Hybrid USD stablecoin FRAX expands to Avalanche

Hybrid USD stablecoin FRAX expands to Avalanche

FRAX, the world’s first fractional-algorithmic stablecoin, is bringing its US dollar-pegged stablecoin to Avalanche’s decentralised finance (DeFi) ecosystem.

Upon completion of the deployment (expected to be by 20 March), FRAX will expand the selection of stablecoins available on the platform and offer unique functionality as a decentralised, permissionless stablecoin.

FRAX employs a hybrid, fractional-algorithmic model that combines the best qualities of 100 per cent fiat-backed stablecoins and pure algorithmic stablecoins. It seeks to be the first stablecoin protocol to create scalable, trustless, stable, and ideologically pure on-chain money.

The team behind FRAX will expand to Avalanche by moving FRAX over the Avalanche-Ethereum Bridge (AEB) but will actively explore plans to port its reserve and minting contracts to Avalanche in the future should the demand be sufficient.

“The vision for FRAX is to be the first and biggest multi-chain algorithmic stablecoin. Getting FRAX stablecoins on Avalanche is our first major step in realising the multichain vision,” says Sam Kazemian, one of the core team members.

Many stablecoin protocols have entirely embraced one spectrum of design (entirely collateralised) or the other extreme (entirely algorithmic with no backing). Collateralised stablecoins either have custodial risk or require on-chain over-collateralisation. These designs provide a stablecoin with a fairly tight peg with higher confidence than purely algorithmic designs.

Purely algorithmic designs provide a trustless, scalable model that captures the vision of decentralised money, but have some drawbacks. Notably, they are difficult to bootstrap, slow to grow (as of Q4 2020 none have significant traction), and can exhibit extreme periods of volatility, which erodes confidence in their usefulness as actual stablecoins.

The FRAX Protocol is a two token system encompassing a stablecoin FRAX (FRAX) and a governance token FRAX Shares (FXS). FRAX can always be minted and redeemed from the treasury contract for 1 dollar in value. Arbitrageurs and users are able to use this mechanism to keep the FRAX price close to 1 dollar. Technical details behind the price stability mechanism can be found here. Impressively, FRAX has kept the peg tight to $1 with less than 2 per cent deviation since launch without exception.

Since the launch of the AEB on 8 February, smart contract activity on Avalanche has boomed, with transactions increasing by 848 per cent to over 515,000, and unique wallets increasing by 1,530 per cent to top 35,000.

In the five months since launching mainnet on 21 September, Avalanche has gained over 830 full, block-producing validators participating in-network consensus, and an additional 5,500 delegators participating in staking. Collectively, they make Avalanche the most decentralised layer 1 blockchain platform, and the third-largest in staked value at over USD8 billion.

Coinbase, Naval, Framework Ventures Back $19M Raise for a Capital-Efficient Stablecoin

Fei Labs, a project building a more capital-efficient decentralized stablecoin, raised $19 million from Andreessen Horowitz (a16z), Framework Ventures, Coinbase Ventures and AngelList founder Naval Ravikant, among others.

The raise, disclosed Monday, is another sign competition is heating up among issuers of stablecoins. These cryptocurrencies are designed to hold their value against some mainstream asset, usually (as in Fei’s case) the U.S. dollar.

Stablecoins play a linchpin role in the crypto ecosystem, allowing traders to quickly move fiat currency (or the next best thing) between global exchanges to take advantage of arbitrage opportunities that might disappear if they waited for a bank wire to clear. In the mushrooming decentralized finance (DeFi) sector, stablecoins are a common form of collateral for loans and other contracts.

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“First, we want to be the best stablecoin in DeFi, in which we would consider DAI to be the primary competitor,” said Joey Santoro, CEO of Feil Labs, which is building the Fei protocol, and author of the white paper describing it. After that, it would challenge other stablecoins, the largest of which is Tether’s USDT, with a $37.5 billion market capitalization as of Friday.

ParaFi Capital and Variant Fund also participated in the round.

Fei’s “genesis launch” is set for March 22, when users will be able to post ETH to get FEI tokens. Early participants in the sale and in the protocol’s liquidity pools on DeFi exchange Uniswap will be incentivized with TRIBE, the project’s governance token.

Other leading stablecoins have drawbacks. MakerDAO’s DAI is over-collateralized, and requires thousands of users to manage individual vaults of their collateral. USDC and USDT are centralized and censorable. Purely algorithmic stablecoins, such as basis cash, are very strange.

Like those assets, “FEI is basically a reserve-backed stablecoin,” Santoro said. But unlike its predecessors, FEI, on the cusp of its market debut, would work through a direct incentive method.

How it works

From the white paper:

“This paper proposes a new stability mechanism called direct incentives. A direct incentive stablecoin is one in which both the trading activity and usage of the stablecoin are incentivized, where rewards and penalties drive the price towards the peg.”

