Written by: Eze Kenechukwu and Joe_King

Type of Stable Coin: Frax is a hybrid Stablecoin, it is a fractional algorithmic stablecoin that is also partially backed by collateral and is also stabilized algorithmically.

Who’s behind the project: The project is owned by the Frax Finance DAO. Frax Finance was primarily formed in 2019 by Sam Kazemian, Travis Moore, and Jason Huan with the goal of developing a decentralized stablecoin that is not affected by Bitcoin’s price volatility. Sam and Travis previously collaborated on Everipedia, a blockchain knowledge store that functions similarly to an on-chain encyclopedia.

Reserve / Peg Mechanism:

The Frax Protocol modifies the collateral ratio during FRAX expansion and retraction by using Collateral Ratio. The protocol de-collateralizes (lowers the ratio) the system during times of expansion, requiring less collateral and more FXS to mint FRAX. This reduces the amount of collateral required to support all FRAX. The protocol re-collateralizes during times of retraction (increases the ratio). This raises the system’s collateral ratio as a percentage of FRAX supply, improving market trust in FRAX as its backing grows.

FRAX can always be minted and redeemed for $1 in the system. Arbitrageurs can use this to balance FRAX demand and supply on the open market. If the market price of FRAX is higher than the price objective of $1, an arbitrage opportunity exists to mint FRAX tokens by putting $1 of value into the system per FRAX and selling the minted FRAX for more than $1 on the open market.

A user must always put $1 worth of value into the system in order to mint new FRAX. The only difference is the percentage of collateral and FXS that makes up that $1 of value. If the market price of FRAX is less than $1, there is an arbitrage opportunity to redeem FRAX tokens by purchasing them on the open market for a low price and redeeming them for $1 in the system. A user can redeem FRAX for $1 worth of value from the system at any time. The only variation is the percentage of collateral and FXS repaid to the redeemer.

Reserve Assets / Mix: FRAX’s reserves are primarily made of accepted collateral used to mint Frax, the most preferred and widely used collateral being USDC, as well as other collateral, in addition to that FXS must be deposited as well to mint FRAX, currently the collateral ratio is 88.00% and the decentralization ratio is 28.20%, therefore more collateral is required to mint FRAX and less FXS is needed, considering that they are both needed to mint FRAX.

The Frax Finance protocol uses a significant portion of its treasury to gain liquidity for FRAX on Curve, and Convex Finance, as the largest holder of CRV, selects which Curve pools are rewarded with CRV emissions every 10 days. Frax owns 19% of CVX, giving them significant control over the Convex protocol, which can be regarded as a proxy for veCRV governance and the direction of future CRV emissions.

The Frax protocol also uses The Collateral Investor AMO (Algorithmic Market Operations) to invest idle USDC collateral into certain DeFi protocols that guarantee dependable yield, in addition to bootstrapping liquidity on Curve through metagovernance. Aave, Compound, and Yearn are among the integrated protocols currently available. As the collateral ratio changes, this AMO will automatically loan or reclaim collateral. The Collateral Investor AMO will automatically provide collateral to the aforementioned protocols to produce greater income on its USDC for veFXS holders as the collateral ratio falls and more of FRAX is algorithmically backed.

Where can it be used: Frax is primarily used on the Ethereum blockchain, however it is also available on Polygon. Frax can be used on the following protocols Uniswap, Curve, SushiSwap, IDEX, Spiritswap, TraderJoe, Solidly, SpookySwap, Apeswap, Sifchain, Gate.io, Paraswap, Balancer (Polygon), Hotbit etc.

Places to borrow or lend: You can lend FRAX on Aave for 0.9% and lend FRAX from Aave at 2.37% at the time of writing this.

Closing Comments: FRAX’s stablecoin design is innovative and extremely adaptive to developing circumstances.

Currently FRAX uses Collateral Based ratio to determine the algorithmic and collateral based composition of FRAX, but recently with the implosion of UST, there have been talks of switching from being collateral based to being credit based.

You can get more information on this from the discussion in the FRAX forum.

https://gov.frax.finance/t/fip-68-move-collateral-ratio-to-100-institute-credit-ratio/1371/22

By switching to a credit based mechanism, they can leverage all kinds of loans to back the stablecoin, preferably over collateralized loans, borrowing a feather from DAI. Considering the fact that at the time of writing this, this is still an ongoing conversation, therefore things will probably change before it is finally shipped. FRAX would be minted entirely out of depositing $USDC. When fresh $FRAX is minted, the protocol issues a short-term illiquid FRAX loan with a 10% Credit Ratio to earn interest; at the same time, an on-chain representation of this loan is established, with an additional module on the dashboard monitoring each new loan origination and its duration. Originally, loans could expire/renew on a three-day cycle, allowing for a short enough term to avoid an attack. The interest collected on lent FRAX could be used to purchase back $FXS and burn it or return it to veFXS stakers via TWAMM.

They also hope to leverage loans traditional companies, by bringing real world assets (RWA) on chain, a number of regulatory requirements come into play, if managed effectively this could see Frax becoming as stable as DAI, however if regulatory concerns for RWA are not managed effectively there could be serious problems down the road.

