The Frax Share token (FXS) is the non-stable, value-accrual token in the protocol. It is meant to be volatile and hold rights to governance and all excess collateral of the system. It is important to note that we take a highly governance-minimized approach to designing trustless money in the same ethos as Bitcoin. We eschew DAO-like active management such as MakerDAO. The less parameters for a community to be able to actively manage, the less there is to disagree on. The only parameters that are up for governance through FXS is adding/adjusting collateral pools, adjusting minting/redemption fees, and refresh rate of the collateral ratio. No other actions such as active management of collateral or addition of human-modifiable parameters are possible other than a hardfork that would require voluntarily moving to a new implementation entirely. The FXS token has the potential of upside and downside of the system, where the delta changes in value are always stabilized away from the FRAX token itself. FXS supply is initially set to 100 million tokens at genesis, but the amount in circulation will likely be deflationary as FRAX is minted at higher algorithmic ratios. The design of the protocol is such that FXS would be largely deflationary in supply as long as FRAX demand grows.
The FXS token’s market capitalization should be calculated as the future expected net value creation from seigniorage of FRAX tokens in perpetuity, the cash flow from minting and redemption 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 capitalisation 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.