Disclaimer: This is not official information, only what I collected from looking at the contracts and talking to ppl.
The purpose of this post is to try to explain a little bit of how Frax works and its Protocol Controlled Value. Things I won’t explain: Collateral Ratio, Frax Minting and Redemption, Frax Stability Mechanism.
TL;DR; Frax owns more than $1 for each Frax that needs backing.
In the recent time we have seen a lot of blog posts and Twitter threads explaining how the partially-backed algorithmic stablecoin called Frax works. I’m not going to do that again and just summarize it as,
Frax is a stablecoin partially backed by an external collateral (for example a 3rd party stablecoin like USDC, DAI, etc), complemented with the issuance of protocol shares, represented with the Frax Share (FXS) token. The value of the FXS token comes from it being the governance token of the protocol and it can also be used to receive a percentage of the seigniorage the protocol generates. In this case, seigniorage mainly refers to the income produced when the collateral that backs Frax is put to work.
The answer is it possible, but does not happen. In the initial version, Frax V1, this was the case, for example if the collateral ratio was of 85%, to mint one Frax you needed to supply 85c of USDC and 15c of FXS, and the latter was burned.
But then, something magical happened, enter the Algorithmic Market Operations or AMOs.
In the image above we can see that since it’s beginning the Frax price was kinda wobbly, but fairly stable around $1. Close to July it began to have a much higher stability, that’s around the time the Curve AMO was introduced. In its essence it does two things: if the Curve Frax3Crv pool is unbalanced in favor of Frax (the pool contains less than 50% of Frax) then the protocol mints Frax, deposits it into the pool to rebalance it and becomes owner of some percentage of the pool. If the pool is unbalanced against Frax (it contains more than 50% of Frax), then, since the protocol is owner of a percentage of the pool, it withdraws Frax and burns it to rebalance the pool.
We can see how the minting to and burning from the pool are mechanisms to stabilize Frax’s price around $1, but also allow the protocol to accumulate enormous amounts of liquidity, currently the Frax protocol owns over 60% of the Frax3Crv, or around $1800m divided between Frax, USDC, Dai and USDT. An AMO with a similar functionality is also deployed on Uniswap V3, but with a much lower TVL of ~$12m.
All of the Frax minted the last months has been through AMOs, so sadly no, no much burning lately, but something different happens. Frax puts its collateral to work, for example it deposits USDC on Yearn, AAVE, Compound, the owned shares of the Curve pools are deposited into Convex, and more. This revenue can be considered as seigniorage, but regardless of definitions, the total collateral owned by Frax grows, and more collateral available means that more Frax can be safely minted, a portion of this minted Frax is used to buyback FXS which is distributed to veFXS stakers. This mechanism was implemented in FIP1559, when it began working, around April, 50% of the buybacks were burned and the other 50% distributed to veFXS stakers. Around October it was modified and now 100% of the buybacks are distributed to stakers.
The Frax dashboard provides the following information
If we breakdown the holdings we get the following
These contracts also have 90.5m of free Frax, and Frax has another 162.4m of Frax lent. Summing up all this information, we can get the amount of Frax that need backing by subtracting the protocol owned Frax from the total Frax supply:
Frax that need backing: 1,151,007,129
When we add all the collateral of the table above (excluding the ones marked with *), the collateral owned by Frax totals $1,062,298,511.
But this is not all the protocol controlled value. You may have noticed that in the table I left out about 1/4 of the liquidity, if we assume that half of that liquidity is Frax and half collateral, the protocol owns about 50m more of Frax and $50m of additional collateral. Also, Frax has an interesting bridging mechanism in which it mints Frax on Ethereum mainnet beforehand and locks it in bridges, which then allows users to mint a native (also called canonical) Frax token when they supply collateral (such as bridged versions of Frax, like anyFrax or PolygonFrax, or other 3rd party stables like BUSD) on those other chains. This means that the protocol owns this to-be-bridged/placeholder Frax, which I estimate to be some tens of millions (I’ll say 30m just to give a number). Finally Frax also has investments, it owns other volatile tokens, which add $67m, shown in the following image.
Summing everything up, my estimation is that there are ~1,070,000,000 Frax that need backing, the protocol controls ~$1,100,000,000 of stable collateral, ~$67m in volatile collateral, which means that current Effective Collateralization Rate is >102%.
Yes, but two things ended up happening:
These are the main reasons why the effective collateralization rate is higher than 100%.
A target collateralization rate of 85% means that there is an excess of ~$190m in stable assets + $67m in volatile assets. My best guesses are that it will eventually be used to buyback and distribute FXS, or it will be used as initial backing of the FPI.
Nothing, best I can do is give you staking options for the airdrop.
Since the StakeDAO product is planned to be released at the end of February, we can expect the airdrop to occur at a latter date, although, like everything in crypto, I wouldn’t be surprised if it gets delayed some more weeks.
It will also be interesting to see how the competition between StakeDAO and Convex develops. For example, Convex could vote against gauge rewards to sdVeToken pools, which probably are a very important part to make StakeDAO’s system success.
You can find a more extensive list of Frax contracts here