Frax is a fractional algorithm stablecoin whose innovative design makes it stand out in the stablecoin market. This article will take an in-depth look at how Frax works, the functionality of its token FXS, and its unique fractional algorithm stablecoin model.
Frax Stock (FXS)
Frax Share Token (FXS) is a volatile utility token within the Frax protocol. The FXS token not only carries governance rights, but also contains all the utility of the system. The scope of governance through FXS includes:
Add/Adjust collateral pool.
Adjust various fees (such as minting or redemption).
Refresh the mortgage rate ratio.
Additionally, in May 2020, the protocol allowed FXS holders to lock FXS tokens to generate veFXS and receive special upgrades, special governance rights, and AMO profits. The supply of FXS is initially set at 100 million tokens, but since FRAX is minted at a higher algorithmic rate, the circulating supply may become deflationary. As long as FRAX demand grows, FXS supply will be largely deflationary.
Fractional algorithm stablecoin model
Fully collateralized stablecoins have custody risks or require on-chain over-collateralization. Stablecoins based entirely on algorithms are difficult to bootstrap, grow slowly, and experience periods of extreme volatility. For these reasons, FRAX has chosen a fractional algorithm stablecoin model, which is partially secured by fiat currency and partially secured by the algorithm.
The value of the FXS token depends on the demand for FRAX. The value of FXS Market Cap is the sum of the uncollateralized value of FRAX Market Cap. As shown below:
At genesis, FRAX is 100% collateralized, meaning that minting FRAX simply requires placing collateral into the minting contract. During the fractional algorithm phase, minting FRAX requires placing an appropriate proportion of collateral and burning a proportion of Frax shares (FXS).
example:
FRAX market price above $1 price target: At a 98% collateral ratio, each minted FRAX requires $0.98 of collateral and burns $0.02 of FXS. At a 97% collateral ratio, each minted FRAX requires $0.97 of collateral and burns $0.03 of FXS, and so on.
FRAX market price range below $1: At a 98% collateral ratio, each FRAX can be redeemed for $0.98 of collateral and $0.02 of minted FXS. At a 97% collateral ratio, each FRAX can be redeemed for $0.97 of collateral and $0.03 of minted FXS.
Collateral Ratios and Oracles
The collateral refresh function in the protocol can be called hourly by any user. The feature can change the collateral ratio in steps of 0.25% if the price of FRAX is above or below $1. Both refresh rate and stepping parameters can be adjusted through management (FXS).
Prices for FRAX, FXS, and collateral are all calculated as ETH:USD prices using Uniswap’s pairing prices and a time-weighted average of Chainlink oracles. Chainlink oracles allow the protocol to get the real price in USD, rather than the average price of the stablecoin pool on Uniswap. This allows FRAX to remain stable relative to the U.S. dollar itself, providing greater resilience.
In a future protocol update, the price feed of collateral could be deprecated and the minting process moved to an auction-based system to limit reliance on price data and further decentralize the protocol.
Liquidity plan and staking
Users who deposit Uniswap LP tokens into incentivized pairs can earn FXS rewards, which can be achieved by adding liquidity to the token pair on Uniswap. Each incentive pair has its own emission rate, and the sum of all FXS rewards for all incentive pairs is emission at a base rate of 18 million FXS in the first year. As FRAX becomes more algorithmic, FXS emission rates are increased by 2x for all pools.
Specific mechanism: Staking ratio boost: The emission rate of each pool is multiplied by the CR Boost constant which is inversely proportional to the staking ratio. This means that as FRAX becomes more algorithmic, the FXS emission rate will increase for all pools. The CR Boost constant is set to a 2x maximum multiplier, which means that if FRAX is fully algorithmic and CR is 0%, the release rate of FXS is increased by 2x.
Time-locked staking: Any LP can lock their LP tokens for 3 years. LP shares are multiplied by two lifting factors: time lock and collateralization ratio. Staking rate increases apply to the base emission rate of FXS, so a staking rate increase means more FXS is distributed across the system. Time-locked boosts apply to an individual's stake as a proportion of all shares in the pool, making it a zero-sum outcome when someone receives a boost from a time-locked stake.
veFXS Boost: veFXS holders will receive an additional weight boost while farming.
Algorithmic Marketing Operations Controller (AMO)
Frax v2 expands the concept of fractional algorithm stability by introducing the concept of "Algorithm Market Operation Controller" (AMO). The AMO module is an autonomous contract that can set arbitrary monetary policies as long as it does not change the FRAX pegged price. This means that the AMO controller can perform open market operations via algorithms, but cannot mint FRAX out of thin air and break the peg. This keeps FRAX’s base layer stabilization mechanism pure and unchanged, which has always been at the core of what makes the protocol special.
Therefore, each AMO can be thought of as a central bank’s monetary lego. Each AMO has four properties:
autonomy
AMO modules are autonomous contracts.
Don't change the peg price: AMO controllers cannot mint FRAX out of thin air and break the peg.
Flexibility: AMO modules create maximum flexibility and opportunity.
Modular design: Anyone can propose, construct, and create AMOs, and as long as they adhere to the specifications, these AMOs can be deployed through governance.
AMO makes FRAX one of the most powerful stablecoin protocols by creating maximum flexibility and opportunity without changing the fundamental stability mechanisms that have made FRAX the leader in the algorithmic stablecoin space. AMO modules open up a modular design space that allows for continuous upgrades and improvements without compromising elegant design, composability, or technical complexity.
in conclusion
Through the above analysis, we can see the uniqueness and innovation of Frax and its FXS token in the stablecoin market. The introduction of its fractional algorithm stablecoin model and AMO module gives Frax significant advantages in providing stability and flexibility. In the future, as Frax continues to develop and improve, it is expected to occupy a more important position in the stablecoin market.