How does Frax algorithmically maintain its peg to the USD?

1 answers

• REndJul 03, 2023 · 2 years ago
  Frax algorithmically maintains its peg to the USD through a combination of market mechanisms and algorithmic adjustments. The protocol uses a collateral pool of assets, including stablecoins and other cryptocurrencies, to back the value of the Frax tokens. When the price of Frax deviates from $1, the protocol incentivizes traders to buy or sell Frax on the market to bring the price back to $1. This is achieved through a mechanism called the Frax Redemption and Minting process. When the price is above $1, traders can buy Frax at a discount and redeem them for the underlying collateral assets, thus increasing the supply of Frax and reducing the price. When the price is below $1, traders can mint new Frax tokens by depositing collateral assets, thus reducing the supply of Frax and increasing the price. The algorithm behind the Frax Protocol continuously monitors the price and adjusts the incentives to maintain the peg to the USD.
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