Frax Finance is an Ethereum-based protocol that issues the FRAX stablecoin, a dual-backed stablecoin that is collateralized both by USDC reserves and an algorithm that works in tandem with FXS, or Frax shares, which is the governance and utility token of the FRAX protocol.
FRAX derives its name from ‘fractional-algorithmic’, a reference to the dual method of backing the value of the token. FRAX is the first and most famous stablecoin to adopt this method. The goal of Frax is to become a ‘crypto-native’ consumer price index, which owners of the FXS token will be able to govern.
How are FXS and FRAX Related?
Unlike other stablecoin collateral methods, FXS has a dual algorithmic and collateral model. FXS is burned, in line with the posted collateral ratio of the protocol, to mint FRAX stablecoins. Users can do this, but the protocol automatically buys FXS tokens and burns them to help manage the supply. FRAX can also be returned to the protocol to redeem FXS tokens.
When FRAX trades above a dollar, users can return a dollar’s worth of value in USDC and FXS to the protocol and then sell the FRAX token for a higher price. This natural incentive then increases the supply of FRAX, causing its value to return to peg. The same is true in the opposite direction, with the FRAX supply contracting when it dips below a dollar as arbitrageurs return it to the protocol to redeem a higher value of USDC and FXS.
The ratio of required USDC and FXS required to mint FRAX stablecoins is determined by the collateral ratio. This ratio automatically adjusts depending on demand. When demand for FRAX is high, the collateral ratio reduces. This means that more and more FXS (and less USDC) is required to mint FRAX tokens, increasing demand for FXS and shifting requirements away from collateral backing. When the demand recedes, then more USDC is required to mint FRAX – shoring up the protocol against any dramatic dwindling in demand, or overall contraction of the crypto value.
The value of the FXS token is therefore not determined simply as a function of the demand for FRAX. Rather, the FXS token’s price movement is reflected in the non-collateralised value of the FRAX stablecoins market cap.
What Utilities Does FXS Token Have?
FXS is a governance and utility token, however, the Frax protocol does not have a DAO (the current most popular model in DeFi protocols). The governance model requires very little active management on behalf of its users, and FXS bestows correspondingly little control over the key levers of the protocol itself. It does open up a few parameters to be discussed by the community, however, including whether to introduce new collateral pools, how to adjust existing ones, and voting on the collateral ratio and the fees the protocol requires.
FXS also offers staking opportunities with its veFXS token, which is similar to the Curve Finance model. Locking up FXS in the protocol lets users receive veFSX, with the amount determined by the length of the lock up. veFXS tokens are, unlike most, not liquid, but can be exchanged for FXS at the end of the lock up period. By locking your FXS tokens into the protocol to receive veFXS, you are able to earn special boosts, special governance rights, and AMO (algorithmic market operations) profits.
Dual Wield, Dual Yield
FRAX protocol’s unique dual-backing model has given it a niche in the current war for stablecoin dominance, a niche it has successfully exploited. FXS, as the fundamental token backing the FRAX stablecoin and its ongoing operation, offers a great opportunity for investors who believe in a stablecoin dominated future to explore different value-backing methods.
Download Numio to get Frax Share
How can I get FXS?
Getting FXSis easy on Numio. You can use your credit or debit card to purchase ETH or USDC, which can then be exchanged for FXS*, you can swap or trade it for other ERC-20 tokens (up to 100x cheaper than other wallets), and you can send or receive it as a payment. Whatever way you choose you can be sure that you are always in full control of your FXS.