Share Dialog
Share Dialog
Subscribe to zloijopa.eth
Subscribe to zloijopa.eth
Onchain governance, but with no voting required to pass proposals ❎ 🗳️ In Optimistic Dual Governance on Aragon OSx, proposals pass automatically after a timelock if not vetoed. Proposers must be on a preset allowlist, keeping your DAO secure. https://aragon.org/how-to/use-optimistic-dual-governance
That's a great concept used by some DAOs, such as Frax Finance, to ensure that crucial proposals aren't hindered by voter apathy. While it's an effective solution, we still need to focus on increasing voter engagement in important proposals so members feel a sense of responsibility for the protocol and the community. A little bit about Frax Finance governance is here: https://paragraph.xyz/@zloijopa.eth/goverland-about-frax
<100 subscribers
<100 subscribers
Let's talk simply about FRAX. Not sure if it is possible, but it's worth a try 🙂
I will explain things from my perspective; this article is not financial advice and please do your research before investing. I hope it will help newbies understand that everything is not that hard when you use analogies and simplify terms.
FRAX is a protocol that invented an algorithmic stablecoin, which survived hard times that many other protocols didn’t. Nowadays FRAX is a fully collateralized stablecoin and moved from algo-coin design. Read till the end to know more.
We all know that the most stable unit right now is the USD. And it was a bar of gold before. So, by stable, we mean something which has the same value at the time of buying and selling.
The idea is that if we want stability in the crypto world, we need a stablecoin. A stablecoin is where each coin maintains the same value over a long (preferably indefinite) period. This ensures that usual operations like lending, buying, exchanging, and paying salaries remain stable.
In a nutshell, in Web3, there were two types of stablecoins:
Collateralized Coins: These are backed by real assets like USD.
Algorithmic Coins: These use rules-based systems to automatically buy, sell, or mint coins to maintain a stable price.
Fully collateralized coins are similar to traditional finance but often lack liquidity, which has slowed the growth of these protocols.
Imagine we have a bakery in a small village. The bakery sells a Stable Cookie for $1. You can also return your cookie (yes, this recipe allows cookies to last forever ) and get your $1 back. For this to be possible with fully collateralized stablecoins, every $1 from each cookie sold is put in a pot to be able to give it back if someone wants to return their cookie.
Liquidity is the ability to buy or sell cookies quickly without affecting the price. If we want to sell a lot of cookies, the price can drop, and if we want to buy too many cookies, the price will rise. The idea of stability fails if the price becomes unstable. We will lose the trust of our villagers in the cookies. Worse yet, what if we cannot bake as many cookies as the market needs? Or what if nobody wants to use our cookie as a $1 equivalent? These factors can lead to problems in our cookie market, resulting in a lack of ability to buy or sell the cookies.
Due to these factors, collateralized stablecoins grew slowly to ensure the balance of all these elements.
Fully algorithmic coins are more risky and volatile, with tricky backing mechanisms, leading some projects to fail (e.g., USD Terra).
Returning to our Stable Cookie analogy, we have a smart machine in the bakery that can automatically adjust cookie supply and recipe based on demand. If more people want to buy Stable Cookies, the machine dynamically changes to produce more cookies. Conversely, if fewer people want them, the machine reduces the number of cookies produced, even by destroying (burning) them.
Where does the USD come from when selling back the cookie? It's a very valid question. Let's say that baking one cookie costs $0.90. This means $0.10 can be put into a reserve fund, called seigniorage. Seignorage also can be used to share profit with cookie holders. This isn't enough if many people want to sell their cookies at the same time. But our amazing machine has more properties than we initially thought. It can partner with different bakeries and other towns to sell and buy other cookies or even Buns they produce, earning money on the market. If our cookies cost more than $1, our machine will sell them in an open flea market in the big town to gain profit and put it in the reserve fund. If villagers believe in our Stable Cookies, they can invest in the bakery, get a percentage of its profit, and help maintain the liquidity of the cookies at the same time.
Then FRAX entered the crypto world — the first partly collateralized and partly algorithmic token. Initially, 1 FRAX = $1. But as the protocol grew, FRAX added algorithms in very small steps to maintain stability. Just 0.25% per iteration to reduce the real backing asset - USD. This is a pegged under-collateralized mechanism where the stablecoin is partly backed by USD and partly by an algorithm.
