Frax Finance to retire algorithmic backing amid stablecoin crackdown

The community of Frax Finance, a decentralized finance stablecoin protocol, has voted to fully collateralize the native stablecoin Frax (FRAX), ending the protocol’s algorithmic backing.

of FIP-188 The governance proposal, first posted on February 15, reached a quorum with 98% of the votes in favor. snap shot February 23rd This changes FRAX’s collateral model.

The time has come for Frax to gradually remove the algorithmic underpinnings of its protocol, read last week’s proposal.

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

seems like @fraxfinance We are serious about making clear that there is no incentive and a stable value fully backed by exogenous collateral.

It will be interesting to see it scale$fxs https://t.co/fSQXpmsge3

0xChaos (@0xCha0s) February 23, 2023

He explained that the original protocol included a variable collateral ratio that would be adjusted based on market demand for stablecoins. The market determines the amount of collateral required for each FRAX to be worth his US$1.

Due to the hybrid model, the stablecoin is 80% backed by crypto assets and partially stabilized by algorithms. This was achieved through the issuance and burning of FXS, a governance token that surged 12% in the last 12 hours.

Frax is the 5th largest stablecoin in the industry with a market capitalization of just over $1 billion.

Following implementation of the proposal, the protocol will not issue any more FXS to increase the collateral ratio and token supply.

For clarity, this proposal does not rely on issuing FXS to achieve 100% CR.

We plan to retain protocol earnings to fund increased collateral rates, including a moratorium on FXS buybacks.

Related: SEC Enforcement on Kraken Opens Doors for Lido, Frax and Rocket Pool

We also approve the purchase of up to $3 million per month of Frax Ether (frxETH) to increase the collateralization ratio. frxETH works similarly to stablecoins, but is instead pegged to Ether (ETH). This facilitates the transfer of his Ether liquidity within the Frax ecosystem.

DeFiLlama recently reported on the growth of frxETH over the last month.

FraxETH has grown 46.33% over the past month and now has over 100,000 ETH tokens locked pic.twitter.com/5NxhKnTHUt

DefiLlama.com (@DefiLlama) February 20, 2023

The move comes amid what appears to be a broader crackdown on stablecoins in the wake of last year’s devastating Terra/Luna collapse.

On February 22nd, the Canadian Securities Administration (CSA) released a long list of new requirements for cryptocurrency companies and stablecoin issuers wishing to remain legally compliant in the country.

That list included strict rules for stablecoin trading and a ban on stablecoins not backed by algorithms or fiat currencies.