Frax Protocol (FRAX) is the world’s first fractional stable coin and crypto native consumer price index. The Frax Protocol (FRAX) introduced the world to the concept of a cryptocurrency being partially backed by collateral and partially stabilized algorithmically. With the vision to create highly scalable, decentralized money in place of fixed-supply digital assets like BTC.
The Consumer Price Index measures the overall change in consumer prices based on a representative basket of goods and services over time. A crypto native consumer price index is based with an exclusive focus on a basket of cryptocurrency products, solutions and services contributing the crypto prices.
The Frax ecosystem has 2 stablecoins:
And a lending facility (Fraxlend).
Frax is an innovative stable coin with parts of its supply backed by collateral and other parts backed algorithmically.
Charlie Lee, Managing Director of Litecoin in the past said, “I think it’s theoretically impossible for algo stables to work well over a long time. It could work short term, but it’s similar to the Martingale Roulette Strategy. It will require a lot of resources for the system to work, and when it inevitably fails, you will lose your shirt.”
he martingale system is a popular betting strategy in roulette: Each time a gambler loses a bet, he. doubles his next bet, so that the eventual win leaves him with profit equal to his original stake.
The idea of betting higher every time you lose is tricky! Crypto is already volatile and the Martingale Roulette Strategy can be disastrously dangerous.
The crash of UST Stable Coin and Luna is a well known and dreaded example of how algorithmic stable coins can terribly fail.
The two biggest ones, Tether (USDT) and Circle’s USD Coin USDC are “over-collateralized” by fiat reserves, meaning they have cash or cash – equivalent assets in their reserves. Similarly, the overcollateralized MakerDAO stablecoin DAI– backed by ether ETH deposited into its smart contracts.
When there is a substantial degree of FUD raised about fully backed stable coins and considering the math and past history one is left wondering if algorithmic stables are reliable?
A finance graduate, Maheen Hernandez has been drawn to cryptocurrencies ever since Bitcoin first emerged in 2009. Nearly a decade later, Maheen is actively working to spread awareness about cryptocurrencies as well as their impact on the traditional currencies. Appreciate the work? Send a tip to: 0x75395Ea9a42d2742E8d0C798068DeF3590C5Faa5
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