Governance Flashnote: Frax FIP-100

Frax has always been a first mover in supporting multi-chain FRAX and is currently active on 12 chains. Despite being focused on collaboration, the resultant exposure to multiple bridges and networks has not always worked out in the protocol’s favor. On each chain single canonical FRAX and FXS tokens are created so as to prevent the fractured liquidity that results from the existence of multiple bridged variants. While each bridge-specific FRAX is given a prefix when it is deployed by the bridge as a unique token, the native Frax contract on each chain allows any bridged FRAX to be swapped for canonical FRAX. When FRAX is enabled on a new chain, the protocol treats each individual bridged FRAX/FXS as a liability of that bridge system. Frax’s AMOs use bridge contracts to expand or contract FRAX supply and to enable users to mint or redeem FRAX. Having one FRAX rather than many bridged versions enhances network effects.

The main downside to this system is that bridge tokens that are swapped with canonical FRAX are held by Frax itself, which exposes the protocol to the risk of multiple bridge smart contracts. If a bridge fails, the bridged FRAX may be rendered worthless while Frax still has the obligation to honor canonical FRAX when bridged to another chain or back to Ethereum mainnet.

For example, Nomad bridge held madFRAX, which was backed by FRAX on another chain. When exploiters stole madFRAX they quickly swapped on Evmos for canonical FRAX, which left other FRAX holders stranded on the Moonbeam chain after liquidity dried up. Both the Harmony exploit and the Nomad exploit resulted in Frax losing at least $7 million FRAX, but going forward the team wishes to circumvent this issue.

The Frax team drafted proposal FIP-100, which seeks to end Frax’s exposure to multiple bridges. The proposal will allow users to continue to hold FRAX on any chain that is fully backed by Frax’s collateral on Ethereum mainnet. However, to bridge canonical FRAX or FXS back to Ethereum, users will need to swap their bridge-specific FRAX (e.g., madFRAX) for canonical FRAX in a liquidity pool, such as a Curve pool, Uniswap pool, or Fraxswap pool. This would bolster the safety of FRAX’s peg while still allowing the protocol to capture volumes across multiple chains. Upon passage, the proposal will remove all protocol-owned liquidity and all protocol ownership of wrapped bridge FRAX and bridged FXS on every chain. MakerDAO recently announced a similar feature that continues to use a canonical stablecoin system but limits exposure to multiple bridges.