The f(x) Flywheel
How Layered Yield Turns a Simple Stable Pool into a 113% Machine
Before we start
Please remember that this content is purely educational and informational in nature, and should not be considered financial advice.
I am NOT a financial advisor.
Before investing even a single dollar, make sure you fully understand what you’re doing and consider seeking guidance from qualified financial professionals.
Imagine a bar that opens with just one item on the menu: coffee.
At the beginning, the goal is not to impress anyone, but simply to survive. Coffee generates a minimal but stable cash flow. That money doesn’t make the bar extraordinary, but it does one fundamental thing: it allows the bar to stay open tomorrow.
After a while, the owner uses part of that cash flow to add a small novelty: a few pastries.
Pastries don’t replace coffee; they complement it. A customer who would have come in just for an espresso now spends a bit more. Revenue grows, even if only slightly.
With higher income, the bar can afford the next step: extending opening hours and introducing an aperitif service. At this point, something important happens. The bar no longer earns only in the morning, but also in the late afternoon. The different sources of revenue begin to work together.
Coffee brings people inside.
Pastries increase the average ticket size.
The aperitif introduces a new time slot.
The result is not a simple sum, but a multiplicative effect.
With more regular and diversified income, the bar can finally make an investment that was previously unthinkable: a dedicated bartender and a real cocktail service. Now the venue operates all day. Evening customers attract afternoon ones. Reputation grows. The bar becomes a destination, no longer just a place people pass through.
At this point, the dynamic has changed.
The bar doesn’t add new services because “things are going well today,” but because the combination of existing services generates enough surplus to finance the next step.
If the bar owner had simply set aside the modest profits from selling morning coffee, at best he might have been able to afford a simple vacation by the end of our story, rather than building an automatic mechanism capable of generating more solid returns. Not to mention that he would have always had to rely solely on himself and on his own ability to generate value.
Let’s apply this way of thinking to the world of finance, and in particular to decentralized finance. There is a term that captures this virtuous mechanism in DeFi: Flywheel.
Where the flywheel is
The flywheel is not the cocktail.
It’s not the coffee.
It’s not even the bartender.
It’s the mechanism by which:
every new source of revenue strengthens the existing ones,
surplus is not extracted, but reinvested,
and each rotation makes the next one easier and faster.
In the crypto world, the most interesting strategies work in the same way.
They don’t start with everything. They build a base, add yield layers, and use what the system produces to unlock the next level.
And today I want to talk about one flywheel in particular: the one created by the partnership between f(x) Protocol and Frax Finance, which makes it possible to achieve returns of up to 113% on a stablecoin pool.
How this flywheel works
The process starts by participating in the fxUSD/frxUSD pool available in the “Earn” section, which at the time of writing generates a yield between 23.37% and 58.43% (depending on how many veFXN you hold), paid in FXN.
The FXN produced this way (think of them as the coffee revenues in the example above) are then swapped for their liquid version on StakeDAO, sdFXN. This allows you to keep the yields and benefits of veFXN, while retaining the freedom to sell them at any time.
The vault allows you to earn:
18.19% APR in wstETH
between 14.59% and 36.46% APR in sdFXN (depending on how many veSDT you hold)
From here on, the flywheel begins.
The sdFXN obtained from the vault are reinvested back into the same vault, together with the FXN earned from the initial stablecoin pool, creating a snowball effect that gradually grows larger and eventually turns into an avalanche.
The wstETH, on the other hand, can be used as collateral to borrow additional fxUSD through the xMINT function, which can then be redeployed into the initial stablecoin pool.
If you want to learn more about the xMINT function, you can read the dedicated article here: https://substack.com/home/post/p-179458591
It’s also worth noting that until the end of the year, minting new stablecoins has zero opening cost, as well as zero maintenance cost.
In this way, all yields find a place within the cycle, contributing to the creation of our “flywheel”.
At this point, however, I’m sure you’re asking yourselves:
How did you get to 113%?
How much more convenient is the “flywheel” compared to simply compounding the fxUSD/frxUSD stablecoin pool by selling FXN for fxUSD and reinvesting them into the pool?
