Frax Finance Votes to Fully Collateralize Its $1 Billion Stablecoin

The community of Frax Finance, a decentralized finance protocol with some $2 billion in total value locked, voted to fully collateralize the protocol’s native stablecoin frax (FRX), according to a vote concluded Wednesday.

The proposal FIP-188, posted last week on Frax’s governance forum, suggested setting the target collateral ratio to 100% using protocol earnings to increase the stablecoin reserves.

The result represents a significant shift for FRX, the fifth largest stablecoin with more than $1 billion in market capitalization, as it eliminates the algorithmic element of the stablecoin’s stabilizing mechanism.

Read more: Algorithmic Stablecoins: What They Are and How They Can Go Terribly Wrong

Frax uses a hybrid design to keep its price pegged to the U.S. dollar. It is 80% backed by crypto asset collateral and partially stabilized algorithmically, burning and minting the protocol’s governance token FXS. Its issuer, Frax Finance, is managed by a decentralized autonomous organization through community proposals and votings.

According to the proposal, the protocol will not create additional FXS to hike the collateral ratio, which would inflate the token’s supply. Instead, it proposes retaining protocol revenues and authorizing the purchase of up to $3 million of frxETH, the protocol’s liquid ether staking derivative, to prop up reserves.

Sam Kazemian, co-founder of Frax Finance, said in the project's Telegram group chat that he favored increasing the collateral for being the "safest design, while also being the most capital efficient."

Some 98% of the voters favored the proposal.

Frax’s decision comes after multiple algorithmic stablecoins lost their price peg and eventually collapsed last year, triggering a wider downfall in crypto markets. The highest-profile fall, TerraUSD’s death spiral in May, wiped out several digital asset firms in the subsequent contagion.

Read more: SEC Sues Terraform Labs, Do Kwon for Misleading Investors on TerraUSD Stablecoin

Frax has been the fastest-growing liquid staking protocol for ETH with a 42% growth over the past 30 days, according to data by DefiLlama.

UPDATE (FEB. 22, 23:21 UTC): Adds quote from Frax co-founder Sam Kazemian.