Frax Finance (FRAX)
- Based in:
- Started in / Announced on:
- Mainnet release:
- Frax Finance is a stablecoin which that blends and leans on elements from both collateralized and algorithmic systems.
Audits & Exploits
- Frax offers up to $10m with a static bug bounty program (28-2-2022).
- Scored 81% on DeFi Safety (28-2-2022):
Contract FRAX is extremely active. There is full coverage of deployed contracts in their software function documentation. With a Test to Code ratio of 719%, this protocol has clearly undergone an astonishing amount of testing. In all my time writing reviews, no other protocol has seen so much testing. There are no scripts provided for protocol testing. No report was found. This protocol has not undergone formal verification. Frax has been audited once [by Certik], before launch. 3 major findings were not corrected.
With the comment :
"Frax Finance has been developed with good security in mind, and this protocol's massive $10M bug bounty ensures that every inch of this protocol is measured for cracks - this is the largest amount offered by a protocol we have reviewed. Frax combines this with great oracle documentation, earning them a place among the best. To improve, this protocol might consider elaborating when documenting its testing methodologies. This protocol's architecture is certainly complicated, so users should feel reassured that Frax takes care to ensure there are no clear lines of fracture."
- From Blockthreat (13-4-2022):
"Frax patched a vulnerability that could allow massive slippages after it was responsibly disclosed by Daniel Von Fange."
"Admin control information was clearly documented at this location. The relevant contracts are not identified. Ownership is clearly indicated in this location. Smart contract change capabilities are not identified. This protocol dose not have a pause control, and this is identified. This protocol's timelock documentation can be found at this location. The timelock is 48 hours."
- Leverages a two-token model to create an algorithmic, partially-collateralized stablecoin.
- Has the FRAX stablecoin.
"At 479 commits, it's clear Frax's development history is as moving as it is inspirational."
- Built on: Ethereum and Avalanche (9-3-2021 expected to be done on 20-3-2021). According to DeFi Safety also on (28-2-2022) BNB Chain, Fantom, Moonriver, Polygon, Solana, Aurora, Harmony and Optimism.
How it works
"Whenever FRAX trades above $1 the protocol’s collateralization ratio is lowered and its algorithmic mechanics become more pronounced, while this collateralization ratio is increased whenever FRAX trades below $1."
"FRAX maintains its price stability by offloading its volatility to FXS, which is the governance token that also partially collateralizes the system. As long as there is a buyer on the open market for FXS, FRAX should be able to maintain its peg."
"The FRAX model claims to be under-collateralised but rather a more accurate description is that it’s algorithmically collateralised through a two token system. Here’s how it works:
- The system starts off being 100% collateral based, which means that in order to mint FRAX you need 1 USDC per FRAX. However, if this is anything below 100% then an equivalent amount of FXS (Frax Shares) need to be deposited. Think of it that rather than depositing 1 USDC you would deposit 0.9 USDC and $0.10 worth of FXS. It’s not really under-collateralized since you still need to deposit at least $1 of value, however it isn’t over-collateralized.
- Now, as time goes on, if the price of FRAX is above $1, then the collateral ratio reduces by 0.25% each hour. If the price of FRAX is below $1 then the collateral ratio increases by 0.25% each hour.
- The net result is that the system can become something like 90% collateralized meaning only 90% of USDC needs to be deposited and 10% of FXS per FRAX minted.
However, this isn’t what helps FRAX maintain its peg. The crucial part here is that anyone who buys and holds FRAX can redeem it for $1 worth of USDC and/or FXS. This means that the peg can be a lot stronger since arbitragers can buy cheap FRAX if it goes below $1 and redeem it for $1 of real collateral. Similarly if the price of FRAX goes above $1 then arbs can come in and mint 1 FRAX for $1 and then sell it for $1.10 (or whatever the above-peg price is)."
