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Dragonfly Capital: Why do we invest in stablecoin Frax?

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Frax, the stablecoin, recently received a strategic round of investment from Dragonfly, which is optimistic about Frax's adjustable collateral mechanism and algorithmic market operations.

原文标题：《 A Visual Explanation of FRAX 》

Originally written by Haseeb Qureshi, Dragonfly Capital&NBSP;

Original text: Perry Wang, Link to Wen

Of all the stablecoins I've combed through (in Chinese), Frax is the most difficult to categorize. Most stablecoins require either excessive collateral, no collateral at all, or the level of collateral depends entirely on the volatility of the cryptocurrency.

Frax is unique; It is the most algorithmic stablecoin like a central bank I have ever seen.

For a true central bank, the bulk of its balance sheet is in other sovereign currencies. Similarly, the assets on Frax's balance sheet are other stablecoins. In the crypto world, this might seem like an odd design choice. But also like a true central bank, Frax can adjust its collateral to the demand for its own currency. When the demand for Frax increases, the system can run looser, and when the demand decreases, it can tighten.

Here's how Frax works:

Dragonfly 合伙人：我们为何投资算法稳定币 FRAX？

The hard and fast rule is that 1 Frax can always be created or redeemed for $1.

But when market conditions change, so does the collateral ratio (CR), and so does the composition of this dollar:

Dragonfly 合伙人：我们为何投资算法稳定币 FRAX？

Like the "Seigniorage Shares" type of stablecoin, Frax's money supply is elastic. As the demand for Frax stablecoins increases, the system can expand the money supply to exceed the sum of the total collateral in the system.

But unlike Seigniorage Shares, Frax can also tighten monetary policy when market conditions demand discipline. Collateral ratios will rise and fall depending on the demand for Frax. If collateral ratios exceed safe levels, they can be gradually adjusted back to appropriate levels.

Perhaps the most interesting element of Frax is its algorithmic market operation (AMO).

Normal central banks engage in open market operations - issuing money to intervene directly in markets where appropriate. This gives central banks the flexibility to improve market functioning, as when the Fed supported the corporate-bond market during the coronavirus crisis.

Frax is designed to have the same flexibility. FRAX allows anyone to propose an AMO policy through governance (emulating the Yearn model), which can be arbitrarily adopted if it is beneficial to the FRAX ecosystem.

One AMO is to issue Frax into a Curve pool to consolidate its anchor to the dollar. (This is essentially like a central bank issuing an unasset-backed currency to defend the value of the currency in the market.) Another example might be issuing Frax and lending on Compound agreements to increase its liquidity, and so on. If the proposal is truly profitable or achieves social benefits, tokens can be issued in a timely manner and funded through AMO. But when the AMO moves out of line and results in a loss of confidence in the FRAX (as reflected by FRAX falling below the anchored price), the AMO can automatically withdraw using the same predetermined algorithm.

This vision design is innovative and seems very different from the concepts of other cryptocurrency central banks. It opens up the possibility of a more powerful and aggressive algorithmic monetary policy than has ever been seen before. It has a lot of work to do to improve the robustness and decentralization of its algorithms. But I think Frax is a fascinating experiment in algorithmic stablecoin design, a project that I'm increasingly excited about. I am very happy to be a part of its investment.

Frax recently closed a strategic round of funding led by our firm, Dragonfly Capital, Electric Capital, Robot Ventures (Robert Leshner and Tarun Chitra), Balaji Srinivasan and Stani Kulechov followed. You can click on Here, To gain a deeper understanding of how Frax works.