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

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.


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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.