New Algorithmic Stablecoin Frax: Ambitions to Challenge Central Bank Currency

Recently, stablecoins and the DeFi sector have become hot topics in the cryptocurrency industry, with various related projects emerging continuously. Against this backdrop, a new stablecoin project called "Frax" boldly announced its entry into the market on October 21, stating its intention to compete with Central Bank currencies.

The core team of the Frax project is quite strong. Its CEO and co-founder, Sam Kazemian, is an Iranian-American software engineer who majored in philosophy and neuroscience at the University of California, Los Angeles. He later self-taught programming and cryptocurrency knowledge. In 2018, Sam participated in the creation of the decentralized online encyclopedia Everipedia.

It is worth noting that the Frax project has also received support from some political figures. A well-known economist joined the team as the Chief Economist, responsible for developing economic models and lending standards. This economist has long focused on monetary policy and believes that private competitors challenging the Central Bank's money supply is beneficial. In addition, Frax's General Counsel, Ralph Benko, previously served as the Deputy General Counsel in a certain government.

Frax adopts an innovative partial reserve system, which differs from traditional one-to-one backed stablecoins. The system is supported by only a small amount of dollar reserves, primarily relying on algorithms to lend out reserves and collect interest to maintain the peg of Frax to the dollar. To reduce risks, Frax will hold nearly 100% of reserve funds in the early stages, and as the network becomes more popular, the proportion of reserve funds will gradually decrease. All loan transactions will be recorded on the blockchain without the need for Central Bank involvement.

However, the stablecoins with a partial reserve system have not yet been tested by the market, which has become one of the main criticisms faced by Frax. Industry insiders point out that if the redemption demand is too high, a stablecoin that lacks full one-to-one backing may collapse. It is worth mentioning that there have been similar projects in the past that attempted to adopt a partial reserve system but ultimately failed.

In the face of these challenges, Sam Kazemian emphasized that Frax's lending mechanism will be key to ensuring its stability. He explained that Frax generates cash flow by charging interest on on-chain lending, and when the price drops, this cash flow can be used to repurchase FRX coins. This mechanism is similar to how a Central Bank repurchases fiat currency by issuing bonds.

Currently, Frax and its collateral are being tested on the mainnet of a certain public chain and are regularly updated to the code hosting platform. Although there is no clear timeline for release, Sam Kazemian stated that Frax is expected to launch a complete product within a year.

As a new project by the co-founder of Everipedia, Frax will benefit from the infrastructure and ecosystem of the former, which helps it better tackle market and regulatory challenges. Sam Kazemian stated that the Frax project can be seen as Everipedia's entry into the DeFi space, and the two projects will achieve mutual benefits.