Frax Finance Explained

Summary: Frax Finance is a DeFi protocol offering three stablecoins and staking derivatives (FRAX, FPI, frxETH) used for yield earning, liquidity provision, and staking in DeFi. The protocol uses innovative subprotocols and native governance tokens (FXS, FPIS) to ensure price stability and user governance. It's a major player in the global crypto market with over $800 million in value locked, founded by Sam Kazemian.

What is Frax Finance

Frax is an innovative DeFi protocol that issues and supports three stablecoins: FRAX, pegged to the USD; Frax Price Index (FPI), tethered to a basket of consumer goods; and FraxEther (frxETH), anchored to ETH. The protocol utilizes three interconnected subprotocols: Fraxswap for collateral rebalancing and liquidity deployment, Fraxlend for loan origination and collateral asset onboarding, and Fraxferry for token transfers across multiple blockchains. The protocol is governed through the native token Frax Share (FXS) and FPIS tokens, which manage the Frax ecosystem and FPI, respectively.

An essential feature of Frax Finance is the Algorithmic Market Operations Controller (AMO), a system of autonomous central banking legos enabling open market operations without affecting the FRAX peg. Paired with the fractional-algorithmic stability mechanism, the AMO maintains a balance between supply and demand for FRAX, ensuring a tight price peg and promoting a robust and efficient platform for decentralized finance transactions.

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What is FRAX?

FRAX is a stablecoin launched by Frax Finance, a decentralized finance protocol. Pegged to the United States dollar (USD), FRAX is designed to maintain a 1:1 value ratio, aiming for $1 FRAX per $1 USD.

The protocol employs a combination of on-chain assets and algorithmic mechanisms to ensure this peg. Should FRAX's price deviate from $1, the system adjusts by manipulating the collateral ratio, working to bring the value back to parity. As such, FRAX offers the benefits of cryptocurrencies, like decentralization and transparency, while mitigating high price volatility making it a safe stablecoin to earn yields in DeFi.

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What is frxETH?

In the Frax Finance ecosystem, Ethereum (ETH) exists as liquid staking derivative under the names frxETH and sfrxETH. frxETH, a stablecoin, is designed to mirror the value of ETH on a 1:1 basis, maintained within a target range of 0.9900 to 1.01 ETH per 1 frxETH. It's minted in equal amounts whenever ETH is contributed to the system.

Meanwhile, sfrxETH is a yield-earning variant of frxETH. Users can convert their frxETH into sfrxETH to gain staking rewards. As these rewards are accrued, additional frxETH is minted and added to a vault. Hence, sfrxETH holders own a share of an ever-growing frxETH pool, mirroring systems like Aave's aUSDC or Compound's cUSDC.

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What can I do with frxETH and FRAX?

frxETH and FRAX, tokens from the Frax Finance ecosystem, have important roles in decentralized finance (DeFi). On platforms like Convex Finance and Curve Finance, you can deposit these tokens as collateral to earn yield. 

You can also provide liquidity with these stablecoins in various pools, earning transaction fees in return. Additionally, staking and yield farming opportunities exist, letting you lock tokens for rewards. These tokens thus offer a mix of stability and income-generation within DeFi.

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What is Frax Shares (FXS)?

Frax Shares (FXS) is the governing and utility token of Frax Finance, a cornerstone of the ecosystem. It allows holders to vote on key parameters and its supply is deflationary with growing FRAX demand. FXS can be locked into veFXS, unlocking additional privileges. With a market capitalization of $500 million, FXS stands within the top 100 crypto assets globally.

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Frax Shares (FXS) Tokenomics

Frax Shares (FXS) tokenomics can be summarized as follows:

• Total Supply: 100,000,000 FXS.
• Community Allocation: 65%, with 60% for yield farming and liquidity programs (halving every December 20th), and 5% for the project treasury covering development, audits, and partnerships.
• Team and Investors Allocation: 35%, distributed as Team / Founders / Early Project Members: 20% (12-month vesting, 6-month cliff). Strategic Advisors / Outside Early Contributors: 3% (36-month vesting). Accredited Private Investors: 12% (Various vesting conditions).

This setup ensures long-term, community-led growth and incentivizes early and strategic contributors.

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Who Founded Frax Finance?

Frax Finance was brought to life by its visionary founder, Sam Kazemian (@samkazemian). An Iranian-American software engineer by profession, Sam also co-founded Everipedia, showcasing his adeptness in the digital space. An alumnus of the University of California, Sam is one of the few influential leaders in the digital asset realm operating out of the United States, skillfully navigating the country's stringent regulatory landscape. His innovative thinking and commitment to the sector underscore his integral role in the success and growth of Frax Finance.

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Bottom Line

In conclusion, Frax Finance, an innovative DeFi protocol, has firmly established its value proposition in the global crypto market. Harnessing three uniquely pegged stablecoins—FRAX, FPI, and frxETH—through its synergistic subprotocols, it deftly maintains price stability using its native governance tokens, Frax Share (FXS) and FPIS. The pioneering Algorithmic Market Operations Controller and the fractional-algorithmic stability system ensure a stable price peg for its tokens. 

This blend of decentralized stability and potential yield has been a significant draw for users, a testament to which is the colossal $800 million in total value locked within the platform. Offering opportunities for yield earning, liquidity provision, and staking, FRAX and frxETH have proven to be crucial assets within DeFi. Under the astute leadership of its founder, Sam Kazemian, Frax Finance has emerged as a powerhouse in the digital asset space, striking a balance between the perks of decentralization, transparency, and price stability.