Before answering these questions, let’s start with a few assumptions that will simplify the calculations for both approaches (that is, we won’t attempt to predict price changes over the next year — no crystal balls or random numbers).
All calculations will assume:
FXN price fixed at $25 and ETH price fixed at $3,000 over the next year;
full access to the maximum APRs indicated in the strategy;
zero transaction costs for harvesting and redeploying capital, with operations performed every 15 days.
Flywheel development
Since the crypto motto should be “Don’t trust, verify!”, let’s verify whether that 113% figure is just a random big number. Let’s do it with a concrete example, starting from an initial investment of $10,000.
First, assuming APRs remain constant throughout the year, we need to calculate the APR for a single period (15 days) starting from the annual APR shown in the strategy.
The general formula is:
APRₚ = (APRᵧ × Dₚ) / Dᵧ
Where:
APRₚ = APR of the single period
APRᵧ = annual APR
Dₚ = number of days in the period
Dᵧ = number of days in the year
This gives us:
for the stablecoin pool: 2.43% APR per period
for the sdFXN yield in the StakeDAO vault: 1.52% APR per period
for the wstETH yield in the StakeDAO vault: 0.76% APR per period
We also assume an LTV (loan-to-value) of 75% for minting fxUSD through the xMINT function.
Let’s simulate the output
Period 0
fxUSD/frxUSD LP = $10,000
sdFXN = $0
wstETH = $0
USD debt = -$0
Period 1
fxUSD/frxUSD LP = $10,000
sdFXN = $243.46
wstETH = $0
USD debt = -$0
Period 2
fxUSD/frxUSD LP = $10,001.38
sdFXN = $243.46 + $243.46 = $490.92
wstETH = $1.85
USD debt = -$1.38
Period 3
fxUSD/frxUSD LP = $10,004.71
sdFXN = $490.92 + $243.49
wstETH = $1.85 + $3.70 = $5.56
USD debt = -$1.38 + -$2.77 = -$4.15
And so on, until reaching a situation like this:
In the end, the total return achieved is approximately 113% of the initially invested amount. As you can see, the position is heavily “pushed” by the effect of reinvesting FXN into the StakeDAO vault.
If instead we had sold the FXN earned for stablecoins and reinvested them into the pool, we would have achieved a more “modest” 79.2%.
The calculation is straightforward: just compute APY from APR:
APY = (1 + APR / p)ᵖ − 1
Strategy risks
As anticipated, we had to make many simplifications in order to arrive at a measurable result. These simplifications translate into risks (or opportunities).
The first risk comes from APR fluctuations, which may decrease or increase depending on pool saturation, FXN price, and the fees the protocol is able to collect.
FXN price itself is another variable to consider, as are gas fees, which could make early harvests and redeployments unprofitable.
There is also the risk that a substantial drop in ETH price could trigger a rebalance of the xMINT loan, reducing its overall value.
Finally, we must not forget smart contract risks (even if they are relatively remote, given the longevity of the two protocols involved).
In short, this is not exactly a “set-and-forget” strategy. It needs to be monitored and actively maintained over time.
Final Thoughts
If there’s one takeaway from this strategy, it’s that the 113% figure is not the point.
The real insight lies in the structure. What makes this setup interesting is not a single high APR, but the way multiple, otherwise ordinary, yield sources are connected and recycled into one another. Each component on its own is understandable. It’s their interaction that changes the outcome.
This is what a flywheel looks like in practice. Yield is not extracted and spent. It is reused. FXN feeds sdFXN. sdFXN produces wstETH. wstETH unlocks additional fxUSD. And fxUSD goes back to where everything started. The system doesn’t rely on a one-off opportunity, but on the accumulation of small advantages over time.
Of course, this doesn’t come for free. APRs fluctuate. Token prices move. Gas costs matter. Leverage introduces constraints. And smart contracts always carry risk. This is not a passive strategy, nor a guaranteed one. It rewards attention, discipline, and an understanding of where the flywheel accelerates—and where it might stall.
But as with the bar in our example, the goal is not to squeeze the system for short-term gains. It’s to let the system do more of the work over time. When yield starts funding the next layer of yield, compounding stops being just a mathematical formula and becomes a design choice.
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Stay safe, stay liquid,
✌️