BC.Game

What Is Frax Finance (FRAX)?

UTC by John Caroline · 6 min read
What Is Frax Finance (FRAX)?
Photo: Frax Finance / LinkedIn

Here’s a guide to learn all there is to know about the Fractional Algorithmic Stablecoin protocol, Frax Finance, to help you stay acquainted with all that concerns this project.

The crypto space has been enriched with several innovative projects seeking to make the sector a very interesting and efficient one for users. Frax Finance (FRAX) is one of those seeking to enrich the use of stablecoins, providing more use cases and efficiency for the industry.

The crypto industry has experienced an incredibly ill-fated situation after the sudden crash of algorithmic stablecoin Terra that happened in the first quarter of 2022. The incident has undeniably been an adverse hit on the crypto community, causing the crypto market to see an incredible slump.

Nonetheless, the failure of Terra ddi not insinuate a restriction on the success of other stablecoin protocols. Hence, there are high hopes that algorithmic stablecoins may earn a comeback via excelling projects like Frax Finance.

Frax Finance: Fractional-Algorithmic Stablecoin Protocol

As the name implies, Frax Finance is a decentralized cross-chain “fractional-algorithmic” stablecoin protocol. The popularly recognised fractional-algorithmic stablecoin has its major focus on establishing a scalable, open-source currency with a flexible supply.

Taking a flashback to the early stage of the Frax Finance protocol, the project was 100% collateralized. This system of operation ensures that minting FRAX only requires placing collateral into the minting contract.

However, the protocol has emerged to a system where it operates in the fractional collateral phase. This system of operation ensures that minting FRAX requires placing the appropriate collateral and FXS into the Frax protocol.

It is worth mentioning that the protocol features a design that allows it to accept any type of cryptocurrency as collateral. As such, Frax will mainly accept on-chain stablecoins to keep volatility low so that FRAX can transition to higher algorithmic ratios smoothly.

The more the protocol continues to gain further adoption, the more the system’s velocity increases. This suggests that it could become easier and safer to include more volatile cryptocurrencies such as ETH and BTC into future pools. The project is seeking to adopt possible infrastructures that will earn its protocol a hedge over volatility.

Frax Finance History

The birth of Frax Finance took place after it was first announced in May 2019. It appeared as a decentral bank that would operate in the form of a fractional-algorithmic stablecoin protocol.

The plan was to create a unique decentralized stablecoin protocol. A number of crypto experts came together to build the project. Crypto veterans Sam Kazemian, Jason Huan, and Travis Moore joined efforts together to build a stablecoin protocol that emerged as the world’s first decentralized stablecoin with parts of its supply collateralized and parts algorithmic stabilized. FRAX Finance was launched on the Ethereum mainnet as at 21 December 2020.

How Frax Finance Works

The fractional algorithmic stablecoin protocol operates with two tokens namely FRAX and FXS. The former serves as the USD-pegged cryptocurrency, while the latter, also dubbed Frax Shares (FXS), serves as the platform’s governance token. Through governance, pool contracts holding USDC as collateral can be added or removed.

Notably, Frax Finance deals with the problem of the capital efficiency of stablecoins, and it seeks to provide a solution to the challenge. Traditional collateral-backed stablecoins like USDT have become an easy target for regulators as they are not decentralized.

This has triggered concerns from Frax Finance as even overcollateralized stablecoins like DAI may have proven to be stable but they are hard to scale because they are capital-inefficient.

As said earlier, the Frax Finance protocol works with a dual-token mechanism which utilizes a USDC and its FXS governance token to partially back its stablecoin with a variable collateral ratio. It is noteworthy that the stability of FRAX is dependent on the correct incentivization of arbitrageurs.

