The community of Frax Finance, a decentralized finance protocol with some $2 billion in total value locked, voted to fully collateralize the protocol’s native stablecoin frax (FRX), according to a vote concluded Wednesday.
Proposal FIP-188, posted last week on Frax’s governance forum, suggested setting the target collateral ratio to 100% using protocol earnings to increase the stablecoin reserves.
The result represents a significant shift for FRX, the fifth-largest stablecoin with more than $1 billion in market capitalization, as it eliminates the algorithmic element of the stablecoin’s stabilizing mechanism.
Frax uses a hybrid design to keep its price pegged to the U.S. dollar. It is 80% backed by crypto asset collateral and partially stabilized algorithmically, burning and minting the protocol’s governance token FXS. Its issuer, Frax Finance, is managed by a decentralized autonomous organization through community proposals and votings.
According to the proposal, the protocol will not create additional FXS to hike the collateral ratio, which would inflate the token’s supply. Instead, it proposes retaining protocol revenues and authorizing the purchase of up to $3 million of frxETH, the protocol’s liquid ether staking derivative, to prop up reserves.
Sam Kazemian, co-founder of Frax Finance, said in the project's Telegram group chat that he favored increasing the collateral for being the "safest design, while also being the most capital efficient."
Some 98% of the voters favored the proposal.
UPDATE (FEB. 22, 23:21 UTC): Adds quote from Frax co-founder Sam Kazemian.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is an award-winning media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. In November 2023, CoinDesk was acquired by Bullish group, owner of Bullish, a regulated, institutional digital assets exchange. Bullish group is majority owned by Block.one; both groups have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary, and an editorial committee, chaired by a former editor-in-chief of The Wall Street Journal, is being formed to support journalistic integrity.