Imagine our bakery introduces a Special Cookie called the "FRX Cookie," which uses real USD to help maintain a price of $1. The bakery has a smart machine (algorithm) that adjusts the supply of these cookies based on their price.
When the FRX Cookie costs less than $1, the machine either reduces the number of cookies on the market or increases the amount of USD backing each cookie to bring the price back to $1. Conversely, when the FRX Cookie costs more than $1, the machine can increase the supply of cookies to lower the price or burn cookies.
The bakery uses a Collateral Ratio (CR) to decide how much USD to keep in reserve. Collateral ratio is the amount of money or assets that must be held in reserve to back the value of our cookie and ensure its stability. A higher CR means the FRX Cookie is backed by more USD, making it more stable. A lower CR means it relies more on the smart machine's adjustments. If the market is unstable, the bakery increases the CR to stabilize the price. If the market is stable, the bakery lowers the CR to allow more cookies to be issued.
If the CR changes, the bakery needs to adjust the USD reserves. For example, if the CR increases from 0.8 to 0.9 for 100 FRX Cookies, the bakery needs more USD. They sell some special vouchers called FXS to get the extra USD. This process is called Recollateralization. If the CR decreases, the bakery has extra USD, so they buy back the FXS vouchers from the market and burn them. This is called the Buyback mechanism.
The FXS token (or special voucher) plays a crucial role in this system. When the bakery needs more USD to back the FRX Cookies, it sells FXS vouchers at a slightly lower price to attract buyers who will provide the necessary USD. When there is excess USD in reserve, the bakery buys back these vouchers and destroys them, maintaining the balance in the system.
By adjusting the CR and managing the supply of USD and cookies, along with the strategic use of FXS tokens, the bakery ensures that the FRX Cookie remains stable and trusted by the villagers.
These are all stories of the old days — and in crypto, the old days mean just a few years ago. Now there are fully algorithmic, over-collateralized, and mixed stablecoins, which are okay (for now 🙂). Who knows what the future holds for us?
Nowadays, FRAX has reached a point where the community decided to fully collateralize the token. FRAX V3 achieved a target collateral ratio (CR) of the Frax protocol to 100%. This means that every FRAX is backed by $1.
FRAX is now even more interesting for the market and investments. Let's quickly see why!
The ecosystem of FRAX is remarkable. To simplify, I would divide it into three parts:
Stablecoins
AMOs (Algorithmic Market Operations): Deployed outside and inside the FRAX ecosystem with the same goals as its own protocols.
FRAX's Own DeFi Protocols: We will not explore them in this article. Understanding the mechanisms of Stablecoins and AMOs is essential to comprehending FRAX, although their DeFi protocols are closely related to AMOs.
The basics are three stablecoins:
FRAX Stablecoin We explored this coin in the previous section. It is a fully USD-pegged asset with 100% collateral ratio now. There will be no more minting of FXS to get FRX, and FXS will just stay as a governance token in the end.
Frax Price Index (FPI) Stablecoin The first stablecoin pegged to a basket of consumer goods. FPI is backed by other cryptocurrencies, such as FRAX for now, and will be backed by others in the future. FPI has its own governance token - FPIS, which is interconnected with FXS. This is probably the most interesting case right now: FPI aims to track inflation and always maintain the same value as it was on the day you minted/bought it. And this means a lot.
Imagine our bakery introduces a new cookie called the "FPI Cookie." Unlike the FRX Cookie, which is always worth $1, the FPI Cookie adjusts its price based on the cost of living in the village. It's like having a cookie that keeps up with inflation.
The bakery's smart machine monitors the prices of various goods and services in the village. If the cost of living goes up, the price of the FPI Cookie increases. If the cost of living goes down, the price of the FPI Cookie decreases. This ensures that the FPI Cookie always reflects the real value needed to maintain your standard of living.
The FPI Cookie is initially backed by FRX Cookies. As the bakery expands, it will start to include other assets like BTC, ETH, and even non-crypto goods and services in its reserve. This diverse backing helps maintain the stability and trust in the FPI Cookie.
If the cost of living changes, the smart machine adjusts the supply of FPI Cookies to keep their value stable. If prices rise, the machine can create more FPI Cookies to match the new value. If prices fall, the machine reduces the supply of FPI Cookies.