In other words, FEI can give users bonuses or charge fees for making trades that help it maintain its peg to the dollar. The developers have tweaked the behavior of an ERC-20 token, which runs on the Ethereum network, so that certain transactions (to start, transactions with the liquidity pool on Uniswap) can face a tax or earn a boost, depending on whether FEI needs to shrink or grow supply.

FEI works on a straightforward transactional basis. “Users can buy FEI from the protocol, and the protocol takes those assets in reserve, which we call protocol controlled value,” Santoro explained. In other words, users don’t stake ETH, Ethereum’s native currency; they buy FEI. The asset traded belongs to the Fei protocol after the trade.

“That’s sort of where the magic of FEI is. The assets in reserve could be under-collateralized, they can be over-collateralized,” Santoro explained. Further, the assets would be deployed elsewhere, such as on the secondary market or – later – in yield-generating projects.

“If you want to get more FEI, you just buy it for a dollar [worth of something] from the protocol,” he said. There’s no debt that has to be maintained by users, as there is on MakerDAO, which generates the stablecoin DAI. The protocol would simply mint FEI as needed.

There will only ever be as much FEI as the market wants, because it will all just be bought on the market.

Exit ramp

What about when users want to sell? “You can’t directly redeem ETH from the protocol. You have to go to a secondary market,” Santoro said, but the Fei protocol will be placing the ETH it takes there anyway.

If and when the protocol allows other assets to be used for buying FEI, the decision to add those assets will be up to holders of TRIBE, the project’s governance token. “It doesn’t have to be just ETH,” Santoro said, but the developers will encourage the community to only add other decentralized assets, such as DAI or aDAI. Governance will also decide where to allocate the protocol’s assets.

“Fei Protocol is intentionally governance minimized,” Santoro said.

“We are basically trying to say, ‘What’s good about Tether and what’s good about MakerDAO?’ and take the good things,” he said. The mistakes the team wants to avoid repeating include “Tether being opaque and MakerDAO being governance-heavy and over-collateralized.”

Variant Fund’s Jesse Walden said its modest governance scope and less-weighty collateralization make FEI “more socially and financially scalable.”

If ETH plunges…

When the ETH price falls and traders want to get out of FEI, selling it on the Uniswap pool will incur some kind of burn. In other words, you won’t get quite $1.00 out of your sale of one unit of FEI on Uniswap because part of it will evaporate when you initiate the trade.

Next, the protocol can itself buy back FEI with its assets and burn the FEI. In both cases, taking supply off the market should push the price back up.

But, should neither of those strategies work, TRIBE can inflate and then buy FEI off the market as well (which is a role MKR serves in MakerDAO). This feature won’t be live at launch, but Santoro expects it will be implemented.

If FEI rises over its target on other markets, users can always go to the FEI protocol to buy more FEI at the $1 peg to take advantage of the arbitrage in the short term, boosting supply and bringing the price back in line with the peg in short order.

That said, FEI also will have certain incentivized pools, such as the ETH/FEI pool on Uniswap. When it wants to expand supply, the protocol can also mint slightly extra FEI when users trade ETH for FEI. This is a part of the direct incentivization mechanic.

Canadian bank plans to launch CAD stablecoin

Today, Canada’s VersaBank announced plans to issue a Canadian dollar stablecoin VCAD, one-to-one backed by a Canadian dollar deposit at the bank. If you haven’t heard of the chartered bank before, it’s because it’s not Canada’s biggest, with a market capitalization of CAD 288 million ($229 million). The bank also wants to leverage its own “digital bank vault” technology created by its subsidiary DRT Cyber.

To issue the stablecoin, it has partnered with Stablecorp, a joint venture between crypto asset manager 3iQ and Mavennet. The latter is known for developing blockchain applications for enterprises such as steel and oil traceability for the Canadian and U.S. governments.

VersaBank doesn’t intend to deal with end-users directly. Instead, it will issue stablecoins to “financial intermediary partners” in exchange for Canadian dollar deposits. In turn, those intermediaries can offer the redeemable stablecoin to consumers and businesses.

“As North America’s first bank-issued “stablecoin”, VCAD offers consumers and businesses the ability to adopt and leverage the benefits of digital currency and blockchain-based assets without the volatility of traditional currencies, alongside the security of a value-backed asset that the cryptocurrency world has long demanded,” said David Taylor, President of both VersaBank and its cyber security subsidiary, DRT Cyber.

VersaBank and StableCorp also plan to offer VUS and VEuro stablecoins in future.

StabeCorp’s CEO Jean Desgagne is an accountant and Vice Chair of Ontario’s accounting body. He also chairs the internal audit committee for the IT Sector of the Province of Ontario. StableCorp already has its own stablecoin, the QCAD.

Meanwhile, JP Morgan is looking to ramp up its JPM Coin activities. To date, the JPM Coin would be classed more as a settlement token than a pure stablecoin in that it is used to convert part of a company’s bank balance into a coin for the purposes of payments, and converted back to a bank balance by the recipient. JPM Coin is also being used in an interbank multi-currency payments network being developed in Singapore.