Also known as Non-Collateralized Stablecoins are whole new types of cryptocurrency designed to provide greater price stability. It can also assist in balancing the supply and demand of the circulating asset. Above all, algorithm-based stablecoins outperform collateralized stablecoins in terms of capital efficiency.
Frax Finance is a blockchain based initiative that uses the FRAX token, a partially collateralized algorithmic stable coin. Frax is an open-source, permissionless, and completely on-chain cryptocurrency that is currently deployed on Ethereum. The Frax Protocol’s ultimate goal is to provide a highly scalable, decentralized, algorithmic money that can be used instead of fixed-supply digital assets like Bitcoin. Like its name suggests, Frax is a fractional-algorithmic system in which the stablecoin is partially backed by both external USDC collateral and internal Frax Shares (FXS).It may basically be created by anyone who has two essential tokens: USDC and FXS, which is called as the protocol’s token.’
To issue new tokens, the minting process employs a collateral ratio. To manufacture one FRAX with a 50 percent collateral ratio, the individual would need to provide $0.5 USDC and $0.5 FXS. Users can redeem the FRAX token for $1 at any moment using the same collateral mechanism as mentioned above. If the user wishes to return to his original assets, he can repeat the operation and obtain $0.5 USDC and $0.5 FXS in exchange for a single FRAX token.