Frax (FRAX) Coin Review : It is Good Or Bad Review

About Frax (FRAX)

Frax (FRAX) Many stablecoin protocols have entirely embraced one spectrum of design (entirely collateralized) or the other extreme (entirely algorithmic with no backing). Collatralized stablecoins either have custodial risk or require on-chain overcollateralization. These designs provide a stablecoin with a fairly tight peg with higher confidence than purely algorithmic designs. Purely algorithmic designs such as Basis, Empty Set Dollar, and Seigniorage Shares provide a highly trustless and scalable model that captures the early Bitcoin vision of decentralized money but with useful stability. The issue with algorithmic designs is that they are difficult to bootstrap, slow to grow (as of Q4 2020 none have significant traction), and exhibit extreme periods of volatility which erodes confidence in their usefulness as actual stablecoins. They are mainly seen as a game/experiment than a serious alternative to collateralized stablecoins.

Frax (FRAX) attempts to be the first stablecoin protocol to implement design principles of both to create a highly scalable, trustless, extremely stable, and ideologically pure on-chain money. The Frax protocol is a two token system encompassing a stablecoin, Frax (FRAX), and a governance token, Frax Shares (FXS). The protocol also has a pool contract which holds USDC collateral. Pools can be added or removed with governance. Although there’s no predetermined timeframes for how quickly the amount of collateralization changes, we believe that as FRAX adoption increases, users will be more comfortable with a higher percentage of FRAX supply being stabilized algorithmically rather than with collateral.

Frax (FRAX) collateral ratio refresh function in the protocol can be called by any user once per hour. The function can change the collateral ratio in steps of .25% if the price of FRAX is above or below $1. When FRAX is above $1, the function lowers the collateral ratio by one step and when the price of FRAX is below $1, the function increases the collateral ratio by one step. Both refresh rate and step parameters can be adjusted through governance.

Frax (FRAX) Storage Key Points

Price Stability

Frax (FRAX can always be minted and redeemed from the system for $1 of value. This allows arbitragers to balance the demand and supply of FRAX in the open market. If the market price of FRAX is above the price target of $1, then there is an arbitrage opportunity to mint FRAX tokens by placing $1 of value into the system per FRAX and sell the minted FRAX for over $1 in the open market. At all times in order to mint new FRAX a user must place $1 worth of value into the system. The difference is simply what proportion of collateral and FXS makes up that $1 of value. When FRAX is in the 100% collateral phase, 100% of the value that is put into the system to mint FRAX is collateral. As the protocol moves into the fractional phase, part of the value that enters into the system during minting becomes FXS (which is then burned from circulation). For example, in a 98% collateral ratio, every FRAX minted requires $.98 of collateral and burning $.02 of FXS. In a 97% collateral ratio, every FRAX minted requires $.97 of collateral and burning $.03 of FXS, and so on.

Minting and Redeeming

Frax (FRAX All FRAX tokens are fungible with one another and entitled to the same proportion of collateral no matter what collateral ratio they were minted at. This system of equations describes the minting function of the Frax Protocol: Thus, the show that no FXS is needed to mint FRAX when the protocol collateral ratio is 100% (fully collateralized). Next, we solve for how much FRAX the will get with the 200 USDC

200 FRAX are minted in this scenario. Notice how the entire value of FRAX is in dollar value of the collateral when the ratio is at 100%. Any amount of FXS attempting to be burned to mint FRAX is returned to the user because the second part of the equation cancels to 0 regardless of the value.

Frax Shares (FXS)

Frax (FRAX is the value accrual and governance token of the entire Frax ecosystem. All utility is concentrated into FXS.

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. Parameters that are up for governance through FXS include adding/adjusting collateral pools, adjusting various fees (like minting or redeeming), and refreshing the 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.

Buybacks & Recollateralization

Frax (FRAX protocol at times will have excess collateral value or require adding collateral to reach the collateral ratio. To quickly redistribute value back to FXS holders or increase system collateral, two special swap functions are built into the protocol: buyback and recollateralize.

Recollateralization

Anyone can call the recollateralize function which then checks if the total collateral value in USD across the system is below the current collateral ratio. If it is, then the system allows the caller to add up to the amount needed to reach the target collateral ratio in exchange for newly minted FXS at a bonus rate. The bonus rate is set to .20% to quickly incentivize arbitragers to close the gap and recollateralize the protocol to the target ratio. The bonus rate can be adjusted or changed to a dynamic PID controller adjusted variable through governance.

FRAX Lending

Frax (FRAX This controller mints FRAX into money markets such as Compound or CREAM to allow anyone to borrow FRAX by paying interest instead of the base minting mechanism. FRAX minted into money markets don’t enter circulation unless they are overcollateralized by a borrower through the money market so this AMO does not lower the direct collateral ratio (CR). This controller allows the protocol to directly lend FRAX and earn interest from borrowers through existing money markets. Effectively, this AMO is MakerDAO’s entire protocol in a single market operations contract. The cash flow from lending can be used to buy back and burn FXS (similar to how MakerDAO burns MKR from stability fees). Essentially the Lending AMO creates a new avenue to get FRAX into circulation by paying an interest rate set by the money market.

AMO Specs

1. Decollateralize – Mints FRAX into money markets. The CR does not lower by the amount of minted FRAX directly since all borrowed FRAX are overcollateralized.
2. Market operations – Accrues interest revenue from borrowers.
3. Recollateralize – Withdraws minted FRAX from money markets.
4. FXS1559 – Daily interest payments accrued over the CR. (currently in development)