About Frax Shares (FXS)

Frax Finance is a stablecoin protocol that operates/issues FRAX, a decentralized dollar-pegged stablecoin. FRAX is backed by both collateral and a series of price stabilizing algorithms. 

Essentially, Frax operates as a “banking algorithm” that adjusts the protocol’s collateral ratio, or the number of stablecoin-denominated deposits needed to back $1 of FRAX, in order to keep FRAX’s price in line with its $1 peg. Each dollar of FRAX is backed by exactly $1 worth of value. However, unlike leading competitors backed by 100% fiat reserves, FRAX is collateralized via a combination of other stablecoins like USDC and the protocol’s own native governance token, FXS. 

The amount of stablecoin required to be posted as collateral is set by the protocol’s collateral ratio, which while it may vary is always purely a function of market forces. The process is fairly straightforward. A collateral ratio of 0.7 would require users to post $0.70 worth of stablecoin and $0.30 worth of FXS to mint $1 of FRAX. Likewise, if one wishes to redeem FRAX, they could receive $0.70 worth of stablecoin and $0.30 worth of FXS for doing so. Ultimately, the collateral ratio is set by market forces, as the protocol’s whitepaper explained.

In times of elevated market demand, FRAX trades slightly above its $1 peg. The protocol’s base stabilization mechanism responds by lowering FRAX’s collateral ratio (a process known as decollateralization), in a bid to incentivize sales and lower price. The same process works in reverse when FRAX is trading below $1.

Frax monetary policy rests solely with Algorithmic Market Operations Controllers (AMOs). An AMO is a smart contract that works to decollaterilze/recollateralize the protocol such that the price of FRAX remains at $1. FRAX’s first AMO remains the base stabilization mechanism described above.

FRAX has since deployed a number of additional AMOs designed to take advantage of various facets of the burgeoning decentralized finance (DeFi) space, including lending and yield farming, Messari explained.

How is the price of Frax Shares (FXS) determined?

The price of FRAX is ultimately a factor of market demand. When demand is high and FRAX is trading above its $1 peg, the protocol’s AMOs respond by decollateralizing the coin in a bid to drop price. When FRAX is trading below $1, the protocol recollateralizes, placing upward pressure on price.

FRAX’s total supply is also a factor of the market’s demand for the asset. Users can mint/redeem FRAX at any time for $1 worth of tokenized value. As of mid-May 2022, there were roughly $1.5 billion FRAX in circulation, making it the 13th largest stablecoin by market capitalization.

Why does Frax Shares (FXS) have value?

Given the capital limitations of 100% fiat-backed stablecoins and the failure of some algorithmically based competitors, FRAX’s “fractional-algorithmic” stablecoin may garner interest in a sector that has come under scrutiny of late in the wake of TerraUSD’s stablecoin debacle.  

What are the main benefits of Frax Shares (FXS)?

• FRAX can always be minted or redeemed for exactly $1 worth of tokenized value.
• Although the FRAX/USD collateral ratio can vary, Messari explained, it is solely determined by market forces.
• FRAX’s AMOs work to balance FRAX’s price while taking advantage of various aspects of the burgeoning DeFI ecosystem including digital lending and yield farming.