Original source:Sam Kazemian, Founder of Frax Finance

Original compilation: Karen, Foresight News

Original compilation: Karen, Foresight News

As the LSD boom continues to heat up, the centralization of node operators has always been one of the major pain points that have been criticized.

Earlier this month, Sam Kazemian, founder of Frax Finance, revealed the construction method and features of frxETH v2, hoping to build an efficient decentralized LSD protocol.

Sam Kazemian believes that the underlying structure of all LSD protocols is a simple lending market, that is, lenders lend ETH and receive receipt tokens (LSD), and borrowers rent the right to run validators and pay lenders interest.

For example, Rocket Pool's "Stake ETH" product allows users to pledge ETH to obtain rETH, that is, lend ETH to obtain rETH, a receipt token; the "Stake + Run Node" product is to borrow 32 ETH to run the validator and send Lenders pay interest.

For another example, Lido's "Stake Ether" is equivalent to lending ETH to obtain stETH, which is similar to lending ETH and obtaining aETH on Aave. Currently, borrowers who run nodes on Lido require a license.

The obvious way to design the most decentralized general-purpose LSD protocol is to create a peer-to-pool lending marketplace. The lender's receipt token is LSD/stablecoin. Loan terms for borrowing validators need to be based on a maximum loan-to-value ratio LTV (similar to Aave or Compound).

In frxETH v2, users provide some small amount of ETH collateral (or other collateral approved by veFTX holders in the future) and borrow validators. Withdrawal addresses and all escrows are decentralized and immutable. Just like the DeFi lending market. Interest is paid directly from the user's ETH+PoS cash flow.

Rates are determined by the market and utilization. No hardcoded fees/commissions. If borrowing validators is cheap, node operators can validate, pay interest to lenders and keep spreads/MEV etc. For experienced node operators, the profits are more lucrative.

If interest rates spike and it's not profitable, just eject or pay off the debt. Remember, the debt is in validators, not in ETH. The user's loan-to-value ratio (LTV) is calculated as validator_value.div(collat_value+validator_value).

Sam Kazemian said, “This ensures that frxETH nodes become the highest performing operators in a decentralized manner, without whitelisting, KYC, and reputation requirements. frxETH v2 nodes will be at the top of the performance rankings, just like frxETH v1 validators in The highest ranking among all nodes in the history of PoS.”

But remember to make sure your LTV is healthy, otherwise you will be liquidated (that is, the validator is removed "eject").

If you get slashed or misbehave, your LTV goes up and some collateral is forfeited. If your collateral barely covers the debt, more must be provided or liquidated.

Sam Kazemian emphasized, “frxETH v2 is the most efficient decentralized lending market, an ETH stablecoin backed by validator debt, and a programmable LSD base layer.”

In addition, frxETH v2 has many innovations in the construction method, such as:

Idle ETH not in validators is sent to Curve AMO (Automated Market Operations) for liquidity and yield. Utilization also takes AMO ETH into account, so is self-rebalancing.

Beacon oracles are also fully decentralized with ZK proofs and no admin keys/multisig/EOA trust.