Introduction

f(x) is an ETH-based leverage protocol designed to address the cryptocurrency sector’s demand for stable assets while reducing risks associated with centralization and capital efficiency. The protocol introduces a new concept known as “floating stablecoins” or fETH. Unlike traditional stablecoins, fETH is not pegged to a fixed value; instead, it tracks a small portion of the price fluctuations of native Ethereum (ETH). In addition, a supplementary asset called xETH is created to serve as a zero-cost leveraged long position in ETH. xETH absorbs the majority of ETH’s price volatility, which helps stabilize the value of fETH.

Birth of the Protocol

In March 2023, the Federal Reserve’s continued interest rate hikes led to a drop in bond prices, causing significant issues with Silicon Valley Bank’s balance sheet. With many depositors starting to withdraw their funds, the liquidity problem worsened, ultimately leading to the bank’s collapse—marking the second-largest bank failure in U.S. history.

USDC, a stablecoin issued by Circle and pegged 1:1 to the U.S. dollar, was directly impacted by the collapse of Silicon Valley Bank, as Circle held some of its reserves at the bank. Around $3 billion of USDC’s reserves were stored there. As a result, USDC’s stability was threatened when the bank collapsed.

USDC’s value dropped below $1, falling to around $0.87, sparking panic in the cryptocurrency market. However, Circle quickly reassured the market, stating that it could restore USDC’s stability through other banking channels and liquidity sources. The U.S. Treasury and Federal Reserve stepped in to protect the depositors of Silicon Valley Bank, which helped stabilize both the market and USDC’s price.

AladdinDAO participated in the discussions surrounding this event, reflecting on the role and model of stablecoins, and decided to revolutionize the concept of stablecoins and decentralized leverage.

The f(x) protocol V1 was released in August 2023. Splitting yield-bearing assets into low-volatility assets (stablecoins) and high-volatility assets (leveraged tokens) created the most capital-efficient decentralized stablecoin while offering leverage traders a zero-liquidation solution. The system has continuously evolved, and 16 months later, with a TVL of $70 million, f(x) released its latest V2 version.

Funding Background

Funding Background（Source: https://www.rootdata.com/Projects/detail/f(x)?k=ODE2Ng%3D%3D）

f(x) Protocol has not yet disclosed any details about its funding. However, its developer, AladdinDAO, raised funds on May 25, 2021. The round included investors such as Polychain, DigitalCurrencyGroup, 1kx, Nascent, AllianceDAO, and MulticoinCapital, though the exact amount raised was not disclosed. [1]

Team Members

Team Members（Source: https://www.rootdata.com/Projects/detail/f(x)?k=ODE2Ng%3D%3D）

f(x) Protocol is developed by AladdinDAO. The core team member is Sharlyn Wu, the initiator of the project. Sharlyn served as the Executive Director of China Merchants Bank International from 2017 to 2020, and as the Chief Investment Officer at HTX from 2020 to 2021. She has also invested in projects like ShieldProtocol, a decentralized derivatives protocol. [2]

Main Features

Core Mechanism

f(x) is a volatility-based protocol that divides the underlying asset into two components based on its volatility. Think of it in the same context as Pendle from the past, a popular structured product in the staking space. The main difference between f(x) and Pendle is that while Pendle divides the principal and future income rights, f(x) divides the volatility of the asset itself.

At the heart of the f(x) Protocol is its equation, which governs all its functions. Here’s the formula:

Where:

n = the number of token assets

s = token price (USD)

nf = amount of fxUSD

f = the net value of fxUSD in USD

nx = the number of xPOSITION units

x = the net value of xPOSITION assets (USD)

This setup enables users to apply a delta-neutral strategy that captures leveraged gains. They can also choose high-volatility positions to reduce liquidation risks, though without inherent returns. This mechanism is fundamental to all versions of the f(x) Protocol. In V1, users must deposit collateral before minting fxUSD or X-token (xPositions).

V2 Features

On November 5th, f(x) Protocol released its V2 whitepaper, which focuses on leveraging xPositions to optimize the use of fxUSD. Users can now use stETH as collateral to open xPositions, while also minting fxUSD simultaneously based on the f(x) equation. The V2 version allows users to directly exchange assets for fxUSD via DEX aggregators and eliminates the need to mint X-tokens for opening xPositions, streamlining the process. The key features of V2 are as follows:

Creating Leveraged Positions (xPOSITION)

xPosition is a non-fungible, high-leverage long position that facilitates decentralized leveraged trading. In V2, users can open xPositions directly with leverage up to 10x without needing to mint X-tokens. The protocol supports higher leverage by minting fxUSD through flash loans to maintain the correct collateral-leverage ratio.

