DeFi protocol Frax is considering buying native blockchain tokens that back its stablecoin. Purchased tokens, such as Ethereum , would be used as reserve collateral for the stablecoin.
Frax is a fractional algorithm stablecoin protocol that strives to be permissionless and open source. It is also an Ethereum based platform that hopes to revolutionize and improve the industry.
The main objective of this system is to guarantee decentralization, scalability and fast settlement of transactions .
The stablecoin algorithmic protocol is considering the idea of buying billions of dollars worth of native tokens from major blockchains. This in order to use them as a reserve guarantee for its stable currency.
Frax function
The stablecoin, called FRAX , maintains its dollar value by being partially collateralized by USDC, along with an algorithm that buys and sells the coin with another token called Frax Shares (FXS).
When the stablecoin was launched, it was fully collateralized by USDC. But as it expanded, it used the algorithmic elements to maintain its peg to the dollar.
It was always an idea that the project would consider other currencies as collateral. The project documentation states that non-stable cryptocurrencies could be added as collateral once the system becomes more robust.
However, recently this plan has been discussed as an imminent possibility to establish another “stability fund” made of various crypto assets.
Frax Finance founder Sam Kazemian said this multi-chain approach to acquiring collateral will incentivize the flow of FRAX -denominated transactions on these blockchains. According to Kazemian , the system will contribute to a significant corresponding demand for tokens native to these Layer 1 chains.
“Note that this strategy means that each L1 chain (including BTC/Lightning) will have an incentive for FRAX stablecoins to flow through their economy, as that creates a central bank-sized market demand for their token. L1″.
Purchase of different cryptocurrencies
The decision bears similarities to Terra , a DeFi-focused blockchain, which has recently made large bitcoin purchases to create a stability fund that will back its Terra USD ( UST ) stablecoin.
Instead of just buying bitcoin , as is the case with Terra , Frax aims to acquire the native assets of all the blockchains where the stablecoin has been issued.
While Frax ‘s largest presence is on Ethereum , it is also listed on 12 other blockchains, including Avalanche , BNB Chain , Fantom , Harmony , Polygon , and Solana , along with Ethereum’s scaling solution Arbitrum .
According to Kazemian , this off-chain collateral acquisition will be directly proportional to the demand for the FRAX stablecoin on these networks. Therefore, the FRAX balance will reflect the percentage of stable money supply in each network.
The stablecoin can set aside a portion of the seigniorage, the protocol revenue generated from the issuance of FRAX , to accumulate the assets. However, the details have not yet been finalized and may first go through a government vote.
In addition to being multi-chain, Frax Finance will take a different route than Terra ‘s manual Bitcoin purchases.
Comparison of Terra vs. Frax
Terra has been buying bitcoin by trading USDT or burning excess LUNA supply in exchange for BTC .
Frax will instead use its Flaxswap platform to execute these large chain buy orders.
Fraxswap is a decentralized exchange designed to allow execution of large order sizes with minimal slippage. This design feature is especially useful for Frax if it continues to acquire a large volume of major cryptocurrencies for a long time.
