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Opinion: Frax Might Be the Most Promising Algorithmic Stablecoin Right Now

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Frax is the first decentralized stablecoin that combines collateralization and algorithms.

Original title: "East Review | May be the most promising algorithmic stablecoin"

Original source: Blockchain World in the East of Beijing

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1. Why other existing algorithmic stablecoins cannot succeed

There are many existing algorithmic stablecoins, such as ampl, esd, bas, etc. , but none of them actually remain stable. Some people think that the current instability is because these coins need to go above and below the water a dozen or even dozens of times to form a consensus and finally stabilize. I don't think this is the case, simply analyze from the root.

If a stable currency cannot be kept stable all the time, it cannot be really applied to finance, and without real application, it is impossible to finally form a consensus.

Biyou’s Haze leader once said that these big stablecoin holders don’t think about the application at all, but CX for others to take over. How can it be successful?

Second, the principle and introduction of Frax

Frax Finance was formerly known as Decentralized Bank (Decentralized Bank) Bank), this project is the first decentralized stablecoin that combines staking and algorithms.

So far, Frax is the only algorithmic stablecoin that is always stable.

The team is public and I take that very seriously.

Adopt the three-coin structure:

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1. FRAX: stable currency, the anchor price is $1USD.

2. FXS: Governance tokens, collecting seigniorage, the total amount is 100 million, one of the core purposes is to transfer the instability brought by speculators from FRAX to FXS.

3. FXB: bond currency, will be issued in V2, we don’t need to pay attention to it for now.

(1) Stablecoin casting

Frax’s casting (Mint) is mortgaged with USDC at the same time and FXS, how much USDC and FXS to use depends on the mortgage rate.

For example: the current mortgage rate is 80%, so to mint $10,000 of FRAX, you need $8,000 of USDC and $2,000 worth of FXS. After the completion, the system charges 0.45% seigniorage for destruction, and at the same time destroys the received FXS of 2,000 US dollars, and USDC enters the treasury for storage! This way every time Frax is minted some FXS will be destroyed.

(2) Determination of mortgage rate

The most important parameter for minting stablecoins is mortgage Rate, two extreme chestnuts, when the mortgage rate is 100%, you need to mortgage 100 usdc to mint 100 Frax, no fxs is required. When the mortgage rate is 0%, to mint 100 Frax needs to mortgage Fxs worth 100 US dollars, no usdc is needed.

The mortgage rate is adjusted according to the price of frax. When the price of frax is greater than $1, it means that the market demand is greater than the supply. Then the mortgage rate will gradually decrease, and the mortgage of usdc The ratio is reduced. When the price of frax is less than $1, it means that the market supply is greater than the demand, then the mortgage rate will gradually increase, and the proportion of mortgage usdc will increase.

(3) Redemption of stablecoins

Stablecoins can be sold through the secondary market Change to usdc, but if the quantity is too large and the market demand is insufficient, it must be the same as bas. The long-term price is lower than 1 dollar, so frax supports the redemption of equivalent usdc and fxs through the system.

For example: the current mortgage rate is 80%, then redeem $10,000 of FRAX, the system will directly give you $8,000 USDC and $2,000 worth of For FXS, after the redemption, the system charges 0.45% seigniorage for destruction, and you can choose to exchange fxs worth $2,000 for equivalent usdc.

It should be noted that during redemption, because the system automatically generates fxs according to the mortgage rate, the total amount of fxs will increase.

(4) Other mechanisms

In order to enhance the stability of the stable currency, the system will continue to More complex mechanisms such as second mortgage, repurchase, PID control algorithm, etc. will be opened. Those who are interested can study it by themselves. The article is too short to elaborate.

Third, the advantages of frax

frax has achieved real stability, once it is greater than $1 , there are funds for arbitrage through casting, and once it is less than $1, there are funds for arbitrage through redemption, and the fluctuations are completely absorbed by fxs. Its system advantages are many.

First of all, its essence is the deposit reserve system of commercial banks. Modern commercial banks do not always prepare 100% of user deposits, generally 10%- 20%, and the rest of the money is used by them to make loans to make money, because it is impossible for everyone to withdraw money at the same time, this business model has been proven to be feasible.

Secondly, the usdc mortgaged by frax in the treasury is not idle. The official will use these usdc to aave through smart contracts to do some low-risk financial management. Repurchase and destroy fxs through wealth management income every day. At present, an automatic financial management contract of 510,000 US dollars has been piloted. This month, 10 million usdc financial management is planned to be launched. It is expected that fxs worth 10,000 US dollars can be repurchased every day.

Again, the casting and redemption of frax requires seigniorage, which is 0.45%. This part of seigniorage is paid by fxs and is destroyed, so fxs It is to collect seigniorage tax continuously through destruction.

Finally, there is no upper limit on the theoretical market value of partially mortgaged stablecoins. The typical comparison is the MKR mechanism. MKR uses over-collateralization, so it takes 2 dollars of ETH to mint 1dai Mortgage, so that the maximum amount of dai that MKR can provide is strictly limited by the total market value of Ethereum. Such a system cannot meet market demand at all. With the partial mortgage model, the leverage can be increased to infinity. For example, a mortgage rate of 50% is 2 times leverage, and when the mortgage rate is 1%, it is 100 times leverage. Theoretically, the frax that can be provided to the market is infinite. Breaking through the limit of the market value of Ethereum!

At present, due to the excellent performance of frax and the vigorous promotion of the official, it has reached a strategic cooperation with crv and sushi, and frax has officially entered the stable currency of crv and sushi Chizi was praised by AC, and the team will continue to work hard to cooperate with other large institutions.

Fourth, the judgment of buying and selling

How to buy and sell fxs is very simple, when the market demand for frax When it increases, buy fxs, and when the market demand for frax shrinks, sell fxs. As for how to judge increases and decreases in demand for frax markets, do your own research.

This article does not constitute any investment advice, investment is risky, and you need to be cautious when entering the market!