Frax Stablecoin Project Attracts Attention: An Algorithmic Stablecoin Using a Partially Collateralized System

Recently, a stablecoin project called Frax has attracted widespread attention in the industry. The project was co-founded by Sam Kazemian, a co-founder of Everipedia, and an economist, and it officially announced its market entry on October 21.

The founding team of the Frax project is strong, which is one of the main reasons it has garnered attention. As the CEO and co-founder of the project, Sam Kazemian is an Iranian-American software engineer. Interestingly, he majored in philosophy and neuroscience at the University of California, Los Angeles, rather than a computer-related field. During his college years, Sam self-taught programming and cryptocurrency knowledge out of interest. In 2018, he was involved in the creation of the decentralized online encyclopedia Everipedia and deployed it on the EOS blockchain.

In an interview, Sam stated that Frax was initially conceived by him and Chief Technology Officer Kedar Iyer, and later gained the endorsement of an economist who is responsible for Frax's economic model and lending standards as Chief Economist. This economist believes that private competitors challenging the monetary supply of central banks is healthy, having followed monetary policy for 30 years and being concerned about government monopoly on currency.

Frax adopts a partial reserve system, which is different from traditional stablecoins. It is not supported by fiat currency on a one-to-one basis but is only backed by a small amount of USD reserves. The project draws on the concept of the Federal Reserve Bank, using algorithms to lend out reserves and collect interest to ensure that the value of Frax remains pegged to the USD. To reduce risk, Frax will hold nearly 100% of reserve funds in the initial phase, and as the network becomes more widely adopted, the proportion of reserve funds will gradually decrease. Sam revealed that all loan transactions will be recorded on the blockchain without the need for central bank involvement.

However, digital currencies that adopt a fractional reserve system have not yet been tested by the market, which poses a significant challenge for Frax. Some industry insiders point out that if the redemption demand is too high, a stablecoin that lacks full one-to-one backing may collapse. Notably, a similar token project launched by a non-profit organization in Switzerland previously ended in failure.

Sam emphasized that Frax's lending mechanism will be key to ensuring its stability. He explained that Frax generates cash flow by collecting interest through on-chain lending, and once the price drops, this cash flow can be used to buy back FRX tokens. The valuation of Frax will be strictly controlled by algorithms, similar to how central banks use bond issuance to buy back fiat currency. Utilizing interest earned from decentralized finance (DeFi) money markets to maintain algorithmic stability is essentially similar to the monetary policy relationships between certain well-known stablecoins.

Sam believes that there is a substantial demand for borrowing on the blockchain, and he anticipates that Frax could become one of the largest lenders in the market. Currently, Frax and its collateral are being tested on the EOS mainnet and are regularly deployed to Github. Although there is no specific timeline, Sam 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 latter's infrastructure and ecosystem, which may help it better adapt to the market and regulatory environment. Sam stated that they will allow the use of IQ tokens as collateral to borrow from the Frax reserve and plan to integrate Frax into Everipedia. He believes that the Frax project can be seen as Everipedia's entry into the DeFi space, with both projects mutually promoting each other's development.