Behind the Decline of frxETH TVL: The LSD Points War and Potential Recovery

Recently, as one of the highest-yielding ETH liquid staking derivatives (LSD), the frxETH launched by Frax Finance has seen a decrease of approximately 100,000 ETH in TVL over the past three months. This article will explore the competitive landscape of the ETH staking market and the deep challenges faced by Frax Finance.

Introduction to frxETH

frxETH is an Ethereum stablecoin launched by Frax Finance, generated by directly staking ETH. It features a dual-token design (frxETH and sfrxETH), which makes it one of the highest-yielding ETH LSD products currently available. Since its launch in November 2022, the yield of sfrxETH has significantly surpassed that of similar products, exceeding stETH by 24% and rETH by 40%.

Analysis of the causes of TVL decline

Despite the excellent yield, the TVL of frxETH has still seen a significant decline, mainly due to the impact of the re-staking craze. A certain re-staking platform offers reward points to users who lock up ETH, attracting a large amount of TVL. Data shows that February 5th, when the platform opened deposits, was exactly when frxETH's TVL reached its peak.

Arbitrage Balance between frxETH and sfrxETH

Frax Finance offers two yield paths for frxETH users:

1. Deposit frxETH into a certain DEX's frxETH/ETH liquidity pool to earn LP rewards.
2. Stake frxETH again as sfrxETH to earn additional staking rewards.

In theory, these two options will form a dynamic arbitrage balance due to the difference in yield, keeping the yields of both at a similar level. As of June 12, the yield of a certain DEX's frxETH/ETH liquidity pool is 2.72%, while the yield of sfrxETH is 3.42%, and the proportions of both are also basically close.

Behind the LSD Points War

Incentive points are a common strategy in LSD competition, used to attract investors to participate in projects. However, this strategy is not a long-term solution, as all point systems are ultimately unsustainable. Re-staking technology itself is an effective narrative that can provide users with additional returns. Frax Finance plans to offer native re-staking services directly in frxETH v2.

Frax Finance's Response Strategy

To meet the challenges, Frax Finance has designed the Flox mechanism as the block space incentive plan for its new L2 network, Fraxtal. Flox will check user assets and on-chain interaction activities, allowing users holding frxETH to earn FXTL on Fraxtal.

Fraxtal, as a modular Rollup blockchain, has the following characteristics:

• EVM equivalence
• Modular Rollup Design
• Block space incentive measures ( Flox )
• Use frxETH as the gas payment token

New Features of frxETH v2

frxETH v2 will introduce the following new features:

• Decentralized Validator
• Improve node capital efficiency
• Node Operator Performance Incentives

In addition, Fraxtal will use frxETH as Gas fees, and burning frxETH can increase the annual yield of sfrxETH.

With the launch of these new features, frxETH is expected to make a resurgence in the field of liquid staking on Ethereum. However, whether it can become a dark horse in the market remains to be seen.