Frax Share

What is Frax Share (FXS)?

Frax Shares are the governance tokens for Frax Finance, a stablecoin protocol that combines algorithmic principles and collateral backing. Frax is an open-source, permissionless protocol aiming to provide a scalable stablecoin supply and replace fixed-supply digital assets like Bitcoin.

Billed as the first fractional stablecoin protocol, Frax is implemented on Ethereum and 12 other chains. It has two stablecoins, FRAX, which is pegged to the US dollar, and FPI, which is pegged to the US Consumer Price Index.

The Frax ecosystem consists of the FXS governance token, the two stablecoins, a native automated market maker (AMM) protocol called Fraxswap, and a lending facility called Fraxlend.

When Was Frax Share Launched?

The Frax ecosystem was conceived by software developer Sam Kazemian in 2019 and realized by November 2020.

Frax had its first investment round in August 2020, and the project saw considerable institutional interest. Some notable Frax backers include Dragonfly, Parafi, Crypto.com Capital, Galaxy Digital, Multicoin, and Tribe.

Stani Kulechov of Aave, Kain Warwick of Synthetix, Eyal Herzog of Bancor, Balaji Srinivasan, and Santiago Roel Santos are also invested in Frax.

How Does Frax Share Work?

The Frax system offers decentralized finance users a new concept in stablecoin design. Hitherto, stablecoins have tended to be collateralized by fiat or fiat equivalents like USDT, overcollateralized by cryptocurrencies with DAI, or entirely algorithmic in design.

The FRAX stablecoin, however, brings the fractional reserve concept to stablecoin usage by backing FRAX partly with collateral and letting a percentage be algorithmic.

FRAX can be minted and redeemed from the system for $1 of value, allowing arbitrage traders to balance supply and demand on the open market. At Genesis, FRAX was 100% collateralized, meaning that all of the value used for minting was collateral.

In the fractional phase, some of the value used in minting comes in the form of FXS tokens. For example, at an 80% collateral ratio, $0.80 per $1 minted becomes collateral, and the user burns $0.20 of FXS to make up the rest.

Redeeming FRAX is the reverse of the process, where the redeemer then claims collateral based on the collateral ratio and holds the remainder in minted FXS tokens. Therefore, during the algorithmic phase, FXS is burned when FRAX is minted, and vice versa.

As such, the FXS token’s value is partially determined by the demand for FRAX. The collateral ratio is adjusted dynamically by the protocol during times of FRAX expansion and retraction.

It, along with the prices of FRAX and FXS, are all calculated with a time-weighted average of the Uniswap pair price and the ETH:USD Chainlink oracle.

This mechanism was the foundation of Frax Finance and made up its core whitepaper. After that, Frax expanded its operations to Frax v2, introducing the idea of the Algorithmic Market Operations (AMO) Controller.

An AMO module is an autonomous contract that enacts arbitrary monetary policy so long as it doesn’t change the FRAX price away from its dollar peg. So, AMO controllers can perform open market operations algorithmically, but they can’t mint FRAX out of thin air and break the peg.

This innovation allows maximum flexibility and opportunity without altering the protocol's stability at its base. It also allows anyone to propose, build, and create AMOs that can be deployed with governance, provided they remain within the above parameters.

What Makes Frax Unique?

Frax is an innovative project with clear technical capability, and the team has grown the protocol quickly. Beyond Frax v2, they have added plenty of innovations to the protocol, such as Frax Ether and Fraxferry.

Frax Ether is a liquid ETH staking derivative that leverages the Frax Finance ecosystem to maximize yield and smoothen the process of earning interest on ETH.

This is accomplished via two tokens, frxETH and sfrxETH. The former acts like a loosely pegged ETH stablecoin, with 1 frxETH representing 1 ETH. When ETH is sent to the “frxETHMinter,” an equivalent amount of frxETH is minted.

This frxETH can then be deposited into sfrxETH, an ERC-4626 vault designed to accrue the staking yield of the Frax ETH validators. Over time, as staking yield is accrued, an equivalent amount of frxETH is minted and added to the vault. Users can therefore redeem their sfrxETH for more frxETH than they originally deposited.

Meanwhile, Fraxferry can be used to “ship” tokens between blockchains. This is a slower, simpler, but more secure method of bridging tokens, motivated by the many bridge hacks experienced by various projects.

How is the Frax Share Network Secured?

Frax isn’t a blockchain. Rather, it is made up of various smart contracts that are deployed on several blockchains. As such, one of the key elements of Frax’s security is the robustness of its smart contracts.

To this end, Frax has been audited extensively by four different firms. In 2022, Frax was audited by Shipyard, Trail of Bits, and Code4rena, while Trail of Bits also carried out two audits in 2021. In 2020, Certik was the firm that audited Frax.

