As the first DEFI project deployed on Fraxtal testnet, GalaxyCash has caught the attention of the Frax team and community. The testnet has been live for three days, but I believe, just like me, you'll find that while its testnet is user-friendly, its operating mechanism is quite hard to understand.

After reading hundreds of messages in the TG, it seems many people still don't fully understand the entire mechanism. Myself also had to read the whitepaper several times and practically engage with the testnet before I understood the subtleties of the entire system design. Today, I'll share my understanding, and I guarantee that after reading this, you'll have an epiphany.

I believe everyone has similar questions when they first read the whitepaper, just like I did. Once we resolve these questions, we'll fully understand the project.

The first question, what is TVL? How is compound interest calculated?

TVL represents your Total Locked Value,you can't claim it all at once but can claim 0.5% of your TVL daily.

Based on the official whitepaper, let's take a specific example to calculate using two different strategies:

Suppose, starting from February 2, 2024, you initially deposit 10,000 Frax. Since the daily interest of 0.5% only accumulates when at least 200 Frax is deposited, we adopt a strategy of depositing 200 Frax every week in a year. According to calculations, the annual TVL amounts to $91,301.47. The total investment is 10,000 + 10,400 = 20,400. The net profit is $70,901.47. The percentage profit is 347.6%.

Now suppose we adopt a strategy of no further deposits. if you claim all at once after 200 days, you can claim the original 10,000 Frax with no profit. If you claim on the 100th day, you can claim 10,000 * 0.5% * 100 = 5,000 Frax, making the TVL 5,000 Frax. If you want to withdraw all, it would take another 200 days: 5,000 * 0.5% * 200 = 5,000.

These two options show that each claim is a race against time, while each deposit is a friend of time. If you deposit for three years, the figures are staggering. Your investment would be 41,200 Frax, but your TVL would be $3,692,018.16. You could claim 0.5% daily, which is 18,460 Frax. Insane, right?

The second question: Where does the 0.5% interest come from? Is there a bubble?

Looking at the operation mechanism of GalaxyCash, first, to earn 0.5% interest, re-deposit is required. If there's no reinvestment, then the 0.5% is not interest but unlocking your own TVL. Suppose everyone deposits but does not reinvest; after 200 days, everyone withdraws their own deposit, meaning there is absolutely no bubble; of course, this situation is unlikely in actual game theory.

If you re-deposit, then the seemingly large daily interest of 0.5% is diluted by the reinvested funds and time. Even if you continuously reinvest and your TVL is very large, as long as new users deposit Frax, it is easy to cover your portion of the withdrawal. Sounds a bit like a Ponzi scheme, right? Let's analyze further.

Everyone's interest is paid in Frax. Frax cannot be created from nothing. At first glance, it only depends on later depositors to pay the earlier depositors' interest. However, in reality, the whole system is still creating income, which is the Cash tax system. In the short term, the interest earned by the people at the front is partly their own reinvestment and partly from the deposits of those behind. Another part is provided by the Cash system's taxation. Now let's analyze the tax system of GalaxyCash.

The third question: What is the tax mechanism of GalaxyCash?

The tax mechanism of GalaxyCash is the most ingenious part of the entire system. The real income generation of the entire system is from Cash taxation. Before understanding this tax mechanism, let's do a simple primer: the Cash token contract adopts a reflection token contract, meaning each transaction transfer automatically deducts a certain amount of tokens as a transaction tax, which according to the smart contract strategy is distributed to other token holders.

Here, each Cash transaction incurs a 10% transaction tax. Understanding this, let's see how the entire system relies on taxation as income.

Let's look at the token allocation in the whitepaper:

The blackhole account for 50%, which will never be unlocked, the DAO holds 24%, managed by the community, and POL holds 6%, meaning that essentially up to 80% of Cash is protocol-controlled. Since Cash is a reflective token, each transaction incurs a 10% tax, meaning approximately 8% of the tax is controlled by the protocol, most of which is used for adding liquidity and for user withdrawals.

Someone might wonder, why would I buy Cash if every transaction incurs a 10% tax? The interesting part here is, every time a user makes a deposit, 85% of it is used to buy Cash. Although there's a tax when buying, who can resist the temptation of a constantly rising K-line? The purchased Cash is also in the Treasury, used for future Frax redemptions.

Since the protocol controls most of the liquidity and Cash, there is virtually no selling pressure for Cash on the market. And because buyers of Cash can earn tax for passive income, their desire to sell is significantly reduced. Then the tax becomes the income of the entire system, maintaining its long-term operation.

The fourth question, if no one deposits or buys Cash anymore, will there be a run-like collapse like Luna?

Although this is unlikely to happen in reality, let's analyze what would happen? The answer is, it won't.

The reasons are as follows:

1. Since everyone unlocks their TVL at a rate of 0.5% per day, at this moment, the system no longer produces any extra bubbles. It would take at least 200 days to complete all the redemptions, giving the system a buffer time. If someone deposits within 200 days, it extends the redemption period;

2. The protocol controls the vast majority of liquidity, so there is no massive sell-off in the market;

3. The total amount of Cash is fixed, there is no infinite issuance;

4. Users' 85% deposit purchases Cash and is stored in the treasury. This part of the funds is always taxed, worth much more than when initially purchased. Even if Cash falls, it can maintain relative value;

5. The system also imposes Payout restrictions on each account, avoiding the impact of whales on the entire market.

The entire system is simply a genius design, outclassing Luna and Olympus.

The fifth question: Should you deposit Frax to earn 0.5% Daily interest, or buy Cash and hold for appreciation?

The real game of the entire system is actually very complex, it seems that early Frax deposits or Cash purchases are almost risk-free, but we still need to analyze a bit.

Firstly, about depositing Frax, before doing so, you must first develop a strategy, either not to deposit at all, or to have a plan for regular deposit. Just depositing without reinvesting not only yields no profit but also locks up your own liquidity, making you the weaker player in the game;

You could initially deposit a relatively large sum of money and then invest 200 Frax weekly, setting a one-year plan, with the final return rate as per the example above at 347.6%.

Next, about buying Cash, since the whitepaper mentions there will be an IDO, IDO details have not been disclosed, the GalaxyCash team has indicated that 50% of the funds from the IDO will be used to add initial liquidity, and 50% for initial deposits. If IDO participants hold steady, early buyers of Cash will likely gain good returns, as the initial deposit of Frax's 85% will be used to buy Cash, thus driving up the price of Cash. Of course, if early IDO participants have low costs and encounter massive sell-offs, they may not necessarily profit. People should DYOR.

Finally, some risk warnings:

• Team risk: GalaxyCash is an anonymous protocol, there is team risk;

• Smart contract risk: Any smart contract has code risks, although the team promises full open source, but still needs to do some research;

• Price fluctuation risk, the complex game can only be understood by actual operation. No one can guarantee immediate price increases upon buying.

In conclusion, The more people participate, the more complex the game becomes, and the more astonishing the scale grows. Once the flywheel starts spinning, it won't stop until it has absorbed all the Frax. DEFI or Ponzi? whatever, It will become a great social experiment.