This way, the FPI Cookie helps villagers maintain their purchasing power, no matter how prices change in the village. The FPI Cookie, backed by a mix of FRX Cookies and other valuable assets, ensures that its value remains consistent with the cost of living.
I am personally fond of this system. Having DAOs treasury in the FPI stablecoins means the value will keep up with inflation. What is even cooler - you can track how your treasury really grows, adjusted for inflation. Why isn't everyone already using it?
A unique feature of the ecosystem is the interconnection between governance coins like FXS and FPIS. Both are entitled to seigniorage, which means holders can benefit from the system's profits. Since FXS and FPIS are interconnected, holding FXS allows you to receive seigniorage from FPIS as well, enhancing the value proposition and incentivizing participation in the governance and stability of the system.
Where does seigniorage come from? Let's learn from the mystery of AMOs:
AMOs (Algorithmic Market Operations) are very similar to the usual banking system but led by algorithms, aka contracts.
These robotic functions play winning games on different markets to gain profit while keeping the coin stable. They invest, lend, and integrate with Curve, Uniswap, and other platforms, aiming to expand more.
So, AMO is a set of rules, carefully prepared to operate without human involvement. Just remember our cookie machine. I won't explain each protocol, but we can look into the Curve AMO to understand the basics:
Convex Finance is a decentralized exchange (DEX), which is like a special marketplace designed for trading stablecoins and similar assets. It allows people to swap these assets with very low fees and minimal price changes during the trade. In this context, the Curve AMO is a set of smart rules that control these trades automatically. This means all the buying and selling happens on its own, without people needing to constantly manage it. This automation makes the system faster and better at responding to changes in the market.
Automatically adding liquidity (funds) to Convex Finance pools. This helps the protocol earn fees and rewards from the trading activity on Curve.
Efficiently managing FRAX reserves, ensuring there is enough liquidity and stability in the system.
The protocol can earn yield (interest or rewards) on its assets by providing liquidity to Convex. This helps increase the overall value and efficiency of the protocol.
And don't forget to check other AMOs in the FRAX Docs and explore the whole ecosystem evolution with Fraxlend, Fraxferry, etc.
Finally, let’s have a quick look at FRAX governance.
The main thing needed to participate in governance here is Frax Share - FXS (Frax Share) or FPIS (Frax Price Index Share), as we learned before.
FXS is both a staking token and a governance token. This means that the more FXS you have, the greater your voting power. FXS holders' voting power corresponds to the number of tokens they hold. However, to utilize it as a benefit and voting mechanism, you need to stake it within the FRAX system, at which point it becomes veFXS.
The staking mechanism is another interesting aspect: when you stake your tokens, you essentially deposit them and refrain from using them as currency or for any other purpose. Staking functions as collateral, helping the protocol to maintain stability, liquidity, and trust. In return, stakeholders may receive benefits and participate in decision-making processes. For instance, in FRAX, you can stake your tokens for up to four years. The more tokens staked for a longer duration, the more stable and trustworthy FRAX becomes.
FRAX Governance is quite simple if you understand what is happening there. Since FRAX operates largely by algorithmic models, there are usually very standard proposals made weekly. After this article, just visit the Snapshot or Goverland App and check that out. You will see proposals about setting new rules for the AMOs, adding new vaults, allocating liquidity, adding new markets, etc. Very rarely are proposals crucial. Though some are such as when I mentioned in the FRAX V3 section above about full collateralization of FRAX by real assets.
Although here is one tricky part I wanted to share with you:
For example, in FRAX Snapshot it can be weird: why is there always weighted voting and not just yes or no choices? Can I be 70% yes and 30% no? Is it made for uncertain people? My anxiety is rising after these questions.
But here is a very simple explanation: FRAX DAO has major token holders, for example, due to the AMOs we mentioned earlier. As AMOs are implemented on other protocols, which are outside of the FRAX ecosystem, there are people who use those protocols while still interacting and holding FRAX and FXS. And we are coming back to a Convex Finance.
Let's check one proposal as an example of the voting structure, made on Frax Finance: [FIP - 353] Shut down Convex.
It's a hot topic: shutting down Convex FRAX rETH/frxETH for an 8,300 FRAX fee. The discussion is buzzing, and you can feel the tension. Voting is done by a weighted system, which might sound complex, but here’s where it gets interesting.
