In the world of DeFi, where liquidity provision is crucial for the success of protocols, Resonate and Frax Protocol have joined forces to introduce a groundbreaking partnership. By leveraging Resonate’s innovative yield futures protocol and Frax Protocol’s ability to incentivize liquidity provision, this collaboration aims to address the challenges associated with the volatility and unpredictability of mercenary liquidity in the market.
Prior to Resonate, protocols were forced to incentivize liquidity by bribing voters to feed gauge-emissions to LPs. While this has been very effective at attracting liquidity in general, there hasn’t been a suitable mechanism for Frax Protocol to guarantee longer term liquidity. Instead, the capital flows freely at the liquidity provider’s discretion. This results 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.
To ensure the contrary holds true, we aim to create a situation where Frax can provision enough guaranteed liquidity through Resonate to completely stabilize their pools on an on-going basis.
Time-Locked LPs and the Resonate Yield Swap Mechanism
To combat the challenges mentioned above, Frax Protocol will pilot Resonate to incentivize liquidity on Frax ETH (frxETH).
This mechanism provides Frax with a means to provide and incentivize FRAXETH LPs to lock their liquidity into desired pairs, for a predetermined duration. The collaboration offers the following solution:
- Upfront Payout and FNFTs: Frax Protocol offers an upfront payment to LPs, representing their expected earnings over a specific duration (e.g., 4 weeks). LPs lock their Velodrome 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 is being developed collaboratively by the Resonate and Frax teams. The initial payout rate will be set above the time value of money (~100% of future earnings) to actively incentivize LPs to time lock their liquidity. Resonate is developing mechanisms to dynamically track the variable rate performance, ensuring attractive pool offerings without overpaying.
Proposed Strategy and Benefits
Under the proposed strategy, LPs deposit their liquidity tokens, receive an upfront payout and an FNFT representing their locked principal. Frax Protocol gains the rights to all the yield earned by the LPs’ principal over the specified duration. With consistent variable rate performance, Frax’s initial outlay will be replenished, creating a sustainable liquidity provision mechanism.
The Future of the Partnership
Resonate is actively collaborating with third-party partners to enhance the liquidity provision ecosystem. Soon, LPs with locked principals 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 the pilot, the Frax and Resonate teams will explore a more aggressive expansion of the program to further assist in scaling frxETH across the EVM!
The partnership between Resonate and Frax Protocol marks a significant milestone in the DeFi space. By incentivizing time-locked LPs and leveraging Resonate’s yield swap mechanism, this collaboration aims to address the challenges associated with capital flight and volatility. Together, they create a more stable and committed liquidity provision environment, paving the way for further innovation in the decentralized finance landscape.
We look forward to sharing more details in the coming period. Stay tuned!