The Frax Finance community decided to phase out the algorithmic backing of the stablecoin FRAX and move to full reserve backing.
The corresponding proposal was approved by holders of 42 million FXS (98.08%). The vote took place from February 17 to 22.
The initial version of the stablecoin included a ‘variable reserve ratio’ that was adjusted according to market demand for FRAX.
The hybrid model envisaged 80% backing in crypto assets, with the remainder stabilized through the burning/minting of the governance token FXS.
The proposal envisions:
- a ban on the minting of FXS and on the decollateralize function;
- a pause in the buyback of FXS;
- the use of the protocol’s revenues to raise the collateral ratio (CR).
The community also approved Frax Ether (frxETH) purchases of up to $3 million per month to boost reserve sufficiency. The asset is pegged to the second-largest cryptocurrency and serves as a conduit for ETH liquidity in the ecosystem.
TVL Frax Ether stands at 100,730 ETH ($170.48 million), according to DeFi Llama.
Frax’s market cap stands at $1.03 billion, according to CoinGecko. By this metric the asset ranks fifth among stablecoins.
“Costs associated with under-collateralization are currently far outweighed by the benefits, as they could undermine the perceived security of FRAX. A gradual transition of the project to 100% CR is the best path for the long-term functioning and growth of the protocol,” the proposal states.
These moves came amid concerns about the BUSD issuer Paxos. On February 10, NYDFS initiated an investigation into the company. Later the regulator ordered the firm to stop issuing the stablecoin.
The company said it would halt the asset’s issuance but would continue to support buyback and conversion operations at least until February 2024. The department explained that its actions were prompted by insufficient collateral backing for the “stablecoin”.
Additionally, reports surfaced of threats by the U.S. Securities and Exchange Commission to sue Paxos over securities laws violations in issuing BUSD.
Moody’s is developing a scoring system for stablecoins, according to reports.
CryptoCompare analysts noted a decline in the market share of algorithmic stablecoins from 12.4% in April 2022 to 1.71%. The collapse of TerraUSD was the reason.