Introducing Frax

2 min readApr 3, 2024

Frax is a unique stablecoin with parts of its supply backed by collateral and parts of the supply algorithmic. The ratio of collateralized and algorithmic depends on the market’s pricing of the FRAX stablecoin. Before Frax, stablecoins were divided into three different categories: fiat collateralized, overcollateralized with cryptocurrency, and algorithmic with no collateral. Frax is the first kind of decentralized stablecoin to classify itself as fractional-algorithmic.

In Frax v1, the collateral ratio of the protocol is dynamically rebalanced based on the market price of the FRAX stablecoin. If the price of FRAX is above $1, then the collateral ratio decreases. If the price of FRAX is below $1 then the collateral ratio increases. The protocol always honors redemptions of FRAX at the $1 peg, but since the collateral ratio is dynamic, it must fund redemptions of FRAX by minting Frax Share tokens (FXS) for the remainder of the value. In Frax V2 there are mechanisms very similar to those previously mentioned that allow you to maintain the peg.

📈 This base mechanism can be abstracted down to the following:
-1 Decollateralize — Lower the collateral ratio by some increment X every time T if FRAX >$1
-2 Equilibrium — Don’t change the collateral ratio if FRAX = $1
-3 Recollateralize — Increase the collateral ratio by some increment X every time T if FRAX <$1

📎 At its fundamental core, the Frax Protocol is a banking algorithm that adjusts its balance sheet ratio based on the market’s pricing of FRAX. The market ‘votes’ on what this ratio should be by selling/exiting the stablecoin if it’s too low (thereby slightly pushing the price below $1) or by continuing to demand FRAX (thereby slightly pushing the price above $1). This decollateralization and recollateralization helps find an equilibrium reserve requirement for the protocol to keep a very tight peg and maximize capital efficiency of money creation. By definition, the protocol mints the exact amount of FRAX stablecoins the market demands at the exact collateral ratio the market demands for $1 FRAX.

📍Despite being a semi-algorithmic stablecoin and therefore classified as a high-risk stablecoin, recent developments in FRAX, its collateral, its adoption and its efficient algorithm have led Stablecomp to classify FRAX in the medium risk section.

📍Today the total owned and slow assets of FRAX is 721 million dollars, while the value of the liabilities is approximately 723 million, so it means that the collateral ratio is approximately 99.7%.

❤️ If you are a FRAX supporter in the Matrix section of Stablecomp you can access a 6% APR yield on the FRAX USDC pair!

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