Centrifuge <> FRAX AMO Proposal

Proposal

Create a Centrifuge AMO and authorize up to $100M worth of liquidity for use in the AMO.

Motivation

Frax is one of the most advanced and promising stablecoins in the Web3 ecosystem. As FRAX looks to diversify their collateral base the community has been forward looking in using RWAs to do so. RWAs offer FRAX a unique source of yield that is uncorrelated to the broader crypto ecosystem, while offering the necessary stability to underpin long-term growth. Centrifuge offers FRAX the opportunity to participate in a wide range of asset classes that can truly diversify the FRAX collateral base. It also offers FRAX the opportunity to proliferate outside the crypto ecosystem.

FRAX has proven it can scale and we therefore view FRAX as a long-term sustainable source of capital that can help shape RWAs.

The full proposal can be found in the Frax governance below :point_down:

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What’s an AMO? Can you provide some more info on FRAX? How has it “proven it can scale”? The UST debacle has raised concerns about algorithmic stablecoins. What makes FRAX a safer bet?

After Market Order i guess

Frax is the first fractional-algorithmic stablecoin protocol. Frax is open-source, permissionless, and entirely on-chain – currently implemented on Ethereum and 12 other chains. The end goal of the Frax protocol is to provide a highly scalable, decentralized, algorithmic money in place of fixed-supply digital assets like BTC. The Frax ecosystem has 2 stablecoins: FRAX (pegged to the US dollar) & FPI (pegged to the Consumer Price Index).

Frax v2 expands on the idea of fractional-algorithmic stability by introducing the idea of the “Algorithmic Market Operations Controller” (AMO). An AMO module is an autonomous contract(s) that enacts arbitrary monetary policy so long as it does not change the FRAX price off its peg . This means that AMO controllers can perform open market operations algorithmically (as in the name), but they cannot arbitrarily 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 the protocol special.

Here is the audit of Frax

You say “our protocol.” What is your connection to FRAX?

Can you give the “explain it to my grandmother” version?

And what are the potential downsides, risks of this proposal, including possible inherent flaws of an algorithmic stablecoin?

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I used the description from Frax Finance’s whitepaper. It should be “their” protocol, sorry for that. :wink: The only connection between FRAX and Centrifuge is the proposal posted above.

I recommend this thread for a better understanding of the concept

Hey @zaatar, I can give some colour here:
you can think of FRAX as a Web3 version of a central bank. The AMOs (algorithmic market operations) are automated strategies that allows the protocol to expand the demand of FRAX when FRAX trades above peg (>1$) and reduce the supply when it trades below peg (<1$). There are different types of AMOs for instance the Curve AMO which provides liquidity into the FRAX-3CRV pool to strengthen the peg, or a lending AMO that works similarly to Maker’s D3M (overcollateralised lending). All AMOs have to respect some conditions in order to operate, the most important is that they cannot affect the FRAX peg. This means that AMO cannot mint FRAX from thin air like in the case of UST/LUNA.

To mint 1 FRAX you need ~0,9$ USDC and 0,1$ of FXS (the governance token of the protocol) atm. The % of USDC necessary to mint 1 FRAX varies according to market conditions eg. during a downturn (like now) the collateralisation ratio (CR) goes up making the protocol more resilient, while during bull market and high demand of FRAX the CR might go down. The CR is adjusted algorithmically and it has proven extremely efficient as FRAX never lost the peg till now.