The new proposal was made on Frax Finance Snapshot space, finishing on 30th of April. The same proposal was made to Convex Finance Snapshot space, finishing on 28th of April. We see that voting at Convex finishes earlier. These 2 days give Convex Finance enough time to cast a vote on the Frax Finance Snapshot Space. So that's how Convex Finance can cast the vote in the same proportion it happened inside their governance space. That's why a weighted voted system is implemented in Frax Finance.
This layered voting process not only keeps things democratic but also adds a strategic twist to governance. The amount of tokens staked in Convex is obviously the biggest, giving them the status of a whale. But in reality, it is split in Convex shares. Watching the votes come in, you realize how interconnected and dynamic the whole system is.
I would like to go further and get an idea of whales in Convex but thats all for today, folks.
The way FRAX is run gives power to its users through a fair voting system using FXS and FPIS tokens.
For investors, FRAX offers a lot of potential. The tokens connected to its governance can earn extra profits. The system uses smart rules (AMOs) to manage money effectively and ensure good returns. With new features like FPI and frxETH, FRAX is a great investment opportunity in the cryptocurrency world. Investing in FRAX can be both rewarding and educational, making it a good choice for both experienced and new investors.
Just don't forget to do research as I am not a financial advisor and will show this sentence at the court 😆 And never invest your last or borrowed money without proper consideration. Anon.
Almost forgot to include some cool links for you to check out:
FRAX Finance official docs: https://docs.frax.finance/
Flywheel educational series on FRAX (they got funding for this through proposal and FRX holders voted "for"): https://flywheeldefi.com/frax-101
Goverland app is a user-friendly tool for voting and DAO insights: https://www.goverland.xyz/
Cool explanation about stablecoins: https://topco.medium.com/stablecoins-collateralized-vs-algorithmic-4935c1266156
Terra USD collapse: https://www.coindesk.com/learn/the-fall-of-terra-a-timeline-of-the-meteoric-rise-and-crash-of-ust-and-luna/
Stablecoins Instability article: https://www.moodys.com/web/en/us/about/insights/data-stories/stablecoins-instability.html
Snapshot votes we talked about:
Let's talk simply about FRAX. Not sure if it is possible, but it's worth a try 🙂
I will explain things from my perspective; this article is not financial advice and please do your research before investing. I hope it will help newbies understand that everything is not that hard when you use analogies and simplify terms.
FRAX is a protocol that invented an algorithmic stablecoin, which survived hard times that many other protocols didn’t. Nowadays FRAX is a fully collateralized stablecoin and moved from algo-coin design. Read till the end to know more.
We all know that the most stable unit right now is the USD. And it was a bar of gold before. So, by stable, we mean something which has the same value at the time of buying and selling.
The idea is that if we want stability in the crypto world, we need a stablecoin. A stablecoin is where each coin maintains the same value over a long (preferably indefinite) period. This ensures that usual operations like lending, buying, exchanging, and paying salaries remain stable.
In a nutshell, in Web3, there were two types of stablecoins:
Collateralized Coins: These are backed by real assets like USD.
Algorithmic Coins: These use rules-based systems to automatically buy, sell, or mint coins to maintain a stable price.
Fully collateralized coins are similar to traditional finance but often lack liquidity, which has slowed the growth of these protocols.
Imagine we have a bakery in a small village. The bakery sells a Stable Cookie for $1. You can also return your cookie (yes, this recipe allows cookies to last forever ) and get your $1 back. For this to be possible with fully collateralized stablecoins, every $1 from each cookie sold is put in a pot to be able to give it back if someone wants to return their cookie.
Liquidity is the ability to buy or sell cookies quickly without affecting the price. If we want to sell a lot of cookies, the price can drop, and if we want to buy too many cookies, the price will rise. The idea of stability fails if the price becomes unstable. We will lose the trust of our villagers in the cookies. Worse yet, what if we cannot bake as many cookies as the market needs? Or what if nobody wants to use our cookie as a $1 equivalent? These factors can lead to problems in our cookie market, resulting in a lack of ability to buy or sell the cookies.
Due to these factors, collateralized stablecoins grew slowly to ensure the balance of all these elements.
Fully algorithmic coins are more risky and volatile, with tricky backing mechanisms, leading some projects to fail (e.g., USD Terra).
