- Frax Finance is an on-chain protocol that mints and manages the FRAX stablecoin.
- FRAX maintains its peg through a dual collateral-backed and algorithmic mechanism, making it more scalable and capital efficient than overcollateralized stablecoins.
- Frax also utilizes Algorithmic Market Operations to generate revenue and ensure the protocol is more secure and robust.
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Frax Finance is a decentralized protocol that can be thought of as a fully autonomous, on-chain central bank issuing and controlling the monetary policy of a fractional-algorithmic stablecoin called FRAX. Found in the sweet spot between fully-collateralized and uncollateralized stablecoins, FRAX is the first decentralized stablecoin that utilizes a dynamically adjusting collateral ratio to successfully maintain peg stability.
The Current Stablecoin Landscape
Frax is a decentralized, fully autonomous on-chain protocol managing a flagship fractional-algorithmic stablecoin that is backed partly by external and partly by internally-generated collateral.
To understand Frax’s value proposition and its standing among other stablecoins, it’s first necessary to summarize the current stablecoin landscape. For the uninitiated, stablecoins are crypto assets pegged, in one way or another, to a particular fiat currency—typically the U.S. dollar. More broadly, they can be classified into two types: centralized and decentralized. Centralized stablecoins represent fully-backed, fiat-collateralized digital assets issued and controlled by centralized companies or custodians. These include Tether’s USDT, Circle’s USDC, and Binance’s BUSD and occupy by far the biggest market share.
Centralized stablecoins are the simplest of the asset class. Centralized issuers mint them in exchange for dollars and redeem them to receive dollars back at an exchange ratio of one-to-one. This means the issuers must be trusted to always have an equal or greater supply of dollars or other highly liquid, low-risk assets like commercial paper or treasuries on their balance sheets to honor those redemptions. While the market generally deems them safer, centralized stablecoins nevertheless carry considerable custodial and censorship risks.
Decentralized stablecoins, on the other hand, typically fall into two categories: over-collateralized and non-collateralized. The most notable example of the former is the Maker protocol, which allows users to mint the DAI stablecoin by locking…