Frax: Fractional-Algorithmic Stablecoin Protocol

Frax is the first fractional-algorithmic stablecoin protocol. Frax is open-source, permissionless, and entirely on-chain – currently implemented on Ethereum and 12 other chains. The end goal of the Frax protocol is to provide a highly scalable, decentralized, algorithmic money in place of fixed-supply digital assets like BTC. The Frax ecosystem has 2 stablecoins: FRAX (pegged to the US dollar) & FPI (pegged to the Consumer Price Index).

Frax is a new paradigm in stablecoin design. It brings together familiar concepts into a never before seen protocol:

• Fractional-Algorithmic – Frax is the first and only stablecoin with parts of its supply backed by collateral and parts of the supply algorithmic. This means FRAX is the first stablecoin to have part of its supply floating/unbacked. The stablecoin (FRAX) is named after the "fractional-algorithmic" stability mechanism. The ratio of collateralized and algorithmic depends on the market's pricing of the FRAX stablecoin. If FRAX is trading at above $1, the protocol decreases the collateral ratio. If FRAX is trading at under $1, the protocol increases the collateral ratio.

• Decentralized & Governance-minimized – Community governed and emphasizing a highly autonomous, algorithmic approach with no active management.

• Fully on-chain oracles – Frax v1 uses Uniswap (ETH, USDT, USDC time-weighted average prices) and Chainlink (USD price) oracles.

• Two Tokens – FRAX is the stablecoin targeting a tight band around $1/coin. Frax Shares (FXS) is the governance token which accrues fees, seigniorage revenue, and excess collateral value.

• Crypto Native CPI – Frax's end vision is to build the first crypto native version of the CPI called the Frax Price Index (FPI) governed by FXS holders (and other protocol tokens). FRAX is currently pegged to USD but aspires to become the first decentralized, permissionless native unit of account which holds standard of living stable.

Price Stability

FRAX can always be minted and redeemed from the system for $1 of value. This allows arbitragers to balance the demand and supply of FRAX in the open market. If the market price of FRAX is above the price target of $1, then there is an arbitrage opportunity to mint FRAX tokens by placing $1 of value into the system per FRAX and sell the minted FRAX for over $1 in the open market. At all times in order to mint new FRAX a user must place $1 worth of value into the system.

The difference is simply what proportion of collateral and FXS makes up that $1 of value. When FRAX is in the 100% collateral phase, 100% of the value that is put into the system to mint FRAX is collateral. As the protocol moves into the fractional phase, part of the value that enters into the system during minting becomes FXS (which is then burned from circulation). For example, in a 98% collateral ratio, every FRAX minted requires $.98 of collateral and burning $.02 of FXS. In a 97% collateral ratio, every FRAX minted requires $.97 of collateral and burning $.03 of FXS, and so on.

Minting

All FRAX tokens are fungible with one another and entitled to the same proportion of collateral no matter what collateral ratio they were minted at. This system of equations describes the minting function of the Frax Protocol: