The Optimist - f(x) Protocol

In The Optimist’s Twitter Spaces which took place on June 27, 2024, Charlie hosted Cyrille and Kmets from f(x) protocol to discuss their new decentralized stablecoin model, overcoming limitations of traditional stablecoins, and the innovative pairing of stable, leveraged tokens and more! Read our notes below to learn more.

Background

Charlie (Host) – Co-Leader at The Optimist

Cyrille.lens (Guest) – Contributor at f(x) Protocol

Kmets (Guest) – Contributor at f(x) Protocol

f(x) Protocol – a DeFi protocol on Ethereum that offers a powerful new decentralized stablecoin enabled by an amplified $ETH

Journey into Crypto and the Evolution of f(x) Protocol

Cyril shares his journey into crypto, starting in 2017, then taking a break in 2018, and re-engaging in 2020 during the DeFi summer. He became involved in the DeFi France community and discovered f(x) in 2023. He started contributing to the project by organizing meetups and sharing ideas on the discord, eventually becoming a core contributor focused on awareness and integrations.
Kmets recounts his entry into crypto in 2021, diving into DeFi and getting heavily involved in the curve ecosystem. He joined Aladdin DAO, contributing to their products and later helping to develop the white paper for f(x) protocol, which emerged in response to the March 2023 USDC depeg. The event highlighted the need for decentralization in stablecoins, prompting the creation of f(x) protocol, which aims to address the stablecoin trilemma of scalability, decentralization, and liquidity.
Kmets mentions that f(x) has been operational for almost a year, expanding its product offerings, and he now serves as an Aladdin DAO maximalist.

Exploring Stablecoin Models: Innovations and Challenges in the f(x) Protocol

Charles expresses his excitement about the rapid development and innovative model of f(x) protocol, recalling his early interest in $fETH and $xETH despite initial reservations due to gas fees.
Cyrille explains why CDP stablecoins struggle to scale, citing the need for over-collateralization and the tendency for users to sell the stablecoins, creating selling pressure. This requires the protocol to maintain substantial external liquidity to keep the peg, making it an expensive and inefficient model.
Charles adds that introducing interest-bearing collateral can further complicate the issue, leading to downward pressure on the peg and forcing users to over-collateralize, reducing efficiency.
Kmets discusses the limitations of centralized stablecoins, such as $USDC and $USDT, highlighting the reliance on third-party auditors and the inherent trust issues. While these stablecoins typically have good liquidity and stable pegs, their centralized nature poses significant risks, especially in decentralized and permissionless platforms. He highlights the importance of having a truly decentralized, scalable stablecoin.
Charles briefly mentions the well-known issues with algorithmic stablecoins, referencing the collapse of Luna as an example.
Cyrille notes that a very small percentage of the stablecoin market is fully decentralized and not exposed to real-world assets or centralization. He attributes this to a lack of trust in decentralized stablecoins, partly due to past failures like Luna. However, he highlights the unique advantage of f(x) protocol, which allows users to mint and redeem stablecoins at Oracle Price, ensuring a perfect peg and addressing trust issues in the decentralized stablecoin space.

Understanding the Innovative Token Pairing Model of f(x) Protocol

Charles asks for an explanation of the stable-volatile token pairing, using $fETH and $xETH as examples.
Cyrille begins by emphasizing the need to understand that f(x) protocol is different from the traditional CDP model. In f(x), users can mint two types of tokens: stablecoins that are decentralized, liquid, and earn yield from the underlying assets, and leveraged tokens that offer significant leverage on assets like $ETH without liquidation risks or funding fees.
Kmets elaborates on the mechanics of $fETH and $xETH, explaining how users can deposit assets and mint $fETH, which captures minimal volatility, or $xETH, which absorbs the remaining volatility. This dynamic allows $fETH to maintain a stable value, while $xETH captures the asset’s price movements. He compares the system to a mortgage, where $fETH represents the debt and $xETH represents the equity, absorbing price fluctuations. This structure provides a decentralized stablecoin that remains stable and a leveraged token that benefits from price movements without liquidation risks.
Cyrille further explains that the protocol allows users to swap assets at Oracle price, ensuring no price impact and infinite liquidity. This feature has made f(x) attractive for platforms like CowSwap, as it can handle large orders without slippage. He also highlights the scalability of the system, as it doesn’t rely on large liquidity pools to maintain stability.
Cyrille explains that $fxUSD works similarly to $fETH but is pegged to the dollar, making it easier for users to understand and use in various contexts. $fxUSD is backed by both Lido’s staked ETH and $frxETH, maintaining its peg through the protocol’s mechanics.
Cyrille also introduces the concept of stability pools, where users can stake their stablecoins to strengthen the protocol. In extreme market events, the stability pool allows users to buy the dip on $ETH, potentially benefiting from market recoveries.

