FXS: The Diamond Tip on The Algorithmic Machine

In the past years, stablecoins have carved out a unique niche in the crypto space.

They offer the best of both worlds:

• The decentralization and security of cryptocurrencies,

• And the stability of traditional fiat currencies.

Among the multitude of stablecoins, the Frax Protocol shines brightly, bringing a a multitude of tokens that combine into a complex and nearly perfect machine.

Its FRAX dollar-pegged stablecoin is backed by an FXS (Frax Share) governance token in a very powerful dual system.

Let’s dig in!

Understanding the Frax Protocol

First, we must understand that the Frax Protocol is a unique approach to stablecoin design that combines the best of decentralized and collateralized mechanisms.

It's a fractional-algorithmic stablecoin protocol, which means it operates with a blend of collateralized assets and algorithmic mechanisms to maintain its peg to the US dollar.

In short, FRAX tokens are minted or burned as market demand and supply forces fluctuate, always maintaining a market-clearing monetary base worth $1.

The Role of FRAX and FXS

In the Frax ecosystem, two tokens play pivotal roles: FRAX and FXS.

FRAX

FRAX is the stablecoin of the Frax Protocol.

It's designed to maintain a 1:1 peg with the US dollar. The stability of FRAX is achieved through a dynamic collateral ratio, which adjusts based on market conditions.

When the price of FRAX is above $1, the protocol decreases the collateral ratio, allowing more FRAX to be minted.

Conversely, when the price of FRAX is below $1, the protocol increases the collateral ratio, reducing the supply of FRAX.

FXS

FXS, or Frax Shares, is the governance token of the Frax Protocol.

FXS holders have the power to vote on various proposals related to the protocol, such as changes to the collateral ratio.

FXS also plays a role in the stability of FRAX. When the price of FRAX is below $1, FXS can be used as collateral to mint more FRAX, helping to restore the peg.

In addition, FXS holders receive fees generated by the protocol, providing an incentive for participation in governance.

The Symbiotic Relationship

FRAX and FXS have a symbiotic relationship.

The stability of FRAX depends on the governance decisions made by FXS holders, while the value of FXS is tied to the success and adoption of FRAX. This interplay creates a balanced ecosystem that promotes stability and growth.

What is FXS?

FXS is the governance token of the Frax protocol, which also includes the FRAX stablecoin.

The Frax protocol is the first of its kind, offering a fractional-algorithmic money system. This means that the supply of FRAX is partially backed by collateral and partially regulated by algorithms, depending on the market price of the coin.

If FRAX starts trading above $1, the protocol decreases the collateral ratio, and vice versa.

How Does FXS Work?

FXS plays a crucial role in the Frax protocol. It accrues fees, seigniorage revenue, and excess collateral value.

While it is a governance token, it doesn't require active management from the community. The parameters up for governance include adding/adjusting collateral pools and adjusting various fees.

However, no human interference is necessary, making it a unique governance token in the crypto space.

Why FXS?

FXS offers several benefits to its users.

It provides a scalable, decentralized, algorithmic money system that aims to replace fixed-supply digital assets like Bitcoin.

It also allows users to stake their LP tokens for up to 3 years, with the stakes multiplied by two boost factors: the time that the tokens spent locked and the collateral ratio.

Investing in FXS

Investing in FXS can be a smart move for those interested in the stablecoin market.

It offers a unique approach to stablecoins and has been making waves in the sector.

FXS is currently available for purchase on most mainstream, centralized or decentralized exchanges.

The Role of FXS in Frax Finance

Frax Share (FXS) is the governance token of the Frax Finance protocol. It is designed to be volatile and hold rights to governance and all utility of the system.

The FXS token plays a crucial role in maintaining the stability of the Frax stablecoin and earning profit for the protocol.

The supply of FXS was initially set to 100 million tokens at genesis, but the amount in circulation is likely to be deflationary as FRAX is minted at higher algorithmic ratios.

The design of the Frax Finance protocol is such that FXS would be largely deflationary in supply as long as FRAX demand grows.

FXS Market Capitalization

The FXS token’s market capitalization should be calculated as the future expected net value creation from the seigniorage of FRAX tokens in perpetuity, the cash flow from minting and redemption fees, and the utilization of unused collateral.

As the market cap of FXS increases, so does the system’s ability to keep FRAX stable. Thus, the priority in the design is to accrue maximal value to the FXS token while maintaining FRAX as a stable currency.

Introduction to veFXS

In May 2020, the Frax Finance protocol allowed FXS holders to lock up FXS tokens to generate veFXS and earn special boosts, special governance rights, and AMO (Algorithmic Market Operations Controller) profits.

veFXS is a vesting and yield system based off on Curve’s veCRV mechanism. Users may lock up their FXS for up to 4 years for four times the amount of veFXS (e.g. 100 FXS locked for 4 years returns 400 veFXS).

veFXS is not a transferable token nor does it trade on liquid markets. The veFXS balance linearly decreases as tokens approach their lock expiry, approaching 1 veFXS per 1 FXS at zero lock time remaining.

Governance and Voting with veFXS

Each veFXS has 1 vote in governance proposals. Staking 1 FXS for the maximum time, 4 years, would generate 4 veFXS.

This veFXS balance itself will slowly decay down to 1 veFXS after 4 years, at which time the user can redeem the veFXS back for FXS.

In the meantime, the user can also increase their veFXS balance by locking up FXS, extending the lock end date, or both.

It should be noted that veFXS is non-transferable and each account can only have a single lock duration meaning that a single address cannot lock certain FXS tokens for 2 years then another set of FXS tokens for 3 years etc.

All FXS per account must have a uniform lock time.

Farming Rewards and veFXS Boosts

Holding veFXS gives the user more weight when collecting certain farming rewards. All farming rewards that are distributed directly through the protocol are eligible for veFXS boosts.

External farming that is promoted by other protocols (such as Sushi Onsen) is typically not available for veFXS boosts since they are independent of the Frax Finance itself.

A user's veFXS boost does not increase the overall emission of rewards. The boost is an additive boost that will be added to each farmer's yield proportional to their veFXS balance.

The veFXS boost can be different for each LP pair by the discretion of the community and team based on partnership agreements and governance votes.

veFXS and AMO Profits

After the implementation of veFXS, holders may be able to collect rewards periodically.

As of July 2023, the FXS rewards for holding veFXS come from the AMO (Algorithmic Market Operations Controller) profits of the protocol that is above the collateral ratio.

50% of the profits are being used to buy back FXS and burn it, and the other 50% is sent to the yield distributor contract for distribution to veFXS holders.

FXS vs veFXS: The Key Differences

In summary, while FXS is the governance token of the Frax Finance protocol, veFXS is a version of FXS that is locked up for a certain period of time (up to 4 years) to earn special boosts, governance rights, and profits.

The main difference between FXS and veFXS is that veFXS holders have committed to locking up their tokens for a certain period, which gives them additional benefits within the Frax Finance ecosystem.

As we've seen, FXS is not just a token, but a key player in the innovative Frax Protocol. It's a shining example of how governance tokens can shape the stability and success of a stablecoin.

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