True Freeze - Deep Dive

A deep look into True Freeze, a protocol that allows users to lock an EVM chain’s native asset out of circulation for their chosen length of time.

True Freeze is a protocol that allows users to lock an EVM chain’s native asset out of circulation for their chosen length of time. Launched last June 8, 2022, it is currently live on Ethereum-mainnet, hence as of now, only ETH can be locked (WETH to be specific). In exchange, users receive yield on their ETH up front in the form of frETH and NFTs representing their locked positions (Certificate of Deposit Freezer NFTs).  It is important to note that these NFTs are pegged 1:1 with the locked ETH and that frETH is not the pegged asset.

By providing this mechanism, True Freeze aims to solve two main problems: (1) the slippage and price impact that comes with trading ETH, and (2) the lack of a proper yield market for those that prefer to hold ETH and find current DeFI protocols too risky.

The following sections will go further into how exactly this protocol aims to solve the problems mentioned, its main components, tokenomics, and some data from its early stages of being live. WETH and ETH will be used interchangeably and will refer to the same asset unless otherwise specified.

What exactly are the problems that True Freeze aims to solve?

Slippage and Price Impact

When trading assets, specifically tokens, people are quoted a price for their trades or they have a target price for when the trade clears. However, as others are also buying and selling the same assets concurrently, it is possible that during a trade, this quoted or target price changes, possibly leaving people with less assets than they expected. This is known as slippage. In addition, as more trades occur, this also changes the price of the asset (price impact) leading to more people joining in on the buying and selling of assets depending on their price targets.

These two things occur as long as trades are made publicly so they both are present on centralized (e.g. Coinbase, FTX) and decentralized exchanges (e.g. Uniswap).

True Freeze addresses this by way of the Certificate of Deposit Freezer NFTs (Freezer NFTs). These NFTs represent the locked/deposited ETH in True Freeze which enables anyone to make bids on the underlying ETH.

Unless these NFTs are immediately redeemed for their underlying asset, these bids and eventual sales do not directly impact the underlying supply and price of ETH which means users avoid the negative effects of slippage and price impact.

Main caveat here is that compared to exchanges, NFT marketplaces usually charge higher for trades (2-2.5% vs 0.05-0.5%). These higher fees are not ideal for DeFi trades. Increasing market competition should bring down these fees but until then, True Freeze recommends marketplaces like nft.org which charges a fixed 0.001 ETH fee on sales.

A Market for Long-Term, Risk-Averse ETH Holders

The second problem is not as obvious as the first. True Freeze’s docs actually do a great job of explaining the ethos behind providing a market for long-term ETH holders. Basically while blue chip protocols like Compound, Aave, MakerDAO provide decent risk-adjusted rewards for ETH, a vast majority of ETH holders still find these DeFi protocols quite risky and are not willing to add on to the already relatively risky nature of ETH as an asset. In essence, long term holders put a higher value on ETH in the future compared to the yields they can get for it in the present. Effectively these users assign a higher time preference rate on ETH and True Freeze builds a market around this time preference by providing risk-minimized up front yields (frETH) to these users who lock in ETH long-term.

Through its design, True Freeze aims to minimize the common inherent risks in trying to earn yield for ETH in DeFi:

1. Migration Risk

The underlying smart contracts that make up True Freeze are immutable and cannot be changed after launch. It has no administrative or governance mechanisms that enable it to be upgraded.

2. Collateral Risk

True Freeze does not use the deposited assets as collateral for any lending or borrowing activities.

3. Liquidation Risk

Related to the previous point, True Freeze does not borrow against the deposited assets in the protocol.

4. Impermanent Loss

True Freeze does not use the deposited assets for liquidity provisions in trading pools.

5. Oracle Risk

True Freeze does not use any oracle to price any assets within the protocol.

Just like any protocol, True Freeze still has smart contract risk. It also uses Wrapped ETH so there is also smart contract risk related to that as well. Users are advised to exercise caution and understand these risks before using the protocol.

When locking ETH in True Freeze, users receive a Freezer NFT and frETH in return depending on how much they locked in and how long the locking period is. The max lock period is 3 years. Locking X amount of ETH for Y days gives you a Freezer NFT that has underlying value of X and frETH worth X * Y/365.

Ex: 2 ETH Locked for 3 years (~1,100 days) = 2 ETH Freezer NFT + 6 frETH

Certificate of Deposit Freezer NFTs (Freezer NFTs)

As mentioned earlier, Freezer NFTs represent the underlying locked ETH in True Freeze. These are like the NFTs that represent the positions of LP providers on Uniswap v3 with the main difference being that Freezer NFTs are tradeable and their pegged value cannot be changed.

A Freezer NFT holder can do the following things:

1. Redeem the underlying ETH before the maturity date wherein the user will have to pay:

I. Early redemption fees in frETH

  • If the redemption is made within the first 67% of the ETH locking period, the fees range from 1.20x to 1x of the frETH received from minting. At the final 33%, it ranges from 1x to 0 of the frETH received. In both instances, the fee rate falls every day but at different rates depending on the time to maturity.
  • 50% of the fees paid above the initial frETH received from minting the Freezer NFT goes to stakers of the FRZ token (more on this in the coming sections). The rest are burned.
  • Check out the True Freeze docs for the full calculation.

