Frax is a stablecoin protocol that uses a hybrid algorithm. Frax is open source, unlicensed, and fully on-chain, currently deployed on Ethereum (and possibly cross-chain in the future).

The ultimate goal of the Frax protocol is to provide a highly scalable, decentralized algorithmic currency for digital assets with a fixed supply like BTC.

Many staboin protocols are entirely designed in one direction (fully guaranteed) or at the other extreme (fully algorithmic without guarantees). Collateralized staboins either have asset custody risks or require excessive collateral on the chain. Compared with purely algorithmic designs, these designs can provide anchored stablecoins with higher reliability. Pure algorithmic designs such as Basis, Empty Set Dollar, and Seigniorage Shares offer a highly untrusted and scalable model that embodies the early bitcoin vision of a decentralized and stable currency. The problem with algorithmic design is that they are difficult to guide, grow slowly (no projects have shown significant traction as of q4 2020), and exhibit extreme volatility, which erodes confidence in their actual use as stablecoins. They are primarily seen as a game/experiment rather than a serious alternative to guaranteed staboins.

Frax has developed a new hybrid stablecoin design using ideas from Uniswap and AMMs. In the Uniswap pool, assets A and B must be proportional because the product function is constant. An LP token is simply a pro-rata claim on pool+ fees, so it usually appreciates (if expenses are higher than transience losses) or depreciates (if transience losses are greater than expenses). The LP token is just a passive claim on the pool. Frax took this idea and turned it into a uniquely designed stablecoin. The LP token is the stablecoin FRAX. This is the goal of staboins, which can always mint/redeem $1 worth of collateral and governance tokens (FXS) at a collateral ratio. The ratio of these two assets (collateral and FXS) changes dynamically according to the stablesoin price. If the stablesoin price is falling, the agreement will suggest that the ratio favors collateral over FXS tokens, restoring confidence in FRAX. Arbitrage opportunities arise for those who want to get discounted FXS by putting collateral into a pool of assets at a new rate, a "remortgage exchange" set up by the agreement, so that the agreement can be remortgaged to a higher mortgage ratio. If the PRICE of FRAX exceeds $1, the protocol will indicate the collateral ratio of FXS tokens to gauge market confidence as more FXS are supplied to the stable algorithm. As FRAX increasingly uses algorithms, excess collateral can be returned to FXS holders via a share repurchase function that anyone can call to burn their FXS tokens in exchange for an equivalent amount of excess collateral. The "repo swap" feature always accumulates additional fees/collateral/value in the system onto governance tokens.

1. Hybrid algorithms. Frax is the first and only stablecoin project to be partially supplied by collateral and partially supplied by algorithms. The ratio of collateral to algorithm depends on the market's pricing of stablecoins. If FRAX trades above $1, the agreement lowers the collateral ratio. If FRAX trades below $1, the agreement will increase the collateral ratio. 2. Decentralization & governance minimization, community governance, emphasizing algorithms with a high degree of autonomy and no active management. 3. Fully on-chain predictor, Frax V1 uses Uniswap (ETH, USDT, USDC time weighted average price) and Chainlink's Oracle (IN US dollars). 4. FRAX is a stablecoin with a target range of around $1 / coin. Frax shares (FXS) are governance tokens used to generate fees, seigniorage income, and excess collateral value. 5. Exchange based monetary policy Frax uses the principles of automated market makers such as Uniswap to create exchange based price discovery and real-time stable incentives through arbitrage.

MKR is overmortgaged compared to MKR, so casting 1dai requires a $2 ETH mortgage, so the maximum number of DAI MKR can offer is severely limited by the total market value of ethereum, and such a system is completely inadequate to meet the market demand. With the partial mortgage model, leverage can be increased to infinity. For example, a 50% mortgage rate is 2 times leverage, and a 1% mortgage rate is 100 times leverage. Theoretically, frax can be infinite for the market, successfully breaking through the limit of Ethereum market value and increasing capital efficiency.

Rather than flood the market with stablecoins containing Rebase attributes, Frax found a reasonable design path for algorithmic stablecoins from a pledge perspective. However, the design goals of the project are relatively ambitious, and some of the goals are difficult to achieve. The details of the economic model are still to be discussed, and the project is jumbled with too many functions and possibilities. Whether the project can fully achieve the goals is worth further observation.

1. Security risk of contract code; 2. Price manipulation risk of predictor; 3. Competition with other stablecoin projects, such as Terra.

Team members have strong academic ability and rich experience in the political field. At the same time, if the token model design can be fully realized, it has great value. It not only adds a new possibility to the stablecoin market, but also releases the dividends pledged by stablecoin to ordinary users.