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Overview (CPI Peg & Mechanics)
A novel stablecoin pegged to a basket of consumer goods
The Frax Price Index (FPI) is the second stablecoin of the Frax Finance ecosystem. FPI is the first stablecoin pegged to a basket of real-world consumer items as defined by the US CPI-U average. The FPI stablecoin is intended to keep its price constant to the price of all items within the CPI basket and thus hold its purchasing power with on-chain stability mechanisms. Like the FRAX stablecoin, all FPI assets and market operations are on-chain and use AMO contracts. The Frax Price Index Share (FPIS) token is the governance token of the system, which is also entitled to seigniorage from the protocol. Excess yield will be directed from the treasury to FPIS holders, similar to the FXS structure. During times in which the FPI treasury does not create enough yield to maintain the increased backing per FPI due to inflation, new FPIS may be minted and sold to increase the treasury. Since the protocol is launched from within the Frax ecosystem, the FPIS token will also direct a variable part of its revenue to FXS holders.
The FPI uses the CPI-U unadjusted 12 month inflation rate reported by the US Federal Government: https://www.bls.gov/news.release/cpi.nr0.htm A specialized Chainlink oracle commits this data on-chain immediately after it is publicly released. The oracle's reported inflation rate is then applied to the redemption price of FPI stablecoins in the system contract. This redemption price grows per second on-chain (or declines in rare cases of deflation). The peg calculation rate is updated once every 30 days when bls.gov releases their monthly CPI price data. Thus, the FPI peg tracks the above 12 month inflation rate and pegs to it at all times from the FPI redemption contract. Thus, when buying FPI stablecoins for another asset (such as ETH) the trader is taking the position that CPI purchasing power is growing faster over time than the sold ETH. If selling FPI for ETH, then the trader is taking the position that ETH growth is outpacing the CPI inflation rate of the US Dollar.
The 12 month inflation rate is used as the peg target of FPI. At an inflation rate of 9.1% in June 2022, the FPI peg would grow at a rate of 9.1% against USD for the next 30 days. Note that during deflationary periods (June 2009) where the rate of inflation is negative, the FPI peg would decrease against USD.
FPI aims to be the first on-chain stablecoin to have its own unit of account derived from a basket of goods, both crypto and non-crypto. While FPI can be considered an inflation resistant yield asset, its primary motivation is to create a new stablecoin to denominate transactions, value, and debt. Denominating DAO treasuries and measuring revenue in FPI as well as benchmarking performance against an FPI trading pair helps better gauge if value accrual is actively growing against inflation in real terms. It also helps ground on-chain economics to baskets of real world assets. At first, the treasury will be comprised solely of $FRAX, but will expand to include other crypto-native assets such as bridged BTC, ETH, and non-crypto consumer goods and services.
FPI uses the same type of AMOs as the FRAX stablecoin however it is modeled to keep a 100% collateral ratio (CR) at all times. This means that for the collateral ratio to stay at 100% the protocol balance sheet must be growing at least at the rate of CPI inflation. Thus, AMO strategy contracts must earn a yield proportional to CPI otherwise the CR will decrease to below 100%. During times that AMO yield is under the CPI rate, a TWAMM AMO will sell FPIS tokens for FRAX stablecoins to keep the CR at 100% at all times. The FPIS TWAMMs will be removed when the CR returns to 100%.