Stablecoins are very important to the crypto market, they represent a solution to have a stable currency inside the blockchain, where most of assets are extremely volatile, bringing new opportunities to users.
In this article, we’ll explore Frax Finance, a stablecoin protocol that provides a different approach to the stablecoin mechanism compared to the top ones like USDT, USDC and DAI.
What is Frax Finance?
Frax Finance is an exciting platform in the DeFi industry. It's all about creating stablecoins – digital currencies that don't swing wildly in value. Frax Finance makes three different stablecoins: FRAX (pegged to the US Dollar), FPI (pegged to a basket of goods), and frxETH (pegged to Ethereum).
But Frax Finance isn't just about stablecoins. It's like a toolbox with different tools that work together:
Fraxswap: This tool helps keep everything balanced. Imagine you have a seesaw – when one side goes up, the other goes down. Fraxswap makes sure that the right amounts of stablecoins are available when people want them. It also helps to adjust the total supply of stablecoins to match what's needed.
Fraxlend: This tool lets people borrow stablecoins. It's like getting a loan, but without needing a bank. People can use their own assets as collateral to borrow stablecoins, and this helps to bring more value into the Frax Finance system.
Fraxferry: Think of this tool as a bridge between different places. It helps to move stablecoins from one blockchain to another, making it easy to use them across different platforms.
The Frax Finance system is guided by two special tokens: Frax Share (FXS) and FPIS. These tokens let people have a say in how the system works and share in its success - FXS for the whole Frax ecosystem and FPIS for the FPI stablecoin.
How does FRAX work?
Frax Finance's journey into version 2 (Frax v2) expands the concept of fractional-algorithmic stability by introducing a groundbreaking concept known as the "Algorithmic Market Operations Controller" (AMO). Think of an AMO as a set of rules stored in a smart contract that directs monetary actions, as long as these actions don't deviate the FRAX stablecoin's price from its peg. In other words, AMOs can perform certain financial operations within predefined limits while ensuring that the FRAX stablecoin remains securely anchored to its target value.
Frax v1: The Foundation
In the earlier version, Frax v1, a single AMO, called the fractional-algorithmic stability mechanism, held the spotlight. It was the core stability mechanism guiding the protocol. Here's how it worked:
Decollateralization: If the FRAX price exceeded $1, the collateral ratio (CR) was reduced. This means that the protocol held slightly less collateral for every stablecoin issued.
Equilibrium: When the FRAX price was exactly $1, the CR remained unchanged. No adjustments were needed.
Recollateralization: If the FRAX price dropped below $1, the CR was increased. This ensured that the protocol held more collateral for each stablecoin in circulation.
Frax v1 also had a unique way of handling redemptions. When users redeemed FRAX, the protocol provided them with a mix of USDC and Frax Share (FXS) tokens. These FXS tokens represented a share of the protocol's value.
Frax v2: Introducing AMOs
Frax v2 takes the foundation of Frax v1 and builds upon it by introducing AMOs – Algorithmic Market Operations Controllers. Each AMO is like a building block, an autonomous contract that follows specific rules:
Decollateralization, Equilibrium, and Recollateralization: Similar to Frax v1, AMOs perform these actions to adjust the protocol's collateral ratio based on the FRAX price's relation to the $1 peg.
Market Operations: Each AMO executes certain operations to maintain stability and liquidity within the ecosystem.
Crucially, AMOs can't violate the price peg by arbitrarily minting new FRAX tokens without backing. This safeguard ensures that the core stability mechanism remains intact.
Enhancing Flexibility and Opportunity
Frax v2's AMOs introduce a remarkable level of flexibility and innovation. The system can now perform a wide range of market operations, expanding the protocol's capabilities while preserving its core stability. If the FRAX price drifts from the peg, AMOs react to bring it back, maintaining stability.
Each AMO serves as a complete "mechanism-in-a-box." This means that developers can create new AMOs that follow the outlined specifications and contribute to the protocol's growth and evolution. These AMOs can be proposed, built, and deployed with governance approval, enhancing the ecosystem's robustness and adaptability.
In essence, the beauty of Frax Finance lies in its ability to blend stability, flexibility, and innovation. By combining fractional-algorithmic mechanisms with the power of AMOs, Frax Finance crafts a resilient and adaptive system that strives to maintain the value of its stablecoins while embracing the dynamic nature of the DeFi landscape.
If you’re thinking about investing and having exposure to the protocol’s growth, you have to be looking at the FXS (Frax Share).
FXS is the value accrual and governance token of the entire Frax ecosystem. All utility is concentrated into FXS.
FXS's value is highly volatile, unlike FRAX's stable value. Its market cap reflects the protocol's success, including seigniorage from FRAX, minting fees, and unused collateral. As FXS's value grows, so does the protocol's ability to maintain FRAX's stability.
There is a maximum supply of FXS tokens capped at 100m tokens, and the distribution is the following:
Frax Finance stands out as a promising project, offering a range of captivating features. If you're intrigued by its token and its potential, take a look at the available pools on Kassandra. You might discover a pool that aligns with your needs, or even venture to create your own if none suit your preferences!
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