The Frax Protocol is the first fractional-algorithmic stablecoin system. Frax is open-source, permissionless, and entirely on-chain – currently implemented on Ethereum (with possible cross chain implementations in the future). The end goal of the Frax protocol is to provide a highly scalable, decentralized, algorithmic money in place of fixed-supply digital assets like BTC. What is Frax Share (FXS) | What is Frax Share token | What is FXS token
The Frax Protocol is the first fractional-algorithmic stablecoin system. Frax is open-source, permissionless, and entirely on-chain – currently implemented on Ethereum (with possible cross chain implementations in the future). The end goal of the Frax protocol is to provide a highly scalable, decentralized, algorithmic money in place of fixed-supply digital assets like BTC. The protocol incorporates the following concepts:
Fractional-Algorithmic – Frax is a unique stablecoin with parts of its supply backed by collateral and parts of the supply algorithmic. The ratio of collateralized and algorithmic depends on the market's pricing of the FRAX stablecoin. If FRAX is trading at above $1, the protocol decreases the collateral ratio. If FRAX is trading at under $1, the protocol increases the collateral ratio.
Decentralized & Governance-minimized – Community governed and emphasizing a highly autonomous, algorithmic approach with no active management.
Fully on-chain oracles – Frax v1 uses Uniswap (ETH, USDT, USDC time-weighted average prices) and Chainlink (USD price) oracles.
Two Tokens – FRAX is the stablecoin targeting a tight band around $1/coin. Frax Shares (FXS) is the governance token which accrues fees, seigniorage revenue, and excess collateral value.
Before Frax, stablecoins were divided into three different categories: fiat collateralized, overcollateralized with cryptocurrency, and algorithmic with no collateral. Frax is the first kind of decentralized stablecoin to classify itself as fractional-algorithmic ushering in the 4th and most unique category.
The supply of the FRAX stablecoin is dynamic and always changing to keep the price at $1 due to its fractional-algorithmic monetary policy. The supply of the Frax Shares (FXS) tokens are hard capped to 100 million tokens at genesis with no inflation schedule in the protocol. The FXS token is the governance token which accrues all value of new minted FRAX, fees, and excess collateral. FXS is an investment and governance asset while FRAX is the currency token.
The Frax Protocol is a community driven and unique design stablecoin. Over 60% of the supply of FXS is issued over a number of years to liquidity providers and yield farmers. It is an entirely decentralized protocol with governance onchain. It is also the first and only stablecoin to incorporate the fractional-algorithmic hybrid design at the time of its launch in November 2020.
The Frax Protocol is the brainchild of American software developer Sam Kazemian who came up with the first idea of a fractional-algorithmic stablecoin in 2019.
The founding team of Frax engineers includes Travis Moore and Jason Huan. Sam Kazemian originally devised the idea when he noticed that stablecoins were growing rapidly but none had any mixture of algorithmic monetary policy and collateralization. Projects that had purely algorithmic monetary policy had failed or shut down without any significant traction. Frax was designed as an answer to measure the market’s confidence in a partly algorithmic and partly collateralized stablecoin.
FRAX, the stablecoin, is available on many major exchanges and DeFi platforms like Uniswap and DEXes. The Frax Shares (FXS) tokens are also available and as liquid as the stablecoin. Investors looking to purchase upside and governance rights to the world’s first fractional-algorithmic stablecoin should buy Frax Shares (FXS). Users who want stability by using the world’s only fractional-algorithmic stablecoin should purchase FRAX.
The Frax Share token (FXS) is the non-stable, value-accrual token in the protocol. It is meant to be volatile and hold rights to governance and all excess collateral of the system. It is important to note that we take a highly governance-minimized approach to designing trustless money in the same ethos as Bitcoin. We eschew DAO-like active management such as MakerDAO. The less parameters for a community to be able to actively manage, the less there is to disagree on. The only parameters that are up for governance through FXS is adding/adjusting collateral pools, adjusting minting/redemption fees, and refresh rate of the collateral ratio. No other actions such as active management of collateral or addition of human-modifiable parameters are possible other than a hardfork that would require voluntarily moving to a new implementation entirely.
The FXS token has the potential of upside and downside of the system, where the delta changes in value are always stabilized away from the FRAX token itself. FXS supply is initially set to 100 million tokens at genesis, but the amount in circulation will likely be deflationary as FRAX is minted at higher algorithmic ratios. The design of the protocol is such that FXS would be largely deflationary in supply as long as FRAX demand grows.
The FXS token’s market capitalization should be calculated as the future expected net value creation from seigniorage of FRAX tokens in perpetuity, the cash flow from minting and redemption fees, and utilization of unused collateral. Additionally, as the market cap of FXS increases, so does the system’s ability to keep FRAX stable. Thus, the priority in the design is to accrue maximal value to the FXS token while maintaining FRAX as a stable currency. As Robert Sam’s described in the original Seigniorage Shares whitepaper: “Share tokens are like the asset side of a central bank’s balance sheet. The market capitalisation of shares at any point in time fixes the upper limit on how much the coin supply can be reduced.” Likewise, the Frax protocol takes inspiration from Sams’ proposal as Frax is a hybrid (fractional) seigniorage shares model.
FXB is coming in Frax v2 per governance and community vote of FXS holders.
So far, we've discussed the stablecoin, FRAX, and the governance token, FXS, which has control of the seigniorage and revenue flow of the protocol. FXS is similar to ownership/stake in the protocol, not debt which is a separate financial primitive. We have not yet discussed how a fractional-algorithmic system like Frax handles issuance of debt which is extremely important for a complete algorithmic monetary policy. Check this section + GitHub for updates as we release Frax Bond (FXB) specs.
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