Frax DAO increases collateral ratio to 100%

The decentralized autonomous organization (DAO) of DeFi stablecoin protocol, Frax Finance, has voted to fully collateralize the protocol’s native FRAX stablecoin, a step towards retiring the algorithmic backing of the protocol.

FIP-188 was passed on Wednesday night following a Snapshot vote. The governance process received just 54 votes, with more than 98% of the voting power (VP) backing the initiative. Moving forward, Frax Finance will gradually remove the algorithmic backing of the protocol while increasing the target collateral ratio (CR) to 100%.

According to the proposal, the increase in CR will be achieved through protocol earnings and growth, not from minting new FXS tokens. Notably, FXS buybacks will be paused and protocol revenue will be used to fund the increased CR. Furthermore, the proposal authorizes a monthly purchase of up to $3 million of frxETH, the protocol’s liquid ether staking derivative.

The proposal was presented to the community by DAO admin Hameed about nine days ago. Explaining the motivation behind the idea, Hameed said that the original protocol utilized a variable collateral ratio, which was adjusted based on the market demand of FRAX. This meant that the market decided the amount of collateral that was needed for each FRAX to equal $1. He argued although the structure was innovative, the protocol had outgrown it.

The costs of being slightly undercollateralized now far outweigh the benefits – especially because it can undermine the perceived safety of FRAX. Gradually shifting the protocol to 100% CR is the best path forward for the long-term health and growth of the protocol.

Hameed was quick to clarify that there was “no imminent need to increase the CR, and there are many ways of reaching the target CR.” However, he mentioned possible ways, such as asset appreciation and protocol earnings.

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