Returning to our Stable Cookie analogy, we have a smart machine in the bakery that can automatically adjust cookie supply and recipe based on demand. If more people want to buy Stable Cookies, the machine dynamically changes to produce more cookies. Conversely, if fewer people want them, the machine reduces the number of cookies produced, even by destroying (burning) them.
Where does the USD come from when selling back the cookie? It's a very valid question. Let's say that baking one cookie costs $0.90. This means $0.10 can be put into a reserve fund, called seigniorage. Seignorage also can be used to share profit with cookie holders. This isn't enough if many people want to sell their cookies at the same time. But our amazing machine has more properties than we initially thought. It can partner with different bakeries and other towns to sell and buy other cookies or even Buns they produce, earning money on the market. If our cookies cost more than $1, our machine will sell them in an open flea market in the big town to gain profit and put it in the reserve fund. If villagers believe in our Stable Cookies, they can invest in the bakery, get a percentage of its profit, and help maintain the liquidity of the cookies at the same time.
Then FRAX entered the crypto world — the first partly collateralized and partly algorithmic token. Initially, 1 FRAX = $1. But as the protocol grew, FRAX added algorithms in very small steps to maintain stability. Just 0.25% per iteration to reduce the real backing asset - USD. This is a pegged under-collateralized mechanism where the stablecoin is partly backed by USD and partly by an algorithm.
Imagine our bakery introduces a Special Cookie called the "FRX Cookie," which uses real USD to help maintain a price of $1. The bakery has a smart machine (algorithm) that adjusts the supply of these cookies based on their price.
When the FRX Cookie costs less than $1, the machine either reduces the number of cookies on the market or increases the amount of USD backing each cookie to bring the price back to $1. Conversely, when the FRX Cookie costs more than $1, the machine can increase the supply of cookies to lower the price or burn cookies.
The bakery uses a Collateral Ratio (CR) to decide how much USD to keep in reserve. Collateral ratio is the amount of money or assets that must be held in reserve to back the value of our cookie and ensure its stability. A higher CR means the FRX Cookie is backed by more USD, making it more stable. A lower CR means it relies more on the smart machine's adjustments. If the market is unstable, the bakery increases the CR to stabilize the price. If the market is stable, the bakery lowers the CR to allow more cookies to be issued.
If the CR changes, the bakery needs to adjust the USD reserves. For example, if the CR increases from 0.8 to 0.9 for 100 FRX Cookies, the bakery needs more USD. They sell some special vouchers called FXS to get the extra USD. This process is called Recollateralization. If the CR decreases, the bakery has extra USD, so they buy back the FXS vouchers from the market and burn them. This is called the Buyback mechanism.
The FXS token (or special voucher) plays a crucial role in this system. When the bakery needs more USD to back the FRX Cookies, it sells FXS vouchers at a slightly lower price to attract buyers who will provide the necessary USD. When there is excess USD in reserve, the bakery buys back these vouchers and destroys them, maintaining the balance in the system.
By adjusting the CR and managing the supply of USD and cookies, along with the strategic use of FXS tokens, the bakery ensures that the FRX Cookie remains stable and trusted by the villagers.
These are all stories of the old days — and in crypto, the old days mean just a few years ago. Now there are fully algorithmic, over-collateralized, and mixed stablecoins, which are okay (for now 🙂). Who knows what the future holds for us?
Nowadays, FRAX has reached a point where the community decided to fully collateralize the token. FRAX V3 achieved a target collateral ratio (CR) of the Frax protocol to 100%. This means that every FRAX is backed by $1.
FRAX is now even more interesting for the market and investments. Let's quickly see why!
The ecosystem of FRAX is remarkable. To simplify, I would divide it into three parts:
Stablecoins
AMOs (Algorithmic Market Operations): Deployed outside and inside the FRAX ecosystem with the same goals as its own protocols.
FRAX's Own DeFi Protocols: We will not explore them in this article. Understanding the mechanisms of Stablecoins and AMOs is essential to comprehending FRAX, although their DeFi protocols are closely related to AMOs.
The basics are three stablecoins:
FRAX Stablecoin We explored this coin in the previous section. It is a fully USD-pegged asset with 100% collateral ratio now. There will be no more minting of FXS to get FRX, and FXS will just stay as a governance token in the end.
