Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Frax (FRAX) a Viable Stabelcoin?

Frax (FRAX) is an advanced stablecoin intended as an alternative to Bitcoin (BTC). To elaborate, they hope FRAX will replace BTC as a go-to store of value for e-commerce and decentralized finance.

To explain, they built Frax with a fractional-algorithmic stablecoin protocol. The protocol uses a fractional-algorithmic stability mechanism to keep Frax’s price as close to $1 US dollar as possible.

The protocol collateralizes FRAX by holding dollars. Hence, if FRAX trades above one dollar, the stability mechanism sells dollars until FRAX’s price falls to $1. Frax will use Uniswap and Chainlink USD price oracles to track and match the dollar’s price.  

Can Frax (FRAX) generate revenue from stablecoins?

Interestingly, Frax uses two tokens, the FRAX stablecoin and Frax Shares (FXS). FXS is a governance token that earns fees, seigniorage revenue, and excess collateral value.

Seigniorage is the difference between the value of money and the cost of producing it. Seigniorage revenue is the money you can make by issuing currency. For example, if it costs 1₵ to create a Frax (FRAX), Frax could make a 99₵ profit. Hence, they try to build a revenue producing mechanism into FRAX.

The ultimate goal at Frax is to create decentralized algorithmic money that can serve as an alternative to fixed supply assets, such as Bitcoin (BTC). The hope is to create a mechanism that can generate unlimited amounts of stablecoins to create an ever-expanding crypto economy.

Is Frax an attempt to build a Crypto Central Bank?

An interesting aspect of Frax’s plans will be to create a crypto native version of the Consumer Price Index (CPI) governed by FXS holders. The CPI is one measure economists and central bankers use to monitor the rate of inflation. Hence, Frax wants to monitor the rate of crypto inflation to control it.

Therefore, I wonder if Frax is an effort to build a crypto central bank. To explain, central banks such as the US Federal Reserve and the People’s Bank of China try to control inflation by setting interest rates. One tool the Fed uses to monitor inflation is the CPI.

Moreover, Central Banks generate revenue through seigniorage. For example, the Federal Reserve generates enormous amounts of revenue when it issues dollars. The hope is that Frax could generate revenue as it issues FRAX.

Could Frax Make Money from Central Banks?

Frax could also be a software development kit (SDK) for central banks that want to build stablecoins or cryptocurrencies. To elaborate, an SDK is a box of digital tools and applications developers use to build software, apps, and infrastructure. For example, developers at Central Bank could use a Frax SDK to build a national stablecoin pegged to their fiat currency.

Frax could make money by taking a cut of the seigniorage central banks generate as they issue fiat currency. I think central banks will be good customers for solutions such as Frax. Several central banks, including America’s Fed, the Bank of England, and the People’s Bank of China are investigating Central Bank Digital Currencies.

I suspect profits from Central Bank Digital Currencies or stablecoins could be huge. The Federal Reserve estimates there was $1.958 trillion in US dollars in circulation in June 2020. In addition, the US monetary base was $5.002 trillion, while the US M1 money supply was $16.534 trillion.

What Value Does Frax (FRAX) Have?

Mr. Market gives Frax some value. On 1 December 2021 CoinMarketCap gave Frax a $1 Coin Price, a Market Capitalization of $132.081 million Fully Market Cap, a $1.130 billion Market Cap, and a 24 Hour Market Volume of $26.138 million.

They based those numbers on a Circulating Supply of 1.28 billion FRAX, a Circulating Supply of 1.23 billion FRAX, a Maximum Supply of 131.993 million FRAX and a Total Supply of 1.229 trillion FRAX. CoinMarketCap named Frax (FRAX) the 213th most value cryptocurrency on 1 December 2021.

In contrast, CoinGecko gave Frax (FRAX) a Coin Price of $1.02, a Market Cap of $1.247 billion, a 24-Hour Trading Volume of $52.552 million, and a Fully Diluted Valuation of $1.247 billion on 1 December 2021. They based those numbers on a Circulating Supply of 1.229 billion, a Total Supply of 1.229 billion, and a Maximum Supply of 1.229 billion.

I think CoinGecko’s price shows Frax (FRAX) is unstable because it exceeds $1. Hence, the fractional-algorithmic stability mechanism may not work.

I consider Frax an interesting stablecoin with enormous potential value. I advise speculators who want to make money from stablecoins to investigate Frax.