FRAX is an open-source, innovative digital asset developed by the Frax.finance ecosystem. The asset is based on the Frax protocol that presents an entirely new stability mechanism driven by algorithmic сomputations.
The mission of the protocol is to develop algorithmic money with a high level of scalability and decentralization. The team of the project tries to create a cryptocurrency version of CPI (the Consumer Price Index) and call it FPI (FRAX Price Index) striving to make it a new standard for stablecoins.
FRAX relies on a rather complex structure that includes the portion of assets backed by collateral while the other portion is stabilized algorithmically. Typically, the design of stablecoins features just one spectrum that implies either collateralized assets or non-collateralized ones that are fully based on algorithmic computations. Since both types of stablecoins have their weak points, the founder of FRAX has decided to take the best of both options to create a hybrid stablecoin and address these issues in an entirely new way. Thus, slow growth and periodic volatility of algorithmic unbacked stablecoins along with a custodial risk problem of a collateralized asset are easily solved with a FRAX mechanism.
FRAX takes its name from the underlying technology as this is a fractional-algorithmic stablecoin protocol. This multichain protocol is based on a bridge mechanism relying on two tokens that fuel the system. These are a stablecoin Frax (FRAX) and the governance token Frax Shares (FXS). There is also a pool contract holding USDC as collateral. Governance allows to add and remove the pools from the ecosystem and to refresh the rate of the stablecoin ratio. Also, the protocol has inbuilt swap functions enabling buyback and recollateralization, which are initiated when the protocol has excess collateral value.
Since FRAX is an absolutely new type of asset, it doesn’t fall under any existing classification rules. Numerous algorithmic projects that tried to achieve partial collateralization for stablecoins in the past failed to do that, so FRAX can be considered as a true innovator in this area.
The price of FRAX and FXS as well as the size of the collateral is taken from Uniswap (the average of the pair price) as the Chainlink oracle provides the accurate USD rate. The calculation mechanism improves the stability of FRAX making it stable against the dollar. In this way, the asset holders can benefit from improved resiliency compared to digital assets that rely merely on the average value of existing stablecoins.
The collateralized and algorithmic ratio depends on the market price of FRAX. When it exceeds 1 USD, the expansion phase begins, and the protocol starts decreasing the collateral ratio which means that a smaller amount of USDC is needed for its minting. On the contrary, when the FRAX price drops below 1 USD, the protocol increases the collateral ratio. Low demand for FRAX results in 100% collateralization. With the growth of users’ trust, the algorithmic portion increases which means that the market decides how much the digital asset is backed by the collateral.
Initially, 100% of FRAX was collateralized. It was necessary to place collateral into the minting contract to mint FRAX. When collateral is sent to the contract during the fractional phase to mint FRAX, the corresponding ratio of FXS is burned. Though the design of the FRAX protocol presupposes that any cryptocurrency can serve as collateral, the initial implementation of the protocol (V1) accepts primarily on-chain stablecoins for this purpose. This is done to reduce the volatility of the collateral and provide a smooth transition to higher algorithmic ratios. As the system evolves and FRAX gets stronger, it becomes possible to include more volatile cryptocurrencies into the governance pools. At the time of writing, FRAX hasn’t yet achieved such a state and can still be referred to as the experimental asset. Users can buy FRAX on numerous decentralized platforms such as Uniswap and DEX.
Nevertheless, FRAX performs even better than its founders expected. The stablecoin provides a better capital efficiency, hence less fiat collateral is needed for the stability of the system. As it has been mentioned above, the asset solves the issue of custodial risk. The decentralized system is regulated by FXS holders who determine the monetary policy of the ecosystem.
Stabilization of the system occurs through multiple mechanisms using minting, bonds, redeeming, algorithmic market operations (AMOs), and Curve metapool.
The Frax platform and its products
FXS is a governance token of the Frax protocol. It is a volatile utility asset of the ecosystem required to pay for some features available on the platform such as minting and redeeming. The founders of the system have never tried to regulate it giving preference to the DAO style of management. In February 2021, FXS was listed on Binance.
Users can take advantage of staking to get FXS rewards. With a larger algorithmic portion of FRAX, more FXS are emitted, consequently, users get higher rewards. The members of the ecosystem are allowed to mint FRAX and redeem it at any time.
Since May 2020, the holders of the FXS token can lock FXS and generate veFXS for higher boosts, special governance rights, and other benefits of the system. It is also planned to enable an optional anonymity feature for users minting FRAX. The developers want to implement zk-SNARKs technology for that.
The author of a fractional-algorithmic stablecoin is a US-based software developer Sam Kazemian who started working over Frax in 2019. His idea was supported by Jason Huan and Travis Moore who joined the project to implement the design of a new concept and became the co-founders of the project.
Jason Huan, Bachelor in Computer Science, co-founded a blockchain community at UCLA (University of California, Los Angeles) in 2017. Travis Moore, Bachelor in Neuroscience, Biochemistry, Cell/Cellular, and Molecular Biology, is an entrepreneur, investor, and programmer who previously was one of Donald Trump’s economic advisors. He takes the position of CTO in the company.