Here is what we are going to cover:

• A short primer on $FRAX stablecoin

• Collateral ratio mechanics

• Minting and Redemption of $FRAX

• Arbitrage

This is an addition to Fundamentals on Stablecoin Mechanics & Variants published earlier. These are some concepts that seem very simple but when we look from a flywheel perspective they help in questioning the value flow in the FRAX ecosystem and how everything leads to adding value to $FXS tokens.

If this simple reading layout doesn’t excite you, you could scroll down to consume the same content as if it were a magazine.

⚠ Disclaimer: All information presented here is my perspective and should be considered educational content. I won’t be responsible for any kind of financial profits or losses derived from your decisions. Financial and investment advice

Earlier algorithmic stablecoins assumed that the audience is ready to digest the concept of fully algorithmically backed stablecoin on the other side, past algorithmic stablecoins didn’t perform as per expectations either.

Similar to a collateralized debt position model, $FRAX was initiated as a fully collateralized stablecoin with the goal of achieving full algorithmic stability.

$FRAX is a partially collateralized stablecoin right now and the portion of $FRAX that is collateralized is known as the collateral ratio.

Here is something from the FRAX document

Although there are no predetermined timeframes for how quickly the number of collateralization changes, we believe that as FRAX adoption increases, users will be more comfortable with a higher percentage of FRAX supply being stabilized algorithmically rather than with collateral.

Collateral ratio (CR) is dynamic and is changed depending on the demand for $FRAX, it can be considered as a way to gauge the confidence of users.

The CR is altered once an hour through a PID controller. Earlier human interference was needed in order to initiate the function to alter the CR but now it is automated through the controller.

PID controller alters the CR based on the past market data: FXS market cap and FRAX circulating supply. PID is covered in depth in one of the upcomming article.

In the scenarios where the demand for FRAX increases, the CR is lowered.

People believe that a fully backed stablecoin offers much more safety and security than an algorithmic one. When people are comfortable holding/using their stablecoins, naturally the demand would increase (provided there is better use).

This is the exact scenario when FRAX tries to gauge the confidence of users by lowering the CR. The same goes for the condition when the demand for FRAX is decreased, CR will be increased.

These changes in CR can be done once an hour for about 0.25% in either direction.

Lowered CR will result in FRAX being more backed by FXS. Thus more FXS will be used in minting and redemption of FRAX.

FRAX can always be traded with the Frax finance for a value of $1, making the system open for arbitrageurs to maintain the price pegged to 1 USD. This opens up an opportunity window for the arbitrageurs whenever the price moves away from the $1 mark.

Frax finance always values $FRAX at $1 so, minting and redeeming can be executed at $1 on Frax finance.

The stability of price depends heavily on the arbitrage opportunities in the secondary market:

The supply is adjusted through minting or burning FRAX in response to the market demand to stabilize the price. It turns out to be a profitable trade to execute the arbitrage and the protocol benefits from this as well.

The profits earned by the arbitrageurs directly come from the unrealized profits or losses made on the liquidity in the pool, making it a zero-sum game.

As the fractional-algorithmic phase (the phase where the collateral ratio is <100%) began, minting $FRAX requires placing the appropriate ratio of stable collateral and $FXS, once the $FRAX is minted, $FXS received by the protocol for minting $FRAX is burned.

For example, in a 98% collateral ratio, every $FRAX minted requires $0.98 of stable collateral and $0.02 of $FXS ($0.02 the worth of $FXS will be burned as soon as the $FRAX is minted).

Redemption of $FRAX will get executed in a similar fashion. For example, in a 98% collateral ratio, every $FRAX can be redeemed for $0.98 of collateral and $0.02 of freshly minted FXS.

Whenever minting or redemption of $FRAX takes place, $FRAX tokens are entitled to the current collateral ratio irrespective of the collateral ratio they were minted at.

Thank you for being here.

You can provide the same value by sharing this article with your circle.

You could even contribute/support these articles by owning one ✌.

Thank you for being here.

You can provide the same value by sharing this article with your circle.

You could even contribute/support these articles by owning one ✌.

