Frax Finance

Key Features and Mechanics

Stability Mechanism

FRAX’s dual approach to stability involves a collateral ratio that adjusts based on real-time market conditions. This ratio determines the proportion of collateralized assets (initially USDC) and algorithmically governed adjustments using the Frax Share (FXS) token. When the market price of FRAX is above $1, the protocol decreases the collateral ratio, allowing for more FRAX to be minted with less collateral. Conversely, if the market price falls below $1, the protocol increases the collateral ratio, effectively reducing the supply to stabilize the price.

Ecosystem Expansion

Frax Finance has expanded its offerings with three stablecoins:

• FRAX: The primary stablecoin, pegged to the USD.
• Frax Price Index (FPI): This stablecoin is linked to the US Consumer Price Index, offering a hedge against inflation.
• FraxEther (frxETH): Pegged to Ethereum, it serves as a more stable alternative to WETH in smart contracts.

The protocol also includes several subprotocols:

• Fraxlend: A decentralized lending platform.
• Fraxswap: An automated market maker (AMM) that facilitates token exchanges.
• Fraxferry: Aims at enhancing cross-chain interoperability.

Governance and Innovations

Transition to Full Collateralization

Following a community vote on February 23, 2023, Frax Finance moved to fully collateralize FRAX, aiming to fortify its stability and reliability. This decision was part of an ongoing effort to adapt the protocol to ensure long-term sustainability and trust among users.

Frax V3 Developments

The third iteration of the protocol, Frax V3, integrates the use of real-world assets (RWAs) to back the stablecoin fully. The IORB rate, provided by the Federal Reserve, plays a crucial role in adjusting the staking yields within the protocol. Frax Bonds, introduced in this version, are non-redeemable tokens that mature into FRAX, enhancing the protocol’s flexibility and financial offerings.

Future Directions

Layer 2 Expansion – Fraxtal

To address the limitations of Ethereum’s scalability, Frax Finance is developing Fraxtal, a Layer 2 solution that will reduce transaction costs and improve transaction speeds. This blockchain is designed to be EVM-compatible, allowing seamless integration with existing Ethereum applications. Fraxtal will use frxETH as its native gas token, further integrating the Frax ecosystem into its infrastructure. Additionally, partnerships with major DeFi platforms like Curve Finance are expected to extend Fraxtal’s functionalities and market reach.