Algorithmic stablecoin platform Frax Finance plans to purchase "billions of dollars worth" of tokens to create a reserve fund for the FRAX algorithmic stablecoin. The founder of the project, Sam Kazemyan, told The Block about this.
The FRAX stablecoin is backed by the native token of the Frax Shares (FXS) project and the centralized “stablecoin” USDC. The platform uses a fractional reserve system, the parameters of which depend on the ratio of FXS liquidity and the total supply of FRAX.
When FRAX trades above $1, the system lowers the collateral ratio, lower it raises it. At the same time, arbitrageurs can buy or issue FRAX, contributing to its binding to the target level of $1.
Initially, FRAX was fully provided by USDC, but as the project developed, the algorithmic component began to play a more prominent role.
Shares of FRAX collateral and algorithmic collateral. Data: Frax Finance.
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The idea of using a range of cryptocurrencies and synthetic assets to maintain stability is present in the Frax Finance whitepaper. However, according to Kazemyan, it is only now that it has begun to be discussed as an "inevitable option."This approach is similar to the initiative of the non-profit organization Luna Foundation Guard. It has invested in Bitcoin and Avalanche (AVAX) to build back-up and improve the sustainability of Terra's UST stablecoin.
Kazemyan said that the platform plans to purchase tokens from all networks where FRAX circulates. Most of the stablecoin supply is on Ethereum, but it is also circulating on 12 other blockchains, including Avalanche, BNB Chain, Fantom, and Solana.
Kazemyan explained that Frax Finance will acquire native tokens in proportion to the demand for stablecoin on a particular blockchain. The balance of the reserve fund will reflect the share of the FRAX supply in each network.
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“This strategy means that any Tier 1 network (including Bitcoin) will be interested in having FRAX stablecoins flow through its economy, as this creates a huge market demand for their native tokens,” he said. According to the founder of the project, part of the seigniorage will be set aside to raise funds for these purposes. However, the details of the plan have not yet been clarified - first, Frax Finance management must vote on this issue.
The total supply of FRAX exceeded 2.69 billion. Over the past six months, the figure has increased by 250%.