frxETH TVL Plummets Variables Hidden Behind LSD Token Battle

Authored by: StableScarab
Translated by: Tyler
Why has the TVL of frxETH, the highest-yielding ETH LSD launched by Frax Finance, suddenly decreased by 100,000 ETH in the past 3 months?
This article aims to help everyone understand the fiercely competitive ETH staking market and the underlying factors reflected by Frax Finance.


What is frxETH?
frxETH is an Ethereum stablecoin launched by Frax Finance, generated by directly staking ETH. Additionally, frxETH (sfrxETH) adopts a dual-token design, making it the highest-yielding ETH liquidity staking derivative (LSD) at present:
Apart from traditional staking forms, the other use cases of frxETH will enhance the annual percentage yield (APY) of sfrxETH. Since its launch in November 2022, the yield of sfrxETH is not only 24% higher than stETH at the same period but also 40% higher than rETH.


So why did the TVL of frxETH drop significantly despite the high yield?
It’s simple – points, points, and more points!
The staking frenzy swept through the LSD market – Eigenlayer provided rewards points to users who locked ETH, attracting a massive TVL, with even higher yields for liquidity staking. Looking at the data charts, the opening of deposits by Eigenlayer on February 5 coincided with the peak of frxETH TVL.


Arbitrage Balance between frxETH and sfrxETH
Why do some frxETH users choose not to double-stake and instead allow their earnings to be transferred to sfrxETH users?
This is because Frax Finance offers another earning option to frxETH users – depositing frxETH into the frxETH/ETH liquidity pool on Curve to earn LP rewards.
From the user’s perspective, Frax Finance actually provides two earning paths for frxETH:
Stake ETH as frxETH, then deposit it into the frxETH/ETH liquidity pool on Curve to earn rewards, while relinquishing their own frxETH staking rewards;
Stake ETH as frxETH, then double-stake it as sfrxETH, allowing them to earn their staking rewards while additionally receiving the portion of frxETH staking rewards relinquished by the first group of users.
In theory, choosing between the frxETH/ETH liquidity pool on Curve (frxETH) and double-staking (sfrxETH) will gradually form a dynamic arbitrage balance due to differences in yield rates, keeping the yields of the two different options within the same range consistently.
According to official data from Frax Finance, as of June 12, the yields of both were indeed quite close: the frxETH/ETH liquidity pool on Curve (frxETH) was 2.72%, while double-staking (sfrxETH) was 3.42%, with the proportions being relatively similar.


The Backstory of the LSD Points War
In the competitive landscape of LSD, points fall under the category of “incentives,” temporary rewards used to attract investors to participate in projects, which are useful for launching projects but do not guarantee long-term effectiveness.
It is well known that points will not last long, and all points schemes are unsustainable strategies – points will eventually be converted into other assets, leading users attracted by high incentives to shift to other projects.
However, liquidity staking itself is a highly effective technical narrative that can provide additional earnings for users, and Frax Finance plans to directly offer native liquidity staking services in frxETH v2.


In this process, the ability to design an appropriate incentive system determines whether the service can continue to be effective, which is why Frax Finance designed the Flox mechanism – Flox, as an incentive plan for the new L2 Fraxtal within Frax Finance, primarily distributes rewards alongside the tail token FXTL.
As Flox checks a user’s assets and on-chain activities, any user holding frxETH on Fraxtal can easily earn FXTL.
According to the latest official documentation, Fraxtal as an L2 network is a modular Rollup blockchain with a roadmap for fractal scaling, featuring:
EVM equivalency. Fraxtal utilizes an OP stack as its smart contract platform and execution environment, enabling project teams to deploy applications as quickly, securely, and cost-effectively as Optimism and Base;
Modular Rollup. Fraxtal will have multiple components and middleware for other chains and networks to use, connect, deploy L3, and build on top of. Currently, Fraxtal uses a separate Data Availability (DA) module developed by the core team of Frax Finance;
Block space incentives (called Flox). This feature rewards users and developers – any account or smart contract that spends gas and interacts with any smart contract on the network will earn “Fraxtal Point System” (FXTL) rewards based on the Flox algorithm, which can later be converted into tokens;
frxETH as the gas payment token;
Additionally, as disclosed by the official sources, Fraxtal will be launched with major Ethereum infrastructure providers, including Fraxscan and Safe from Etherscan, as well as DeFi-related services like Chainlink, Axelar Network, and LayerZero.
So why do I believe frxETH will make a comeback? Besides the native liquidity staking feature, frxETH v2 will introduce the following new functionalities:
Decentralized validators;
Higher node capital efficiency;
Performance incentives for node operators;
Most importantly, Fraxtal will use frxETH as gas fees, burning frxETH to increase the annual percentage yield (APR) of sfrxETH.
Despite the challenges, whether frxETH can become a standout in the Ethereum liquidity staking race remains worth deep observation.