Algorithmic stablecoins can be divided into two models, single-token and multi-token.
The algorithmic stable coins of the single-token model include: AMPL, Base, etc.;
Algorithmic stablecoins of the multi-token model include: ESD, Basis, Frax, etc.;
Frax will go live next Monday, let’s give a brief introduction.
1. Algorithmic stable currency Frax
Frax is trying to become a highly scalable, trustless, extremely stable, and ideological pure chain stablecoin.
There are three tokens in the Frax protocol: FRAX (stable currency), Frax Shares (governance and value accumulation tokens), Frax Bonds (debt financing tokens)
There are also pool contracts holding collateral in the Frax agreement. USDT and USDC mortgages are initially supported, which can be added or removed through governance.
2. Frax design concept
Frax uses Uniswap’s AMMs concept to construct a new hybrid stablecoin design.
Frax converts the LP in AMMs to design a unique stable currency, and the LP token is the stable currency Frax.
Frax can be minted/redeemed with collateral and governance (FXS) tokens worth 1 USD in proportion to the collateral, and the ratio of these two assets (collateral and FXS) will dynamically change according to the price of the stablecoin.
3. Casting the collateral of FRAX
The FRAX stablecoin can be minted by putting the corresponding number of its components into the system.
At the origin stage, FRAX is 100% collateralized, that is, to mint FRAX only needs to put the collateral into the minting contract.
In the fractional stage, casting FRAX requires placing an appropriate proportion of collateral and burning the proportion of Frax shares (FXS).
The protocol is designed to accept any type of cryptocurrency as collateral, but the implementation of the Frax protocol will mainly accept stablecoins on the chain as collateral to stabilize the volatility of collateral, so that FRAX can smoothly transition to more The proportion of algorithms.
As the speed of the system increases, volatile currencies such as ETH and package BTC will be included in the future pool for governance.
4. How is Frax stable?
FRAX can be minted and exchanged from the system at any time, valued at $1, allowing arbitrageurs to balance the demand and supply of FRAX on the open market.
1. When the price of Frax is higher than $1
If the market price of FRAX is higher than the target price of 1 U.S. dollar, then there is an arbitrage opportunity, by putting 1 U.S. dollar worth of cryptocurrency into the system, minting FRAX, and selling FRAX tokens on the open market for more than 1 U.S. dollar. .
At any time, in order to make a new FRAX, the user must put a value of $1 in the system. The difference is the ratio of collateral and FXS to the value of $1.
When FRAX is in the stage of 100% collateral, 100% of the value of FRAX put into the system is collateral. When the protocol enters the fractional phase, the part of the value that enters the system during the casting process becomes FXS (and then burns out of the loop). For example, with a collateral ratio of 98%, each FRAX minted requires USD 0.98 of collateral and USD 0.02 of fxs. With a collateral ratio of 97%, every FRAX minted requires $0.97 in collateral and $0.03 in fxs to burn, and so on.
2. When Frax is less than $1
If the market price of FRAX is lower than the price range of $1, there is also an arbitrage opportunity. FRAX tokens can be purchased cheaply on the open market and the FRAX tokens can be redeemed from the system at a value of $1.
At any time, users can redeem FRAX worth 1 USD from the system. The difference is only the ratio of collateral and FXS returned to the redeemer.
When FRAX is in the 100% collateral phase, 100% of the value returned by the redemption of FRAX is collateral. When the agreement enters the scoring phase, the part of the value that leaves the system during the redemption process becomes FXS (it is minted for the exchange of users). For example, with a collateral ratio of 98%, each FRAX can be exchanged for 0.98 USD collateral and 0.02 USD fxs. With a collateral ratio of 97%, each FRAX can be exchanged for 0.97 USD collateral and 0.03 USD fxs.