Of course, a smart contract can be airtight, but that’s in vain if the blockchain hosting it fails. Frax is deployed on several major blockchains, including Ethereum, Binance Smart Chain, Avalanche, Polygon, and Fantom. Each is secured slightly differently, but most use variations of proof-of-stake to establish consensus.

What is the Use of FXS?

FXS is the non-stable utility token of the Frax ecosystem, intentionally volatile in nature and granting holders governance rights over the platform.

It has the potential for upside and downside utility if the system where the delta changes in value are always stabilized away from the FRAX stablecoin. FXS is anticipated to be a deflationary cryptocurrency, as FRAX is minted at higher algorithmic ratios.

Therefore, as long as FRAX demand grows, the FXS token is meant to be largely deflationary in nature. As the market capitalization of FXS increases, so too does the system’s ability to keep FRAX stable.

FXS holders can also lock up their FXS tokens to generate veFXS to earn special boosts, governance rights, and algorithmic market operations (AMO) profits. In a sense, veFXS functions a lot like Curve Finance’s veCRV.

The comparison also extends to Convex Finance, which has integrated veFXS into its own platform to try and capture Frax’s voting power just like it has with CRV.

Who Controls Frax Share?

FXS is controlled by its holders via the veFXS system, although governance over Frax is limited. This is by design, as the project’s vision is a governance-minimized approach to designing trustless money. To quote: “the less parameters for a community to be able to actively manage, the less there is to disagree on.”

A Frax Gauge is a farming smart contract that takes deposits in one asset and rewards the depositor’s yield in FXS. These are used to incentivize particular behaviors that are advantageous to the protocol.

The gauge system is a major part of Frax governance since veFXS holders distribute their voting power across these gauges. Through this mechanism, veFXS holders, the most long-term users of the protocol, have control over the future FXS emission rate.

Additionally, gauge emissions are fixed and halved every year. This means that the amount of FXS emitted reduces by 50% yearly, similar to the Bitcoin block reward every four years.

How Much FXS is In Circulation?

FXS has a fixed maximum supply of 100 million tokens. Beyond that, the circulating supply changes because of the constant minting and burning of FXS.

A full 60% of the FXS maximum supply is earmarked to be distributed to the community through yield farming, liquidity incentives, and exclusive governance proposals over a number of years.

5% of the FXS supply went to the Project Treasury, which is a pool of FXS governed by the community and team. The purpose of this fund is development grants, open source upkeep of the code, smart contract audits, bug bounties, Frax Improvement Proposals, and more.

The Frax team, founders, and early project members, meanwhile, received 20% of the total supply. Strategic advisors and other contributors were given 3%, and accredited private investors picked up 12% of the FXS supply.

The team tokens were vested over 12 months, and advisors were locked in for 36 months. Private investors saw 2% of their 12% unlocked at launch, but 5% each was locked over the next 6 and 12 months.

How Do You Buy FXS?

You can buy FXS on a variety of decentralized exchanges, which is a reflection of the protocol’s popularity. Curve and Uniswap are two of the easiest venues to find FXS liquidity.

Additionally, you could also redeem FRAX for some FXS or simply buy FXS on a centralized crypto exchange as well. However, keep in mind that you can’t vote your FXS when you hold it on a CEX.

How Do You Store FXS?

To vote your Frax Shares and use them in DeFi as intended, you’ll need a non-custodial or private cryptocurrency wallet. A majority of FXS usage is on Ethereum, but if you want to use FXS on a different blockchain, you’ll need a corresponding wallet.

Many wallets, like Metamask and Trust Wallet, can be used with multiple blockchains, so make sure to do your due diligence on which wallet suits your needs best.

Frax Share Energy Consumption

Frax Finance is a decentralized application or a collection of smart contracts put together to enable various complicated functions on-chain. This means that Frax by itself is just code, but it does rely on third-party blockchains like Ethereum to work.

Luckily, many, if not most, of the blockchains Frax uses are proof-of-stake. PoS is currently the cleanest consensus mechanism among the major blockchains, relying as it does on a minimum amount of hardware and computing power per node.

Some PoS chains are more lightweight than others energy-wise, but they compare very well as a group to proof-of-work blockchains like Bitcoin.

Is FXS a Good Investment?

2022 wasn’t a good year for cryptocurrency investors, and it all started with the collapse of Terra Luna, an algorithmic stablecoin ecosystem that had started to add a collateralization mechanism.

While similarities do exist between FXS and what was then LUNA, there are several key differences. One of the simplest is the fact that FXS has a maximum supply cap of 100 million, so a repeat of the Luna fiasco is likely impossible.

DeFi is a complicated industry and carries many risks. Frax has successfully navigated the waters of DeFi and stablecoins, though its continued innovation is a good sign for the future.