Introduction
The f(x) Protocol is an Ethereum-based derivative protocol designed to offer volatility-controlled assets through a dual-token model: Fractional ETH (fETH) and Leveraged ETH (xETH). This system aims to cater to users seeking either low-volatility exposure to ETH (fETH) or leveraged long positions (xETH).
Core Components
Fractional ETH (fETH)
- Low-volatility derivative: Targets a beta of 0.1 (10% of ETH’s price movement).
- Collateralized by stETH: Fully backed by ETH deposits converted to stETH.
- Stability mechanisms: Dynamic redemption adjustments to maintain low volatility.
Leveraged ETH (xETH)
- High-volatility derivative: Absorbs excess volatility from fETH.
- Dynamic leverage: Adjusts based on the system’s collateralization ratio (CR).
Protocol Mechanics
f(x) Invariant
The protocol ensures the combined Net Asset Value (NAV) of fETH and xETH equals the total ETH reserve:
\text{ETH Collateral} \times \text{ETH Price} = (\text{fETH Supply} \times \text{NAV}_{\text{fETH}}) + (\text{xETH Supply} \times \text{NAV}_{\text{xETH}})Collateralization Ratio (CR)
- Critical metric: CR = Treasury TVL / NAV of fETH.
- Healthy range: 130%–200% (2–4x leverage for xETH).
- Stability Mode: Triggered if CR <130%, disabling fETH minting and adjusting fees.
Protection Mechanisms
- Rebalance Pool: Burns fETH to redeem stETH, improving CR.
- Reserve Pool: Funds xETH minting incentives during Stability Mode.
- FXN Token Raise: Last-resort recapitalization via governance tokens.
Integration with Curve
Liquidity Pools
- fETH/crvUSD: Low-volatility pair for stablecoin-like assets.
- xETH/ETH: High-volatility pool for leveraged ETH exposure.
Incentives
- Gauges approved: Enhances liquidity and visibility.
- Yield opportunities: LP farming rewards in FXN tokens.
Risk Vectors
Smart Contract Risk
- Audits: 3 completed, with a 4th planned for additional backstops.
- Bug bounty: Up to $500,000 for critical vulnerabilities.
Economic Risk
- Demand dependency: Relies on sustained interest in ETH leverage.
- Liquidity incentives: Rebalance Pool must remain sufficiently funded.
Custody Risk
- Multisig control: 6-of-9 signers manage upgrades and parameters.
- Future decentralization: Planned migration to veFXN governance.
Oracle & Collateral Risk
- Price feeds: Chainlink ETH/USD and stETH/USD, with Curve EMA fallback.
- stETH backing: Dominant LSD with strong liquidity but peg risks.
LlamaRisk Gauge Assessment
Centralization
- Rug risk: Mitigated by 6-of-9 multisig.
- Team dependency: DAO transition planned.
Economics
- Incentives: Organic demand for xETH is critical; backstops exist for shortfalls.
- Redemptions: Users can exit fully if CR remains healthy.
Security
- Audits: No critical unresolved issues; beta status warrants caution.
Recommendation
The f(x) Protocol demonstrates robust design with multiple safeguards for CR stability. While still in beta, its integration with Curve and transparent risk management justify gauge incentives.
FAQ
1. What happens if the CR drops below 130%?
Stability Mode activates, pausing fETH minting and incentivizing xETH minting/fETH redemptions to restore balance.
2. How is fETH’s low volatility maintained?
The protocol dynamically adjusts redemption values, reflecting only 10% of ETH’s price movement.
3. Can I lose funds if the Rebalance Pool is depleted?
The Reserve Pool and FXN token raise act as backstops, though extreme scenarios may impact recovery speed.
👉 Learn more about f(x) Protocol’s safeguards
4. Is stETH safe as collateral?
stETH is the largest LSD by TVL and liquidity, though depeg events (rare) could temporarily disrupt redemptions.
5. Who controls the protocol?
A 6-of-9 multisig manages upgrades today, with plans to decentralize to veFXN holders.