They say that the best way to spend your time in the bear market is building, and that’s exactly what
@aladdindao
has been doing…building a new protocol called “f(x)”! So what is
@protocol_fx
and why is it being built?
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$USDC depegging in mid-March was a stark reminder that centralization is a constant risk that will be tested. $USDC's price fell to $0.88 causing worry for those depending on the peg, including
@aladdindao
.
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So the gigabrains at
@aladdindao
decided to tackle this centralization issue and cooked up
@protocol_fx
!
f(x) (pronounced “f of x” - just like a mathematical function) is a protocol that allows users to use native $ETH to mint two different tokens: $fETH and $xETH
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$fETH: a low volatile $ETH asset that has price movements at 1/10th the price movements of native $ETH (Beta of 0.1)
$xETH: a zero-cost leveraged long $ETH position that absorbs the volatility of $ETH price movements to stabilize $fETH
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So here is how f(x) works: a user puts $200 dollars worth of $ETH into the protocol reserve, and they can mint $200 worth of $xETH, $fETH, or both…a nearly 100% capital efficient mint process (small percentage go to fees, of course). Redemption is the same but in reverse.
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As a very basic example to illustrate the mechanics, let’s say that the protocol has $200 worth of reserve $ETH, $100 worth of $fETH minted, and $100 worth of $xETH minted (at genesis, the value of each individual token will start at $1).
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Now let’s say the price of the $ETH goes up 10% to $220. This means that our $fETH value is now up 1% (1/10th of 10%) to $101, & to ensure that the value of the system holds true to the invariant, our $xETH is now: $220(value of ETH) - $101(value of fETH) = $119! Up 19%!
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$xETH will vary in terms of its leverage due to various factors. It will be up to the market to determine the leverage, but 1.5-2x leverage would be within the healthy bounds of the protocol design.
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Interesting to note also is that if the collateral value of $ETH ever drops below 130% above the value of $fETH, the system starts to begin to engage the risk modules. The risk modules have several levels, which are as follows:
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“Stability Mode” - In this mode, the protocol switches such that it tries to slow down the reduction of $xETH & $ETH. Minting fees for $fETH and redemption fees for $xETH are increased, and $xETH minters earn extra incentives from $fETH holders in a small stability fee.
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“User Rebalance Mode” - Users earn incentives by redeeming $fETH for $ETH. In this mode, the redemption fee for $fETH is set to 0. Once f(x) is well enough established to be on the radar of arbitrageurs and MEV-searchers, this mode will be sufficient to stabilize the system.
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“Protocol Rebalance Mode” - In this mode, both level 1 and 2 are still in action, but the protocol uses $ETH from the reserve to market buy, and then burn, $fETH from an AMM. This mode is unlikely to ever be triggered due to the profitability of liquidations in Level 2.
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“Recapitalization Mode” - This is the “oh $%*& I hope you have canned goods and ammo in your bunker” mode. The most extreme case, where the protocol has the ability to issue gov tokens to raise $ETH to recapitalize, either by minting $xETH or by buying and redeeming $fETH.
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So that’s the absolute basics of how f(x) works! A novel approach to create decentralized assets that have stable-like properties…as well as a zero-cost leveraged perpetual! More details are coming soon, so be sure to watch twitter and discord!
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