As FRAX is already listed on Aave V2 on the supply and borrow sides, we are proposing to list FRAX on Morpho-Aave as well. There is approximately $30M already deposited on Aave and $10M borrowed. This listing would unlock new use cases for the FRAX stablecoin by reducing the spread between the supply and the borrow rates (around 1.5% currently on Aave).
FRAX cannot be used as collateral on Aave. Given that Morpho replicates the same parameters as Aave, the loan to value and liquidation thresholds would be set to 0 on Morpho too. Hence, the risk added to Morpho-Aave by the listing of FRAX is minimal.
This forum post is a first temperature check to see if Morpho’s community would like to list FRAX on Morpho. Happy to hear your thoughts on this proposal!
Before listing any asset we follow this asset listing checklist. This is what we applied to assess whether listing FRAX on Morpho should be considered. Below, is a brief summary of our research.
Smart contracts study
To conduct our research, we referred to FRAX’s documentation and checked the different asset implementations that the Morpho protocol would interact with:
The FRAX token conforms well to the ERC20 standard and both Aave token’s implementations are standard aToken and variable debt tokens implemented by Aave which would greatly work with Morpho’s Implementation.
FRAX smart contracts have been audited several times by Trail Of Bits, a leading audit company that also audited Morpho, and all high-severity issues have been resolved. No hacks have been reported yet and a bug bounty of 50K FRAX is available for white hack hackers.
Frax Finance is mostly using the USDC asset as collateral and also uses different well-known and secure protocols (such as Aave, Compound, Yearn) to generate yields on top.
Data study
FRAX has kept a steady peg against USD; the price has deviated less than $0.03 USD since in January 2021.
Governance discussions
We also read the governance discussion about FRAX listing on Aave V2 Mainnet, which are well-documented resource:
The FRAX asset has been listed on Aave V2 to be supplied and borrowed but cannot be used as collateral. It would be the same on Morpho.
Opportunities
Frax Finance recently released FraxLend with competitive borrowing rates (mostly < 0.5%) compared to the Aave market. Yet, rates have not been well arbitraged. Eg. Borrowing on FraxLend to supply to Aave where the supply rate is around 1%. Thanks to Morpho, the arbitrage opportunity could be amplified!
FRAX lenders and borrowers would benefit from $MORPHO rewards distributed to Morpho users.
N.B.:
The opportunity for FraxLend arbitragers becomes even stronger.
If the community decides to adopt the Morpho Gauges, it would enable voters to distribute additional tokens to FRAX users.
The $MORPHO distribution on the FRAX market would start at the epoch following the listing.
Frax has conducted AMOs on different protocols in the past. This could be done also on Morpho. For example, the DAO could accumulate $MORPHO tokens to vote in gauges (if the MIP is adopted) and grow its ecosystem!
Morpho positions could be listed later on in the Frax’s gauges system!
We would be happy to discuss further the topics mentioned above with the Frax community if the proposal goes through.
Next step
Morpho Labs is supporting the listing FRAX on Morpho. We will wait a few more days before creating a snapshot vote for the community to vote.
The arbitrage opportunity looks pretty small. Not sure about the use case.
Is Frax really willing to conduct AMO on $MORPHO tokens? If yes, for what reasons would they want to incentivise users to deposit/borrow FRAX on Morpho?
While no one has yet delegated to me (you can do so at onetruekirk.eth), I am commenting here as an example of how I’d vote in Morpho governance.
I am in support of onboarding FRAX as a lending asset to Morpho-Aave. The risk of this proposal would be essentially constrained to those who are supplying or borrowing FRAX, and no trouble to other users. Adding additional borrowable assets is generally a good thing and promotes cross market arbs.
Even if FRAX is not mentioned in the list, we think that this is wise to wait for the governance to take measures before listing any new asset on Morpho.
I think this is a very good suggestion, to increase diversification