The Frax Protocol is the first fractional-algorithmic stablecoin system. This is open-source, permissionless, and entirely on-chain – currently implemented on Ethereum (with possible cross chain implementations in the future). The end goal of the protocol is to provide a highly scalable, decentralized, algorithmic money in place of fixed-supply digital assets like BTC.
The Frax ecosystem has 2 stablecoins: (pegged to the US dollar) & FPI (pegged to the US Consumer Price Index). The Finance economy is composed primarily of the two stablecoins, a native AMM (Fraxswap), and a lending facility (Fraxlend).
Frax Finance Facts
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Core concepts to understand the unified Frax Finance ecosystem include:
Frax is the first and only stablecoin with parts of its supply backed by collateral and parts of the supply algorithmically stabilized. The stablecoin (FRAX) is named after this hybrid fractional-reserve system.
Fraxswap, a native AMM –
Fraxswap is the first AMM with time weighted average market maker orders used by the Frax Protocol for rebalancing collateral, mints/redemptions, expanding/contracting FRAX supply, and deploying protocol owned liquidity onchain.
Fraxlend, permissionless lending markets –
Fraxlend is the lending facility for the & FPI stablecoins allowing debt origination, customized non-custodial loans, and onboarding collateral assets to the Frax Finance economy.
Crypto Native CPI Stablecoin –
The end vision is to build the most important decentralized stable coins in the world. The Price Index (FPI) stable coin is the first stablecoin pegged to a basket of consumer goods creating its own unit of account separate from any nation state denominated money.
Four Tokens –
FRAX is the stablecoin targeting a tight band around $1/coin. The Share (FXS) is the governance token of the entire ecosystem of smart contracts which accrues fees, seigniorage revenue, and excess collateral value. FPI is the inflation resistant, CPI pegged stablecoin. FPIS is the governance token of the Frax Price Index and splits its value capture with FXS holders.
Gauge Rewards System –
The community can propose new gauge rewards for strategies that integrate The stablecoins. FXS emissions are fixed, halve each year, and entirely flow to different gauges based on the votes of veFXS stakers.
Frax Shares (FXS)
The Frax Share token (FXS) is the non-stable, utility token in the protocol. It is meant to be volatile and hold rights to governance and all utility of the system. It is important to note that they take a highly governance-minimized approach to designing trustless money in the same ethos as Bitcoin. They eschew DAO-like active management such as MakerDAO. The less parameters for a community to be able to actively manage, the less there is to disagree on.
Parameters that are up for governance through FXS include adding/adjusting collateral pools, adjusting various fees (like minting or redeeming), and refreshing the rate of the collateral ratio. No other actions such as active management of collateral or addition of human-modifiable parameters are possible other than a hardfork that would require voluntarily moving to a new implementation entirely.
The FXS token has the potential of upside utility and downside utility of the system, where the delta changes in value are always stabilized away from the token itself. FXS supply is initially set to 100 million tokens at genesis, but the amount in circulation will likely be deflationary as is minted at higher algorithmic ratios. The design of the protocol is such that FXS would be largely deflationary in supply as long as demand grows.
How Many FRAX and FXS Coins Are There in Circulation?
The supply of the FRAX stablecoin is dynamic and always changing to keep the price at $1 due to its fractional-algorithmic monetary policy. The supply of the Shares (FXS) tokens are hard capped to 100 million tokens at genesis with no inflation schedule in the protocol. The FXS token is the governance token which accrues all value of new minted , fees, and excess collateral. FXS is an investment and governance asset while is the currency token.
What Makes Frax Unique?
The Protocol is a community driven and unique design stablecoin. Over 60% of the supply of FXS is issued over a number of years to liquidity providers and yield farmers. It is an entirely decentralized protocol with governance on chain. It is also the first and only stablecoin to incorporate the fractional-algorithmic hybrid design at the time of its launch in November 2020.
Who Are the Founders of the Frax Protocol?
The Frax Protocol is the brainchild of American software developer Sam Kazemian who came up with the first idea of a fractional-algorithmic stablecoin in 2019.
The founding team of engineers includes Travis Moore and Jason Huan. Sam Kazemian originally devised the idea when he noticed that stablecoins were growing rapidly but none had any mixture of algorithmic monetary policy and collateralization. Projects that had purely algorithmic monetary policy had failed or shut down without any significant traction. Frax was designed as an answer to measure the market’s confidence in a partly algorithmic and partly collateralized stablecoin.
Where Can I Buy or Obtain FRAX and FXS?
The stablecoin, is available on many major exchanges and DeFi platforms like Uniswap and DEXes. The Shares (FXS) tokens are also available and as liquid as the stablecoin. Investors looking to purchase upside and governance rights to the world’s first fractional-algorithmic stablecoin should buy Shares (FXS). Users who want stability by using the world’s only fractional-algorithmic stablecoin should purchase FRAX.
They uses ideas from Uniswap and AMMs to build a novel hybrid stablecoin design never seen before. In a Uniswap pool, the ratio of asset A and B has to be proportional due to the constant product function. The LP token is just a pro rata claim on the pool + fees so it is usually increasing in value (if fees higher than impermanent loss) or loses value (if impermanent loss greater than fees). The LP token is just passive claims on the pool.
Frax takes that idea and turns it over to design a unique stablecoin. The LP token is the stablecoin,. It is the object of stabilization and always mintable/redeemable for $1 worth of collateral and the governance (FXS) token at the collateral ratio. This ratio of the two assets (collateral and FXS) dynamically changes based on the price of the stablecoin.
If the stablecoin price is dropping, then the protocol tips the ratio in favor of collateral and less in the FXS token to regain confidence in. An arbitrage opportunity arises for people wanting to put in collateral into the pool at the new ratio for discounted FXS which the protocol mints for this “recollateralization swap.” This recollateralizes the protocol to the new, higher collateral ratio.