Frax Finance Plans to Move Away from Algorithmic Backing in Response to Stablecoin Regulations

Frax Finance, a decentralized finance stablecoin protocol, has announced that it will fully collateralize its native stablecoin, Frax (FRAX), ending the algorithmic backing of the protocol.

The FIP-188 governance proposal, posted on February 15, has now reached a quorum with 98% voting in favor, according to a snapshot on February 23.

Near unanimous vote to move $frax to 100% CR over time.

Seems like @fraxfinance serious about making it clear it’s a stable worth holding with no incentive and completely backed with exogenous collateral.

Will be interesting to see it scale$fxs https://t.co/fSQXpmsge3
— 0xChaos (@0xCha0s) February 23, 2023

The initial protocol included a “variable collateral ratio” that adjusted based on the market demand of the stablecoin. The hybrid model resulted in the stablecoin being 80% backed by crypto asset collateral and partially stabilized algorithmically.

The new proposal plans to retain protocol revenue to fund the increased collateral ratio, including authorizing up to $3 million per month in Frax Ether (frxETH) purchases to increase the collateral ratio.

Frax is currently the industry’s fifth-largest stablecoin with a market capitalization of just over $1 billion. The implementation of the proposal will mark the end of the algorithmic backing of the protocol, moving to a fully collateralized model.

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