Frax Airdrop Review: First Fractional-Algorithmic Stablecoin

About Frax Airdrop

Frax Airdrop is the first fractional-algorithmic stablecoin protocol. Frax is open-source, permissionless, and entirely on-chain – currently implemented on Ethereum and other chains. The end goal of the Frax protocol is to provide a highly scalable, decentralized, algorithmic money in place of fixed-supply digital assets like BTC.

The Frax protocol is a two token system encompassing a stablecoin, Frax (FRAX), and a governance token, Frax Shares (FXS). A user can mint FRAX by supplying the USDC stablecoin as collateral, along with FXS token in amounts set by the Frax collateral ratio (CR).

Frax Airdrop will be airdropping their upcoming FPI stablecoin to various FXS stakers & LPs. Users who hold veFXS, tFXS, cvxFXS and provide liquidity to FRAX/FXS pool by February 20th, 2022 will be eligible for the airdrop. Stake FXS on Frax to receive veFXS, stake FXS on Tokemak to receive tFXS and stake FXS on Convex to receive cvxFXS.

How To Join Age Of Frax Airdrop

First Step

Frax will be airdropping their upcoming stablecoin “FPI” to various FXS stakers and LPs. You can buy FXS from Binance.

Second step

Users who hold veFXS, tFXS or cvxFXS and/or provide liquidity to the FRAX/FXS pool by the snapshot date will be eligible for the airdrop.

Third Step

Stake FXS on Frax to receive veFXS, stake FXS on Tokemak to receive tFXS, stake FXS on Convex to receive cvxFXS and provide liquidity on Frax to receive FRAX/FXS LP tokens.

Fourth Step

cvxFXS holders will be eligible for the maximum possible airdrop multiplier because Convex will lock any deposited FXS for 4 years. For more information regarding this, see this article.

Fifth Step

The snapshot will be taken on February 20th, 2022.

Six Step

More details regarding the airdrop will be announced in the coming days.

Seven Step

For more details regarding the airdrop, see this tweet.

FRAX Lending

This controller mints FRAX into money markets such as Compound or CREAM to allow anyone to borrow by paying interest instead of the base minting mechanism. The minted into money markets don’t enter circulation unless they are overcollateralized by a borrower through the money market so this AMO does not lower the direct collateral ratio (CR).

This controller allows the protocol to directly lend FRAX and earn interest from borrowers through existing money markets. Effectively, this AMO is MakerDAO’s entire protocol in a single market operations contract. The cash flow from lending can be used to buy back and burn FXS (similar to how MakerDAO burns MKR from stability fees). Essentially the Lending AMO creates a new avenue to get FRAX into circulation by paying an interest rate set by the money market.

Frax Shares (FXS)

FXS is the value accrual and governance token of the entire Frax Airdrop ecosystem. All utility is concentrated into FXS. The Frax Share token (FXS) is the non-stable, utility token in the protocol. It is meant to be volatile and hold rights to governance and all utility of the system. It is important to note that they take a highly governance-minimized approach to designing trustless money in the same ethos as Bitcoin. They eschew DAO-like active management such as MakerDAO.

The less parameters for a community to be able to actively manage, the less there is to disagree on. Parameters that are up for governance through FXS include adding/adjusting collateral pools, adjusting various fees (like minting or redeeming), and refreshing the rate of the collateral ratio. No other actions such as active management of collateral or addition of human-modifiable parameters are possible other than a hardfork that would require voluntarily moving to a new implementation entirely.

The FXS token has the potential of upside utility and downside utility of the system, where the delta changes in value are always stabilized away from the FRAX token itself. FXS supply is initially set to 100 million tokens at genesis, but the amount in circulation will likely be deflationary as FRAX is minted at higher algorithmic ratios. The design of the protocol is such that FXS would be largely deflationary in supply as long as FRAX demand grows.

veFXS & Long Term Staking

In May 2020, the protocol now allows FXS holders to lock up FXS tokens to generate veFXS and earn special boosts, special governance rights, and AMO profits. Check the in depth.

Conclusion

Frax Airdrop uses ideas from Uniswap and AMMs to build a novel hybrid stablecoin design never seen before. In a Uniswap pool, the ratio of asset A and B has to be proportional due to the constant product function. The LP token is just a pro rata claim on the pool + fees so it is usually increasing in value (if fees higher than impermanent loss) or loses value (if impermanent loss greater than fees). The LP token is just passive claims on the pool.

Frax takes that idea and turns it over to design a unique stablecoin. The LP token is the stablecoin, FRAX. It is the object of stabilization and always mintable/redeemable for $1 worth of collateral and the governance (FXS) token at the collateral ratio. This ratio of the two assets (collateral and FXS) dynamically changes based on the price of the stablecoin.

If the stablecoin price is dropping, then the protocol tips the ratio in favor of collateral and less in the FXS token to regain confidence in FRAX. An arbitrage opportunity arises for people wanting to put in collateral into the pool at the new ratio for discounted FXS which the protocol mints for this “recollateralization swap.” This recollateralizes the protocol to the new, higher collateral ratio.