FRAX

FRAX is a unique stablecoin that pioneered the fractional-algorithmic stability mechanism. It's partially backed by collateral and partially stabilized algorithmically, designed to be highly capital-efficient while maintaining its peg to the US Dollar.

How It Works

FRAX uses a two-token system:

• FRAX: The stablecoin pegged to $1 USD
• FXS (Frax Shares): The governance and value accrual token

The protocol dynamically adjusts the collateral ratio based on market conditions. When FRAX trades above $1, the collateral ratio decreases (making it more algorithmic). When it trades below $1, the collateral ratio increases (making it more collateralized).

Key Features

• Dynamic Collateral Ratio: Adjusts automatically based on market demand
• Capital Efficient: Requires less collateral than fully-backed stablecoins
• Multi-Collateral: Accepts various crypto assets as collateral including USDC
• DeFi Integration: Widely used across DeFi protocols for lending, liquidity provision, and yield farming

Innovation

FRAX represents a middle ground between fully-collateralized stablecoins (like USDC) and purely algorithmic stablecoins (like the failed UST). This hybrid approach aims to combine the best of both worlds: capital efficiency and stability.

Considerations

While innovative, fractional-algorithmic stablecoins are more complex than traditional fiat-backed stablecoins and require understanding of both collateral mechanisms and algorithmic stabilization methods.