Frax Price Index (FPI) Stablecoin The first stablecoin pegged to a basket of consumer goods. FPI is backed by other cryptocurrencies, such as FRAX for now, and will be backed by others in the future. FPI has its own governance token - FPIS, which is interconnected with FXS. This is probably the most interesting case right now: FPI aims to track inflation and always maintain the same value as it was on the day you minted/bought it. And this means a lot.
Imagine our bakery introduces a new cookie called the "FPI Cookie." Unlike the FRX Cookie, which is always worth $1, the FPI Cookie adjusts its price based on the cost of living in the village. It's like having a cookie that keeps up with inflation.
The bakery's smart machine monitors the prices of various goods and services in the village. If the cost of living goes up, the price of the FPI Cookie increases. If the cost of living goes down, the price of the FPI Cookie decreases. This ensures that the FPI Cookie always reflects the real value needed to maintain your standard of living.
The FPI Cookie is initially backed by FRX Cookies. As the bakery expands, it will start to include other assets like BTC, ETH, and even non-crypto goods and services in its reserve. This diverse backing helps maintain the stability and trust in the FPI Cookie.
If the cost of living changes, the smart machine adjusts the supply of FPI Cookies to keep their value stable. If prices rise, the machine can create more FPI Cookies to match the new value. If prices fall, the machine reduces the supply of FPI Cookies.
This way, the FPI Cookie helps villagers maintain their purchasing power, no matter how prices change in the village. The FPI Cookie, backed by a mix of FRX Cookies and other valuable assets, ensures that its value remains consistent with the cost of living.
I am personally fond of this system. Having DAOs treasury in the FPI stablecoins means the value will keep up with inflation. What is even cooler - you can track how your treasury really grows, adjusted for inflation. Why isn't everyone already using it?
A unique feature of the ecosystem is the interconnection between governance coins like FXS and FPIS. Both are entitled to seigniorage, which means holders can benefit from the system's profits. Since FXS and FPIS are interconnected, holding FXS allows you to receive seigniorage from FPIS as well, enhancing the value proposition and incentivizing participation in the governance and stability of the system.
Where does seigniorage come from? Let's learn from the mystery of AMOs:
AMOs (Algorithmic Market Operations) are very similar to the usual banking system but led by algorithms, aka contracts.
These robotic functions play winning games on different markets to gain profit while keeping the coin stable. They invest, lend, and integrate with Curve, Uniswap, and other platforms, aiming to expand more.
So, AMO is a set of rules, carefully prepared to operate without human involvement. Just remember our cookie machine. I won't explain each protocol, but we can look into the Curve AMO to understand the basics:
Convex Finance is a decentralized exchange (DEX), which is like a special marketplace designed for trading stablecoins and similar assets. It allows people to swap these assets with very low fees and minimal price changes during the trade. In this context, the Curve AMO is a set of smart rules that control these trades automatically. This means all the buying and selling happens on its own, without people needing to constantly manage it. This automation makes the system faster and better at responding to changes in the market.
Automatically adding liquidity (funds) to Convex Finance pools. This helps the protocol earn fees and rewards from the trading activity on Curve.
Efficiently managing FRAX reserves, ensuring there is enough liquidity and stability in the system.
The protocol can earn yield (interest or rewards) on its assets by providing liquidity to Convex. This helps increase the overall value and efficiency of the protocol.
And don't forget to check other AMOs in the FRAX Docs and explore the whole ecosystem evolution with Fraxlend, Fraxferry, etc.
Finally, let’s have a quick look at FRAX governance.
The main thing needed to participate in governance here is Frax Share - FXS (Frax Share) or FPIS (Frax Price Index Share), as we learned before.
FXS is both a staking token and a governance token. This means that the more FXS you have, the greater your voting power. FXS holders' voting power corresponds to the number of tokens they hold. However, to utilize it as a benefit and voting mechanism, you need to stake it within the FRAX system, at which point it becomes veFXS.
The staking mechanism is another interesting aspect: when you stake your tokens, you essentially deposit them and refrain from using them as currency or for any other purpose. Staking functions as collateral, helping the protocol to maintain stability, liquidity, and trust. In return, stakeholders may receive benefits and participate in decision-making processes. For instance, in FRAX, you can stake your tokens for up to four years. The more tokens staked for a longer duration, the more stable and trustworthy FRAX becomes.
