Frax

What is Frax Protocol (FRAX)?

FRAX is the first fractional algorithmic stablecoin which is built on the Frax protocol. The protocol is an open source, permissionless project powered by Ethereum net. The Frax protocol aims to replace digital assets that have a fixed quantity with a highly scalable algorithmic currency.

The main features of the Frax crypto project include:

• Two token system. Two tokens operate under the protocol: FRAX and FXS. FRAX, as you already know, is a stablecoin. FXS, on the other hand, is a protocol governance token that helps generate income from fees, share premium, and additional collateral value. As of 2020, FXS tokens can be locked to generate veFXS for larger increments, unique governance privileges, and other system benefits;
• Community driven. Frax is a community-driven protocol that emphasizes an algorithmic approach that does not require active management;
• Frax uses Uniswap and Chainlink Oracles. FXS and FRAX prices and collateral are taken from Uniswap as the Chainlink oracle provides the exact USD rate (taking the average price of the pair). This calculation mechanism makes FRAX more stable compared to the dollar.

Founders of the Frax Protocol

In 2019, software developer Sam Kazemian came up with the unique idea of ​​creating a stablecoin with a fractional algorithm. The idea was born due to the fact that most projects with algorithmic monetary policy were prone to failure.. So he decided to combine algorithmic monetary policy with collateral to try to solve this problem.

Engineers Travis Moore and Jason Huang helped him implement the idea, which resulted in the creation of the first fractional algorithmic stablecoin.

What is FRAX?

Essentially, FRAX is a stablecoin, meaning that it manages to maintain a stable price even when the cryptocurrency market fluctuates. One FRAX is pegged to 1 US dollar at a 1:1 rate.

However, FRAX is a unique type of stablecoin because one part of its offering is algorithmic and the other is backed by collateral. The price of FRAX in the market determines the share of collateralized and algorithmic supply.. The Frax protocol has built-in swap capabilities that allow for buyback and recollateralization, which are used to control the amount of collateral.

For example, the collateral amount increases as soon as the price of FRAX falls below $1.00. However, as soon as the price of FRAX rises above $1, the collateral is reduced.

While any cryptocurrency can serve as collateral as intended by the FRAX protocol, its first iteration primarily accepts on-chain stablecoins as payment. This reduces collateral volatility and facilitates a smooth transition to higher algorithmic odds.

Frax has a contract with the pool, which is designed to hold USDC as collateral. Ecosystem management allows you to add and remove pools. As the Frax system develops, more volatile cryptocurrencies may be added to the management pool.

Since FRAX is a stablecoin, its supply is dynamic. It changes to maintain the price of FRAX at $1. In contrast, the protocol does not have an inflation chart for FXS tokens, which have a fixed supply of 100 million tokens.

Minting FRAX

By adding the required number of components to the system, FRAX stablecoins can be minted. Since FRAX was fully backed by collateral from its inception, minting it simply required collateral to be placed in the minting contract. On the other hand, at the fractional stage it was necessary to pay the required amount of deposit. In addition, to create FRAX, the required amount of FXS had to be burned.

Arbitrageurs can balance the supply and demand of FRAX on the open market by issuing and buying FRAX out of the system for $1. The user must continuously enter $1 into the system to create a new FRAX..

If the market price exceeds the $1 target price, there is an arbitrage opportunity to issue tokens by adding $1 to the value of each FRAX and selling the tokens for more than $1 on the open market. On the other hand, if the price of FRAX is less than $1, there is an arbitrage opportunity to buy back FRAX tokens by buying them at a lower price on the open market and buying them back for $1 of value in the system.