DeFi Sector Brief: Frax Enters the Liquid Staking Arena

Top of Mind

Fueled by Bitcoin’s 30% rally over the last two weeks, DeFi protocols are leading a market-wide price resurgence. Within the sector, liquid staking derivatives are having their moment to shine. Over the last 14 days, Rocket Pool’s RPL rose 56%, Lido’s LDO grew 30%, and Stakewise’s SWISE notched a 26% gain. However, the newest entrant to DeFi’s competition for liquid staking supremacy, Frax Finance, outperformed all of these incumbents. Frax’s FXS token witnessed a 91% price increase over the same period as the market priced in the growth of its new staking service.

Frax’s Journey into ETH Staking

Frax Finance is a stablecoin protocol at its core. After bootstrapping a partially collateralized algorithmic stablecoin (FRAX), the protocol expanded its set of services to introduce a native DEX (Fraxswap) and native lending market (Fraxlend). These secondary services combine to support the use of FRAX and together form Frax’s DeFi Trinity. With its core product suite established, Frax’s developers noticed the similarities between stablecoins and liquid staking derivatives. They decided the staking market would be easy to penetrate given their experience designing the Frax ecosystem.

Frax opened its doors for ETH staking services in late October 2022. It uses a unique two-token design that differentiates it from incumbent staking derivative models. Users that stake ETH through Frax receive the frxETH token as a receipt of their deposit. Unlike other liquid staking derivatives, frxETH doesn’t accrue value from staking rewards. Instead, it serves as a stablecoin that’s loosely pegged to ETH. Along with gas optimizations, frxETH essentially behaves the same as wrapped ETH (WETH).

frxETH is complemented by sfrxETH, a version of frxETH that accrues staking yield. sfrxETH represents a deposit receipt in an ERC-4626 vault that receives all the profits from Frax’s set of Ethereum validators.