The community of decentralized financial stablecoin protocol Frax Finance has voted to fully collateralize its native stablecoin Frax (FRAX), marking the end of algorithmic support for the protocol.
The FIP-188 The administration’s proposal, originally released on February 15, reached a quorum after 98% voted in favor, according to snapshot February 23 — which would change FRAX’s collateralization model.
“The time has come for Frax to phase out algorithmic support for the protocol,” read last week’s proposal.
Almost unanimous vote to move $frax to 100% CR over time.
It seems like @fraxfinance seriously make it clear that this is a stable holding without incentives and fully supported by exogenous collateral.
It will be interesting to see it at scale$fxs https://t.co/fSQXpmsge3
— 0xChaos (@0xCha0s) February 23, 2023
She explained that the original protocol contained a “variable collateral ratio” that was adjusted based on market demand stablecoin. The market would dictate how much collateral was required for each FRAX to equal one US dollar.
The hybrid model resulted in the stablecoin being 80% backed by crypto-asset collateral and partly algorithmically stabilized. This was achieved by minting and burning its management token, FXS, which has risen by 12% in the last 12 hours.
Frax is the fifth largest stablecoin in the industry with a market cap of just over $1 billion.
Once the proposal is implemented, the protocol will not mint any more FXS to increase the collateral ratio and token supply.
“To be clear, this proposal does not rely on minting any FXS to achieve 100% CR.”
It plans to retain protocol proceeds to fund an increased collateralization ratio that includes the suspension of FXS buybacks.
Related: Sec’s push against Kraken opens the door to Lido, Frax, and Rocket Pool
It will also allow purchases of Frax Ether (frxETH) up to $3 million per month to increase the hedging ratio. frxETH behaves similarly to a stablecoin, but is pegged to Ether (ETH) instead of. It facilitates the movement of Ether liquidity within the Frax ecosystem.
DeFiLlama recently reported on the growth of frxETH over the past month.
FraxETH is up 46.33% in the last month and now has over 100,000 ETH tokens locked up pic.twitter.com/5NxhKnTHUt
— DefiLlama.com (@DefiLlama) February 20, 2023
The move comes amid what appears to be a wider crackdown on stablecoins in the wake of last year’s disaster Terra/Luna Collapse.
February 22 Canadian Securities Administrators (CSA) posted a long list new requirements for crypto companies and stablecoin issuers who want to stay in compliance with the country’s laws.
Included on this list were strict rules for trading stablecoins and a ban on algorithmic or non-fiat stablecoins.
