Bonds (FXB) & Interest Rates

So far, we've discussed the stablecoin, FRAX, and the governance token, FXS, which has control of the seigniorage and revenue flow of the protocol. FXS is similar to ownership/stake in the protocol, not debt which is a separate financial primitive. We have not yet discussed how a fractional-algorithmic system like Frax handles issuance of debt which is extremely important for a complete algorithmic monetary policy. Check this section + GitHub for updates as we release Frax Bond (FXB) specs.

The FXB AMO controller issues FXB tokens on an xy=k curve and pays FXB owners a protocol adjustable interest rate paid into the curve (so that FXB holders can redeem their bonds at higher prices, essentially creating a fungible interest bearing token with high liquidity). Previous attempts at bonds/coupons by other projects have been unsuccessful for a number of reasons: lack of fungibility, low liquidity, poor economic design, and no base layer fractional-algorithmic mechanism to backstop them if needed. The bond & interest rate AMO allows for servicing large FRAX contractions to offload the burden slowly over 1 year (or some maturity timeline) rather than all at once on the fractional-algorithmic mechanism. For example, if there is a large contraction event that requires 50% of the FRAX supply to be redeemed quickly at once, then there would be immense pressure on FXS holders due to newly minted FXS being sold off by redeemers. The FXB AMO offers an interest rate yield on FRAX that some users could earn instead of redeeming FRAX for collateral+FXS. This substantially protects FXS holders. As the interest is being paid out, if newly minted FRAX lowers the CR and slips the price, the AMO turns off until enough FRAX is redeemed and the CR is at the right amount to restore the peg. This mechanism essentially softens out large contractions over the FXB maturity period in a more sustainable and longer time-horizon so that FXS holders are shielded from vicious cycles that have plagued other algorithmic stablecoin designs.