Frax Share (FXS) Explained

The Frax Protocol is a novel system that utilizes fractional-algorithmic methods to stabilize its stablecoin. It is an open-source, permissionless, and entirely on-chain platform, currently deployed on Ethereum, with the possibility of cross-chain integration in the future. The protocol comprises two tokens: FRAX, a stablecoin designed to maintain a tight price band around $1 per coin, and Frax Shares (FXS), a governance token that accrues fees, seigniorage revenue, and excess collateral value.

Frax Share (FXS) Explained

The Frax Shares (FXS) token is a non-stable, utility token that plays a crucial role in the Frax Protocol. It is designed to be volatile and has governance rights and access to all system utilities. The Frax Protocol takes a highly governance-minimized approach to designing trustless money, in line with Bitcoin’s ethos, and avoids DAO-like active management, such as MakerDAO.

FXS holders have the power to govern the protocol’s parameters, including adding or adjusting collateral pools, adjusting fees (e.g., minting or redeeming), and refreshing the rate of the collateral ratio. However, no other actions, such as active management of collateral or addition of human-modifiable parameters, are possible other than a hardfork that would require voluntarily moving to a new implementation entirely.

The FXS token’s market capitalization should be calculated based on the future expected net value creation from seigniorage of FRAX tokens in perpetuity, the cash flow from minting and redemption fees, and utilization of unused collateral. As FRAX demand grows, FXS supply is expected to be largely deflationary, as the amount in circulation will likely decrease.

The FXS token has the potential for both upside and downside utility of the system, and the Frax Protocol’s design ensures that the delta changes in value are always stabilized away from the FRAX token itself.

As the market cap of FXS increases, so does the system’s ability to keep FRAX stable. Therefore, the priority in the design is to accrue maximal value to the FXS token while maintaining FRAX as a stable currency.

To access documents: docs.frax.finance

About Frax Protocol (FRAX)

The Frax Protocol is an innovative stablecoin system that uses fractional-algorithmic methods. Frax is an open-source and permissionless system that operates entirely on the blockchain, currently utilizing Ethereum with the possibility of expansion to other chains in the future.

The ultimate goal of the protocol is to offer a decentralized and scalable algorithmic currency, as opposed to fixed-supply digital assets such as BTC.

The protocol includes the following key features:

Fractional-Algorithmic: Frax is a distinctive stablecoin that combines collateral-backed and algorithmic-backed elements. The proportion of collateralized and algorithmic-backed elements depends on the current market value of the FRAX stablecoin. If FRAX trades above $1, the protocol reduces the collateral ratio, while if it trades below $1, the protocol increases the collateral ratio.

Decentralized and Governance-Minimized: The protocol is community-run and relies on a highly autonomous, algorithmic approach with no active management.

Fully On-Chain Oracles: Frax v1 relies on Uniswap (ETH, USDT, USDC time-weighted average prices) and Chainlink (USD price) oracles.

Two Tokens: The protocol has two tokens: FRAX, which is the stablecoin pegged tightly to $1/coin, and Frax Shares (FXS), the governance token that earns fees, seigniorage revenue, and excess collateral value.

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About Stablecoins

Stablecoins present a means of connecting the divide between conventional currencies such as the U.S. dollar and cryptocurrencies. By functioning as digital assets with stable prices that resemble fiat, but retain the flexibility and practicality of cryptocurrency, stablecoins offer an innovative solution to the issue of crypto unpredictability.

The stability of their value is an inherent feature of stablecoins. These digital assets are classified into four main types, based on the type of collateral they use as a foundation: fiat-backed, crypto-backed, commodity-backed, and algorithmic.