Have you looked into FRAX at all or any of the specifics around the project? We can do better than dismiss a project because it shares the terms “algorithmic” and “stablecoin”. In 2018 / 2019, a lot of people looked at LEND and wrote it off because of the ICO hangover / bear market. And yet, here we are. It’s also worth noting that this proposal is for the addition of FXS, which is the governance token of the Frax protocol. There are 14 other volatile governance tokens listed on Aave and I do not think FXS is materially different.
FRAX first and foremost is a stablecoin. The stability mechanism combines collateral (“fractional”) with preset rules (“algorithmic”). Each FRAX token is currently backed by $0.87 of USDC and interest bearing USDC. This is a world apart from purely “algorithmic stablecoins”. I respect other projects desire to innovate and try new things, however I’m not sure that any of those projects have nailed the “stablecoin” side of things.
For FRAX, the result has been a high level of stability around $1.00 since launch. FRAX has effectively had the stability of fiat backed stablecoins. These charts are slightly dated now but the stability of FRAX has only increased in the intervening time:
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.
Ryan Watkins also recently did an overview of the space, including FRAX, for Messari:
That being said, the only perfect projects are the ones that never launch. I’m happy to engage in valid criticisms of Frax. Since launch, one of the better criticisms has been that FRAX is basically wrapped USDC and accordingly it’s not very decentralized. I think this was a fair point at the start but is less valid now. There are tradeoffs made with any project. Frax prioritized stability and capital efficiency at the start, understanding that it’s always possible to further decentralize collateral over time but it would be very difficult to regain user confidence if Frax was fully decentralized but highly volatile and useless as a stablecoin. The push to decentralize collateral is a huge priority for the team and community but not at the expense of safety and stability in the near term.
Fast forward to the present and the protocol has diversified the collateral into Aave, Compound and Yearn. Now, freezing Frax’s collateral involves freezing Aave, Compound and Yearn’s USDC. This is incremental progress but significantly strengthens the decentralization of Frax’s collateral. With the recent release of v2, the groundwork has been established to add other forms of collateral and fully decentralize the collateral. If you look at other aspects of Frax, you’ll find a similar story - the team and community understand what needs to be done and are aggressively executing on it.