Is Frax (FRAX) A Good Investment?

Introduction

The Frax Protocol is the first fractional-algorithmic stablecoin system. Frax is open-source, permissionless, and entirely on-chain – currently implemented on Ethereum (with possible cross-chain implementations in the future). The end goal of the Frax protocol is to provide highly scalable, decentralized, algorithmic money in place of fixed-supply digital assets like BTC. Decentralized & Governance-minimized – Community governed and emphasizing a highly autonomous, algorithmic approach with no active management. Fully on-chain oracles – Frax v1 uses Uniswap (ETH, USDT, USDC time-weighted average prices) and Chainlink (USD price) oracles.

Two Tokens – FRAX is the stablecoin targeting a tight band around $1/coin. Frax Shares (FXS) is the governance token that accrues fees, seigniorage revenue, and excess collateral value. Before Frax, stablecoins were divided into three different categories: fiat collateralized, overcollateralized with cryptocurrency, and algorithmic with no collateral. Frax is the first kind of decentralized stablecoin to classify itself as fractional-algorithmic ushering in the 4th and most unique category.

How Does Frax work?

• From Yield Farmer (16-1-2021):

"Whenever FRAX trades above $1 the protocol’s collateralization ratio is lowered and its algorithmic mechanics become more pronounced, while this collateralization ratio is increased whenever FRAX trades below $1."

• From Delphi Digital (1-2021):

"FRAX maintains its price stability by offloading its volatility to FXS, which is the governance token that also partially collateralizes the system. As long as there is a buyer on the open market for FXS, FRAX should be able to maintain its peg."

• From DeFi Weekly (28-1-2021):

"The FRAX model claims to be under-collateralized but rather a more accurate description is that it’s algorithmically collateralized through a two token system. Here’s how it works:

1. The system starts off being 100% collateral-based, which means that in order to mint FRAX you need 1 USDC per FRAX. However, if this is anything below 100% then an equivalent amount of FXS (Frax Shares) needs to be deposited. Think of it that rather than depositing 1 USDC you would deposit 0.9 USDC and $0.10 worth of FXS. It’s not really under-collateralized since you still need to deposit at least $1 of value, however, it isn’t over-collateralized.
2. Now, as time goes on, if the price of FRAX is above $1, then the collateral ratio reduces by 0.25% each hour. If the price of FRAX is below $1 then the collateral ratio increases by 0.25% each hour.
3. The net result is that the system can become something like 90% collateralized meaning only 90% of USDC needs to be deposited and 10% of FXS per FRAX minted.

However, this isn’t what helps FRAX maintain its peg. The crucial part here is that anyone who buys and holds FRAX can redeem it for $1 worth of USDC and/or FXS. This means that the peg can be a lot stronger since arbitragers can buy cheap FRAX if it goes below $1 and redeem it for $1 of real collateral. Similarly, if the price of FRAX goes above $1 then arbs can come in and mint 1 FRAX for $1 and then sell it for $1.10 (or whatever the above-peg price is)."

• From Dragonfly Research, which is an investor (16-7-2021):

"FRAX is unique; it is the most central bank-like of algorithmic stablecoins I have seen. If you take a real central bank, most of its assets are other sovereign currencies. Similarly, the assets on FRAX’s balance sheet are other stablecoins. In crypto, this might seem like a strange design choice. But also like a true central bank, FRAX is able to adjust its collateralization level according to the demand for its own currency. When there is more demand for FRAX, the system can run looser, and when demand wanes, it can tighten. Like with Seigniorage Shares, the money supply of Frax is elastic. When demand for the FRAX stablecoin increases, the system can expand the money supply beyond the total collateral in the system. But unlike with Seigniorage Shares, FRAX can also tighten monetary policy when market conditions call for discipline.

But perhaps the most interesting element of Frax is its Algorithmic Market Operations (Amos). Frax allows anyone to propose an AMO strategy via governance (a la Yearn), and if the strategy is good for the Frax ecosystem, it is free to be adopted.

One such AMO involves minting FRAX into a Curve pool to strengthen the peg. (This is essentially like the central bank minting unbacked currency to defend the peg in the market.) Another example might be minting FRAX to lend on Compound to improve its liquidity, and so on. If it is profitable or accomplishes a socially useful goal, it can be minted just-in-time and funded via an AMO. But if that AMO overreaches and triggers a decrease in confidence in FRAX (as measured by FRAX going below the peg), the AMO can automatically pull back using the same predefined algorithm."

Financial Analysis:

Frax price today is $1.01 with a 24-hour trading volume of $18,203,997. FRAX price is up 0.5% in the last 24 hours. It has a circulating supply of 450 Million FRAX coins and a total supply of 451 Million.  At the time of writing this post (Oct 17, 2021), Frax's Return On Investment (ROI) over the past year was 299%, underperformed in 'Seigniorage, Avalanche Ecosystem, Polygon Ecosystem, USD Stablecoin, Decentralized Finance (DeFi), Stablecoins' categories which had 299% growth over the past year. It's underperformed in the crypto market which had 11763% growth over the past year.

Another critical factor in the success of any project is gaining public attention. Our data shows that Frax's Twitter account saw a growth of 68% over the last months in the number of followers, which is considerable. However, the Telegram channel users had a 6% growth over the last months.

Over the last five months, Frax's Market Capitalization rank followed an overall inclining trend, starting at the rank of 191-190 on July-Aug 2021, reaching 174 in Oct 2021. However, by the time of writing this post, Frax's market cap rank is about 174, and its value is $1,232,682,219 Billion. Moreover, its liquidity score is 40% under the market's average score, making it relatively harder to sell in bear markets.

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