Frax

The history of Frax (FRAX) began in December 2020 when it was launched by Frax Finance after 18 months of development. At the time, the stablecoin market was limited, and existing options were either over-collateralized or algorithmic, both of which had their drawbacks. Frax aimed to create a stablecoin that could maintain its peg to the U.S. dollar while minimizing collateral requirements.

Initially, FRAX operated as a "fractional-algorithmic" stablecoin, meaning it was partially collateralized and partially algorithmic. This hybrid approach allowed the protocol to adjust the collateral ratio based on market conditions, ensuring stability. When demand for FRAX was high, the protocol decreased the collateral ratio, allowing more FRAX to be minted without additional collateral. Conversely, when demand was low, the protocol increased the collateral ratio to maintain stability.

However, in February 2023, the Frax Finance community voted to shift away from its algorithmic operations and transition to a fully collateralized model. This change means that FRAX is now underpinned by a 100% collateral ratio, ensuring its stability through full asset backing.

Throughout its history, FRAX has faced various challenges, including the collapse of other stablecoins like Terra/Luna and the depeg of USDC. Despite these challenges, FRAX has proven resilient and has grown significantly, with a market cap of over $1 billion USD, making it the sixth-largest stablecoin in the cryptoeconomy.

Today, FRAX is widely used in decentralized finance (DeFi) applications and can be acquired through various exchanges or minted directly on the Frax Finance platform. It continues to serve as a stable source of value in the volatile crypto markets, with its stability dependent on effective governance by FXS holders and the management of the collateral ratio over time.

Frax (FRAX) is a decentralized stablecoin protocol that combines elements of both collateralized and algorithmic stablecoins. Here's how it works:

The Frax Protocol issues three stablecoins: FRAX, FPI, and frxETH. FRAX is pegged to the US dollar, FPI is pegged to a basket of consumer goods, and frxETH is pegged to Ethereum (ETH) for use in smart contracts.

Initially, FRAX was secured by a fractional algorithmic system where a portion of the stablecoin was collateralized by a dynamic ratio of Frax Share (FXS) tokens. However, the community decided to transition FRAX to 100% collateralization, eliminating the algorithmic component.

Frax v2 introduced the AMO module, which is a set of autonomous contracts that perform monetary actions to ensure FRAX price stability. AMO modules aim to balance the value of FRAX, seek profits, and adapt to market conditions. Profits are primarily returned to FXS token holders, who also control the allocation of profits.

Fraxswap is a native Automated Market Maker (AMM) that uses time-weighted average market maker (TWAMM) orders. This feature helps spread large purchases or sales over time, minimizing price impacts. Fraxswap is used for rebalancing collateral, minting and redeeming FRAX, and deploying protocol-owned liquidity on-chain.

Fraxlend is a permissionless lending facility for Frax-based stablecoins. It allows debt origination, customized non-custodial loans, and onboarding collateral assets to the Frax Finance economy. The platform uses oracle technology for optimal pricing and algorithmic interest rate calculations.

Fraxferry is a platform that transfers natively issued Frax Protocol tokens across multiple blockchains. It uses bridging technology that prioritizes security over speed, addressing concerns about bridge exploits in the crypto industry.

Frax Share (FXS) is the governance token of the Frax ecosystem. It captures fees, revenue, and excess collateral value. FXS holders have voting rights to adjust protocol rules, add new collateral pools, and change protocol fees.

The community can propose new gauge rewards for strategies that integrate Frax-based stablecoins. FXS emissions are fixed, halve each year, and flow to different gauges based on the votes of veFXS stakers.

Overall, Frax Finance aims to create a comprehensive DeFi ecosystem by integrating stablecoins, liquidity, and lending markets, making it a unique platform in the cryptocurrency space.

The token Frax (FRAX) has several strengths:

1. Decentralized and Trustless: FRAX is a decentralized stablecoin that operates on a trustless system, ensuring that it is highly scalable and ideologically pure on-chain money.

2. Hybrid Mechanism: FRAX uses a combination of collateralized and algorithmic mechanisms to maintain its stable value, setting it apart from other stablecoins that rely solely on collateralization or algorithms.

3. Diverse Collateral: FRAX is collateralized by a diverse basket of assets, including USDC, USDT, and other stablecoins, which are held in a smart contract. This diversification helps to reduce risks and maintain stability.

4. Algorithmic Market Operations: FRAX employs Algorithmic Market Operations (AMOs) such as Fraxlend and Curve, which are controlled by Frax Share (FXS) token holders. These operations help to maintain the stable value of FRAX by minting or burning tokens based on market conditions.

5. Governance and Utility: The Frax Share (FXS) token serves as the governance and utility token, allowing holders to participate in decision-making and vote on proposals that affect the Frax protocol. This governance model is designed to be highly governance-minimized, reducing the potential for disagreements.

6. Flexibility and Integration: FRAX is part of a broader ecosystem that includes DeFi financial services such as Fraxlend, a money market that allows lenders to commit assets and earn interest-bearing tokens. This integration provides users with a comprehensive suite of tools to manage their digital assets.

These strengths contribute to FRAX's unique approach to stablecoins and decentralized finance, making it a notable project in the rapidly evolving DeFi landscape.

Frax, a decentralized dollar-pegged stablecoin, presents several financial risks to investors. These risks include:

• Smart Contract Risks: Frax relies heavily on smart contracts and oracles, which can be vulnerable to errors, hacks, or disputes. The newness of v3 features and the transition into different spaces such as RWA and bond-like products further elevate these risks.
• Liquidity and Redeemability Risks: As a decentralized stablecoin, Frax cannot be redeemed against an issuer. Instead, holders must rely on centralized exchanges for convertibility to fiat U.S. dollars. This can lead to liquidity issues and affect the stability of the peg.
• Regulatory Risks: The absence of a clear regulatory regime for decentralized stablecoins may favor the use and liquidity of centralized stablecoins. This could negatively impact Frax's adoption and stability.
• Governance Risks: Frax's on-chain governance mechanism, which allows holders of veFXS to determine what goes into pools and the annual yield for staked Frax, can be complex and may lead to disputes or unintended consequences.
• Collateralization Risks: Frax's balance sheet is made up of a mix of stablecoins, pools, and more volatile cryptocurrencies. If the value of these assets fluctuates significantly, it could impact the stability of Frax.
• Market Capitalization Risks: Frax's market capitalization is subject to market volatility, which can affect its stability and liquidity.

These risks highlight the importance of careful consideration and thorough research before investing in Frax or any other cryptocurrency.

• Sam Kazemian: Co-founder of Frax Finance, a decentralized stablecoin protocol. He is also the founder of Everipedia, a for-profit, wiki-based online encyclopedia.
• Jason Huan: Founder of Frax Finance.
• Travis Moore: Co-founder of Frax Finance.