Fraxlend

How Fraxlend works

Fraxlend is a permissionless lending market protocol built on Frax's infrastructure. Where Compound has a single interest rate model applied uniformly to all markets, Fraxlend treats each market as its own standalone credit market. Market creators define the interest rate curve at deployment - specifying base rate, utilization inflection point, and the slope multipliers before and after that inflection. This means a ETH/FRAX market might target 80% utilization with a 2% base rate, while a FXS/FRAX market targets 70% utilization with a 5% base rate due to FXS volatility.

The interest rate is determined by utilization: borrowed / (lent - borrowed). When utilization is below the target, the IR curve is flat - rates are low and stable to attract borrowers. Above the target, the curve steepens because the market signals that capital is scarce, making borrowing expensive and incentivizing repayment or new lender entry. This is the same mechanic as Compound's multiplier, but Fraxlend's per-market curves allow much more granular tuning.

Fraxlend uses Chainlink oracles for price feeds, with each market having an assigned oracle set by governance or the factory. Health factors are computed in real-time: collateral_value CF must exceed borrowed_value. When HF drops below 1.0, the position enters liquidation. Liquidators compete to be first - they repay the borrowed asset, receive collateral plus a bonus (typically 5-10%), and the borrower loses that bonus. The Fraxlend AMM uses an internal interest rate mechanism that functions like a market for credit - the IR curve itself is the pricing mechanism for borrowing capital.

Key concepts

Permissionless market creation

Any user can create a Fraxlend market by calling the factory contract with a collateral asset, borrowed asset, and interest rate curve parameters. The creator sets the IR function (base rate, utilization inflection, slopes), the collateral factor, and the oracle. This makes Fraxlend a market-building protocol rather than just a lending pool - anyone can create credit markets for any asset pair with Chainlink oracle support.

Interest rate curve

Each Fraxlend market has a piece-wise linear IR curve defined at creation. Below the utilization inflection, the curve is flat (low rates attract borrowers). Above the inflection, the slope multiplies sharply - borrowing becomes expensive and lenders earn high yields. The curve is similar to Compound's interest rate model but is per-market and creator-defined rather than uniform across the protocol.

Collateral factor and health factor

The collateral factor (CF) determines how much a borrower can draw against their collateral - e.g. a 75% CF means $10,000 of ETH collateral can support $7,500 of borrowed FRAX. The health factor (HF) = (collateral_value CF) / borrowed_value. HF < 1 triggers liquidation. Riskier assets have lower CFs; ETH might be 80%, while a more volatile asset might be 50%.

Fraxlend AMM

The Fraxlend AMM is the interest rate discovery mechanism - not a traditional asset AMM. The AMM's core function is setting the borrow rate as a function of utilization. The creator defines the shape; market forces (supply/demand for borrowing) then determine where on that curve the market operates at any given time. If utilization goes above target, rates rise to attract lenders; if it drops, rates fall to attract borrowers.

Liquidation engine

When a position's health factor drops below 1, the position can be liquidated by anyone. Liquidators call the Fraxlend liquidation function, repaying borrowed asset in exchange for collateral plus a bonus (the liquidation penalty, typically 5-10%). The liquidation bonus is the primary incentive that keeps the system solvent - it compensates liquidators for execution risk and bots for the gas race to be first.

Frequently asked questions

How is Fraxlend different from Compound or Aave?

Compound and Aave have governance-set interest rate curves and risk parameters - one size fits all markets. Fraxlend lets anyone create a lending market with a custom interest rate curve defined at market creation. The IR curve is a piece-wise linear function set by the market creator, meaning each market can optimize for its collateral type, utilization targets, and borrower profile. This permissionless market creation is the core differentiator.

What determines the borrow APR in a Fraxlend market?

Borrow APR is set by the market's interest rate curve as a function of utilization (borrowed / available). The curve is defined by the market creator at creation and can include a base rate, the utilization inflection point, and slopes before/after. When utilization is below the inflection point, the borrow APR is low and stable. Above it, the curve steepens sharply to incentivize repayment and attract more lenders. This is similar to how Compound's multiplier works but more flexible and per-market.

How do liquidations work on Fraxlend?

Fraxlend uses a health-factor system: when a position's health factor drops below 1, it becomes eligible for liquidation. Liquidators can repay borrowed asset debt in exchange for a portion of the collateral (typically a 5-10% bonus). The liquidation engine finds the cheapest available collateral to swap, repays the debt, and captures the spread. Liquidators compete via flash loans and arbitrage bots, keeping positions???.

What collateral types are supported?

Fraxlend supports any ERC-20 as collateral, but market creators can restrict which assets are accepted in their specific market. The protocol integrates with Chainlink for price feeds, and each market has a oracle set chosen by governance. Common collateral types include ETH, wBTC, FXS, and major tokens, but the permissionless nature means markets can be created for any asset pair.

What is the Fraxlend AMM and how does it relate to IR curves?

The Fraxlend AMM is the interest rate discovery mechanism. Unlike Compound where the governance sets rates, Fraxlend's AMM is essentially a per-market interest rate market. When a market is created, its IR curve defines the 'price' of borrowing at each utilization level. As demand for borrowing shifts, utilization changes, and the IR curve determines the resulting rate - similar to how an AMM prices assets, but for the interest rate. Market creators can update IR parameters over time as conditions change.

Can Fraxlend markets be created permissionlessly?

Yes. Any user can deploy a Fraxlend market by calling the factory contract with the asset pair, initial IR curve parameters, and oracle configuration. The creator sets the initial borrowing and lending rates, collateral factor, and utilization targets. This permissionless model means Fraxlend can support any asset pair that has a Chainlink price feed and sufficient liquidity for liquidations to be viable.

How does Fraxlend interact with Frax's broader ecosystem?

Fraxlend is a core Frax product that reinforces the FRAX flywheel. When users borrow FRAX against ETH collateral, they need FRAX to repay - driving demand for FRAX in the ecosystem. Interest paid on FRAX borrowings flows partly to the Frax Surplus Buffer. Fraxlend markets also accept FRAX as collateral, and the protocol's gauge system allows veFXS holders to direct FCA emissions toward Fraxlend markets, bootstrapping new lending pairs.

Related reading

• Frax Finance Overview - the fractional-algorithmic stablecoin, AMO controller, and CR that underpin the FRAX borrowed in Fraxlend.
• veFXS Mechanics - how FXS staking and gauge voting distribute FCA emissions to Fraxlend markets and incentivize liquidity.
• Compound Finance - compare Fraxlend's per-market custom IR curves to Compound's protocol-wide rate model and governance-set parameters.
• Curve Liquidity Pools - how Curve LP positions are used as collateral across Fraxlend markets and the risks involved.