The Frax Finance platform of algorithmic stablecoins plans to acquire tokens worth billions of dollars to create a reserve fund backing the FRAX algorithmic stablecoin. The founder of the project, Sam Kazemian, told The Block.
The FRAX stablecoin is backed by the project’s native token Frax Shares (FXS) and the centralized stablecoin USDC. The platform uses a fractional-reserve system, whose parameters depend on the ratio of FXS liquidity to the total FRAX supply.
When FRAX trades above $1, the collateral ratio is lowered; when it trades below, it is increased. At the same time, arbitrageurs can buy or mint FRAX, helping it peg to the target $1.
Initially FRAX was fully backed by USDC, but as the project has evolved the algorithmic component has begun to play a more prominent role.
The idea of using a spectrum of cryptocurrencies and synthetic assets to support stability exists in Frax Finance’s technical documentation. However, according to Kazemian, it has only now begun to be discussed as an “inevitable option”.
This approach is similar to the Luna Foundation Guard nonprofit initiative. It invested in биткоин and Avalanche (AVAX) to build a reserve and bolster the stability of Terra’s UST.
Kazemian said the platform plans to acquire native tokens across all networks where FRAX circulates. The majority of the stablecoin’s supply is represented on Ethereum, but it also runs on twelve other blockchains, including Avalanche, BNB Chain, Fantom and Solana.
Kazemian explained that Frax Finance will acquire native tokens proportionally to demand for the stablecoin on a given blockchain. The balance of the reserve fund will reflect FRAX’s share of supply on each network.
“This strategy means that any layer-one network (including Bitcoin) will be interested in FRAX circulating through its economy, as this creates enormous market demand for their native tokens,” he noted.
According to the project’s founder, funds for these purposes will be set aside from a portion of the сеньоража. However, details of the plan have not yet been clarified — governance at Frax Finance must first vote on this issue.
The total supply of FRAX has surpassed 2.69 billion. Over the last six months, the metric has increased by 250%.
As reported in March 2022, the Fantom project announced the launch of its own stablecoin USDB with high-yield liquidity pools as collateral.
Follow ForkLog’s Bitcoin news on our Telegram — cryptocurrency news, prices and analysis.