What is Frax Finance?
Are you tired of stablecoins that are about as stable as a unicyclist on a tightrope? Look no further than Frax Finance, the DeFi platform that's making waves in the world of stablecoins. With its unique algorithmic design, Frax Finance aims to provide a stablecoin that's actually stable
Frax Finance is a DeFi platform that was launched in December 2020 by Sam Kazemian and Travis Moore. The platform aims to create a stablecoin that is both stable and decentralized, using a unique algorithmic design that combines elements of both algorithmic and collateral-backed stablecoins.
The Frax stablecoin (FRAX) is designed to maintain a target price of $1 USD, but instead of being pegged to a specific asset, it uses a combination of collateral and a fractional-algorithmic design to maintain its stability. This allows for greater flexibility and adaptability, as the system can adjust to changing market conditions without relying on a single asset or reserve.
Until 2023, Frax Finance operated in an algorithmic model. In light of the 2022 turmoil, Frax governance voted to make FRAX fully collateralized. The majority of collateral on Frax is made out of DAI and USDC, with only a small portion in ETH.
Frax Finance has a decentralized governance system that allows FRAX holders to participate in decision-making regarding the future of the platform. FRAX holders can vote on proposals and changes to the protocol using the FraxDAO platform, which is built on top of the Aragon platform.
To participate in governance, FRAX holders must stake their tokens in the FraxDAO contract, which gives them voting power proportional to the amount of FRAX they have staked. Governance proposals can be submitted by anyone, and must be approved by a quorum of FRAX voters before they can be voted on.
FraxDAO also includes a proposal reward system, which provides incentives for community members to propose and vote on governance changes. The system rewards successful proposals with a percentage of the total amount of FRAX staked in the FraxDAO contract, providing an incentive for active participation in governance.
How does Frax Finance work?
Frax is a stablecoin that is designed to maintain its value at around $1 USD, and it uses a unique algorithmic stability mechanism to achieve this goal.
The Frax stability mechanism works by adjusting the supply of the FRAX token in response to changes in demand, similar to how central banks use monetary policy to stabilize the value of their currencies. When demand for FRAX increases, the system mints new FRAX tokens and sells them on the market to meet the demand, which increases the supply of FRAX and helps to bring its price back towards $1 USD. Conversely, when demand for FRAX decreases, the system buys back FRAX tokens from the market and burns them, reducing the supply of FRAX and helping to maintain its price stability.
The algorithmic stability mechanism of Frax is powered by a combination of on-chain and off-chain market data and metrics, including the USD price of FRAX on major decentralized exchanges, the total supply of FRAX, and the amount of FRAX held in reserve.
One of the unique features of Frax's stability mechanism is that it is partially backed by collateral in the form of other cryptocurrencies, including Ethereum (ETH), Chainlink (LINK), and Wrapped Bitcoin (WBTC). This means that the value of the collateral is used to provide a floor to the value of FRAX, which helps to stabilize its price and prevent extreme fluctuation
The Frax protocol is a two token system encompassing a stablecoin, Frax (FRAX), and a governance token, Frax Shares (FXS).The Frax protocol is a two token system encompassing a stablecoin, Frax (FRAX), and a governance token, Frax Shares (FXS).
FRAX Token
The FRAX token is the stablecoin of the Frax protocol, and its primary utility is as a stable medium of exchange and store of value. The value of FRAX is designed to be pegged to the US dollar, with a target price of $1.00 per FRAX.
FRAX can be used for a variety of purposes, including as a payment method, a unit of account, or a hedge against cryptocurrency volatility. For example, someone who wants to hold a stable asset in their cryptocurrency portfolio could hold FRAX instead of traditional stablecoins like USDT or USDC.
In addition to its use as a stablecoin, FRAX also has some additional utility within the Frax ecosystem. For example, FRAX can be used as collateral to mint FXS, the governance token of the Frax protocol. FXS can then be used to participate in governance and earn staking rewards.
Frax Shares (FXS)
Frax Shares (FXS) is the governance token of the Frax protocol, and it is used to govern the overall direction and development of the Frax ecosystem.
