche team steps in and bails out the project. This would be a costly move for Avalanche, but it would show support for the ecosystem and help to restore confidence in the platform. Additionally, the initial move higher in $AVAX added $1bn+ to their Marketcap, with $300m being wiped out post-hack. In this situation, $3m seems to us like a menial investment given the potential risk:reward.

• The team come to some form of white hack agreement. This would involve the hackers returning some of the stolen funds in exchange for a bounty. This is a more likely outcome, as it would be cheaper for the team and would not require Avalanche to intervene.

• The project is abandoned and users lose everything. This would be the worst-case scenario for everyone involved. It would damage the reputation of the Avalanche ecosystem and deter future investment.

Additional thoughts:

The Stars Arena hack is a reminder of the risks associated with investing in new and untested projects. It is important to do your own research before investing in any project, and to be aware of the potential risks involved.

It is also worth noting that the Avalanche team has a good reputation for handling security incidents. In the past, they have been quick to respond to hacks and have taken steps to mitigate the impact on users. This suggests that the Avalanche team is likely to take steps to support the Stars Arena community and to restore confidence in the platform.

Arbitrum Odyssey / Incentive Program

Arbitrum Odyssey, a community event that introduces users to the Arbitrum ecosystem, was relaunched on September 26, 2023. The event was originally launched in June 2022 but was paused due to network congestion.

The relaunched campaign will last 7 weeks and feature 13 Arbitrum projects. While there will be no airdrop or other financial rewards for participating in the Odyssey, the participating projects are likely to see increased TVL and activity over this period.

The program comes at a time when the Arbitrum Foundation is also pushing short-term incentive schemes, aiming to distribute up to 75 million ARB tokens from DAO-funded incentives to active protocols on the Arbitrum network.

Arbitrum’s Short-Term Incentive Program Proposal

Key Goals of the Arbitrum Odyssey and Incentive Schemes

The Arbitrum Odyssey and incentive schemes are designed to achieve the following goals:

• Support Network Growth: Accelerate the distribution of incentives to Arbitrum decentralized applications (dApps) to foster network and ecosystem expansion.

• Experiment with Incentives: Uncover new incentive strategies to boost user engagement, transaction volume, and liquidity.

• Find New Models for Grants and Developer Support: Generate maximum activity on the Arbitrum network.

Overall, both approaches aim to increase volume, transactions, users, and liquidity in the Arbitrum ecosystem, and tokens are well-positioned to benefit from these flows, notably $ARB, $GMX, $RDNT, $DODO, and $MAGIC. Traders should watch these tokens closely through October.

Remainder of the Month

• Yearn Finance, a decentralized finance (DeFi) platform, will launch its veYFI token on October 19th, 2023. veYFI is a locked version of YFI that gives holders more voting power, boosted rewards, and potential access to exclusive features in the Yearn Finance ecosystem. This is designed to incentivize long-term holding and participation in the governance process. We believe the launch of veYFI has the potential to be a major catalyst for YFI for several reasons, including increased demand for YFI, improved governance, increased rewards, and network effects.

• Radiant Capital (RDNT) launches on the Ethereum Mainnet 3rd October 2023 and we believe this move could add $2.75bn-$7.15bn in TVL to the protocol. Overall, this move will make the protocol more accessible to a wider audience and open up a larger pool of assets, making it a significant opportunity for Radiant Capital to grow its user base and TVL.

• Worldcoin Market-Maker Agreement Expiries. Market-making agreements signed on the $WLD USDT-Perp launch are set to expire at call prices significantly higher than the current price. This provides a massive incentive to push the market higher into the agreement expiry date - October 24th.

• Apecoin ($APE) unlocks 4.23% of the circulating supply, equal to $17.47.

• Axie Infinity ($AXS) unlocks 11.26% of the circulating supply, equal to $65.41m

• CyberConnect ($CYBER) unlocks 11.43% of the circulating supply, equal to $6.57m.

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