About Frax (FRAX)

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

Frax operates as a “banking algorithm.” It adjusts the protocol’s collateral ratio, 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 stablecoins required to be posted as collateral is set by the protocol’s collateral ratio. 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.

When it comes to monetary policy on Frax Finance, Algorithmic Market Operations Controllers (AMOs) run the show. Broadly, 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 was (and still is) the base stabilization mechanism described above.

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

Who created FRAX?

FRAX is the brainchild of American software developer Sam Kazemian. As noted by CoinMarketCap, Kazemian first developed the idea for a “fractional-algorithim” stablecoin after seeing the failures of purely algorithmically based projects. Kazemian was assisted in development by Travis Moore and Jason Huan.

When was FRAX created and how much was it worth?

FRAX began trading in December of 2020 and has generally maintained its intended $1 peg since.

According to CoinGecko, FRAX briefly broke above its peg in February of 2021 reaching a record high of $1.14.

FRAX has also broken below its peg on several occasions, the worst of which saw the dollar tracking asset fall to $0.89.

How is the price of FRAX 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 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 May 2022, there were roughly $1.5 billion FRAX in circulation making it the 13th largest stablecoin by market capitalization.

Why does FRAX have value?

Given the capital limitations of 100% fiat-backed stablecoins and the failure of some purely algorithmically based competitors, FRAX’s “fractional-algorithmic” stablecoin may be just the thing needed to inspire faith in a sector under much scrutiny.

Is FRAX secure? 

FRAX is ERC-20 complaint and backed by a range of leading crypto wallets and exchange-based storage solutions. In addition to its Ethereum compatibility, FRAX is currently integrated with a range of independent networks including Solana, BSC Smart Chain and Avalanche.

What are the main benefits of FRAX?

• FRAX can always be minted/redeemed for exactly $1 worth of tokenized value.
• FRAX’s Algorithmic Market Operations Controllers (AMOs) work to balance FRAX’s price while taking advantage of various aspects of the burgeoning DeFI ecosystem including digital lending and yield farming.

What do critics say about FRAX?

That FRAX is not fully supported by USD-backed reserve, as evidenced by the token deviating from its $1 peg as it did on several occasions over the course of the spring and summer of 2022.