FinNexus Blog

FinNexus Blog

An introduction to the new FRAX pool in the FinNexus Protocol for Options

Ryan TianFebruary 23rd 2021

FinNexus is creating a new liquidity pool using FRAX tokens as the collateral asset. 4,000 cFNX will be provided as basic daily mining rewards and incentives will be adjusted according to the Total Value Locked (TVL) of different pools on a monthly basis.

Why an Algorithmic Stablecoin?

An algorithmic stablecoin is a token that adjusts its supply deterministically (i.e. using an algorithm) in order to control its price. At the most basic level, an algorithmic stablecoin expands its supply when it is above the price target and contracts when it is below.

Algorithmic stablecoins play an increasingly important role in DeFi. Several platforms have launched elastic stablecoin models, managing to accumulate great total value locked (TVL).

Please find more information on algorithmic stablecoins here.

A community vote ‘FIP #05’ on which algorithmic stablecoin to include as collateral in a new FPO pool was held in Jan 2021.

The FinNexus community strongly supported adding FRAX as a new collateral asset to the new FPO liquidity pool.

How does the FRAX pool work?

The FRAX pool will apply a system similar to our time-tested MASP mechanism as in any other liquidity pools in FPO v1.0.

  • Options buyers can purchase options on BTC, ETH, SNX, LINK and MKR with FRAX.
  • The FRAX pool provides the collateral for writing options and the liquidity for exercising options.
  • FRAX serves as the medium of exchange. Users purchase options using FRAX and premiums in FRAX are contributed to the pool. When holders exercise their options, that transaction will also be settled in FRAX.
  • Premiums in FRAX will be automatically distributed to all pool participants.
  • When contributing liquidity to the pool, users will receive premiums distributed in FRAX and other mining incentives.

For more information on FPO v1.0, please find the product paper here.

How to mine and get rewards?

The FRAX pool will apply the same mining mechanism as other FinNexus pools. You can find the key takeaways on our mining system and an introduction on the FinNexus blog.

Users will be able to enjoy a 20x multiplier when providing liquidity in both FRAX and FNX pool. There will be another 5x multiplier for locking the staked FNX in mining contracts.

In order to get the highest mining rewards, it is recommended that the miners contribute both FRAX and FNX into the mining pool and lock the FNX contribution. The locking period can be adjusted according to individual preferences.

FRAX is not required for any lockup periods in mining.

A detailed how-to guide if FRAX pool mining can be found here.

Basic mining rewards

In order to offer attractive rewards to pool contributors and keep the incentives on Ethereum balanced, 4,000 CFNX will be provided as basic rewards in the FRAX pool mining for the first month. The reward will be allocated from the current USDC/USDT pool and the total rewards on Ethereum will stay unchanged.

The FinNexus team will make adjustments to the allocation of rewards to different pools on a monthly basis, according to the TVL of the pools.

Is there any risk associated with the FRAX pool?

Before ‘jumping into the FRAX pool’ or buying options with FRAX, it is important that users understand the potential risks. FinNexus strives for transparency and would like to warn that liquidity/collateral pools are not risk-free. This means that participants might in some cases lose money.

Please refer to this breakdown of potential risks for more information about issues associated with the FPO.

There are some risks lying in the algorithmic stablecoins, too.

  1. The value of algorithmic stablecoins may change, with volatility having an unfavorable impact on the trading and settlement of options.
  2. A trustworthy price feed source for collateral assets is needed.
  3. There is a risk that some algorithmic stablecoins may lose their liquidity if the mechanism fails to work or the price falls into an irreparable descending spiral.
  4. For this reason, FinNexus will include a shut-down trigger for these experiments. If the new pool with algorithmic stablecoins fails to attract more than $500K TVL in 15 days or a systematic failure materializes in the future, the team reserves the right to shut the pool down.*

The way forward

So far, the MASP mechanism in FPO has provided great flexibility in building DeFi options pools, with multiple assets as collaterals.

Establishing a liquidity pool with FRAX is an innovative experiment, but certainly will not be the last upgrade FinNexus is implementing.

We will keep on building different liquidity pools with various assets as collateral. The goal is to make the creation of pools permissionless in the long run, so that they may accept any kind of cryptoassets as collateral, making it as easy as creating different trading pairs on Uniswap or Sushiswap.