Frax Stablecoin Backing to Feature Layer 1 Tokens, Real-World Loans

Using real assets will allow Frax’s products to operate as intended even in a bear market.

AccessTimeIconApr 8, 2022 at 8:40 a.m. UTC
Updated May 11, 2023 at 5:29 p.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

Algorithmic stablecoin platform Frax Finance plans to expand the basket of assets that back its FRAX stablecoin by adding other cryptocurrencies, interest-generating tokens and traditional asset loans to the mix.

The Frax protocol is a two-token system comprising the stablecoin and a governance token, Frax shares (FXS). FRAX maintains a peg to the U.S. dollar by being partially collateralized by USD coin (USDC) alongside periodically buying and selling FXS to maintain its market capitalization.

That is set to change.

"FRAX plans to buy native tokens of layer 1 blockchains that support the FRAX stablecoin to be used as reserve collateral,” founder Sam Kazemian said in a message to CoinDesk. “As FRAX is on multiple blockchains, we are taking a multichain approach in proportion to demand across the chains for FRAX.”

The move will facilitate more FRAX based transactions on those blockchains and create greater demand for their layer 1 tokens, Kazemian said. Layer 1, or base, tokens are the native assets of individual blockchains, such as Ethereum, Avalanche, or Terra.

FRAX is most dominant on Ethereum at writing time, with over $2.2 billion worth of value locked. It is present on several other blockchains, meaning the company is likely to buy Avalanche’s AVAX, Binance Chain’s BNB, Fantom’s FTM and Solana’s SOL in the coming months to back the FRAX that circulates on those chains.

In addition, FRAX will be “backed by an extremely diverse range of crypto assets,” Kazemian pointed out. Some will generate cash flow while others will be on-chain loans that accumulate interest.

That will help protect against a change in the dynamics of the broader market, such as a drop in the bitcoin price that could hit other tokens and affect Frax’s reserves.

Bear market-proof

Loans held outside of crypto protocols could also act as a hedge against crypto market downturns.

“We are also exploring real-world asset loans so that there is cash flow countercyclically from crypto bear markets,” Kazemian said. “FRAX closely resembles a central bank which needs a balance sheet that is on aggregate valuable under all market conditions."

Frax's approach differs from the one adopted by the Luna Foundation Guard (LFG), a non-profit that started buying billions of dollars worth of bitcoin (BTC) in March as a reserve backing for UST stablecoins, one of the two assets of the Terra protocol.

They aren’t competing, however. Terra and Frax teamed up last week to create the “4pool,” a liquidity pool on stablecoin swap service Curve Finance. The pool is composed of two algorithmic stablecoins, UST and FRAX, and two centralized stablecoins, USDC and USDT, and aims to become the most-liquid offering for traders on Curve.

Curve is the biggest decentralized finance platform on Ethereum, with over $21 billion in value locked. At the time of this writing, “tricrypto2” was the largest Ethereum-based pool on Curve by value locked, holding more than $78 million of USDT, wrapped bitcoin and wrapped ether.

UPDATE (April 8, 8:51 UTC): Corrects spelling of Kazemian.

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies 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 with an editorial committee to protect journalistic independence. CoinDesk offers all employees above a certain salary threshold, including journalists, stock options in the Bullish group as part of their compensation.

Shaurya Malwa

Shaurya is the Deputy Managing Editor for the Data & Tokens team, focusing on decentralized finance, markets, on-chain data, and governance across all major and minor blockchains.

Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.