Rai Reflex Index and Frax Protocol: focus on algorithmic stablecoins

Forget what you know about stablecoins! Today, we are going to discover the algorithmic stablecoins. If you love DeFi and are looking for a decentralized stablecoin at the highest level, open your eyes wide, here comes RAI and FRAX!

Forget what you know about stablecoins! Today, we are going to discover the algorithmic stablecoins. If you love DeFi and are looking for a decentralized stablecoin at the highest level, open your eyes wide, here comes RAI and FRAX!

What is an algorithmic stablecoin?

An algorithmic stablecoin is nothing more and nothing less than a stable coin, and therefore a stable cryptocurrency. Where this type of crypto, draws its originality in the world of DeFi, it is by the algorithms that govern the stability of their price, via the increase or reduction of the number of tokens in circulation.

Algorithmic stablecoins are said to be trustless, i.e. without a central body with authority over the system. A smart contract will take care of maintaining the price of the token via an oracle, without the need for collateral. That’s why it’s called non-collateralized stablecoin for an algorithmic stablecoin that has no fiat currency reserves.

While algorithmic stablecoins represent “true” decentralization for purists, their complexity and mechanisms make them a riskier choice than projects that are collateralized through fiat currencies.

Stablecoin algorithm: Rai Reflex Index (RAI)

What is RAI stablecoin?

Rai Reflex Index was created by Reflexer Labs. For the team behind Reflexer Labs, RAI is the “first true stablecoin.” No more collateralization in fiat currency, RAI relies onETH as collateral, and ETH only. The price of RAI does not follow any fiat currency, that’s why it is called a non-pegged cryptocurrency. The Reflex Index RAI stablecoin uses a PID controller (a closed-loop control system, called Money God by Reflexer Labs) to stabilize its price, as well as a Chainlink RAI/USD oracle. The latter includes 16 oracles, which are based on two parameters: deviation threshold (currently set at 2%) and staleness threshold (currently set at 24h).

The evolution of the RAI stablecoin

A test phase during 2020 demonstrated the reliability of the system. While during this phase the ETH gained more than 250%, the RAI in its test version managed to maintain stability with variations of 4% or less. For almost a year, the price of the RAI has been around 2€50/2€60. Reflexer Labs announced in December 2021 an initiative to popularize stablecoins: the Money God League.

RAI staking: making money in crypto

Want to stake your RAI tokens to earn interest in crypto?

You have two options:

  • Via Uniswap V2 by depositing liquidity with the RAI/ETH pair.
  • Via Uniswap V3 by depositing liquidity with the RAI/DAI pair.

Algorithmic Stablecoin: Frax Protocol (FRAX)

What is FRAX stablecoin?

Frax Protocol is described as the first fractional-algorithmic stablecoin. It was founded by Sam Kazemian in June 2019, with support from Stephen Moore. This new kind of stable cryptocurrency is a hybrid system that combines both collateralization and adjustments via an algorithm.

How does it work? If the price of Frax Protocol’s token, FRAX (indexed to the US dollar), falls below $1, the requested guarantee is increased, while it is decreased when the FRAX price rises above $1. FRAX has USDC as collateral.

Released at the end of 2020, the FRAX stablecoin has seen strong adoption as it currently sits at 204th place in the Market Cap rankings. The Frax Finance application tracks the collateralization and decentralization ratio. At the time of writing, it is 84.5% for 29.01%, with a total value of 2.627 billion dollars. A diagram shows the distribution of these funds, between AMOs, USDC pool and the algorithmic share.

The evolution of the FRAX stablecoin

FRAX, in its V1, uses the oracles of Uniswap and Chainlink. It was designed to be based on the Ethereum blockchain, but has become cross-chain (compatible with Polygon, Avalanche, BSC, Fantom…). FRAX V2 uses Algorithmic Market Operations Controllers, AMOs, which represent a Turing-complete system, whose objective is to ensure maximum flexibility while maintaining price stability. According to the project’s whitepaper, anonymity could become available for those who want it, via the addition of an option using zk-SNARKs.

Frax Protocol also includes a governance token, the Frax Shares (FXS), whose value is conditional on the demand for FRAX. Frax Shares is currently 233rd in the Market Cap rankings. Its FXS token rose sharply at the very end of December 2021 and the beginning of January 2022, reaching over €36. It is now trading at around 16€.

FRAX staking : generate passive income in crypto

Frax Protocol offers the possibility of staking with FRAX and FXS tokens, for example by adding liquidity on Frax Finance pools via Uniswap, or via the FRAX3CRV pool on Curve or StakeDAO. Staking LP tokens allows you to earn cryptocurrency rewards, with FXS tokens.

In summary:

  • An algorithmic stablecoin offers maximum decentralization.
  • This type of stable cryptocurrency uses oracles and smart contracts to ensure the stability of its price.
  • An algorithmic stablecoin is not necessarily backed by a fiat currency, as is FRAX, which has a peg to the US dollar. This is the case of the RAI.

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