Frax Finance Shifts to Full Collateralisation for FRX Stablecoin

Frax Finance, a decentralized finance protocol boasting over $2 billion in total value locked, has experienced a major transformation in its collateralisation strategy following a community decision to fully collateralise its native stablecoin, FRX. The proposal, known as FIP-188, was shared on the protocol’s governance forum last week and advocated for establishing a target collateral ratio of 100%, utilizing protocol revenues to bolster the stablecoin reserves. This proposal received an overwhelming 98% approval rate and seeks to remove the algorithmic component from the stablecoin’s stabilising framework.

Previously, the FRX stablecoin operated under a hybrid model that combined crypto asset collateral with algorithmic mechanisms to maintain its peg to the U.S. dollar. The transition to full collateralisation will not involve the issuance of additional governance tokens, FXS, to boost the collateral ratio or token supply. Instead, the protocol intends to use its revenue to enhance the collateral ratio and will authorise up to $3 million per month in Frax Ether (frxETH) purchases to support this increased ratio.

The community’s support for the full collateralisation move was highlighted by Sam Kazemian, co-founder of Frax Finance, who characterized it as the “safest design and most capital efficient.” Frax Finance operates as a decentralized autonomous organization, engaging in community-driven proposals and votes, and this change in collateralisation strategy responds directly to the collapse of various algorithmic stablecoins that contributed to a broader downturn in crypto markets last year.

This decision to fully collateralise the stablecoin also aligns with a growing regulatory scrutiny on stablecoins, particularly those that are algorithmic or lack fiat backing. Recently, the Canadian Securities Administrators imposed stringent regulations on stablecoin issuers, banning algorithmic or non-fiat-backed stablecoins. According to DefiLlama, Frax Finance has emerged as the fastest-growing liquid staking platform for ETH, achieving a 42% increase within the past 30 days.

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