Frax Finance community votes to collateralize its stablecoin

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

The community of Frax Finance, a decentralized finance (DeFi) protocol with around $2 billion in total value locked, voted to completely collateralize its native stablecoin frax (FRX), as per a vote concluded Wednesday.

The proposal FIP-188, published last week on governance forum of Frax, proposed setting the target collateral ratio to 100 per cent using protocol earnings to raise reserves of stablecoin.

The outcome represents an important move for FRX, the fifth biggest stablecoin with over $1 billion in terms of market capitalization, as it removes the algorithmic element of the stablecoin’s stabilizing mechanism.

Frax uses a hybrid design to keep its price pegged to the U.S. dollar. It is 80 per cent backed by crypto asset collateral and in part steadied algorithmically, burning and minting the protocol’s governance token FXS. Its issuer, Frax Finance, is governed by a decentralized autonomous organization through community suggestions and votings.

As per the proposal, the protocol will not produce additional FXS to raise the collateral ratio, which would boost the token’s supply. Rather, it suggests keeping protocol revenues and permitting the purchase of up to $3 million of frxETH, the protocol’s liquid ether staking derivative, to support reserves.

Sam Kazemian, Frax Finance’s co-founder, said in the Telegram group chat of the project that he supported raising the collateral for being the ‘safest design, while also being the most capital efficient.’

Around 98 per cent of the voters backed the proposal.

Frax’s decision comes after several algorithmic stablecoins lost their price peg and finally collapsed last year, triggering a broader slump in crypto markets. The highest-profile fall, TerraUSD’s death spiral in May, collapsed a number of digital asset firms in the ensuing contagion.

Frax has been the fastest-growing liquid staking protocol for ETH with a 42 per cent growth during the past 30 days, as per data by DefiLlama.