The process is as follows: Provide collateral → Flash loan collateral → Mint fxUSD → Create xPOSITION.

Key Features of xPOSITION (Leverage Tool):

• Up to 10x leverage for high-intensity trading.
• Fully decentralized, no liquidation risk.
• Zero funding costs under normal market conditions, maximizing user returns.

V2 Version View（Source: https://fxprotocol.gitbook.io/fx-docs/f-x-protocol-mechanisms/key-functions-of-f-x-2.0）

Minting fxUSD

Each unit of xPOSITION mints the necessary fxUSD to manage volatility and maintain collateral. For example, a 10x leveraged position has 1 unit of xPOSITION supported by 9 units of fxUSD, with the underlying collateral being stETH. In V2, fxUSD is minted using flash loans.

The V2 version also introduces liquidity pools where users can deposit USDC or fxUSD to provide liquidity for the protocol’s stability. Unlike the previous V1 stable pool, the V2 version anchors USDC and fxUSD to maintain the value of deposits in USD terms.

Like typical liquidity pools, LPs can earn returns in the following ways:

• Arbitrage between the fxUSD/USDC AMM pool
• Trading and rebalancing fees paid by X-token traders.

fxUSD (Stablecoin) Features:

• Fully decentralized with reliable price pegging
• Instant minting and redemption based on demand
• Extract liquidity from collateral and earn sustainable yields

Rebalancing Mechanism

The V2 version introduces automatic rebalancing. If leverage exceeds safe limits (e.g., ETH price falls), the protocol will burn excess fxUSD associated with xPositions, sell the stETH for fxUSD or USDC, and return it to the liquidity pool. This mechanism lowers leverage while keeping users’ exposure to the underlying assets, preventing liquidation risks.

This automatic process removes manual intervention and protects users from forced liquidation, offering a safer and more reliable method for managing volatile market positions.

Differences Between V1 and V2

In the first version, V1 offers variable leverage tokens, providing up to 4.3x leverage on ETH and up to 5.6x leverage on wBTC. The majority of these leverage tokens come without financing costs. V1’s unique proposition is its leverage without liquidation risks or financing costs, paired with scalable decentralized stablecoins, making it a powerful solution. However, the unpredictability of variable leverage might not fit everyone’s needs, which is where V2 comes in, introducing a groundbreaking feature: a fixed leverage of up to 10x, fully on-chain, with no liquidation risk or financing costs.

V2 also offers exclusive features through liquidity pools, providing high and sustainable returns via PERP trading commissions. These returns are generated without putting stakers at risk from market volatility. In contrast to other perpetual trading protocols, the V2 liquidity pool remains dollar delta-neutral, effectively avoiding counterparty risk.

While V1 remains an excellent choice, it offers a unique use case by splitting any yield-bearing asset into stablecoins and leveraged xTokens. The stablecoins provide higher yields without market risks, while xTokens carry higher market risks but yield no returns.

V1 Data（Source:https://fx.aladdin.club/assets/）

V2 Data（Source: https://fx.aladdin.club/v2/statistics/）

As seen in the V1 and V2 dashboards released by f(x), the funds locked in the V2 protocol have reached $123M, significantly outpacing V1’s $12M. In nearly all categories, V2’s stablecoin performance exceeds that of V1. This highlights how the V2 version, post-upgrade, is more attuned to market demands.

Current Stablecoins and Leveraged Tokens Provided Compared to V1

Stablecoins

• fxUSD: f(x)’s flagship stablecoin running on V2, fully collateralized by Lido stETH, making it one of the most liquid and secure assets in the DeFi space.
• rUSD: A V1 stablecoin backed by Etherfi eETH and Renzo ezETH. When staked, it earns re-staking rewards and provides staking points.
• btcUSD: A V1 stablecoin collateralized by wBTC. As wBTC doesn’t produce yields, a small fee is charged to xToken holders, which is distributed to stable stakers.
• cvxUSD: A V1 stablecoin supported by aCVX, an automatically compounded staked CVX created by Concentrator.
• fETH: The first V1 type stablecoin with a unique design. It is not pegged to the dollar but remains stable by capturing only 10% of ETH’s price fluctuations (the rest is absorbed by the xToken).