FXS holders have several important governance rights, including the ability to vote on proposals related to changes in the Frax protocol, such as changes to the collateralization ratio or changes to the algorithmic stability mechanism.
In addition to governance rights, FXS also has an economic role within the Frax ecosystem. When the Frax system generates excess FRAX tokens beyond the demand for the stablecoin, these excess tokens are used to buy back FXS tokens from the market. This creates demand for FXS and helps to support its price.
FXS is also used to incentivize participation in the Frax ecosystem through staking rewards. FXS holders can stake their tokens to earn a share of the transaction fees generated by the Frax protocol, as well as a portion of the excess FRAX generated by the stability mechanism.
Frax Lend
Frax offers lending services for a wide variety of ERC20 tokens. Each pair represents an isolated markets from where anyone can participate in lending and borrowing activities.
Lenders are able to deposit ERC-20 assets into the pair and receive yield-bearing fTokens. As interest is earned, fTokens can be redeemed for ever-increasing amounts of the underlying asset.
The fTokens can be redeemed at any time for the underlying asset, plus the interest accumulated.
Each pair relies on an oracle to determine the market rate for both the Asset Token and the Collateral Token. Oracles combine price feeds from multiple places to achieve a robust and manipulation resistant price feed.
How to make money on Frax Finance?
One way to make money by helping Frax stabilize to $1 is by becoming a liquidity provider on the Frax Protocol.
For example, let's say you have 50 USDC and 50 FRAX. You can provide liquidity on the Frax-USDC pool by depositing both tokens into the pool in equal proportions. By doing so, you become a liquidity provider, earning trading fees in return for providing liquidity to the pool.
As the demand for Frax increases, the price may rise above $1, causing the Frax Protocol to mint new FRAX tokens and distribute them to liquidity providers, incentivizing them to supply more liquidity and helping to stabilize the price back to $1. Conversely, if the demand for Frax decreases, the price may drop below $1, causing the Frax Protocol to buy back FRAX tokens from the market and burning them, incentivizing liquidity providers to remove liquidity from the pool.
The direct way of arbitraging FRAX is via the platform's Fraxswap.
By participating in this liquidity pool, you can earn trading fees and rewards in the form of FRAX and FXS tokens, while also helping to maintain Frax's price stability around $1.
Frax Finance veFXS
veFXS is a vesting and yield system based off of Curve’s veCRV mechanism. Essentially, veFXS is more akin to an account based point system that signifies the vesting duration of the wallet's locked FXS tokens within the protocol.
Holding veFXS will give the user more weight when collecting certain farming rewards. All farming rewards that are distributed directly through the protocol are eligible for veFXS boosts.
Price Prediction for Frax Finance — Can it hit $1000?
Buying and hodling FXS — the native token of Frax Finance— is one way of potentially making money on Frax.
By looking at its current price, it’s natural to think about the chance of FXS hitting $1000 per token. This can happen sooner, or way in the future, and is determined by a couple of ever changing factors.
Let’s examine the potential growth of the FXS token by analyzing its tokenomics. FXS's current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} FXS tokens being in circulation today, that means a price of {PRICE} per FXS.
How did we come to that calculation? It’s quite easy, the price of a FXS token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each FXS coin.
By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of FXS at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for FXS to hit that price.
At a price of $1000 per token, that means the current market cap of FXS would equal ${{CIRCULATING_SUPPLY} * 1000}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $1000.
Now let’s shift our attention to the fully diluted market cap.
Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.
The fully diluted market cap represents the total value of a coin if all tokens were in circulation. FXS's whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} FXS which means that no more coins above that number will ever be created.
These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.
How does this impact the price of FXS? Taking into account the current price of a FXS token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. FXS coins that have been burned are not taken into consideration because they have been permanently removed from circulation.
Whether it seems gigantic or not, the number we came to above only takes into account the current price of a FXS token. Doing the same calculation but with a price of $1000 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 1000} for the FXS protocol fully diluted market cap.
These are all crucial details to know when calculating if FXS can reach the price of $1000 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.
The future of FXS depends solely on its growth as a network used by tens and hundreds of millions of users.
If you’re looking to add some FXS to your portfolio, the most trusted places to get some are Binance and Coinbase.