Innovative Stablecoin Solutions: Exploring the f(x) Protocol’s Unique Features and Benefits

Cyrille explains that users can deposit their $fxUSD into the stability pool, where they earn yield from both the underlying collateral and FXN emissions. This provides an attractive risk-reward strategy, allowing users to earn a significant yield while having the potential to buy dips in the market during severe downturns.
Charles highlights the unique advantage of the protocol, where users seeking leverage can mint X tokens directly, avoiding the downward pressure on stablecoins that occurs with CDP models. This innovation ensures that stablecoins maintain their peg more effectively.
Kmets simplifies the $fxUSD model by explaining that it accepts two types of collateral: Lido’s staked ETH and $frxETH. These collateral types support the $fxUSD token, which can continue to expand by adding more collateral types, providing scalability and flexibility. He positions $fxUSD as the flagship medium of exchange, while $fETH is seen as a premier store of value.
Cyrille further explains that $fxUSD brings utility by being pegged to the dollar, making it easier for users to understand and use. Pairing with $fxUSD is beneficial for other stablecoins, as they can leverage its perfect peg and instant liquidity for more efficient liquidations.
Charles adds that other stablecoins can benefit from the f(x) protocol’s non-slippage liquidity, enabling more efficient liquidations without the risk of thin liquidity pools.
To demonstrate the user experience, Cyrille shares his screen to show the f(x) protocol UI. He explains that users can mint $fxUSD by selecting their preferred collateral, such as $USDC, and converting it to a decentralized stablecoin with a perfect peg. This process is straightforward and user-friendly, encouraging users to switch from centralized stablecoins to decentralized options provided by f(x) protocol.
Kmets explains the unique earning opportunities within the stability pools, which are segregated by collateral type, allowing users to choose their preferred exposure. This siloed approach ensures that users’ $fxUSD are only exposed to the specific collateral backing their chosen stability pool.
Cyrille says that while the protocol allows for diverse collateral types, it also provides users with the option to limit their exposure to a single collateral, catering to varying risk preferences and investment strategies.

Exploring Collateral-Specific Stablecoins

Charles highlights the importance of f(x) protocol’s ability to add new LSTs (liquid staking tokens) as collateral while ensuring that users uncomfortable with specific tokens can choose to mint with others, like $wstETH, and have their risks siloed.
Cyrille elaborates on this, explaining that if you stake into a specific stability pool, you are only exposed to that pool’s collateral. He clarifies that while holding $fxUSD exposes users to all collaterals, staking into a specific stability pool limits exposure to that pool’s collateral, offering more control over risk.
Kmets introduces the concept of collateral-specific stablecoins like $arUSD and BTCUSD. He explains that $arUSD functions similarly to $fxUSD but with backing from specific collaterals like Etherfi’s $ETH and Renzo’s $ezETH. This setup allows users to earn points and interest while maintaining exposure to their preferred assets. BTCUSD, on the other hand, is backed by $WBTC and includes a small funding fee for leverage token holders.
Cyrille highlights that BTCUSD is an experiment in using non-yield-bearing tokens as collateral, highlighting its use for bullish BTC holders seeking liquidation-free leverage. He also discusses the popularity of $arUSD, which offers unique yield opportunities due to its integration with Etherfi’s point program and Eigenlayer points. This stablecoin provides amplified yields and additional point earnings, making it an attractive option for users.
Charles appreciates the innovative nature of these stablecoins, noting that $arUSD functions as a decentralized alternative to Ethena’s staked USDe. Cyrille further explains that $arUSD is available on multiple L2s and will soon be on the super chain. He mentions the existing f(x) native stablecoin paired with LUSD on Velodrome, offering an attractive 97% APY and encouraging votes for further incentives.

The Benefits and Future Deployment of f(x) Protocol and $arUSD Stablecoin

Charles appreciates the versatility and advantages of $arUSD, highlighting its decentralization, high yield, and security compared to other stablecoins like $USDe. He mentions that $arUSD offers what everyone wants in a stablecoin: yield, liquidity, and decentralization.
Cyril adds that $arUSD and other f(x) stablecoins provide higher yields without off-chain risks, contributing to Ethereum’s decentralization through staking and re-staking platforms.
Charles asks about which layer-2 networks f(x) protocol will deploy on first. Cyril suggests that Base could be a great option and encourages the community to voice their preferences on Discord.
Kmets highlights the synergistic nature of f(x) protocol, explaining that a stronger stablecoin like $arUSD enhances the appeal of leveraged tokens. He credits Aladdin DAO for creating a system that benefits users with varying risk profiles.
Cyrille adds that FXN, the governance token, is a revenue-sharing token that distributes a significant portion of the protocol’s fees. He notes that as TVL and volume increase, so do the fees shared with FXN holders.
Charles transitions to discuss the governance aspect of FXN and its benefits. Cyrille mentions that users can lock their FXN to gain voting power and boosts, similar to $CRV on Curve. For those who prefer liquidity, options like CVX/FXN on Convex provide yield while maintaining some voting power.

Exploring f(x) Protocol: Decentralized High-Yield Opportunities and Governance Rewards

Charles highlights the impressive features of f(x) protocol’s $arUSD, emphasizing its decentralized nature, high yield, and contribution to Ethereum’s security. He also mentions that FXN, the governance token, offers revenue sharing from protocol activities, including mint and redeem fees.
Cyrille explains that users can earn voting incentives and revenue by staking FXN. He points out that the more TVL and volume the protocol achieves, the higher the yield for FXN holders. Additionally, there are plans to rebalance stability pools to increase yields for $arUSD stability pool stakers.
Charles inquires about analytics and tracking for f(x) protocol’s growth. Cyrille mentions a comprehensive Dune dashboard created by community member Ivan Gan, where users can monitor TVL growth and other metrics.
Kmets and Cyrille reflect on the skepticism people might have when hearing about high yields in DeFi, emphasizing the importance of assessing and understanding the tangible risks involved. They note the significant opportunities in DeFi due to market asymmetries, showcasing the early stage of the industry.

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Show Information

Medium: Twitter (Audio)
Show: The Optimist Twitter Space
Show Title: f(x) Protocol – Relentless stablecoin innovation
Show Date: June 27, 2024