Frax is one of the most forward-thinking stablecoins in the market, and in light of that I wanted to suggest a step-change improvement, largely based on suggestions Sam made on Telegram. This is intended to be a preliminary discussion to be refined and then proposed as a FIP.
First up is taking the CR to 100%, due to market conditions. This would ease concern over the risk of $FRAX to the market and would completely disincentivize anyone from attacking the protocol. CR is 87.25% at the time of writing; we could discuss the merits of a lower CR, as well as how quickly to achieve this. My suggestion would be to get there by raising CR 25-50bps per day until we reach 100% collateralization, which would be 22-44 days.
Second suggestion is that we move from CR (collateral ratio) to a CR (credit ratio). This would allow the protocol to issue short-duration loans in FRAX, which could be used to earn interest. For example, the Credit Ratio (CR) could be set at a static 10% to begin and we could propose some mechanism that allowed this amount to float, once established.
This moves us away from using equity (FXS) as a direct piece of the mint-redemption model, where it is no longer used as a liability against $FRAX.
FRAX would be minted using 100% $USDC. Upon minting new $FRAX, the protocol would create a short duration illiquid FRAX loan at the current Credit Ratio to be used to earn interest; simultaneously a representation of this loan would be created on-chain, with an additional module on the dashboard tracking each new loan origination and its duration. Perhaps loans would expire/renew on 3 day cycles at first, allowing a short enough duration to obviate the risk of an attack. The earned interest from loaned FRAX could be used to buyback $FXS via TWAMM and burn it or return it to veFXS stakers; I prefer the latter, but it’s worth discussing.
Upon redemption of FRAX, redeemers would receive 1:1 $FRAX:USDC. In the instance that there was not enough idle $USDC available, $FXS would be minted and sold into the most liquid pool for $USDC, paired with the collateral available, and returned to the redeemer at 1:1.
The above serves to distance FRAX from a similar stablecoin + governance token model as UST/LUNA, creates a fully collateralized stablecoin model that can still earn significant returns using its AMOs, a conservative amount of credit, and maintain stability in all markets.
Please feel free to discuss and I will track suggestions and incorporate changes accordingly. I won’t have all the answers, but wanted to get a discussion started around this topic as I think it’s a very positive step in what is likely to be an increasingly regulated environment.
**UPDATE 14/5/22: It appears that there is quite a bit of contention over this move and concern with the overall proposal, with particular regard to the focus on USDC. This was just a suggestion, but it is clear that something of this magnitude needs more discussion prior to going to vote. **
For that reason, I would suggest we not move this to vote after the typical 5 day discussion period and give time for the Frax team and community to provide an outline that seems more broadly accepted.