Frax Shares (FXS)

FXS is the staking and governance token of the entire Frax ecosystem. All utility is concentrated into FXS and its locked variant, veFXS.

Summary

The Frax Share token (FXS) is the non-stable, utility token in the protocol, as opposed to FRAX the stablecoin. It is meant to be volatile and hold rights to governance and all utility of the system. Parameters that are up for governance through FXS include adjusting various fees, allocating protocol assets, and enabling new lending pairs for Fraxlend. Surplus protocol income is also distributed to locked FXS (veFXS) holders, and these veFXS holders can also earn farm weight boosts and other benefits. FXS supply is initially set to 100 million tokens at genesis (distribution here). As of 10/2/2024, the hard FXS supply cap is still 100 million tokens.

The FXS token has the potential of upside utility and downside utility of the system, where the delta changes in value are always stabilized away from the FRAX token itself and not affecting the peg.

FXS

Original Model (V1)

In the original (V1) model of FRAX, FRAX minting required both FXS and another stablecoin, such as USDC. The percentage of each (e.g. 15% FXS, 85% USDC) varied according to market conditions. See Frax V1 Background for details.

The FXS token’s market capitalization would be calculated as the future expected net value creation from seigniorage of FRAX tokens in perpetuity, the cash flow from fees, and utilization of unused collateral. Additionally, as the market cap of FXS increases, so does the system’s ability to keep FRAX stable. Thus, the priority in the design is to accrue maximal value to the FXS token while maintaining FRAX as a stable currency. As Robert Sam’s described in the original Seigniorage Shares whitepaper: “Share tokens are like the asset side of a central bank’s balance sheet. The market capitalization of shares at any point in time fixes the upper limit on how much the coin supply can be reduced.” Likewise, the Frax protocol takes inspiration from Sams’ proposal as Frax is a hybrid (fractional) seigniorage shares model. FXS would be largely deflationary in supply as long as FRAX demand grows.

Schematic of current utility of FXS (V1)

Current Model (V2 onwards)

In the current model, FXS is still used for governance, receives excess protocol income, and confers other miscellaneous benefits to holders (via veFXS). However, FXS is no longer needed to mint FRAX. That functionality is delegated to AMOs.