Frax v2 expands on the idea of fractional-algorithmic stability by introducing the world to the idea of the “Algorithmic Market Operations Controller” (AMO). Simply put, an AMO controller is an autonomous contract that enacts arbitrary FRAX monetary policy so long as it does not lower the collateral ratio and change the FRAX price. This means that AMO controllers can perform open market operations algorithmically (that’s where they get their name), but they cannot simply mint FRAX out of thin air and break the peg. This keeps FRAX’s base layer stability mechanism pure and untouched which has been the core of what makes our protocol special and has inspired other smaller projects. It also keeps AMO controllers economically disciplined knowing that there is a ceiling for the amount of FRAX that can be unbacked which stops the protocol from unrestrained money printing of classical central banks.
The AMO controllers will programmatically pause operation if any of their logic requires minting FRAX that would require recollateralization of the CR. The base layer fractional-algorithmic mechanism is always running just like before. If FRAX price is above the peg, the CR is lowered, FRAX supply expands like usual, and AMO controllers keep running. If the CR is lowered to the point that the peg slips, the AMOs pause all market operations, the system recollateralizes just like before as FRAX is redeemed and the CR goes up to return the peg. This allows all AMOs to operate with input from market forces, the same way that the v1 mechanism works.
AMO controllers enable FRAX to become one of the most powerful stablecoin protocols by creating maximum flexibility and opportunity without altering the base stability mechanism that made FRAX the leader of the algorithmic stablecoin space. AMO controllers open a modular design space that will allow for constant upgrades and improvements without jeopardizing protocol operation. This is the next step in Frax becoming the most capital efficient decentralized digital money.
Moving forward, Frax v2 will begin to have multiple AMO controllers that improve the protocol, increase capital efficiency, increase privacy, and drive more value to FXS holders. Anyone can propose, build, and create AMOs which can then be deployed with governance. That means if you believe Frax’s algorithmic market operations should include interaction with your DeFi protocol, reach out to us to discuss development and collaboration! Many projects have greatly benefited from being integrated into Frax’s AMOs just as much as Frax itself has benefitted. For example, the Collateral Investor AMO has deployed over $30m+ of idle collateral to yEarn, Aave, and Compound.