Key Terms

Introduction

• FPI is a stablecoin that aims to track the rate of inflation. In other words, it is inflation resistant and ensures its holders maintain their purchasing power.

• FPI uses a Consumer Price Index oracle to track inflation. This is updated monthly.

• FPI seeks to be inflation resistant by being backed by yield-generating FRAX. If the yield generated by the underlying FRAX is less than the inflation rate then FPIS is minted and sold to cover the shortfall, ensuring that FPI remains inflation resistant.

• FRAX is required to mint FPI. For example, you would require 1000 FRAX to mint $1000 worth of FPI (minus a 0.3% swap fee). This underlying FRAX is used to generate yield so that FPI tracks inflation.

Yield: Ensuring Inflation Resistance

1. When treasury yields > inflation → additional yield goes to FPIS holders.
2. When treasury yields < inflation → FPIS is minted and sold to make up the difference.

• In both scenarios, the aim is that FPI maintains its peg to inflation, while FPIS holders either benefit (from seigniorage) or suffer (from dilution).
• The yield-generating strategies are unclear as of now. Given that FPIS holders will be diluted if the yield is below the rate of inflation, they could be incentivized to endorse increasingly risky strategies to generate yield. This is something that will need to be monitored carefully.
• If FRAX fails to generate yield equal to or greater than the rate of inflation on a regular basis, then FPIS will suffer greatly and the system will not work.

FXS

FXS is the governance token of FRAX. FPI could be of great benefit to the FXS token. This is because:

• FXS is required to mint FRAX
• FRAX is required to mint FPI

Therefore, FPI could be a way of accelerating the growth of the FRAX stablecoin. FXS is burned to mint FRAX, meaning that there will be more deflationary pressure on FXS with an increase in demand.

FPIS and FXS should be complementary and do not compete with each other. FPI is essentially a new product in the FRAX ecosystem that if successful will accrue value to the FXS token. A variable share of FPIS revenue will accrue to FXS.

Frax and Convex

Frax is the largest holder of CVX, which it uses to influence emissions and boost their FRAX pool. This CVX will probably also be used for an FPI pool on Curve.

FPI

FPI offers a strong value proposition - holders can maintain their purchasing power in a high inflation environment. Note that excess yield will not go to FPI - meaning that it is essentially capped at the rate of inflation. The core product is an inflation-resistant stablecoin. If it succeeds, it will make for a good money lego in DeFi as it will be constantly increasing in value (assuming inflation is always positive).

Minting FPI (only on Ethereum)

1. Go to Frax Finance
2. Select ‘Mint FPI’
3. Choose how much FRAX you want to convert to FPI
4. Select ‘Mint’

FPIS

• FPIS can be considered a more risky play - especially in the current environment. This is because it is required to cover the shortfall when FRAX fails to generate yield to cover inflation.
• If inflation rises and the crypto market performs poorly, generating this yield will be increasingly difficult. This is because the FPIS price will likely fall with the rest of the market meaning that more FPIS will need to be minted and sold to cover the shortfall.
• This is not a guaranteed outcome but something to be aware of in poor market conditions.
• The FPIS emissions schedule is yet to be released.

Regulatory risk

One thing to bear in mind is the nature of FXS and FPIS. Both tokens accrue value through the yield generated in the system. As the regulatory net closes in, it is important to beware of the risk that overzealous regulators may try and classify such products as unregistered securities. Whether or not you believe this is relevant to the success of the project, it is still worth bearing in mind if holding these tokens.

Takeaway

• The mid to long-term success of this monetary experiment is dependent on the sustainability and safety of the underlying strategies to generate yield. If successful, it offers a very strong product that addresses the increasingly pertinent problem of inflation.
• Many seasoned DeFi users will be able to generate a better yield than FPI through farming.
  • However, users who do not want to engage in farming can purchase FPI which is a passive strategy.
  • Those who do engage in farming may still want to allocate a small portion of their portfolio to FPI for diversification.
• FPIS is risky as
  • It is a new product and
  • Its purpose is to act as a backstop in case yields generated are less than the rate of inflation.
  • In a prolonged bear market, it could be unfeasible to safely generate yield that matchs inflation.
• If successful, the FPI product will accrue value to the FXS token
• Being bullish on FPI does not necessarily mean being bullish on FPIS. If this is the case, purchasing FXS is a more risk-averse play that will also give exposure to the success of FPI.