# sfrxETH - Yield Nest Collateral Risk Brief
*Note: frxETH is exchangeable for sfrxETH by depositing into the sfrxETH vault. The exchange rate of frxETH per sfrxETH increases over time as staking rewards accrue.*

## Market Liquidity

Liquidity for frxETH is currently available on Curve and Uniswap, with the majority of liquidity pools on Curve. While sfrxETH has markets on Balancer and Curve. Market depth for both assets seems healthy with volume not being concentrated in a single pool. Concerningly, no CEX liquidity is available for either asset and Curve represents a large concentration of liquidity, largest ETH paired pool for frxETH had a $29.8M TVL at time of writing (frxETH/WETH).

A slippage greater than 1% would require an estimated 10870 frxETH to ETH trade ($26.9M) and 11495 sfrxETH to ETH trade ($31.1M). This demonstrates a deep level of liquidity but with the caveat of Curve pool dependence.

## Token Volatility

The liquid staking basis, the difference in price between frxETH and ETH, has remained relatively stable over the last 90 days. LSB observed has averaged -0.22% over the period, and has ranged between -0.98% and 0.58%. Relative to LST market leader wstETH, frxETH has deviated slightly more from its peg.

Source: [Coingecko Historical Data](https://www.coingecko.com/en/coins/frax-ether/historical_data) | 5/28/2024 - 8/26/2024

## Smart Contracts

Smart contracts aren't upgradable nor do they have any proxies. The frxETH code heavily borrows from Frax and FPI stablecoins. There has only been one audit of frxETH and sfrxETH by code4rena (29th of November, 2022), 12 unique vulnerabilities were found with 2 being rated as high severity, while the remaining 10 were rated as medium severity. Issues identified were either fixed, acknowledged or not fixed.

Since frxETH is based on prior code that is mature and has been audited extensively, the risk associated should be considered minimal.

## External Factors/Dependencies

There is no Chainlink pricefeed available for frxETH or sfrxETH at time of writing. A custom [SfrxEthFraxOracle](https://etherscan.io/address/0xB9af7723CfBd4469A7E8aa60B93428D648Bda99d#code) that reports prices from, UniswapV3 frxETH/FRAX TWAP oracle, Curve frxETH/ETH EMA oracle and Chainlink ETH/USD oracle. This pricefeed is yet to be audited and Curve currently recommends third parties to not integrate the EMA oracle, as it can be [manipulated](https://resources.curve.fi/factory-pools/understanding-oracles/#manipulation) over multiple blocks.

Given that a reliable pricefeed is yet to be established, the components of the custom pricefeed have some merit in providing limited assurances given their sourcing.

## Centralization Vectors

Frax Core Team controls all validator nodes, frxETH v2 intends to allow for anonymous / external validators to enter the frxETH system. The current state of v2 is only described and has not been implemented.

The 3-of-5 frxETH [Treasury multisig](https://etherscan.io/address/0x9aa7db8e488ee3ffcc9cdfd4f2eaecc8abedcb48) is responsible for protocol operations and funds management. All user funds are managed by this multisig and by ETH staking validators operated by the Frax team. There seems to have been a delay in upgrading to a fully decentralized governance model. Trust assumptions therefore must be made on both node operations and fund management.

## Legal Status

Frax operates as a DAO with no legal entity. It is possible a DAO could be considered an “unincorporated general partnership” with uncertain consequences. Frax has not had any enforcement actions against it, although due to factors such as the centralization of operations and funds management along with questionable sanctions compliance, Frax may be exposed to regulatory risk.

## Conclusion

Overall, frxETH measures positively for market liquidity, volatility and smart contract maturity. Liquidity has a deep reliance on Curve, this concentration can be explained by the utilization of Automated Market Operations (AMO) that sustain liquidity.

Significant risks noted include centralisation of key functions within the team including node operations and fund management. Lastly, the lack of a reliable pricefeed limits visibility around the asset.