We are extremely excited to unveil the first step in our deployment partnership with Frax Finance!
Upfront frxETH rewards are now available at the 30D average yield rate of 7.9% APY for WETH/frxETH LPs on Velodrome Finance.
Double that of a traditional naked stETH position — paid upfront.
In the world of DeFi, where provisioning liquidity is crucial to the wellbeing of a protocol, we’ve joined forces with Frax to introduce a groundbreaking deployment. By leveraging Resonate’s innovative yield futures protocol and Frax’s ability to incentivize liquidity provision, this collaboration has set out to address the challenges associated with the volatility and unpredictability of mercenary liquidity.
Properly utilizing future yield to combat mercenary liquidity offers limitless possibilities, enabling investors to capitalize on unlimited upside while completely protecting the downside. For Frax, it provides a means to secure fixed-term liquidity with the upside of generating protocol-owned-liquidity. Additionally, upfront incentives are likely to attract outside capital into the Frax ecosystem.
This is the first domino in the grand plan to completely revolutionize our industries’ utilization of yield on a large scale.
Prior to Resonate, protocols were forced to incentivize liquidity by bribing voters to feed gauge-emissions to LPs. While this was effective in attracting liquidity, there wasn’t a suitable means for Frax Protocol to guarantee longer term liquidity. This would often result in the prisoner’s dilemma known as ‘Mercenary Liquidity’ for LPs, which in the case of a capital flight event or major sentiment shift, could prove to be damaging.
The Solution Mechanism
Time-Locked LPs and the Resonate Yield Swap Mechanism
- Upfront Payout and FNFTs: Frax Protocol offers an upfront payment to LPs, representing their expected earnings over a 28 day period. LPs lock their WETH/frxETH LP tokens into Resonate for the agreed-upon period and receive an FNFT (Financial NFT) that represents their locked principal. This FNFT is tradeable on secondary markets, so an exit is available throughout the period (without negatively impacting Frax’s liquidity or the relevant token price — FNFTs are traded over-the-counter on any NFT marketplace).
- Exposure to Variable Rate Performance: By underwriting the LPs’ upfront fixed rate, Frax gains exposure to the variable rate performance of the LP tokens farmed through Resonate. If the farm performance remains consistent, Frax’s initial payout will be fully replenished, enabling them to underwrite more LPs — in other words they are able to recycle their “bribe”, which has never before been possible.
- Dynamic Pricing and Strategy: The pricing structure for the partnership has been developed collaboratively by the Resonate and Frax teams. The initial payout rate will be set at the 30D average yield rate to actively incentivize LPs to time lock their liquidity. We’re developing more mechanisms to dynamically track the variable rate performance, ensuring attractive pool offerings without overpaying.
The WETH/frxETH LP being utilized as the underlying farm is presently yielding 8.59% on Velodrome. This rate is generated by LPs fees, VELO emissions and bribes. By utilizing Resonate as a proxy into Velodromes LP, the yield claimed upfront is denominated exclusively in frxETH.
This presents a fork in the road for prospective investors:
- Claim the $frxETH future yield at the provided 30D average rate and add exposure through other means, or simply ride it out.
- If you believe yield will fall below the 30D average, it’s the best time to claim your future yield. You’ll benefit from the time value of money, increased immediate exposure and its corresponding compounding effects.
- If the contrary holds true, where yield will be greater than 30D average, the decision is more complex. One must account for the corresponding value of $VELO rewards in relation to $frxETH, and more importantly one’s ability to effectively utilize the claimed future yield.
What can I do with my upfront yield?
Let’s analyze a few ways the aforementioned future yield would be best utilized in the Optimism ecosystem.
To note, some will utilize varying denominations of Ethereum — at which point you may simply complete a swap on Uniswap or similar DEX.
- Claim more $frxETH future yield on Resonate, by looping your upfront payout back into the same pool.
2. Alternatively, you can create your own Resonate pool with any fixed-rate/term length/payout token or even purchase another individual’s future yield using your realized future yield.
3. Add to WETH/frxETH LPs on Velodrome Finance or Beefy Finance to continue earning the market variable rate, with the additional effects of compounding in play.
4. Open an ETH option on Lyra Finance
If the option expires worthless, your only loss is 28 days of future yield. If you get it right, your returns will be significant. In either case, your ETH is unlocked and withdrawable from Resonate in 28 days at which point you can try again.
5. Open a ETH long/short with up to 50x leverage on Kwenta
This trade enables you to speculate on ETH with sizes up to a significant portion of your original principal, while risking none of it — full principal protection.
The Future of the Partnership
In the near future LPs with locked principal will have the option to take out loans or exit their positions early, introducing additional opportunities for looping and sophisticated strategies. Upon a successful completion of this pilot, the Frax and Resonate teams will explore a more aggressive expansion..
From these foundational resources, any number of new and novel trading strategies can be developed — all of which present no risk to the capital present at the beginning of the journey.
Imagination is the only limitation.
Eventually, these strategies will be refined into out-of-the-box products. In the meanwhile, it presents traders an opportunity to wield a unique edge over the market and develop their own alpha.
Acquiring LP tokens can be a difficult process, especially with an unfamiliar exchange. That’s why we decided to build a custom zapper contact to expedite that process. By simply sending ETH to the zapper contract, we swap the eth for all the parts of the LP and mint the tokens right back to you. With only one transaction and no approvals you’ll receive the LPs right in your wallet to deposit directly into Resonate, making the process of receiving upfront yield even easier. Stay tuned as we plan to incorporate this feature into resonate throughout the protocol to make deposit as simple as possible
The deployment between Resonate and Frax Protocol marks a significant milestone in the overall progression of DeFi. By incentivizing time-locked LPs and leveraging Resonate’s yield swap mechanism, this deployment will address the challenges associated with capital flight and volatility. In the end, creating a more stable and committed liquidity provisioning environment, paving the way for further innovation.
Best regards to the team at Frax Finance, we appreciate your vote of confidence and look forward to our continued work together. Couldn’t speak more highly of the team — extremely professional, knowledgeable, and most importantly — visionaries.
A true confidante in our mission to create a better and more effective financial system.
Learn more about Frax Finance
Resonate is a decentralized yield-swapping platform where users can rent out their variable rate assets to receive fixed rates. Through tokenizing positions with Financial NFTs (FNFTs), Resonate is able to offer short-term lockups and zero-slippage trades. Resonate serves to stabilize interest rates on any yield-bearing protocol across DeFi.