Frax Finance Community Votes to Fully Collateralize $FRAX Stablecoin, Remove Algorithmic Backing

The Frax Finance community has voted to approve a governance proposal to set the target collateral ratio (CR) of the $FRAX stablecoin to 100%, and remove the algorithmic backing of the protocol. Going forward, $FRAX will become a fully collateralized stablecoin.

$FRAX was originally designed to be a fractional-algorithmic stablecoin. It has a variable collateral ratio which is adjusted based on the market demand of $FRAX. But the proposal pointed out, "the small algorithmic backing of $FRAX creates the perception that $FRAX is the less safe option for users to hold, especially after $UST's failure tainted the algorithmic stablecoin concept. There is very little benefit in maintaining the current CR of 92%." It said that "gradually shifting the protocol to 100% CR is the best path forward for the long-term health and growth of the protocol."

According to the proposal, no $FXS will be minted to achieve the target of 100% CR. Instead, protocol revenue will be retained to fund the increased CR, including pausing $FXS buybacks. $veFXS yield remains the same. In addition, the proposal authorizes protocol comptrollers to buy up to $3m of $frxETH each month to increase the stablecoin reserves.