Frax Community Votes to Fully Collateralize Stablecoin, Remove Algorithmic Backing

No New Minting of $FXS

With nearly unanimous assent from $FXS governance token holders, the Frax Finance community has voted to remove the algorithmic underpinnings from the $FRAX stablecoin and move to a fully collateralized model over time.

“The time has come for Frax to gradually remove the algorithmic backing of the protocol. The Frax protocol has grown and evolved dramatically since the protocol launched in December 2020,” according to the governance proposal.

Specifically, the proposal calls for increasing the target collateral ratio of $FRAX to 100% in the long term, with no additional minting of $FXS. Buybacks of $FX will be paused, while $veFXS yield will remain the same. Up to $3 million per month in $frxETH purchases will be authorized to increase the collateral ratio.

The move from Frax comes amid broader market uncertainty about stablecoins, as $BUSD issuer Paxos Global decided to stop minting the stablecoin and severed its relationship with Binance in response to pressure from U.S. regulators. Last spring, the collapse of Terra's algorithmic stablecoin $UST generated shockwaves through the crypto universe.

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What is FRAX

FRAX is an open-source, permissionless, and entirely on-chain protocol. They carry the vision of providing highly scalable, decentralized, algorithmic money in place of fixed-supply digital assets like BTC.

FRAX is the first and only stablecoin partly backed by collateral and partly by algorithm. The stablecoin (FRAX) is named after the “fractional-algorithmic” stability mechanism. The collateral to algorithm-backing ratio depends on the market’s pricing of the FRAX stablecoin. If FRAX trades above $1, the protocol decreases the collateral ratio. On the other hand, If FRAX is trading under $1, the protocol increases the collateral ratio.

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