Frax: The Road to Fraximalism

Those unfamiliar with Frax should read our Frax asset profile before diving into this report. Essentially, Frax partners with various DeFi protocols, such as Curve and Convex, to incentivize utilization of its FRAX stablecoin via bribe rewards and FXS emissions. With a clear roadmap set, FRAX could grow its market cap by 6x and still only be matching its biggest decentralized stablecoin competitor DAI.

FRAX’s USD peg proved resilient through this recent market downturn and increasing skepticism arising from the fall of UST. Yet FRAX is only partially algorithmic. While LUNA effectively was the sole backing for UST, FRAX’s algorithmic component is only 10% of FRAX’s supply. AMOs (algorithmic market operation controllers) back 90% of FRAX’s USD-pegged liabilities. These assets are easy to liquidate if needed. FXS stands only as the final defense in case of a complete bank run.

Debunking FXS Supply Assumptions

Frax critics commonly claim that while Frax earns profits through its AMOs, these profits do not offset FXS token reward inflation, which is assumed to be sold on receipt. However, a thorough examination of the distribution of FXS’ supply reveals otherwise.

Currently, FXS distributes 87,500 FXS per week in token rewards. Every 12 months, this emission reduces by 50%. 18 million in FXS has been emitted through gauge rewards and liquidity incentives since inception, which at first glance seems like significant inflation. However, FXS, with its value accrual mechanism and deflation potential, is not a typical farm and dump “worthless governance” token. A significant proportion of FXS supply actively flows back into different mechanisms of the protocol.