Written by: Eze Kenechukwu and Joe_King

Type of Stable Coin: Frax is a hybrid Stablecoin, it is a fractional algorithmic stablecoin that is also partially backed by collateral and is also stabilized algorithmically.

Who’s behind the project: The project is owned by the Frax Finance DAO. Frax Finance was primarily formed in 2019 by Sam Kazemian, Travis Moore, and Jason Huan with the goal of developing a decentralized stablecoin that is not affected by Bitcoin’s price volatility. Sam and Travis previously collaborated on Everipedia, a blockchain knowledge store that functions similarly to an on-chain encyclopedia.

Reserve / Peg Mechanism:

The Frax Protocol modifies the collateral ratio during FRAX expansion and retraction by using Collateral Ratio. The protocol de-collateralizes (lowers the ratio) the system during times of expansion, requiring less collateral and more FXS to mint FRAX. This reduces the amount of collateral required to support all FRAX. The protocol re-collateralizes during times of retraction (increases the ratio). This raises the system’s collateral ratio as a percentage of FRAX supply, improving market trust in FRAX as its backing grows.

FRAX can always be minted and redeemed for $1 in the system. Arbitrageurs can use this to balance FRAX demand and supply on the open market. If the market price of FRAX is higher than the price objective of $1, an arbitrage opportunity exists to mint FRAX tokens by putting $1 of value into the system per FRAX and selling the minted FRAX for more than $1 on the open market.

A user must always put $1 worth of value into the system in order to mint new FRAX. The only difference is the percentage of collateral and FXS that makes up that $1 of value. If the market price of FRAX is less than $1, there is an arbitrage opportunity to redeem FRAX tokens by purchasing them on the open market for a low price and redeeming them for $1 in the system. A user can redeem FRAX for $1 worth of value from the system at any time. The only variation is the percentage of collateral and FXS repaid to the redeemer.

Reserve Assets / Mix: FRAX’s reserves are primarily made of accepted collateral used to mint Frax, the most preferred and widely used collateral being USDC, as well as other collateral, in addition to that FXS must be deposited as well to mint FRAX, currently the collateral ratio is 88.00% and the decentralization ratio is 28.20%, therefore more collateral is required to mint FRAX and less FXS is needed, considering that they are both needed to mint FRAX.

The Frax Finance protocol uses a significant portion of its treasury to gain liquidity for FRAX on Curve, and Convex Finance, as the largest holder of CRV, selects which Curve pools are rewarded with CRV emissions every 10 days. Frax owns 19% of CVX, giving them significant control over the Convex protocol, which can be regarded as a proxy for veCRV governance and the direction of future CRV emissions.

The Frax protocol also uses The Collateral Investor AMO (Algorithmic Market Operations) to invest idle USDC collateral into certain DeFi protocols that guarantee dependable yield, in addition to bootstrapping liquidity on Curve through metagovernance. Aave, Compound, and Yearn are among the integrated protocols currently available. As the collateral ratio changes, this AMO will automatically loan or reclaim collateral. The Collateral Investor AMO will automatically provide collateral to the aforementioned protocols to produce greater income on its USDC for veFXS holders as the collateral ratio falls and more of FRAX is algorithmically backed.

Where can it be used: Frax is primarily used on the Ethereum blockchain, however it is also available on Polygon. Frax can be used on the following protocols Uniswap, Curve, SushiSwap, IDEX, Spiritswap, TraderJoe, Solidly, SpookySwap, Apeswap, Sifchain, Gate.io, Paraswap, Balancer (Polygon), Hotbit etc.

Places to borrow or lend: You can lend FRAX on Aave for 0.9% and lend FRAX from Aave at 2.37% at the time of writing this.

Closing Comments: FRAX’s stablecoin design is innovative and extremely adaptive to developing circumstances.

Currently FRAX uses Collateral Based ratio to determine the algorithmic and collateral based composition of FRAX, but recently with the implosion of UST, there have been talks of switching from being collateral based to being credit based.

You can get more information on this from the discussion in the FRAX forum.

https://gov.frax.finance/t/fip-68-move-collateral-ratio-to-100-institute-credit-ratio/1371/22

By switching to a credit based mechanism, they can leverage all kinds of loans to back the stablecoin, preferably over collateralized loans, borrowing a feather from DAI. Considering the fact that at the time of writing this, this is still an ongoing conversation, therefore things will probably change before it is finally shipped. FRAX would be minted entirely out of depositing $USDC. When fresh $FRAX is minted, the protocol issues a short-term illiquid FRAX loan with a 10% Credit Ratio to earn interest; at the same time, an on-chain representation of this loan is established, with an additional module on the dashboard monitoring each new loan origination and its duration. Originally, loans could expire/renew on a three-day cycle, allowing for a short enough term to avoid an attack. The interest collected on lent FRAX could be used to purchase back $FXS and burn it or return it to veFXS stakers via TWAMM.

They also hope to leverage loans traditional companies, by bringing real world assets (RWA) on chain, a number of regulatory requirements come into play, if managed effectively this could see Frax becoming as stable as DAI, however if regulatory concerns for RWA are not managed effectively there could be serious problems down the road.