FRAX Governance is quite simple if you understand what is happening there. Since FRAX operates largely by algorithmic models, there are usually very standard proposals made weekly. After this article, just visit the Snapshot or Goverland App and check that out. You will see proposals about setting new rules for the AMOs, adding new vaults, allocating liquidity, adding new markets, etc. Very rarely are proposals crucial. Though some are such as when I mentioned in the FRAX V3 section above about full collateralization of FRAX by real assets.
Although here is one tricky part I wanted to share with you:
For example, in FRAX Snapshot it can be weird: why is there always weighted voting and not just yes or no choices? Can I be 70% yes and 30% no? Is it made for uncertain people? My anxiety is rising after these questions.
But here is a very simple explanation: FRAX DAO has major token holders, for example, due to the AMOs we mentioned earlier. As AMOs are implemented on other protocols, which are outside of the FRAX ecosystem, there are people who use those protocols while still interacting and holding FRAX and FXS. And we are coming back to a Convex Finance.
Let's check one proposal as an example of the voting structure, made on Frax Finance: [FIP - 353] Shut down Convex.
It's a hot topic: shutting down Convex FRAX rETH/frxETH for an 8,300 FRAX fee. The discussion is buzzing, and you can feel the tension. Voting is done by a weighted system, which might sound complex, but here’s where it gets interesting.
The new proposal was made on Frax Finance Snapshot space, finishing on 30th of April. The same proposal was made to Convex Finance Snapshot space, finishing on 28th of April. We see that voting at Convex finishes earlier. These 2 days give Convex Finance enough time to cast a vote on the Frax Finance Snapshot Space. So that's how Convex Finance can cast the vote in the same proportion it happened inside their governance space. That's why a weighted voted system is implemented in Frax Finance.
This layered voting process not only keeps things democratic but also adds a strategic twist to governance. The amount of tokens staked in Convex is obviously the biggest, giving them the status of a whale. But in reality, it is split in Convex shares. Watching the votes come in, you realize how interconnected and dynamic the whole system is.
I would like to go further and get an idea of whales in Convex but thats all for today, folks.
The way FRAX is run gives power to its users through a fair voting system using FXS and FPIS tokens.
For investors, FRAX offers a lot of potential. The tokens connected to its governance can earn extra profits. The system uses smart rules (AMOs) to manage money effectively and ensure good returns. With new features like FPI and frxETH, FRAX is a great investment opportunity in the cryptocurrency world. Investing in FRAX can be both rewarding and educational, making it a good choice for both experienced and new investors.
Just don't forget to do research as I am not a financial advisor and will show this sentence at the court 😆 And never invest your last or borrowed money without proper consideration. Anon.
Almost forgot to include some cool links for you to check out:
FRAX Finance official docs: https://docs.frax.finance/
Flywheel educational series on FRAX (they got funding for this through proposal and FRX holders voted "for"): https://flywheeldefi.com/frax-101
Goverland app is a user-friendly tool for voting and DAO insights: https://www.goverland.xyz/
Cool explanation about stablecoins: https://topco.medium.com/stablecoins-collateralized-vs-algorithmic-4935c1266156
Terra USD collapse: https://www.coindesk.com/learn/the-fall-of-terra-a-timeline-of-the-meteoric-rise-and-crash-of-ust-and-luna/
Stablecoins Instability article: https://www.moodys.com/web/en/us/about/insights/data-stories/stablecoins-instability.html
Snapshot votes we talked about:
FraxEther (frxETH) Stablecoin Pegged to ETH for use as a replacement for WETH in smart contracts. This is a good solution to stake your ETH without complications and limitations. You can stake any amount and take it back anytime without losing yield. Upcoming frxETH v2 will further enhance this by creating a lending market for validators.
Imagine our bakery wants to offer a special cookie that includes a valuable ingredient called "Ether" (ETH). They introduce a new type of cookie called the "frxETH Cookie." Each frxETH Cookie is backed by real Ether, just like the FRX Cookies are backed by USD.
Each frxETH Cookie is backed by the same amount of Ether. This means for every frxETH Cookie, the bakery holds an equivalent amount of Ether in reserve. When villagers want to buy frxETH Cookies, they give the bakery Ether, and the bakery mints new frxETH Cookies for them. If villagers want to redeem their frxETH Cookies for Ether, the bakery burns the frxETH Cookies and gives back the equivalent amount of Ether.
