Frax Finance says the increase in CR will be reached "over time through protocol growth and earnings."
The community of Frax Finance, a decentralized finance (DeFi) fractional-algorithmic stablecoin protocol, has approved the proposal to fully collateralize the protocol’s native stablecoin Frax (FRAX).
The proposal was initially introduced on February 15th. Slightly more than a week after the introduction, on February 23rd, the offer was approved, with 98% of votes in favor of the FIP-188 governance proposal.
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Upon approval, Frax Finance will “set the target collateral ratio (CR) of the Frax protocol to 100%.” The team behind Frax highlighted that desired CR will be reached gradually through the protocol's "growth and earnings.”
The original FRAX protocol had a “variable collateral ratio,” which adjusted depending on the market demand of Frax Finance's native stablecoin, FRAX. In this case, the market commanded how much collateral was needed to ensure that each FRAX would be worth exactly $1.00.
Therefore, over time, by minting and burning the protocol’s governance token FXS, Frax Finance made its native stablecoin, FRAX, 80% backed by crypto asset collateral and partially stabilized algorithmically.
Frax Finance FIP-188 governance proposal reads:
The time has come for Frax to gradually remove the algorithmic backing of the protocol. The costs of being slightly undercollateralized now far outweigh the benefits – especially because it can undermine the perceived safety of FRAX. Gradually shifting the protocol to 100% CR is the best path forward for the long-term health and growth of the protocol.
At the end of the proposal, Frax Finance noted that it is set to “authorize around $3 million per month in ftxETH purchases to increase the CR.” Frax Finance co-founder Sam Kazemian, in the company's Telegram group, noted that the firm hopes to increase collateral using the “safest design while also being the most capital efficient.”
At the time of writing, Frax (FRAX) retails for $0.9987, recording a 0.27% price decrease in the past 24 hours. FRAX is the fifth stablecoin in terms of market capitalization, with a market cap of over $1 billion.