Here is what we are going to cover:

• A short primer on $FRAX stablecoin

• Collateral ratio mechanics

• Minting and Redemption of $FRAX

• Arbitrage

This is an addition to Fundamentals on Stablecoin Mechanics & Variants published earlier. These are some concepts that seem very simple but when we look from a flywheel perspective they help in questioning the value flow in the FRAX ecosystem and how everything leads to adding value to $FXS tokens.

If this simple reading layout doesn’t excite you, you could scroll down to consume the same content as if it were a magazine.

⚠ Disclaimer: All information presented here is my perspective and should be considered educational content. I won’t be responsible for any kind of financial profits or losses derived from your decisions. Financial and investment advice

Earlier algorithmic stablecoins assumed that the audience is ready to digest the concept of fully algorithmically backed stablecoin on the other side, past algorithmic stablecoins didn’t perform as per expectations either.

Similar to a collateralized debt position model, $FRAX was initiated as a fully collateralized stablecoin with the goal of achieving full algorithmic stability.

$FRAX is a partially collateralized stablecoin right now and the portion of $FRAX that is collateralized is known as the collateral ratio.

Here is something from the FRAX document

Although there are no predetermined timeframes for how quickly the number of collateralization changes, we believe that as FRAX adoption increases, users will be more comfortable with a higher percentage of FRAX supply being stabilized algorithmically rather than with collateral.

Collateral ratio (CR) is dynamic and is changed depending on the demand for $FRAX, it can be considered as a way to gauge the confidence of users.

The CR is altered once an hour through a PID controller. Earlier human interference was needed in order to initiate the function to alter the CR but now it is automated through the controller.

PID controller alters the CR based on the past market data: FXS market cap and FRAX circulating supply. PID is covered in depth in one of the upcomming article.

In the scenarios where the demand for FRAX increases, the CR is lowered.

People believe that a fully backed stablecoin offers much more safety and security than an algorithmic one. When people are comfortable holding/using their stablecoins, naturally the demand would increase (provided there is better use).

This is the exact scenario when FRAX tries to gauge the confidence of users by lowering the CR. The same goes for the condition when the demand for FRAX is decreased, CR will be increased.

These changes in CR can be done once an hour for about 0.25% in either direction.

Lowered CR will result in FRAX being more backed by FXS. Thus more FXS will be used in minting and redemption of FRAX.

FRAX can always be traded with the Frax finance for a value of $1, making the system open for arbitrageurs to maintain the price pegged to 1 USD. This opens up an opportunity window for the arbitrageurs whenever the price moves away from the $1 mark.

Frax finance always values $FRAX at $1 so, minting and redeeming can be executed at $1 on Frax finance.

The stability of price depends heavily on the arbitrage opportunities in the secondary market:

The supply is adjusted through minting or burning FRAX in response to the market demand to stabilize the price. It turns out to be a profitable trade to execute the arbitrage and the protocol benefits from this as well.

The profits earned by the arbitrageurs directly come from the unrealized profits or losses made on the liquidity in the pool, making it a zero-sum game.

As the fractional-algorithmic phase (the phase where the collateral ratio is <100%) began, minting $FRAX requires placing the appropriate ratio of stable collateral and $FXS, once the $FRAX is minted, $FXS received by the protocol for minting $FRAX is burned.

For example, in a 98% collateral ratio, every $FRAX minted requires $0.98 of stable collateral and $0.02 of $FXS ($0.02 the worth of $FXS will be burned as soon as the $FRAX is minted).

Redemption of $FRAX will get executed in a similar fashion. For example, in a 98% collateral ratio, every $FRAX can be redeemed for $0.98 of collateral and $0.02 of freshly minted FXS.

Whenever minting or redemption of $FRAX takes place, $FRAX tokens are entitled to the current collateral ratio irrespective of the collateral ratio they were minted at.

Thank you for being here.

You can provide the same value by sharing this article with your circle.

You could even contribute/support these articles by owning one ✌.

Thank you for being here.

You can provide the same value by sharing this article with your circle.

You could even contribute/support these articles by owning one ✌.