Proposal to add FRAX to Aave
FRAX is a redeemable stablecoin with a dynamic collateral ratio that adjusts based on market demand. Frax is unique among recent stablecoin designs in that each FRAX is always redeemable for $1.00 worth of assets from the Frax protocol. This has kept the price of FRAX in a relatively tight band around $1.00, making Frax an ideal asset to borrow and lend against on Aave.
Launched in December 2020, the circulating supply of FRAX now exceeds 80 million, with daily volumes regularly ranging from $10-20 million. FRAX liquidity pools currently have over $150m of liquidity. The protocol has also experienced a major expansion and contraction cycle without a significant deviation from the $1.00 price target.
The Frax community recently approved the investment of system collateral, currently approximately $71m USDC, into yield bearing USDC. Accordingly, the protocol began supplying USDC to Aave to earn a return on this collateral. Frax already has over 7,500,000 aUSDC and will continue increasing deposits on Aave, demonstrating a strong synergy between the Frax and Aave communities. Continued growth of the Frax protocol and system collateral could lead to Frax becoming one of the larger suppliers of USDC to Aave.
The Frax protocol is designed to let market demand for the FRAX stablecoin set the collateral ratio that backs each FRAX. Currently, each FRAX is collateralized by approximately $0.86 USDC and $0.14 of the Frax governance token, FXS. When the price of FRAX is above the target (~ $1.00), the protocol gradually lowers the collateralization ratio of USDC to FXS. When the price of FRAX is below the target (~ $1.00), the protocol gradually increases the ratio. FRAX can always be minted or redeemed by the protocol for $1.00 of assets, which counterbalances significant price deviations from the $1.00 target. Frax emphasizes a highly autonomous, algorithmic approach with no active management of the price stability function.
Stability of FRAX
Credit to Warp Capital for performing the following analysis earlier this month. There have been no notable changes or deviations for FRAX since this analysis was performed:
From inception FRAX has maintained the peg of $1, trading within the normal range. Figure 1 illustrates the USD price for the last 30 days of stablecoins from different groups: fiat-backed like BUSD, GUSD etc.; algorithmic with overcollaterization like sUSD, DAI; elastic like AMPL and algoseignorage like BAC, ESD and FRAX. The noticeable divergence is present for BAC and ESD – fully algoseignorage without any collateral. Also, elastic AMPL converges to the peg with the high volatility.
Figure 1. Last 30 days stablecoins performance vs. USD
Figure 2. Last 30 day performance without 3 aforementioned algorithmic stablecoins that have experienced high volatility (AMPL, BAC, ESD). As we see FRAX goes in line with other stablecoins demonstrating alike volatility.
Figure 3. Last 30 day stablecoin performance vs USD excluding sUSD.
If we exclude sUSD which has the big spike at the beginning of 2021, we will get the performance illustrated on Figure 3. Figure 3 shows the dynamics of the remaining stablecoins and as we see FRAX is within the range of other stablecoins.
Benefits for Aave
The Frax community is very active and looking for venues to lend and borrow FRAX. Aave should enjoy increased revenue from the lending and borrowing of FRAX, as well as additional USDC deposits as the Frax collateral pool grows. While FRAX is often lumped together with “algorithmic stablecoins”, a closer analysis shows that FRAX is in fact highly stable and capital efficient.
Additional Resources on Frax
Whitepaper: Introduction - Frax ¤ Finance
Codebase: frax.finance · GitHub