In the world of decentralized finance (DeFi), the FXS token and its associated protocol FRAX are attracting a lot of attention. This article will delve into two main applications of the FXS token: Collateral Investor and FRAX Lending. These applications not only provide users with a stable source of income, but also optimize capital efficiency through a variety of market operation mechanisms.
Collateral Investing: Diversified Streams of Income
Invest in Idle Collateral: The Collateral Investor Automated Market Operation (AMO) invests idle USDC collateral in multiple reliable DeFi protocols. Currently integrated protocols include Aave, Compound and Yearn. These protocols provide stable yields while ensuring that the investment’s collateral can be withdrawn at any time to respond to large-scale FRAX redemption demands.
Instant Withdrawal and CR Calculation: Investing in collateral that can be withdrawn instantly will not reduce the protocol’s Collateralization Ratio (CR) because these funds are always available for use. However, any investment that requires time to delay withdrawals will be considered a reduced CR. This design ensures the stability and liquidity of the protocol.
Investment income and FXS1559 mechanism: Any investment income exceeding CR will be destroyed through the FXS1559 mechanism. This mechanism not only helps control the supply of FXS tokens, but also increases their market value.
AMO specifications
Decollateralize: Invest idle collateral in various yield-generating protocols. Investments that cannot be withdrawn immediately will reduce the CR calculation.
Market operations: Compound interest investments under CR.
Recollateralize: Withdrawing investments from the vault to release collateral for redemption.
FXS1559: The portion of daily investment income exceeding CR will be destroyed.
FRAX Lending: Efficient Capital Operation
Loan income:The FRAX Lending AMO mints FRAX into money markets (like Compound or CREAM), allowing anyone to borrow FRAX by paying interest. These minted FRAX will only enter circulation when the borrower over-collateralizes, and therefore will not directly reduce CR.
Market operations and profits
This controller allows protocols to lend FRAX directly and earn interest from borrowers through existing money markets. These cash flows can be used to buy back and burn FXS, similar to MakerDAO’s mechanism for burning MKR through stabilization fees.
AMO specifications: Decollateralize: Cast FRAX into the money market. Since all FRAX lent out is overcollateralized, CR will not decrease directly.
Market operations: Accumulation of interest income from borrowers.
Recollateralize: Withdraw minted FRAX from the money market.
FXS1559: The daily accumulated interest income exceeding CR will be destroyed.
Adjust interest rates and capital efficiency: This AMO can adjust lending rates by minting more FRAX (lowering interest rates) or removing and destroying FRAX (raising interest rates). This is a powerful economic lever because it changes the cost of borrowing for all borrowers.
in conclusion
The FXS token and its associated AMO applications showcase the innovation and potential in the DeFi space. Through collateral investment and FRAX lending, these applications not only provide users with a stable source of income, but also optimize capital efficiency through a variety of market operation mechanisms. As DeFi develops, FXS tokens and their applications are expected to play an even more important role in the future.