What is FRAX and FXS

Frax is a hybrid algorithmic stable coin, partially backed by USDC and FXS. FRAX's algorithm balances the collateral ratio (amount of USDC) based on supply and demand and liquidity of FRAX. The goal is to achieve decentralization based on an algorithmic model, without the drawbacks from the traditional twin coin system (i.e. UST/LUNA).

Frax is the world’s first fractional-algorithmic stablecoin; The Frax Protocol introduced the world to the concept of a cryptocurrency being partially backed by collateral and partially stabilized algorithmically.

Table of Contents

The Mechanics (V1)

Mechanics diagram: https://docs.frax.finance/minting-and-redeeming

➕ Minting: New FRAX shares are minted by depositing a ratio (CR) of USDC and FXS.

1. USDC * CR is deposited and held in FRAX's treasury (0xB1748C79709f4Ba2Dd82834B8c82D4a505003f27)
2. USDC * (1-CR) is burned and removed from circulation.
3. USDC amount is issued in FRAX and delivered to minter

➖ Redeeming: USDC is redeemed from the treasury, FXS is issued and delivered to redeemer.

1. USDC * CR is removed from the treasury and delivered to redeemer.
2. USDC * (1-CR) is minted in FXS and delivered to redeemer.
3. Redeemed amount is burned

💰 Minting and redeeming are subject to a 0.20% - 0.45% fee

Collateral Ratio

• The protocol adjusts the collateral ratio during times of FRAX expansion and retraction

• [V1] When FRAX is at or above $1, the function lowers the collateral ratio by one step per hour and when the price of FRAX is below $1, the function increases the collateral ratio by one step per hour.

• [V2] As of February 2021, the system uses a PIDController to control the collateral ratio according to the change in the growth ratio, defined as such:

  

• At its core, the growth ratio measures how much FXS liquidity there is against the overall supply of FRAX.

• As the collateral ratio is changed by the change in the growth ratio, a low overall CR implies more preceding periods of net positive growth ratio change than net negative.

• The motivation for the growth ratio is to take in the signal of the market cap of FRAX and FXS, such that a change in the collateral ratio can be supported by current conditions.

• The new system still uses a price band, but only adjusts the collateral ratio up or down when the price of FRAX is outside of the targeted band.

• Example

  • For example, a situation of $5 million of FXS liquidity with 50 million outstanding FRAX is much less fragile than one with the same FXS liquidity but 500 million outstanding FRAX.
  • $Gr=(15M+12M+5M)(50M)=0.54Gr=(15M+12M+5M)(50M)=0.54$

FXS

• The Frax Share token (FXS) is the non-stable, utility token in the protocol.
• 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.
• The FXS token has the potential of upside utility and downside utility of the system, where the delta changes in value are always stabilized away from the FRAX token itself.
• The design of the protocol is such that FXS would be largely deflationary in supply as long as FRAX demand grows.