What is the Frax Protocol?

In a cryptocurrency market ever familiar with volatility, continuous stablecoin innovation will remain necessary and noteworthy. Frax is the world’s first fractional-algorithmic stablecoin. This algo stablecoin was designed with stability, decentralisation and capital efficiency in mind.

Taking the best attributes of fiat-backed stablecoins and combining them with the best attributes of pure algorithmic stablecoins, a unique stablecoin was achieved, one that is a partially collateralised and partially algorithmically-stabilised.

The Frax Protocol follows a two token system involving FRAX and FXS. Partially collateralised stablecoin Frax (FRAX) is paired with governance token Frax Shares (FXS). Frax was launched in November 2020 on Ethereum, and it is currently pegged to the USD.

How does minting and stabilising work?

FRAX, the currency token, has a dynamic supply in keeping with the fractional-algorithmic monetary policy requiring the price to remain at $1, while FXS remains capped at 100 million. As the investment/governance asset, FXS accrues value of newly-minted FRAX, fees and excess collateral.

Naturally, both are required in order to mint FRAX. The ratio of collateralised and algorithmic will be determined by the market’s pricing of the FRAX stablecoin. If FRAX is trading at above $1, the protocol decreases the collateral ratio. On the other hand, if FRAX is trading at under $1, the protocol increases it. A ratio of 70% per cent would mean that $1 FRAX can be minted with $0.70 USDC and $0.30 FXS. The fact remains that 1 FRAX can always be redeemed for $1, so for the same 70% ratio FRAX is redeemable for $0.70 of USDC and $.30 of FXS.

The convertibility of FRAX guarantees its peg with USDC by utilising buy or sell pressure. When FRAX is below $1, arbitrageurs would buy FRAX, redeem them and get USDC and FXS in exchange. The FXS are sold, a profit is made and the buy pressure restores the peg. When the reverse happens, FRAX would be sold, a profit would be made, and this time it would be the sell pressure that restores the peg.

Fully on-chain oracles, such as Uniswap (ETH, USDT, USDC time-weighted average prices) and Chainlink (USD price) are utilised by Frax v1. FXS are minted and distributed by the protocol to liquidity providers in several Uniswap-incentivised pools such as FRAX/USDC, FRAX/WETH and FRAX/FXS.

A word on the Frax mission and its origins

The Frax Protocol is entirely open-source and community driven, aiming to provide a highly scalable and decentralised money in stark contrast to fix-supply assets such as BTC. In keeping with this outlook, it is naturally also public, i.e. permissionless, and completely on-chain.

Frax was founded by Sam Kazemian, an American software developer who is also the co-founder of Everipedia, a decentralised version of Wikipedia.

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