What is Frax and Why It is in the Spotlight in 2024?

Algorithmic stablecoins such as AMPL, MIC, DSD, ESD, and FRAX are becoming increasingly popular in 2024, with a growing user base and value.

FRAX is one of the few algorithmic stablecoins that has proven successful in practice, achieving its primary goal of maintaining a $1 price range.

FRAX V2 is pushing the boundaries of algorithmic stablecoin innovation by aiming for adoption in various DeFi-related features, which will give the project a strong presence in both regular and irregular crypto markets. FXS investors will likely need to lobby for their stablecoin as its valuation is solely based on FRAX’s adoption.

What is Frax? A Beginner’s Guide

Frax Finance is a blockchain project with the FRAX token, which is a partially collateralized algorithmic stablecoin. It can be minted by any individual who provides two essential tokens: USDC and FXS, the protocol’s “share token.”

The minting process uses a collateral ratio to create new tokens. When the collateral ratio is 50%, an individual would need to provide $0.5 of USDC and $0.5 of FXS to mint one FRAX.

Users can redeem FRAX tokens for $1 at any time using the same collateral process. If a user wants to return to their previous assets, they can repeat the process and receive $0.5 USDC and $0.5 FXS for a single FRAX token.

Unlike other stablecoins like DAI, FRAX is only partially collateralized to USDC, with its reserve of USDC always lower than the amount of circulating FRAX tokens.

To ensure a stable ratio against USDC, Frax Finance uses arbitrageurs who are financially incentivized to buy FRAX and redeem it if the token falls below $1. This creates buying pressure that restores the token’s stability and allows arbitrageurs to profit.

Likewise, the same arbitrageurs restore FRAX’s original value if it rises above $1. They do this by minting FRAX using USDC and FXS and then selling the token to profit, which pushes the price down with enough selling pressure.

What Gives Frax Tokens Their Value?

FRAX’s minting mechanism creates demand for FXS, incentivizing holders to invest in the token. This generates buying pressure for the protocol’s other token as long as users seek to move their assets into the stablecoin. Additionally, FXS holders benefit from the fact that once new FRAX tokens are minted, a proportional number of FXS tokens are burned.

As FRAX’s adoption increases, FXS’s price also rises. Since FXS’s usage is heavily linked to the design of the FRAX stablecoin, the more FRAX tokens are minted, the higher the value of these so-called shares.

What Fortune has it for Frax Finance?

Frax Finance is currently another algorithmic stablecoin attempting to solve the price stability problem differently. Its primary intricacies are hidden behind a deep mathematical layer that is too complex to explain in layman’s terms. Real adoption will determine whether their model is successful or not.

Shortly, the Frax Finance team will launch more user-friendly features to improve FRAX’s utility and bring other DeFi-related novelties. For example, FRAX V2 will bring FRAX bonds, a vAMM, and new collateral types.

Summary

Frax v3, the latest iteration of the protocol, was designed to achieve full collateralization through the use of assets such as RWAs. The governance token Frax Shares (FXS) gains fees, seigniorage revenue, and excess collateral value. The current trend is bullish while the prediction goes with the trend.

Disclaimer

The views and opinions stated by the author, or any people named in this article, are for informational purposes only. They do not establish financial, investment, or other advice. Investing in or trading in stocks, cryptos or related indexes comes with a risk of financial loss.

Source: https://www.thecoinrepublic.com/2024/01/24/frax-finance-what-is-frax-and-why-it-is-in-the-spotlight-in-2024/