FRAX is a redeemable stablecoin with a dynamic collateral ratio that adjusts based on market demand for FRAX. Frax is unique among recent stablecoin designs in that each FRAX is always redeemable for $1.00 worth of assets from the Frax protocol. This has kept the price of FRAX in a relatively tight band around $1.00, making Frax an ideal asset for a Shell pool.
Since launching in December 2020, the circulating supply of FRAX now exceeds 80 million, with daily volumes regularly ranging from $10-20 million. FRAX pools currently have over $150m of liquidity. The protocol has also experienced a major expansion and contraction cycle without a significant deviation from the $1.00 price target.
Additional Resources on Frax
Whitepaper: Introduction - Frax ¤ Finance
Codebase: frax.finance · GitHub
Proposed Asset Weights
50% - FRAX
16.7% - USDC
16.7% - USDT
16.7% - DAI
Open to input for suggestions on weights to best maximize liquidity and utility on Shell.
What are the points of centralization / smart contract / financial risk?
While FRAX has shown tremendous stability, it is still early days for the protocol. The team is in the process of transitioning to a fully decentralized governance process. Because USDC is collateral partially backing each FRAX, FRAX also inherits some USDC risk. Future versions of the protocol will diversify and potentially eliminate this risk.
From a smart contract perspective, the smart contracts have been audited and reviewed by community members and leading security experts in the industry. However, as we all know, this is no guarantee that the contracts are flawless. The team continues to follow industry best practices and engage outside experts to remain vigilant for any potential issues.
The main financial risk for FRAX is that the FRAX peg would break. To date, the peg has been resilient. FRAX is designed to always be redeemable for $1.00 of assets and approximately 86% of the outstanding FRAX supply backed by USDC. The Frax team’s overriding priority is to maintain a strong peg for FRAX. Accordingly, other parts of the Frax protocol are designed to absorb volatility so that FRAX maintains the peg. The FRAX protocol also has approximately $20m of capital locked within the system for up to 3 years, which provides liquidity in times of volatility.
How will this pool attract TVL?
Increasing integrations and utility should drive demand for FRAX. Given existing uniswap routing limitations, there is currently limited liquidity connecting FRAX and DAI / USDT. This is an opportunity for Shell. Shell’s tight stablecoin pools also offer an arbitrage tool to help maintain the peg of FRAX. A Shell pool could attract significant arbitrageurs and lead to a deeper integration in the Frax protocol.
What is the project’s vision and how does Shell fit into that?
Frax’s vision is to create a decentralized, stable, scalable, and capital efficient digital money. A Frax pool on Shell could assist Frax by increasing integration in the DeFi ecosystem while also providing an important tool to help maintain the peg. A Frax pool on Shell could benefit Shell by increasing platform TVL, volume and fees while furthering Shell’s objective of creating an internet monetary system using stablecoins.
Please let me know if you have any questions or suggestions.