II. A penalty worth 0.25% of the underlying ETH paid in WETH (all goes to FRZ stakers)

2. Hold the NFT until maturity and redeem it for the underlying ETH

I. No early redemption fees and penalties incurred; meaning there is no frETH fee and no WETH % penalty.

II. Users earn the frETH yield they received upfront by holding the NFT until maturity.

3. Sell it on an NFT marketplace

As of today, there have been X Freezer NFTs minted, representing Y in underlying ETH. Of this, Z has been redeemed early worth A ETH. Check out the data on mints and redemptions.

Active vs Redeemed NFTs
Daily NFT Mints and ETH Value

Freezer-ETH Token (frETH)

frETH represents the users’ time-preference for ETH. If the Freezer NFTs are held to maturity, frETH serves as the upfront yield for long time holders. Effectively, these tokens also subsidizes the cost of making Freezer NFTs and as well the cost of selling these NFTs below their underlying ETH value.

As mentioned earlier, frETH is minted from locking ETH and creating Freezer NFTs. The value of frETH comes from (1) its role as the fee in making early Freezer NFT redemptions and (2) the mechanism that it can be burned to earn the inflation from the FRZ token supply.

Given that True Freeze was only launched recently, the current supply of frETH is still small.

frETH Daily Supply

You can also check the frETH/WETH liquidity pool on Curve here.

Freezer Revenue Token (FRZ)

This token behaves like True Freeze’s dividend-yielding asset. By staking the FRZ token, users are entitled to a portion of Freezer NFT early redemption fees and all of the penalties associated with early redemptions.

There is an initial supply of 100 million FRZ tokens distributed accordingly:

FRZ 100M Distribution (approx.)
  1. 42 million airdropped to ~230k Ethereum addresses
  2. 6 million to around 20 angels and interns who made initial contributions to the project since it was just a white paper
  3. 12 million allocated to 4 core developers; 8 million vesting over 2 years 4 million immediately available for staking
  4. 20 million allocated to Partner DAOs and Protocols serving as grants for their ongoing development as well as their possible contributions to the further development of the True Freeze ecosystem
  5. 20 million to help bootstrap the frETH/WETH pool on Curve, serving as liquidity incentives

As of today, there have only been 258k+ FRZ claimed from the airdrop, representing less than 1% of the total. These can be claimed on the True Freeze website where users can also check their eligibility. All unclaimed FRZ airdrop tokens will be burned by December 10, 2022.

In the first year of True Freeze, FRZ inflates at 10% and this rate falls by 1% until it reaches 2% annual inflation. This creates a 10-year Accumulation Phase for FRZ. You can check the full details here.

Related to this, FRZ can be earned in three ways:

  1. Burn frETH to get a proportional amount of FRZ inflation
  2. Provide frETH/WETH liquidity on Curve through FRZ incentives (pending a UI-update on Curve)
  3. Earn it from True Freeze’s Partner DAOs

Check out the list of partners here which is constantly being updated as more are identified. (Disclosure: MetricsDAO is a partner of True Freeze for ongoing analytics bounties)

How does True Freeze maintain its stability?

The True Freeze Flywheel

True Freeze and its related assets claim to have a “self-stabilizing tokenomics.” It is designed to absorb ETH’s volatility and the changing prices of frETH in order to keep providing decent yields to its users. The 7 core principles are as follows:

  1. Lower frETH prices (in ETH terms) means lower early withdrawal costs to access locked ETH.
  2. When early withdrawals cost less, more of them happen, leading to revenue to FRZ stakers.
  3. More revenue to FRZ stakers improves its price against frETH, so frETH is burned to earn FRZ.
  4. 1 frETH burned = 1 ETH confirmed locked for 1 year, reducing the circulation of ETH.
  5. As ETH's price is volatile, more early withdrawals happen when it is relatively high (to sell ETH high and rebuy it low).
  6. To withdraw ETH early requires frETH, so the price of frETH rises.
  7. When frETH rises, the benefits of locking ETH rises, so more people lock ETH and sell frETH; restarting the flywheel when frETH prices fall.

This banks on the fact that lower frETH prices pushes users to redeem their Freezer NFTs early which kickstarts the flywheel. True Freeze lays out the full breakdown here.

Conclusion: True Freeze’s Value Proposition

With its novel innovation of trading ETH as an NFT and upfront yield to long term ETH holders, True Freeze solves two problems at scale. First, it measures and prices the volatility and risk of ETH through tokenizing the belief that ETH in the future will be worth more than its value now and its yields. This is done through frETH, providing this as liquidity up front to long term ETH holders. These tokens also subsidizes the cost of making Freezer NFTs and as well the cost of selling these NFTs below their underlying ETH value.

Second, Freezer NFTs in themselves aim to address the negative effects of slippage and price impact on trading assets on public exchanges. This instrument effectively turns NFT marketplaces into over-the-counter trading platforms for the underlying asset. One just has to consider the marketplace selling fees and ensure they are using a platform fit for the NFT DeFi use case.

True Freeze is still in its early days given it only launched back in June 8, 2022. It is a protocol that is worth watching closely given the design choices it has made, especially with regards to removing any governance and admin functions. Time will tell if it can deliver on its promise by way of its design, incentive scheme, ecosystem of partners, and the future products that can be built on top of it.

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