Price Stability - Frax Finance ¤

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• allowing arbitragers to balance the demand and supply of FRAX in the open market

• At all times in order to mint new FRAX a user must place $1 worth of value into the system.

• If the market price is above the price target of $1, then there is an arbitrage opportunity to mint tokens by placing $1 of value into the system per FRAX and sell the minted FRAX for above $1 in the open market.

• As the protocol moves into the fractional state, some of the value that enters into the system during minting becomes FXS (which is then burned)

• For example, in a 96% collateral ratio, every FRAX minted requires $.96 of collateral and burning $.04 of FXS

• If the market price of FRAX is below the price range of $1, then there is an arbitrage opportunity to redeem FRAX tokens by purchasing cheaply on the open market and redeeming FRAX for $1 of value from the system

• As the protocol moves into the fractional phase, part of the value that leaves the system during redemption becomes FXS (which is minted to give to the redeeming user). For example, in a 98% collateral ratio, every FRAX can be redeemed for $.98 of collateral and $.02 of minted FXS.

• During the fractional/algorithmic phase, FXS is burned as FRAX is minted. On the other hand, when FRAX is redeemed, minting of FXS occurs.

• When there is demand for FRAX, redeeming it for FXS plus collateral initiates minting of a similar amount of FRAX into circulation on the other end (which burns a similar amount of FXS)

• The protocol adjusts the collateral ratio during times of FRAX expansion and retraction

• During times of expansion, the protocol decollateralizes (lowers the ratio) the system so that less collateral and more FXS must be deposited to mint FRAX.

• X. This lowers the amount of collateral backing all FRAX.

• During times of retraction, the protocol recollateralizes (increases the ratio). This increases the ratio of collateral in the system as a proportion of FRAX supply, increasing market confidence in FRAX as its backing increases.

• The value that accrues to the FXS market cap is the sum of the non-collateralized value of FRAX’s market cap.

• FXS token’s value is therefore partially determined by the demand for FRAX

• During times of retraction, the protocol recollateralizes (increases the ratio). This increases the ratio of collateral in the system as a proportion of FRAX supply, increasing market confidence in FRAX as its backing increases.

• In such an update, the protocol would run with no price data required for any asset including FRAX and FXS. Minting and redemptions would happen through open auction blocks where bidders post the highest/lowest ratio of collateral plus FXS they are willing to mint/redeem FRAX for.

• This auction arrangement would lead to collateral price discovery from within the system itself and not require any price information via oracles. Another possible design instead of auctions could be using PID-controllers to provide arbitrage opportunities for minting and redeeming FRAX similar to how a Uniswap trading pair incentivizes pool assets to keep a constant ratio that converges to their open market target price.