Intro to Frax
Frax is the initial fractional-algorithmic stablecoin protocol. Frax is open-source and entirely on-chain. The main function for the Frax protocol is provision of highly scalable, decentralized, algorithmic money in the position of fixed-supply digital funds like BTC. Frax is at most stablecoin in which some of its shares are supported by security and parts of the supply algorithm. If the coin market is fluctuating above $1, the protocol reducts the collateral ratio and vice versa.
How Does FRAX Work
The Frax treaty is created on a collection of algorithmic tools that operates with the former unit reserve stereotype with an algorithmic point of view. The protocol has a security ratio of 1:1.2, this means that for each circulation of $1 worth of FRAX, there is an apparent $1.2 worth of collateral detained in the protocol.
This insurance could be used in the form of US dollars, Ethereum, or Bitcoin, which authorizes a wide ranging collateral base that aids in managing risks. The algorithmic approach functions the moment the value of FRAX decreases from $1.
The moment FRAX value decreases below $1, the protocol produces new FRAX tokens and vends them for collateral advantage. This raises the collateral ratio and propels the price to its initial price which is $1. All the procedure is done through a mechanism known as “redemption,” here FRAX holder can exchange their tokens for collateral assets at the current collateral ratio.
On the contrary, if FRAX value increases above $1, the protocol eliminates FRAX tokens and allows the collateral assets to the market. This lowers the collateral ratio and brings it to its initial $1 value. “Re-Collateralization,” mechanism does all this where the protocol purchases FRAX tokens back from the market using collateral assets.
The algorithmic stability of the Frax mechanism makes certain that FRAX value remains stable at $1. This is attained by using Frax Oracle.
Frax Oracle Supplys the protocol with current market data. The Oracle gives the Frax algorithm all the information, this will mold whether to mint or burn FRAX tokens.
The Frax algorithm is modified to react to market fluctuation instantly, thus ensuring that the value of FRAX is stable. Therefore , the algorithm determines whether it will mint new FRAX tokens in case FRAX value decreases slightly below $1. This averts the value of FRAX from decreasing further while stabilizing the value of FRAX to stay close to $1.
The Frax algorithm also bears in mind the collateral ratio and modifies it as required to maintain the stability of FRAX. This makes certain that the agreement always has adequate security to support the value of FRAX.
