Frax is an open-source algorithmic protocol on the Ethereum blockchain featuring two native tokens: FraxShare (FXS) and FRAX.
The Frax Protocol employs a decentralized governance approach with minimal vertical control. The governing body focuses on swiftly addressing any issues that may arise within the community.
Previously, we discussed one of the project's stablecoins – FRAX, which is backed by USDC at a 1:1 ratio.
The second token in the ecosystem, FraxShare (FXS), acts as a value-accumulating asset and is a tool for project governance.
Unlike the stable FRAX, the FXS token was initially conceived as a deflationary asset.
The initial supply of FXS was set at 100 million tokens, but its market quantity depends on the demand shifts of FRAX.
The protocol's development priority is to increase the value of FXS as much as needed to maintain the FRAX price at a consistent level. Intending to support the price stability of FRAX, an Algorithmic Market Operations Controller (AMO) module was developed.
If the price of FRAX falls below $1, arbitrageurs are incentivized to buy FRAX and exchange it for USDC, thereby increasing demand and stabilizing the price.
If the price of FRAX rises above $1, they can issue new FRAX tokens by sending their USDC and FXS to the pool and selling them, thereby increasing the supply and bringing the price back to the desired level.
In other words, AMO operates on the principle of communicating vessels – the protocol's liquidity flows from one token to another. Throughout this, the USDC stablecoin serves as the balancer.
How the AMO module works. Source: Messari
FraxShare cryptocurrency was launched for trading on December 27, 2020, at a price of $3.90.
In January 2021, the token experienced its first rally, reaching a peak of $29.26. Throughout 2022, the price of FXS continued to rise, setting its all-time high on April 3 at $42.67.
Currently, FXS is facing bear market pressures, similarly to most tokens. However, over the past three months, its volatility has not exceeded 2%, which is a decent performance for most low-market-cap cryptocurrencies.
FXS Price Chart. Source: CoinMarketCap
As this article is being written:
- The price of FXS stands at $5.40;
- Daily trading volume is $22.1 million;
- The income from staking ranges from 0.21% to 0.84% annually;
- 4.2 million FXS are locked in liquidity pools (40.2% of the total supply);
- The average lock-up period is over one and a half years.
Since FXS owners engage in long-term staking and receive additional benefits from special bonuses and governance rights, the project continues to stay afloat. However, the protocol clearly lacks its own cross-chain bridge for transactions between different networks.
Currently, developers suggest using the internal secure protocol, Frax Ferry, but according to user feedback, it's too slow for transferring assets to Arbitrum and Optimism. Such a transaction takes more than a day, which is uncompetitive in the modern DeFi economy.