Unique Features of Frax Finance

As said earlier, Frax Finance is an innovative fractional algorithmic stablecoin protocol. Hence it possesses certain unique features that enables it to outstand other stablecoin protocols in the market. Some of these features include:

  • Frax Finance ensures the stability of prices. Price stability is one of the ultimate goals of Frax Finance. Although the protocol operates with a fairly untested dual-token model, FRAX has been trading within a stable 250 basis points band for almost its entire duration. This feature allows it to outstand other comparable projects like Iron Finance and Empty Set Dollar, which tried (and failed) to achieve a stable peg with an algorithmic stablecoin design.
  • veFXS. Frax Finance deploys a mechanism dubbed as vote-escrowed vesting system. This system of operation was popularized by Curve Finance. The vote-escrowed vesting system allows token holders to stake their FXS and receive veFXS in return, representing their share of the staked FXS and their voting power in governance proposals.
  • Algorithmic Market Operations (AMO). Frax Finance also operates with certain unique mechanisms which are collectively regarded sthe the algorithmic market operations. These infrastructures include balancing the collateral ratio, maintaining a healthy equilibrium,and  accruing value to FXS. It is important to note that these infrastructures help to ensure the stability and viability of Frax Finance.

FRAX Token

As said earlier, FRAX is the protocol’s USD-pegged stablecoin. It is often regarded as a hybrid stablecoin pegged to the US dollar. It is noteworthy that the supply of the FRAX stablecoin is dynamic and always changing to keep the price at $1 due to its fractional-algorithmic monetary policy.

FXS Token

The utility token of Frax Finance is the FXS token. This token also serves as the governance token of the protocol. Frax Finance has provided a total supply of 100 million FXS. 60% of the token is allocated to farming rewards. 20% of the FXS token is allocated to the team, 12% is distributed to the private investors, 5% of the remaining tokens is allocated to the treasury and the last 3% is allocated to advisors of the protocol.

Pros and Cons of Frax Finance

Frax Finance offers exclusive benefits to its users with the unique and innovative mechanisms it adopts. The protocol provides holders of FXS tokens with an increasing power to mint FRAX with their FXS. Moreso, the decentralized nature of the protocol helps it to fight regulatory setbacks, thereby becoming a minor target for regulators. The protocol tends to fight volatility, hence it guarantees users adequate stability in the value of the token.

Meanwhile, the protocol’s utility and governance token suffers from potential volatility, which can arrive if the FRAX stablecoin changes its distance from the focused $1 price point. In addition, it is quite complicated for the FRAX token to be effectively used for leverage. This is because depositors have no guarantee that they’ll receive their exact amount and type of collateral back.

Bottom Line

Frax Finance has proven to outstand other stablecoin protocols in the industry considering the mechanism it deploys. The protocol features a dual token model which has facilitated its efficiency.

It is correct to say that having multiple stablecoins like DAI, FRAX, MIM, UST, and the likes, with different designs is a value-add to the crypto and web3 ecosystem as it derisks the blockchain ecosystems. FRAX and FXS are built with a long-term mindset and vision to have FRAX integrating into critical DeFi protocols.

Share:

FAQ

What is Frax Finance?

Frax Finance is a decentralized cross-chain “fractional-algorithmic” stablecoin protocol. The popularly recognised fractional-algorithmic stablecoin has its major focus on establishing a scalable, open-source currency with a flexible supply.

Who is behind Frax Finance?

Frax Finance was founded by Sam Kazemian, Jason Huan, and Travis Moore.

How does Frax Finance work?

Frax Finance protocol works with a dual-token mechanism which utilizes a USDC and its FXS governance token to partially back its stablecoin with a variable collateral ratio. It deals with the problem of the capital efficiency of stablecoins, and it seeks to provide a solution to the challenge. 

What is the FRAX token?

FRAX is the protocol’s USD-pegged stablecoin. It is often regarded as a hybrid stablecoin pegged to the US dollar.

What is the difference between FRAX and FXS tokens?

FRAX token serves as the USD-pegged cryptocurrency of the protocol. Meanwhile, FXS, also dubbed as Frax Shares (FXS), is the platform’s utility and governance token.

guides