Leveraged Tokens (V1)

• xETH: A perpetual leveraged token offering up to 4x exposure to ETH price movements, supported by Lido stETH.
• xstETH/xfrxETH: ETH leveraged tokens offering up to 4.3x exposure, supported by Lido stETH and frxETH.
• xeETH/xezETH: ETH leveraged tokens offering up to 4.3x exposure, supported by Lido eETH and ezETH.
• xwBTC: A Bitcoin leveraged token providing up to 5.6x exposure.
• xCVX: A CVX leveraged token providing up to 3x exposure.

Risks in Extreme Scenarios

xTokens (v1): In an extreme worst-case scenario, all xTokens could lose their value. However, the stabilization mechanism is designed to activate and rebalance them before this happens. If this mechanism fails, xTokens might drop to zero. In such a case, the protocol’s overall collateralization rate remains at 100%, and fxUSD is always backed and pegged to the dollar. If the market continues to decline, fxUSD might temporarily lose its peg, but it’s likely to return to the dollar peg if the underlying market (like ETH) rebounds.

xPOSITION (v2): The rebalancing and liquidation thresholds are carefully adjusted to avoid such situations. In an unlikely worst-case scenario, the protocol could face bad debt if both rebalancing and liquidation mechanisms fail. To protect users from this risk, 25% of the f(x) protocol’s revenue is set aside in a reserve fund for such extreme cases. If the reserve fund is insufficient, the bad debt will be distributed across all xPOSITIONs.

Token Economics Model

Token information

Token information （Source: https://www.coingecko.com/en/coins/f-x-protocol）

f(x) Protocol’s native token is $FXN. The total supply is capped at 2 million, with 54.94% currently in circulation.[3]

Token Distribution

Token distribution（https://fxprotocol.gitbook.io/fx-docs/earn-with-f-x/usdfxn-tokenomics)

The $FXN token distribution is as follows:

• Liquidity incentives: 49%；
• Community contributors: 3%；
• Treasury reserves: 10%；
• IDO：5％；
• Testnet/Beta/IDO users: 0.5%；
• veCLEV holders: 0.25%；
• veCTR holders: 0.25%；
• AladdinDAO：30％；
• Initial liquidity: 1%；
• Strategic partnerships: 1%。

Token Unlocking Schedule

Token Unlocking（https://fxprotocol.gitbook.io/fx-docs/earn-with-f-x/usdfxn-tokenomics)

The unlocking of $FXN follows a structured timeline:

• Liquidity incentives: 5% released linearly in the first year, with a 10% annual decrease, completing the release over 50 years;
• Community contributors: Linear vesting over 12 months, spread across 3 years (Year 1: 1.5%, Year 2: 1%, Year 3: 0.5%);
• Treasury reserves: 24 months linear vesting;
• Testnet/Beta/IDO users: 12 months linear vesting;
• veCLEV holders: 12 months linear vesting;
• veCTR holders: 12 months linear vesting;
• AladdinDAO: Linear vesting over 24 months, followed by a lock-up period;
• Strategic partnerships: Linear vesting over 12 months.

Token Utility

$FXN operates under Curve’s ve token model. When locked, it generates $veFXN, with longer lock-up periods yielding more $veFXN.

For protocol income, after accounting for liquidity provider incentives, part of the earnings are distributed to $veFXN holders.

Token Economic Risks

Based on the release schedule for $FXN, the token unlocking rate is higher in the first 24 months and becomes slower afterward. After 24 months, nearly half of the total token supply will be unlocked.

The primary use case for $FXN is staking to earn a portion of the protocol’s earnings, which are distributed after deducting liquidity provider rewards. Aside from this, $FXN doesn’t have other significant utilities, so its performance on the demand side is similar to other DeFi protocol tokens, which often struggle to absorb the output from the supply side.

This situation leads to potential inflationary pressures, and $FXN may experience a consistent downward price trend, much like other tokens. For holders, the only way to offset losses from price depreciation is by staking to earn rewards.

Conclusion

f(x) Protocol has rapidly grown in the decentralized stablecoin market thanks to its innovative design. Key strengths include: no need for over-collateralization, maintaining the stability of fxUSD through its dual-token system (fxUSD and X-token); a diverse but isolated reserve structure that mitigates the risk of relying on a single asset while offering opportunities for arbitrage via multiple whitelisted liquidity staking tokens (LSTs); an innovative incentive model that rewards users with LST staking rewards and protocol stability incentives; and a streamlined yield system that provides efficient returns via stETH reserves and FXN token rewards.