Frax attempts to be the first stablecoin protocol to implement both design principles to create highly scalable, incredibly stable, and ideologically pure on-chain money. Frax (FRAX), and a governance token, Frax Shares (FXS) is the Frax protocol two-token system encompassing a stablecoin. The protocol also has a pool contract that holds USDC collateral, and pools can be added or removed with governance.
There are no set timeframes for how fast the number of collateralization changes. As FRAX adoption increases, users will be more comfortable with a higher percentage of FRAX supply stabilized algorithmically than with collateral. The collateral ratio refresh characteristic in the protocol can be called by any consumer once per hour. The process can change the collateral ratio in steps of .25% if the price of FRAX is above or below $1. When FRAX is above $1, the function lowers the collateral ratio by one step, and when the price of FRAX is below $1, the process increases the collateral ratio by one step. It will refresh the rate, and parameters can be adjusted by governance. In a future protocol update, they can even be adjusted dynamically using a PID controller design. FRAX, FXS, and collateral are calculated with a time-weighted average of the Uniswap pair price and the ETH: USD Chainlink oracle. The Chainlink oracle allows the protocol to get the accurate cost of USD instead of an average of stablecoin pools on Uniswap. FRAX will be able to stay stable against the dollar itself, providing more excellent resiliency instead of using a weighted average of existing stablecoins only.
By placing the appropriate amount of its constituent parts into the system, FRAX stablecoins can be minted. At genesis, FRAX is 100% collateralized, meaning that minting FRAX requires only placing collateral into the minting contract. During the fractional phase, minting FRAX requires setting the appropriate ratio of collateral and burning the ratio of Frax Shares (FXS). While the protocol is designed to accept any cryptocurrency as collateral, this implementation of the Frax Protocol will mainly accept on-chain stablecoins as collateral to smoothen out volatility in the collateral so that FRAX can move to more algorithmic ratios flowingly. As the velocity of the system increases, it becomes easier and safer to include volatile cryptocurrencies such as ETH and Wrapped BTC into future pools with governance.
