frxETH is a derivative asset that is soft-pegged to ETH. Holding frxETH on its own does not accrue staking yield.
frxETH is a low-cap, fully collateralized asset. This asset is exposed to the underlying risks of Frax, a protocol rated as Moderately Risky. frxETH is a derivative asset that is soft-pegged to ETH and can always be redeemed 1:1 for ETH. Holding frxETH does not earn any yield on its own. Instead, users can stake frxETH in the staking vault for sfrxETH to accrue staking yield of the Frax ETH validators. The asset has an uncapped supply but has inflation control or burn mechanisms in place. The Frax team manages the frxETH minter contract with a limited 3/5 multisig (i.e. infinite mint), which exposes the asset to greater centralization risk and ultimately could lead to a death spiral if frxETH were to be insufficiently unbacked by ETH collateral.
frxETH acts as a stablecoin that is soft-pegged to ETH. 1 frxETH always equals 1 ETH as the amount of frxETH in circulation matches the amount of ETH staked in Frax. When users deposit ETH into Frax, an equivalent amount of frxETH is minted. Holding frxETH is analogous to holding WETH as it is not eligible for staking yield on its own. Instead, users can choose to deploy their frxETH to third-party strategies like Curve to earn trading fees.
The Frax Ether system consists of three core components: frxETH, sfrxETH, and the Frax ETH minter. The underlying code for frxETH is largely forked from both the FRAX and FPI stablecoins. sfrxETH is obtained by first approving the sfrxETH contract as a frxETH spender, and then calling the mint function. As validators earn staking rewards, an equivalent amount of frxETH is minted and sent to the sfrxETH contract. This means the user may redeem a greater amount of frxETH than they initially minted. The Frax ETH minter mints frxETH when it receives ETH deposits. Whenever a deposit pushes the minter balance over 32 ETH, the contract automatically spins up a new validator. The protocol currently charges a 10% fee on all generated staking rewards.
frxETH is designed to be a stablecoin that is loosely pegged to ETH. This means the price of frxETH could depeg from time to time based on current market conditions. Frax has also set the withdrawal address to the Frax multisig at launch.