Frax Stablecoin Ditches Algorithmic Backing, Moves to 100% Collateral

Frax Stablecoin Ditches Algorithmic Backing, Moves to 100% Collateral

A community vote to ditch the current algorithmic backing of Frax (FRAX) – a decentralized stablecoin by Frax Finance – has been approved, and will see the collateral ratio (CR) of the stablecoin increase to 100%.

In a snapshot that finalized earlier today, 98% were in favor of the move.

The FIP-188 proposal outlined the increase will be achieved through protocol earnings and not by minting new FXS tokens.

“The time has come for Frax to gradually remove the algorithmic backing of the protocol,” read the proposal.

Currently, Frax uses a “variable collateral ratio” which changes it’s backing based on market demand, letting the market decide how much collateral was necessary for one FRAX to equal one US Dollar.

“The costs of being slightly undercollateralized now far outweigh the benefits – especially because it can undermine the perceived safety of FRAX.”

Frax intends to meet a CV of 100% by retaining protocol revenue, which includes pausing buybacks of it’s Frax Share (FXS) governance token.

The protocol will also purchase up to $3 million Frax Ether (frxETH) each month to help increase the collateral ratio. frxETH is Ether (ETH) that is within the Frax ecosystem and is “loosely” pegged to the price of ETH. Frax Ether currently sits at a total value locked (TVL) of over $170M according to data from defillama.

Following the snapshot, FXS saw a spike in price and is currently up 11% on the day.

frax share to usd chart
source: coinmarketcap

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Liam Peak
Liam Peak
Liam is the founder and head editor at Coinmash. Previously working as a blockchain developer, he enjoys sharing insights on DeFi, NFTs, and Blockchain tech. Occasionally he'll share a thought or two and cover some breaking news surrounding Web3.