To apply new fee model for f(x) Protocol to scale in the market bear cycle.
The background of this new fee model is this: To scale f(x) protocol, we have to design fee table which motivate investors to mint xETH in the bear cycle of Web3 market.
It’s because Web3 market bear cycle will be a key growth phase for f(x) as same as UST in LUNA.
Based on the current fee structure, fETH will go into “disabled” with Stability Mode when ETH goes into the long-term bear cycle, which seriously limits the scalability of f(x).
To understand the above more clearly, we can learn important things from FRB operation model which has over 100 years history. Learning from FRB is “Standing on the shoulders of Giants” for us.
They mainly take two operations: normal mode and emergency mode.
From the above, the stability Mode works as same as emergency mode on FRB. FRB will not often use this mode because they deeply understand this operation model brings lots of market turmoil based on their experience. The latest case they used this model is during Corona Shock. They printed lots of USD by buying US Treasury.
In our stability mode on f(x), we use fETH on Rebalance Pool to sell fETH and buy xETH to raise CR higher than 130.6 again. I feel very uncomfortable with this operation. This is exactly as same as emergency operation model on FRB. I also expect huge conflicts will raise from fETH holders who uses Rebalance Pool. Who can guarantee their fETH on rebalance pool will move back to their hand? We must always and carefully prepare for unexpected things would happen in Web3 market which I saw many times as Web3 OG since 2013. Thus, We must minimize the usage of this operational mode.
In order to minimize the usage of Stability Mode, we should establish more flexible fee operation model as I proposed on Vol.4 fee model. This is very much as same as FRB does on FFR control like 0.0% to 5.5%, etc on their normal operation mode. The current f(x) fee table on normal mode has only single fee table, which is completely lack of flexibility.
Thus, again, how we incentivize long-term xETH holders is a key element to scale f(x) .
To solve the above potential issues, I propose two new fee tables:
One: “Medium Mode” between Normal and Stability Mode. CR sets at <140.6 >130.6.
Two: “Bull Mode”. CR sets at >185.1.
The major purpose to set the above mode is to incentivize xETH holders to mint and hold during Web3 market bear cycle.
This is because to consider xETH purely as a trading product will misguide us to achieve its product market fit of f(x).
I do think considering “two year bull cycle and two year bear cycle with following every 4 year BTC halving schedule”, we should attract ETH long-term holders to invest in xETH as the long-term investment vehicle.
Because if f(x) functions accurately, those investors who hold ETH in long-term can gain bigger return than directly buying and selling ETH with the above every 4 year cycle. If we can successfully attract these long-term investors to xETH market with the accurate product understanding, f(x) can stably scale and accelerate the mass adoption.
One of the key component on “Medium Mode” is xETH Incentive Pool. The ideal APR target will be around higher than 2%. We don’t need this pool APR on Stability Mode because we make fETH disable to mint, and use fETH rebalance pool with selling fETH and buy xETH. To avoid Stability Mode is a main mission for Medium Mode.
Then, the next key question is “How we achieve higher than 2% APR for xETH holders on Medium Mode?”
I am thinking of two solutions.
A. We lock up our 10% FXN DAO Treasury with the maximum term (4 years lock up), and allocate the ETH returns to xETH holders when f(x) goes to Medium Mode.
B. To allocate the above 10% FXN DAO Treasury to FXN yield farming vaults on Concentrator.
B is back up. I prefer A is the best because the risk level of A is lower than that of B. Thus, in order to achieve higher than 2% APR on A, we should think of supplementing our DAO Treasury.
In my understanding, this 10% DAO treasury is for Recapitalization Mode on f(x). But, I think this is not the effective solution to maintain f(x) because the recapitalization mode will cause the same negative spiral which happened between LUNA and UST.
The price crush of LUNA caused additional capital flight from UST which accelerated the de-peg of UST against USD.
Thus, to use this 10% for xETH Incentive Pool is more constructive solution to scale f(x).
Then, here is additional suggestion. I think our current FXN allocation plan on Liquidity Incentive with 49% is too large.
We can set this incentives with 30% to 39%, and move the rest of FXN to DAO treasury in order to raise the APR for xETH Incentive Pool.
The key thing we have to understand here is the market value of FXN goes up with the growth of TVL on f(x).
Based on this, to allocate the ETH return of veFXN on the DAO Treasury to xETH Incentive Pool will strengthen the network effect of f(x) Protocol.
Basically, sooner is better to start xETH Incentive Pool backed by FXN DAO Treasury because we can accumulate the ETH return with veFXN when ETH in bull cycle and we can use these returns xETH Incentive Pool when ETH is in bear cycle.
Currently, I suppose BTC 4th halving bull cycle will end in Q4 2025 to Q1 2026.
Here is also the summary of other fee adjustment.
When the CR > 185.1%, f(x) disables to mint xETH in order to secure higher return for xETH holders than directly investing in ETH in the market bull cycle. 1.5x is too weak. Higher than 2.0x is the best.
On the Bull Mode, fETH Mint Fee should set as 0.0% to increase fETH market supply while xETH Redeem Fee should set as 0.0% to decrease xETH market supply.
On Stability Mode, we eliminate xETH Mint Incentive because we should use this inventive for xETH Incentive Pool on Medium Mode.
On Bull mode, we set fETH Redeem Fee at 1.0% in order to avoid the decrease of fETH supply in the market bull cycle.
On Medium mode, we set xETH Redeem Fee at 8.0% in order to avoid the decrease of xETH supply in the market bear cycle.
One last thing, we can also apply dynamic adjusted fee table models for both fEXH minting / redeeming and xETH minting / redeeming in CR > 130.6 to < 185%. If this model does not require too much technical work and gas fee consumption for the smart contract management, we should apply this model. This automatic fee model will enable f(x) to scale faster with following the principles of market economy.
As I mentioned on the above, sooner is better to apply this new fee model. The polling process begins now and will end at 23:59 UTC on 12/31/24.
If Quorum is reached, a Snapshot Vote will be put up at 00:00 UTC on 01/01/2024.
For - The above Fee No.4 is applied. The New DAO Treasury is applied, and the new FXN DAO Treasury is locked up to run xETH Incentive Pool.
Against - Nothing.