2026-01-16 09:26:56

Frax (FRAX) follows a hybrid stablecoin approach — it is backed by real collateral and maintained through an algorithmic mechanism. In simple terms, how much of your held FRAX is truly supported by assets depends on how the market prices it.

The mechanism is quite flexible. If FRAX is traded above $1 on exchanges, the protocol will gradually reduce the collateral ratio because the market itself is helping to stabilize it, reducing the need for more real assets as backing. Conversely, if the price drops below $1, the protocol will immediately increase the collateral reserves, using real assets to support the peg and prevent further decline.

What does this mechanism mean for traders? When FRAX is trading at a premium, arbitrage opportunities arise; when it’s at a discount, increasing the collateral ratio also means the protocol is strengthening stability. For those looking to take action on FRAX, this price-collateral ratio relationship is worth paying attention to.

FRAX-20.85%

View Original

This page may contain third-party content, which is provided for information purposes only (not representations/warranties) and should not be considered as an endorsement of its views by Gate, nor as financial or professional advice. See Disclaimer for details.

11 Likes

Reward
11
6
Repost
Share

Comment

0/400

SchroedingersFrontrun

· 5h ago

It seems that arbitrage opportunities do exist, but can this dynamic collateralization logic really hold up? I always feel that a market shock will test true capabilities.

View OriginalReply0

SpeakWithHatOn

· 5h ago

This dynamic adjustment is really brilliant—it's the market regulating itself, with the protocol acting as a smart "steward." Wait, so when there's a premium, should we rush in to arbitrage? When there's a discount, we need to be cautious... It feels like stablecoins are becoming a bit complicated.

View OriginalReply0

MoonRocketman

· 5h ago

Look at this linkage mechanism. Once the RSI momentum enters the overbought zone, the collateralization ratio begins to gradually release fuel, a typical adaptive track adjustment... The countdown to the launch of the arbitrage window has already begun.

View OriginalReply0

DaoResearcher

· 5h ago

According to the mechanism design in the white paper, this dynamic collateralization ratio model actually has an incentive incompatibility issue—reducing collateral during market premiums. Theoretically, it's wonderful, but in practice, it can create moral hazard. I have elaborated on this in the comments of Governance Proposal #427. Based on the data, the risk coefficient is seriously underestimated.

View OriginalReply0

wagmi_eventually

· 5h ago

Basically, it's dynamic allocation. When prices go up, they relax the collateral; when prices drop, they add more. It's a pretty clever design.

View OriginalReply0

ContractHunter

· 5h ago

This logic sounds good, but essentially it's still betting on market sentiment. If you play the premium and discount well, you can make money; if not, just wait to be cut.

View OriginalReply0