You might wonder why villagers would use frxETH instead of just holding Ether? The bakery offers staking rewards for villagers who hold frxETH Cookies. By staking their frxETH, villagers can earn additional cookies over time, similar to earning interest on a savings account. This provides an incentive to use frxETH instead of holding Ether directly. The bakery has partnerships with other vendors and financial services in the village and outside it. Using frxETH Cookies might give villagers access to special offers, discounts, or additional financial products that aren't available with Ether alone. The bakery's system might simplify the process of transacting with Ether by handling technical details like gas fees and transaction speeds. This makes it easier for villagers who might not be familiar with the complexities of using Ether directly.
By backing each frxETH Cookie with real Ether and using a smart algorithm to adjust the supply, the bakery ensures that the value of frxETH Cookies remains stable. Villagers can trust that their frxETH Cookies are always worth the underlying Ether, providing a reliable and stable asset.
Imagine a villager named Alice. She has some Ether but wants to earn rewards and take advantage of the bakery's additional services. Alice exchanges her Ether for frxETH Cookies at the bakery. She then stakes her frxETH to earn extra cookies over time. Alice also uses frxETH to buy goods at partner shops, gaining discounts and benefits. She finds it easier and more beneficial than using Ether directly, thanks to the bakery's management and added features.
FraxEther (frxETH) Stablecoin Pegged to ETH for use as a replacement for WETH in smart contracts. This is a good solution to stake your ETH without complications and limitations. You can stake any amount and take it back anytime without losing yield. Upcoming frxETH v2 will further enhance this by creating a lending market for validators.
Imagine our bakery wants to offer a special cookie that includes a valuable ingredient called "Ether" (ETH). They introduce a new type of cookie called the "frxETH Cookie." Each frxETH Cookie is backed by real Ether, just like the FRX Cookies are backed by USD.
Each frxETH Cookie is backed by the same amount of Ether. This means for every frxETH Cookie, the bakery holds an equivalent amount of Ether in reserve. When villagers want to buy frxETH Cookies, they give the bakery Ether, and the bakery mints new frxETH Cookies for them. If villagers want to redeem their frxETH Cookies for Ether, the bakery burns the frxETH Cookies and gives back the equivalent amount of Ether.
You might wonder why villagers would use frxETH instead of just holding Ether? The bakery offers staking rewards for villagers who hold frxETH Cookies. By staking their frxETH, villagers can earn additional cookies over time, similar to earning interest on a savings account. This provides an incentive to use frxETH instead of holding Ether directly. The bakery has partnerships with other vendors and financial services in the village and outside it. Using frxETH Cookies might give villagers access to special offers, discounts, or additional financial products that aren't available with Ether alone. The bakery's system might simplify the process of transacting with Ether by handling technical details like gas fees and transaction speeds. This makes it easier for villagers who might not be familiar with the complexities of using Ether directly.
By backing each frxETH Cookie with real Ether and using a smart algorithm to adjust the supply, the bakery ensures that the value of frxETH Cookies remains stable. Villagers can trust that their frxETH Cookies are always worth the underlying Ether, providing a reliable and stable asset.
Imagine a villager named Alice. She has some Ether but wants to earn rewards and take advantage of the bakery's additional services. Alice exchanges her Ether for frxETH Cookies at the bakery. She then stakes her frxETH to earn extra cookies over time. Alice also uses frxETH to buy goods at partner shops, gaining discounts and benefits. She finds it easier and more beneficial than using Ether directly, thanks to the bakery's management and added features.
2 comments
Onchain governance, but with no voting required to pass proposals ❎ 🗳️ In Optimistic Dual Governance on Aragon OSx, proposals pass automatically after a timelock if not vetoed. Proposers must be on a preset allowlist, keeping your DAO secure. https://aragon.org/how-to/use-optimistic-dual-governance
That's a great concept used by some DAOs, such as Frax Finance, to ensure that crucial proposals aren't hindered by voter apathy. While it's an effective solution, we still need to focus on increasing voter engagement in important proposals so members feel a sense of responsibility for the protocol and the community. A little bit about Frax Finance governance is here: https://paragraph.xyz/@zloijopa.eth/goverland-about-frax