FPI: An Inflation-Resistant Stablecoin

In April 2022, Frax released FPI as an inflation-pegged stablecoin, which tracks the US 12 month Consumer Price Index for All Urban Consumers (CPI-U) as reported by the BLS. The CPI-U measures the cost of a basket of goods, including food, energy, vehicles, medical care, etc. FPI has the potential to be an attractive DeFi building block that maintains purchasing power against inflation. FPI is governed by FPIS, which was airdropped to veFXS and cvxFXS holders. So far, FPI has grown to an $87M market cap composed mostly of Frax’s protocol owned liquidity. However, with the launch of veFPIS, increased clarity on the token distribution, and the start of liquidity incentives, now is the time to start paying attention to the FPI ecosystem.

Mechanics

Frax utilizes a specialized Chainlink oracle that updates a BLS’ 12 month CPI metric on-chain. This then modifies the FPI redemption price, which gradually increases or decreases depending on the reported metric. The FPI calculation rate is updated every 30 days. FPI is 100% collateralized by FRAX and FPIS, whereas FRAX is 92% collateralized by USDC and FXS.

A 100% collateral ratio is critical to the sustainability of FPI, as the collateral must grow to match CPI inflation. This collateral grows from various on-chain yield generating AMOs, including liquidity provision on Uniswap, Fraxswap, and Curve; and collateral investing on Aave and Fraxlend. These AMO strategies enable Frax to earn revenue on collateral that would otherwise sit idle. Since inception, the FPI system has earned a cumulative $2M of profits from AMOs.

If AMOs do not earn enough yield to support the FPI peg, the protocol can mint FPIS and sell it on the market in exchange for more collateral to back FPI. While this may smell like a death spiral to anybody with PTSD from the UST collapse, an FPIS unwind is unlikely due to Frax’s monopolistic control of Curve and Convex incentives, which enable the protocol to drive rewards to its AMOs. Further, with the upcoming launch of a frxETH AMO and potential governance actions to diversify yield strategies, Frax can likely maintain optimum profits and support a healthy FPI peg.

For those concerned with FPI’s potential threat to Frax as a protocol, the siloing of FPIS as collateral separate  from FXS protects the longevity of the protocol’s main functions, while enabling experimentation to foster FPI as a new DeFi primitive.