What is FRAX?

Frax Protocol is the first fractional algorithmic stablecoin system. Frax is open-source and permissionless, and it operates entirely on-chain. Currently implemented on the Ethereum blockchain, but cross-chain implementation is possible in the future. The ultimate goal of the Frax Protocol is to provide a highly scalable, decentralized algorithmic currency to replace fixed-supply digital assets like BTC. The governance token for Frax, Frax Shares (FXS), was launched in 2020, with a total supply of 100 million tokens.

The Team

Frax Finance was founded by American software developer Sam Kazemian between 2019 and 2020. He first proposed the idea of a fractional algorithmic stablecoin in 2019. Prior to this, he co-founded Everipedia, a for-profit online encyclopedia, with Theodor Forselius in December 2014.

Other founding members include Travis Moore and Jason Huan. Travis Moore is the Chief Technology Officer (CTO) of Frax Finance and also a co-founder and CTO of Everipedia, making him a long-term collaborator with Kazemian. Jason Huan is also a graduate of the University of California, Los Angeles, majoring in computer science. During his time at UCLA, he co-founded Blockchain, a student-run blockchain community focused on the technical and business aspects of blockchain applications.

How does Frax work?

Frax is a hybrid stablecoin that is backed by assets and supported by mathematical encryption algorithms. It is an open-source, permissionless, and fully on-chain protocol that operates on Ethereum (ETH) and other blockchains. It aims to provide highly scalable and decentralized algorithmic currency to replace fixed-supply digital assets like BTC.

The Frax protocol is a dual-token system consisting of the stablecoin FRAX and its governance token Frax Shares (FXS). FRAX is pegged to 1 US dollar algorithmically, and its collateral ratio is adjusted based on market demand to keep the price of FRAX at 1 US dollar instead of sticking to a predetermined ratio. When FRAX is above 1 US dollar, the platform decreases the collateral ratio by 0.25%. When FRAX is below 1 US dollar, the collateral ratio is further increased.

Frax Token - FXS

FXS is the value accrual and governance token for the entire Frax protocol, as all utilities are performed through FXS. Due to Frax's management team taking a highly governance-minimized approach, the functionality of FXS is limited to increasing or adjusting the collateral pool, adjusting various fees (such as minting or redemption), and refreshing the collateral ratio. The team believes that if the community can only actively manage limited parameters, dissent will be reduced.

The theoretical supply of FXS is set at 100 million tokens. However, given that FRAX is minted with a high FXS ratio, the amount in circulation is likely to be deflationary. This means that as demand for FRAX grows, the supply of FXS will gradually become scarce.

How does FRAX maintain its $1 peg?

There are two mechanisms that maintain the stability of the FRAX price: minting and redemption.

The FRAX stablecoin is minted by inserting a suitable amount of components into the system. When FRAX is fully collateralized at genesis, users only need to put collateral into the minting contract to mint FRAX. When FRAX enters the fractional phase, the minting of FRAX requires users to put in a portion of collateral and burn a portion of FXS. In short, the combination of collateral and FXS constitutes a FRAX. For example, at a 98% collateralization ratio, each FRAX minting requires $0.98 worth of collateral and $0.02 worth of FXS. Meanwhile, at a 97% collateralization ratio, these numbers become $0.97 and $0.03, respectively.

FRAX can always be minted and redeemed from the system for a value of $1, allowing arbitrageurs to balance the supply and demand of FRAX in the market. If FRAX is above the target price of $1, arbitrageurs and users can mint FRAX tokens worth $1 and sell them on the market for more than $1. The same applies when FRAX is below the target price of $1. Arbitrageurs and users can buy FRAX tokens cheaply in the market and redeem them from the platform for $1. However, it should be noted that redeemers will receive a combination of collateral and minted FXS coins.

So, what do you think of Frax Protocol and how will it impact the crypto industry? Let us know your thoughts in the comment section!

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Reference

• https://coinmarketcap.com/currencies/frax/
• https://moonbeam.network/community/projects/frax-finance/
• https://www.gemini.com/cryptopedia/frax-crypto-protocol-asset-backed-algorithmic-stablecoins
• https://www.wwsww.cn/xinbi/14036.html
• https://frax.finance/