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Frax Finance has been one of 2023’s hottest decentralized finance protocols. As stablecoin and liquid staking narratives gain traction, its native token has been on a wild ride up.
Frax has been using the bear market to double down on building and developing its products. Additionally, the DeFi protocol aims to provide a decentralized option to the crowded centralized stablecoin market.
Its FRAX coin is somewhere in between over-collateralized stablecoins such as USDC and DAI and algorithmic ones such as UST.
On Jan. 16, a DeFi researcher highlighted the new developments from the project team.
A Fractional Collateralization Stablecoin
Frax uses a two-token system similar to that used by the now-defunct Terra/Luna ecosystem. The unstable FXS token absorbs the volatility of the FRAX stablecoin.
However, the minting of FXS also requires a variable percentage of USDC, depending on the current collateral ratio (CR). This sets it apart from LUNA as “fractional collateralization allows for growth. It also backstops against death spirals,” said the researcher.
During low peg confidence, a higher percentage of USDC can be used. During periods of high confidence, such as bull markets, a higher percentage of FXS can be used to mint FRAX.
Furthermore, Frax is also deeply integrated with the Curve Finance stablecoin arbitrage protocol. It has established strategies such as the 50/50 FRAX/USDC Frax Base Pool, allowing Curve newcomers to pair their coins instead of using the incumbent 3pool.
However, the product driving momentum at the moment is its liquid staking derivative, frxETH. It operates similarly to Lido’s stETH or Rocket Pool’s rETH. Additional yields beyond staking rewards are also possible. This is because users can lend frxETH to liquidity pools on Curve to earn trading rewards.
Furthermore, frxETH can be converted into sfrxETH (staked frxETH) for additional staking rewards. These higher yields are more attractive than staking ETH directly.
FXS Doubles in a Fortnight
The liquid staking derivatives have driven the price of the native token, Frax Share, higher this year. FXS has almost doubled in price over the past two weeks.
FXS was trading at $9.09 at the time of press, following a 3% gain on the day and bucking the intraday market trend. Remarkably, it has risen 120% from $4.13 at the beginning of this year.
FXS has been one of the best performers of 2023. However, it remains down 78.7% from its January 2022 all-time high of $42.80.