ITSA lists FRAX Stablecoin in Tokenbase

FRAX is a fractional reserve algorithmic stablecoin pegged to the US dollar incorporating a two-token system. Launched in December 2020, the protocol aims to move away from the model of stablecoin over-collateralization to a model of fractional collateral backing where parts of the supply are backed by an algorithm of a two token system: FRAX and FRAX Shares (FXS). When the collateral ratio of FRAX is below 100%, the difference is covered by the Frax Shares token. The FXS token is also part of the protocol’s governance system.

Authors: Valentin Kalinov, Christian Viehof

The stablecoin market is currently dominated by tokenized funds like Tether and overcollateralized stablecoins like DAI. While these stablecoins maintain a stable peg to the USD, there are also a few shortcomings. Stablecoins like Tether have a custodial risk while DAI must stay overcollateralized, leading to capital inefficiency. On the other side of the spectrum are pure algorithmic stablecoins like Empty Set Dollar (ESD), where the peg is algorithmically managed. While highly decentralized, these stablecoins often suffer from high volatility. Many algorithmic stablecoins have lost their peg during market downturns because of the lack of collateral to back their value. Frax is trying to fix that problem by being partially collateralized while still having algorithmic stabilization. We could categorize Frax as a fractional reserve algorithmic stablecoin where if the collateral ratio (CR) drops below 100%, the difference is covered by the FXS token. For example, in a 90% collateral ratio, every FRAX can be redeemed for $0.90 of collateral and $0.10 of minted FXS. FRAX can always be minted and redeemed for $1 of value from the system. In order to mint new FRAX, users must place 1 dollar worth of value into the system. Frax accepts other stablecoins (e.g., USDC, DAI, FEI, etc.) as collateral. In the future, the system should accept volatile assets like Ethereum. There are two scenarios if the price of FRAX deviates from $1 dollar :

• FRAX is above one dollar: There is an arbitrage opportunity to mint Frax for 1 dollar worth of collateral and FXS and sell it on the open market for a higher price. At the same time, the system lowers the CR to discourage investors from buying FRAX.
• FRAX falls below one dollar: There is an arbitrage opportunity to buy Frax on the open market and redeem it for $1 worth of collateral and FXS. The protocol also increases the CR. Falling below one dollar is considered the more scary scenario for any stablecoin when it comes to monetary policy because it can enter a negative feedback loop cycle. Many pure algorithmic stablecoins have fallen victim to their contractionary policies.

Figure 1: Frax Collateral ratio (CR) (Source: https://app.frax.finance/)

Frax V2

Having access to an enormous pool of funds, the Frax team recognized the opportunity of putting these funds to work. The Frax protocol is capable of instantly minting FRAX and FXS tokens on demand which opens new market opportunities. The V2 version of the protocol introduces Algorithmic Market Operations Controllers (AMOs). AMOs build on top of the base protocol and perform market operations to earn yield, transaction fees, and interest. The community votes on which AMOs get deployed. Each AMO must include the so-called FXS1559 function, which calculates all excess value in the system and uses the profits to buy and burn FXS tokens. Here are a few examples:

• Collateral Investor AMO: The Collateral Investor AMO moves idle USDC collateral to select DeFi protocols that provide a reliable yield (e.g., Aave, Compound Finance).
• Curve Finance AMO: Providing FRAX and USDC (from the collateral pool) liquidity on Curve and earning from trading fees. Additionally, by providing liquidity, the AMO tightens the peg to the US dollar. Curve allocates CRV tokens as rewards for liquidity providers like FRAX. Since CRV tokens are also part of Curve’s governance structure, FXS token holders have a direct impact on the governance decisions of Curve. Our “Curve Wars” article covers the topic in more detail.
• Uniswap V3 AMO: Similar to Curve Uniswap V3 liquidity, AMO puts FRAX and collateral (e.g., USDC) to work at a specific price range and collects profits. The liquidity pool also tightens the peg to the US dollar.
• FRAX Lending: The AMO mints FRAX into money markets such as Compound to allow anyone to borrow FRAX by paying interest. The borrower puts collateral on Compound, and new FRAX tokens get minted. Since the protocol can mint FRAX on demand, this operation does not influence the CR, and the profits are used to buy and burn FXS.

Figure 2: Frax Value Distribution (Source: https://app.frax.finance/)

AMOs try to create maximum flexibility while not exposing the CR to more risk. If the CR is lowered to the point that the peg slips, the AMOs have pre-defined re-collateralization operations, which increases the CR. We could say that AMOs complement the base mechanism of V1.

The AMOs are interesting development for Frax. Similarly, Fei Protocol utilizes its on-chain collateral on other protocols to earn yield, transaction fees, and interest. We can see a clear trend of DeFi protocols becoming more interconnected not only on a financial level but also on a governance level. Frax, for example, has acquired significant voting rights on the Curve protocol. Soon we will be witnessing DAO-to-DAO governance interactions.

Frax Price Index (FPI)

Stablecoins pegged to fiat currencies are subject to dollar inflation. FPI will offer the opportunity of a stable asset that counters inflation by following the Consumer Price Index (CPI). The FPI will become a stablecoin that adjusts for inflation. The project will launch in 2022 with an airdrop for long-term community members.

The classification of FRAX according to the ITC:

Figure 3: The FRAX Tokenbase entry (Source: https://itin.itsa.global/S9SRXFM22)

Economic Purpose (EEP): FRAX is listed as a fiat-pegged payment token (EEP21PP01USD) similar to the other stablecoins in the industry.

Industry Type (EIN): The issuer of FRAX is active in the field of Payment Services and Infrastructure (EIN06PS).

Technological Setup (TTS): FRAX is an Ethereum ERC-20 Standard Token (TTS42ET01). The Class “Ethereum ERC-20 Standard Token” captures every token that is implemented by means of the ERC-20 Standard on top of the Ethereum blockchain.

Legal Clam (LLC): The FRAX token does not entitle its holder to any legal claim or rights against the issuing organization, therefore it is listed as a No-Claim Token (LLC31).

Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. FRAX is built by Fei Labs, its Issuer Type is a Private Sector Legal Entity (LIT61PV).

Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information on the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). The FRAX token qualifies as a Non-Authorized Significant E-Money Token (REU51EM12) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.

List of all Frax tokens:

Figure 4: Tokenbase list with all Frax tokens (Source: https://api.itsa.global)

The International Token Standardization Association (ITSA) e.V.

The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.

• The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
• The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
• ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.

Remarks

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Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis, as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via valentin.kalinov@itsa.global and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.

Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via christian.viehof@itsa.global and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.

ITSA lists FRAX Stablecoin in Tokenbase