"FRAX is unique; it is the most central bank-like of algorithmic stablecoins I have seen. If you take a real central bank, most of their assets are other sovereign currencies. Similarly, the assets on FRAX’s balance sheet are other stablecoins. In crypto, this might seem like a strange design choice. But also like a true central bank, FRAX is able to adjust its collateralization level according to the demand for its own currency. When there is more demand for FRAX, the system can run looser, and when demand wanes, it can tighten. Like with Seigniorage Shares, the money supply of Frax is elastic. When demand for the FRAX stablecoin increases, the system can expand the money supply beyond the total collateral in the system. But unlike with Seigniorage Shares, FRAX can also tighten monetary policy when market conditions call for discipline.
But perhaps the most interesting element of Frax is its Algorithmic Market Operations (AMOs). Frax allows anyone to propose an AMO strategy via governance (a la Yearn), and if the strategy is good for the Frax ecosystem, it is free to be adopted.
One such AMO involves minting FRAX into a Curve pool to strengthen the peg. (This is essentially like the central bank minting unbacked currency to defend the peg in the market.) Another example might be minting FRAX to lend on Compound to improve its liquidity, and so on. If it is profitable, or accomplishes a socially useful goal, it can be minted just-in-time and funded via an AMO. But if that AMO overreaches and triggers a decrease in confidence in FRAX (as measured by FRAX going below the peg), the AMO can automatically pull back using the same predefined algorithm."
- From Yield Farmer (14-3-2021):
"Unveiled its V2 system, which involves underpinning the FRAX stablecoin with + zero-coupon bonds."
- From Yield Farmer (16-1-2021):
"The protocol's oracle source is documented at this location. The contracts dependent are identified. There is relevant software function documentation. This protocol documents front running mitigation techniques. This protocol documents flashloan countermeasures at this location."
Their Other Projects
- Frax Finance is launching Fraxlend, a permissionless lending market that allows anyone to lend or borrow assets with any token that is a part of a Chainlink data feed (6-9-2022):
"First, Fraxlend will enable the protocol to mint new FRAX through the borrowing and lending process. Fraxlend allows the Frax Finance protocol to directly lend FRAX and earn interest through existing money markets. Until now, the only way to do that was by taking out an over-collateralized loan on a lending platform such as Curve. With Fraxlend, the protocol can now do this whole process in-house, which generates an additional cash flow that can be used to “buy back and burn FXS.
The second new application Drake highlighted is the ability to create custom term sheets for protocol-to-protocol deals. Typically, these deals — such as when a DAO wants to send another DAO tokens — are worked out via Telegram chats and finalized as OTC deals involving multi-sig wallets. Fraxlend lets DAOs set up the deal on chain, automating the process and making it more transparent."
- Can be found [Insert link here].
Projects that use or built on it
Pros and Cons
"While the FRAX model does move in the right direction, it still has a few major problems:
- Right now FRAX only supports USDC meaning it’s a wrapped for USDC in some ways. FRAX v2 attempts to add volatile currencies through the introduction of FRAX bonds.
- FRAX can’t be used effectively for leverage (like MakerDAO or ARCx) since depositors have no guarantee that they’ll receive their exact amount and type of collateral back. This may be okay assuming FRAX aims to be a primary MoE exchange coin. However, like others, the main beneficiaries of the FRAX stablecoin are the FXS holders who will have increasing power to mint FRAX with their FXS.
The last point around early holders is something I think that plagues all algorithmic stablecoins, and that’s the fact that they enrich early holders at the expense of later holders. Ultimately this will hinder their ability for real adoption since the late adopters will become the early adopter’s exit liquidity."
Team, Funding, Partners
"Many team members are public and cross-reference their employment."
- Drake Evans; core dev
"Frax recently closed a strategic round, which was led by us at Dragonfly Capital, with participation from Electric Capital, Robot Ventures (Robert Leshner & Tarun Chitra), Balaji Srinivasan, and Stani Kulechov."
- Partners with Olympus (6-2021).
- Was one of the 4 launch partners of Debt DAO (1-8-2022). Olympus was another one.
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