frxETH TVL Decrease: Variables Behind LSD Points Competition

As the highest-yielding ETH liquid staking derivative, frxETH launched by Frax Finance has recently seen a significant decline in TVL. This article will explore the fiercely competitive ETH staking market and the underlying factors reflected by Frax Finance.

Introduction to frxETH

frxETH is an Ethereum stablecoin generated by directly staking ETH. It employs a dual-token design (frxETH and sfrxETH), making it one of the highest-yielding ETH liquid staking derivatives currently available. Since its launch in November 2022, the yield of sfrxETH has significantly outperformed similar products.

Reasons for the Decrease in TVL

Despite the high yield, the TVL of frxETH has still seen a significant decline. The main reason lies in the rise of the restaking frenzy, particularly with the launch of Eigenlayer. Eigenlayer offers rewards points to users who lock ETH, attracting a large amount of TVL. Data shows that on February 5, when Eigenlayer opened deposits, it coincided with the peak of frxETH's TVL.

Arbitrage Balance between frxETH and sfrxETH

Frax Finance provides two yield paths for frxETH users:

1. Deposit frxETH into the Curve frxETH/ETH liquidity pool to earn LP rewards.
2. Stake frxETH again as sfrxETH to earn additional staking rewards.

These two choices create a dynamic arbitrage balance due to the difference in yield, keeping the yields of both at similar levels. As of June 12, the yield of Curve's frxETH/ETH liquidity pool was 2.72%, while sfrxETH was 3.42%.

The Essence of LSD Points Competition

Point incentives are an important strategy in LSD competition, used to attract investors to participate in projects. However, this strategy is not sustainable in the long term. All point models will eventually be converted into other assets, leading users to turn to other projects.

The re-staking technology itself is an effective narrative that can provide users with additional yield. Frax Finance plans to directly offer native re-staking services in frxETH v2.

Future Plans of Frax Finance

Frax Finance has designed the Flox mechanism as an incentive plan for block space on the new L2 network Fraxtal. Fraxtal is a modular Rollup blockchain with the following features:

• EVM equivalence
• Modular Rollup Architecture
• Block Space Incentive Mechanism (Flox)
• Use frxETH as the Gas payment token

Fraxtal will collaborate with multiple Ethereum infrastructure providers.

New Features of frxETH v2

frxETH v2 will introduce the following new features:

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

It is worth noting that Fraxtal will use frxETH as gas fees, and burning frxETH can increase the annualized yield of sfrxETH.

Whether frxETH can stand out in the field of liquid staking on Ethereum still requires further observation.