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Frax Finance Community Locks In $2 Billion in Value and Fully Collateralises Native Stablecoin FRX

Feb 24, 2023

Frax Finance Community Decides to Fully Collateralise FRX Stablecoin, Moving Away from Algorithmic Backing

Frax Finance, a decentralised finance protocol with over $2 billion in total value locked, has undergone a significant shift in its collateralisation mechanism after the community voted to fully collateralise its native stablecoin, FRX. The proposal, FIP-188, was posted on the protocol's governance forum last week and suggested setting the target collateral ratio to 100% using protocol earnings to increase the stablecoin reserves. The proposal received a 98% vote in favour and aims to eliminate the algorithmic element of the stablecoin's stabilising mechanism.


The FRX stablecoin was previously backed by a hybrid design that used crypto asset collateral to keep its price pegged to the U.S. dollar while partially stabilising it algorithmically. The shift to full collateralisation will not rely on minting any additional governance tokens, FXS, to increase the collateral ratio and token supply. Instead, the protocol plans to retain protocol revenue to fund the increased collateral ratio and authorise up to $3 million per month in Frax Ether (frxETH) purchases to increase the collateral ratio.


The move towards full collateralisation was favoured by the community, with co-founder of Frax Finance, Sam Kazemian, expressing support for it as the "safest design, while also being the most capital efficient." Frax Finance is managed by a decentralised autonomous organisation through community proposals and votings, and the shift in collateralisation mechanism is a response to the collapse of multiple algorithmic stablecoins that triggered a wider downfall in crypto markets last year.


Frax Finance's decision to fully collateralise its stablecoin also comes amid a wider crackdown on stablecoins, including algorithmic or non-fiat-backed stablecoins, by regulators worldwide. The Canadian Securities Administrators recently published strict rules for stablecoin issuers, including a prohibition on algorithmic or non-fiat-backed stablecoins. Frax Finance has been the fastest-growing liquid staking protocol for ETH, with a 42% growth over the past 30 days, according to data by DefiLlama.


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