[Company Watch] Dual Asset Backed Stablecoins — Would this work?
Frax Finance is the pioneer in designing a creating a special type of stablecoin, although Frax defined it as both algorithmic and collateralised, the stablecoin is essentially a collaterialised one, with two coins as collaterals, one USDC, and the other one Frax’s platform token FXS.
As of now, the total issuance of $125m Frax is backed by $105m USDC and $20m of FXS, its platform token.
This is how Frax works as a stablecoin:
- Frax can always be minted and redeemed from the system for $1 of value.
- When Frax>1, anyone can mint Frax, with the combination of USDC and FXS based on a collateral ratio. For example, in a 98% collateral ratio, every FRAX minted requires $.98 of collateral and burning $.02 of FXS.
- When Frax <1, anyone can redeem Frax, to receive a combination of USDC and FXS based on a collateral ratio. For example, in a 98% collateral ratio, every FRAX can be redeemed for $.98 of collateral and $.02 of minted FXS.
- A minting/redemption fee of 0.45% is applied.
The collateral ratio is determined by the following:
- When Frax>1, the collateral ratio lowers by 0.25% per hour
- When Frax<1, the collateral ratio increases by 0.25% per hour.
As the collateral ratio moves, the amount of USDC required in the reserve, can be more or less. E.g. When 100m Frax is minted with 100m USDC at the beginning and subsequently the collateral ratio drops to 99%, then there’s only a need to maintain 99m of USDC in the reserve. In other words, there will be a surplus or shortage of USDC from time to time. Frax Finance allows anyone to re-collateralise or buy-back collaterals when this happens. At a prize of 0.75% of the value, paid in FXS.
The system design ideally works, but it’s not forever robust. For instance, if there’s no market demand for FXS in extreme situations, then the reserve pool of USDC will not be rebalanced to fund all the Frax according to the designed collateral ratio. In such case, Frax will lose its peg.
Frax Finance is audited by Certik. Its team comprises of Sam Kazemian, a tech entrepreneur and advised by Stephen Moore, an economist and former advisor to Federal Reserve.
Currently, Frax Financial is giving out mining incentives to encourage adoption of the new stablecoin.
Why is Frax the pioneer, and not the one — two weeks after it’s launch, forks by anonymous teams have surfaced and attracted $10m over liquidity. Pegs Cash, for example, is one of these. Our hypothesis is that such multi-asset backed stablecoins are valid up to the strength of the platform tokens — and comparing these two will provide a good opportunity in testing this. We will see in a few weeks time.
(Serenity Team, 18 Jan 2021, Twitter: https://twitter.com/SerenityFund)