With the news of the upcoming Frax Finance airdrop of a CPI-linked stablecoin, let’s take a look at what exactly Frax Finance and its stablecoin are all about.  Covered: Frax Airdrop What Is Frax? How Frax Works FXS Governance Token Future Of Frax Protocol Frax Airdrop Frax Finance announced that it is airdropping their CPI-linked […] The post What Is Frax, And Why Is It Airdropping A Stablecoin? appeared first on CryptosRus.

What Is Frax, And Why Is It Airdropping A Stablecoin?

With the news of the upcoming Frax Finance airdrop of a CPI-linked stablecoin, let’s take a look at what exactly Frax Finance and its stablecoin are all about. 

Covered:

  • Frax Airdrop
  • What Is Frax?
  • How Frax Works
  • FXS Governance Token
  • Future Of Frax Protocol

Frax Airdrop

Frax Finance announced that it is airdropping their CPI-linked stablecoin Frax Price Index (FPI) to certain holders, stakers and liquidity providers on their network. Anyone who is holding cvxFXS, staking veFXS, or providing to the FXS liquidity pool by February 20th is eligible for the airdrop.

The stablecoin is “inflation-resitant” resistant according to the team. For the launch, the team partnered with Chainlink as its oracle. 

“FPI references this Chainlink Data Feed to manage an inflation-pegged stablecoin tied to consumer price data. This is the first implementation towards our overall goal of FPI becoming a fully decentralized and permissionless unit of account that is more inflation-resistant than the dollar but still price stable to a basket of goods,” Frax Finance said via their medium blog.

Recommended: Rep. Joshua Gottheimer Introduces Bill To End Stablecoin FUD

What Is Frax Exactly?

As the number of DeFi applications and projects multiply, so do users’ stablecoin options. Frax Protocol is a hybrid algorithm stablecoin protocol.

Unlike better-known stablecoins like Tether and USDC, FRAX is pegged to other stablecoins and not directly to USD. Launched by Sam Kazemian in November 2020, it aims to measure market confidence in partially algorithmic and partially collateralized stablecoins. 

The protocol, which includes FRAX, a fractional algorithm stablecoin backed by USDC, a governance token, has already become the largest algorithmic stablecoin by MarketCap.

How does FRAX work?

The current market price of FRAX determines the ratio of FRAX collateral to the algorithm. If FRAX is above $1, the CR (Collateral Ratio)decreases to add mint supply to FRAX.  Below $1, the CR increases to redeem the FRAX. Therefore, the price of FRAX always fluctuates in a small range around $1, which is more stable than other stablecoins.

Price of Algorithm Stablecoins

However, there could also exist extreme potential risks. If FRAX is continually minted, the price of FRAX could fall due to oversupply, with the potential for an extreme black swan event in the event of a large number of redemptions. To solve this issue, Frax V2 introduces the AMO (Algorithmic Market Operations Controller) mechanism.

Without lowering CR or FRAX prices, AMO performs open market operations to increase the amount of FRAX minted or redeemed. It not only maintains the stability of the protocol but also increases the efficiency of capital utilization. Take the FRAX Lending AMO as an example.

The Frax Protocol Lening AMO provides liquidity by lending FRAX to DeFi’s protocols such as Aave to earn interest. The FRAX does not enter into liquidity, meaning the CR is not reduced and the utilization of the FRAX is increased.

Frax Finance – FRAX Lending AMO

Aside from the Lending AMO, Frax Protocol also has Curve AMO, UniSwap V3 Liquidity AMO and Collateral Investor, the first generation AMO. It is worth mentioning that Frax Protocol’s AMO design is consistent with MakerDAO and can be considered highly advanced.

Currently, you can get FRAX on DEXs such as PancakeSwap or UniSwap, or by pledging USDC and burning a certain amount of FXS to mint FRAX.

Recommended: Brian Brooks – “Stablecoin Issuers Don’t Present All The Risks That Banking Presents”

FXS Governance Token

FXS, the governance token of the Frax protocol, is also the minting fees of FRAX. Burning a certain amount of FXS can mint FRAX. If CR=80%, it takes 0.8 USDC (collateral) and burns $0.2 FXS to mint one FRAX.

 Instead of using the DAO model, the Frax protocol adheres to a fractional algorithm with minimal voting decisions. As a result, FXS holders can vote on adjustments to the CR and pledge pools. This is the effect of holding FXS in addition to earning income. 

FXS can be rewarded by pledging FRAX liquidity to the DeFi protocol. According to the Footprint Analytics, the current price of FXS fluctuates at an average of $23 and has risen 205.4% from Jan. 1. 

Price & Trading Volume of FXS Latest 90 Days

The Future of Frax Protocol

Currently, Frax has access to 14 chains with over 70 protocols and a market cap of $2.7 billion. 

Frax Protocol has now closed two strategic funding rounds—one led by Dragonfly Capital in July and another by Crypto.com in August.

MarketCap of Algorithm Stablecoins

While FRAX has emerged as the leading algorithmic stablecoin, FRAX leans on USDC as its only collateral asset. This is not healthy for the stability and development of a protocol over time.

Even though FRAX relies heavily on users’ feelings against consensus mechanisms, the stability of FRAX has been proven since it launched in 2020. 

Recommended: How To Earn 20% On UST Stablecoins With Anchor Protocol

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