What is FRAX?

Frax is a decentralized fractional stablecoin. This means, it’s partially collateralized with on-chain crypto (USDC) and the other bit is backed by an algorithm.

The stablecoins market is very well established. How does Frax add a flavor to it? Let’s understand stablecoins first.

The goal of any stablecoin is simple— maintain its peg to 1 USD. However, things get fiercely complex to achieve this simple goal.

Numerous methods like fiat collateralization, commodity backing, crypto collateralization, and complex computer algorithms have been used in the past. Here are some live results:

DAI is over collateralized.

USDT is fiat-backed but centralized. USDT has been frozen in the past.

UST was completely algorithm-backed. However, the faith has been lost in stablecoins with its recent spiral death.

On the contrary, FRAX is neither a hundred percent Fiat nor algorithm backed, only collateralized by the given fraction called collateralization ratio.

This collateralization ratio is however not decided by the Frax protocol. The collateral can go in any direction in long run. It only adjusts to keep the peg of FRAX to $1.

Minting & Stability of FRAX

Minting

The FRAX minting process is kept simple. To mint one FRAX (worth $1) a collateral amount (only USDC) along with Frax governance token (FXS) within the parameters of the pre-determined collateral ratio is locked in Frax Finance treasury.

For instance, if the collateral ratio is 85 percent, 0.85 percent of USDC with 0.15 percent of FXS can be locked in Frax Protocol to mint one FRAX. The same can be redeemed, if the FRAX is returned to its protocol, the user is given back the locked assets (USDC and FXS).

Stability

Say the price of Frax breaks its peg either way up or down. The stability can be restored. The process is fairly incentivized for users to even care about it

For instance, if the Frax trades above a dollar, Arbitrageurs can deposit USDC and FXS only worth a dollar in the required collateral ratio, to mint one FRAX token. This token then can be traded in the open market and the user can bag the difference.

For the other way around, if Frax trades below a dollar, arbitrageurs can buy from the open market at less than a dollar, and then redeem it to bag the USDC & FXS in a collateralized ratio worth one dollar.

However, the collateral ratio is entitled to change according to market demands. Say, you deposited 80 USDC and 20 dollars’ worth of FXS to mint 100 FRAX. Upon redemption, you may receive deposited assets in different ratio as it is subject to change.

FXS– The Governance Token & Value accrual

At the genesis of FXS tokenomics, the supply was capped at a total of 100 million.

With every FRAX mint, the collateralized FXS is burnt. This creates a limited supply of its governance token. As the usage of Frax ups, the supply of FXS is reduced, creating more value for its governance token and to its holders.

Hey, the holders can pool FXS in liquidity pairs like FXS/FRAX, and FXS/ETH on Uniswap to earn a small cut for gas collected on every swap.

With more veFXS comes more Voting powers. It follows a similar voting escrow model that is popular amongst other DeFi protocols.

Users can lock up their FXS in return for veFXS for up to 4 years, the higher the locking period the maximum rewards, yeah, yeah, you get it. The reward for veFXS seems promising:

• Governance rights
• Special boost rewards
• AMOs profits

Frax AMOs are programmatically designed to move the collateral USDC to other DeFi ecosystems to efficiently enhance the profits without actually breaking the FRAX peg to $1. The profits are then used to rebuy Frax and burn it, or directly lend profits to veFXS holders.

In any other case if the collateralization ratio is increased, requiring more USDC collateral. The AMO reverses and deposits the USDC back until FRAX restores confidence.

Frax has implemented several important AMOs, each AMO works hard (lol, computer programs) to bring maximum profits to the Frax treasury.

• FRAX 1559
• Collateral investor
• Curve AMO
• Uniswap V3
• Frax lending

The majority of profits are brought in by the collateral investor AMO which is about $70 million, while other AMOs also have a fair share in accruing the profits.

veFXS Upgrade: Frax, Convex, and Curve wars****

The story of reaps & rewards goes further with their partnership with Convex. From here on things are a bit complex, if, in simpler terms, it’s more money for veFXS holders. Before we head on to how this partnership benefits FRAX and its holders, let’s understand Convex Protocol first.

Decrypting in 3… 2… 1… Go!

Soon after its launch,* *Convex Protocol gained traction in the DeFi space. Here’s why— Simplicity and more rewards. The user couldn’t ask for more— unless it’s even more money.

Convex simplifies now what is known as the Curve wars on its user's behalf.

It soon began accruing CRV and veCRV, and by the first half of 2021, it became the largest holder of veCRV.

This is where Curve Wars gets intéressant. With more veCRV comes more Voting powers. Wait, but how’s voting power gonna help— unless it’s about money.

Every 10 days, the curve emissions are decided by the veCRV holders— the voters. That which pool shall benefit maximum from the emission.

Curve emission is the highness term for, the distribution of swap fees collected on curve protocol to various liquidity poolers.

Here’s what partnership does, Frax holds 19% of convex becoming the largest holder than any in the space. This ultimately bestows Frax the governance powers of the Curve protocol.

Here’s what partnership does for veFXS holders. Users can lock the same in return for cvxFXS. This is however an irreversible deal. The protocol in future plans to introduce FPI (Frax Price Index) that will be airdropped to every cvxFXS holder.

The other exit strategy cvxFXS/FXS pool is being planned. However, at the time of writing this gem, the development is still in the very early stage, and the writer is thrilled about the upcoming Elvis film.

Final thoughts on Frax Protocol

That’s all fellas you don’t need a conclusion or final thoughts on Frax protocol. Nope, you don’t need it at all. All you need is love. Here’s love for you, &Peace.