frxETH v2 will launch an efficient and decentralized LSD protocol
frxETH v2 will launch a decentralized LSD protocol that is efficient.
Frax Finance has recently released details about their upcoming LSD protocol, frxETH v2, and why it is the most unique, versatile, and efficient decentralized protocol. This news has quickly gained widespread attention. We know that in traditional LSD protocols, their basic structure is similar, with lenders loaning out ETH and receiving a receipt token, and borrowers renting ETH and paying interest. The way Rocket Pool works, for example, is by staking ETH on validators. Lenders can collateralize ETH on Rocket Pool and receive rETH (Rocket Pool’s receipt token). Borrowers can rent ETH and pay interest in order to run validators. The value of Rocket Pool’s receipt token rETH is pegged one-to-one to the value of ETH. Therefore, the value of rETH fluctuates with the price of ETH.
Similarly, the way Lido, another LSD protocol, works is by staking ETH on Ethereum 2.0 validators. Investors deposit ETH into Lido and receive stETH (Lido’s receipt token). Like Rocket Pool, borrowers can rent ETH and pay interest in order to run validators. However, Lido’s validator leasing is limited to specific nodes that are managed and controlled by the Lido team. Although there are differences in their specific implementations, the basic logic remains the same.
Farx’s founder also stated on social media that the motivation and first principle of building the frxETH protocol is precisely because the basic structure of all LSD protocols is a simple lending market, regardless of the incentive mechanism or marketing strategy. Lenders loan out ETH and receive a receipt token (LSD), and borrowers rent the right to run validators and pay interest based on loan-to-value (LTV) loan terms. The goal of frxETH v2 is also clear, with a focus on creating a truly decentralized, unique, and versatile LSD protocol. The key to creating a truly decentralized LSD protocol is to create a peer-to-peer pool lending market, where lenders can receive receipt tokens and borrowers can rent validators. This structure allows for maximum decentralization and versatility. The design of the frxETH v2 protocol is as simple as possible, with borrowers only needing to provide the minimum amount of ETH collateral to rent validators. Withdrawal addresses and all regulation are on-chain and decentralized, just like in DeFi lending markets. Interest is paid directly from the borrower’s ETH and PoS cash flows, with rates determined by market forces and utilization. There are no hardware costs or commissions, making the protocol highly profitable for advanced node operators.
If interest rates surge and you’re unable to profit, simply exit or pay off your debts. Because your debt is in the validator, not ETH, you can simply pause and wait for rates to meet your expectations once again. Your loan-to-value (LTV) ratio is calculated by dividing the validator’s value by the sum of the collateral’s value and the validator’s value.
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These features ensure that frxETH nodes become the best operators in the entire industry in a decentralized way, without restrictions such as whitelists, KYC or reputation. Like frxETH v1 validators, frxETH v2 nodes will also rank first in performance and become one of the highest-rated nodes in the history of PoS.
At the same time, you should also ensure that your LTV is healthy. Otherwise, you will be liquidated (i.e. the validator will be expelled). If you are penalized or behave improperly, your LTV will increase and some collateral will be confiscated. If your collateral is unable to repay your debt, you must increase your collateral or be liquidated.
frxETH v2 is currently the most efficient and decentralized lending market and is supported by ETH collateral as a stablecoin. It is also the most programmable LSD base layer available for projects to build on. The protocol has more innovative features, such as ETH not used in validators being sent to Curve AMO for liquidity and revenue. Utilization will consider AMO ETH, so it is self-balancing. The beacon oracle is also completely decentralized and controlled on-chain, with zk proofs and no need for administrator keys, multisignatures or EOA trust.