Diverse reserve assets are hot! Algorithmic stablecoin protocol Frax may purchase multiple L1 tokens as collateral assets

Following Terra, algorithmic stablecoin protocol Frax Finance is considering purchasing billions of dollars worth of other native tokens from various blockchains as collateral assets for its stablecoin FRAX, aiming to increase Frax's trading demand across different blockchains.

Diversifying Frax Reserve Assets

The current FRAX is mainly generated through USDC collateralization, and the collateral ratio is adjusted through the re-collateralization and redemption mechanism of FXS to maintain the stability of the FRAX price.

According to The Block, with the market value of FRAX reaching approximately $2.7 billion, the Frax Finance team is also planning to add other non-stablecoins as collateral, such as BTC or ETH among other L1 tokens. The founder, Sam Kazemian, stated that using multi-chain assets as collateral would help incentivize trading volume denominated in FRAX across various blockchains.

"Remember, this strategy implies that every L1 blockchain will have an incentive to integrate FRAX into its economic system, as it creates central bank-scale market demand for its L1 token." Kazemian said.

Differences from Terra

Although both involve purchasing tokens from other chains to increase the reserves of their stablecoins, Frax Finance does not only buy Bitcoin like Terra does, but intends to acquire the native assets of blockchains issuing stablecoins.

In addition to multi-chain approach, Frax Finance's method of asset acquisition differs from Terra. It does not involve exchanging through USDT or converting LUNA into Bitcoin reserves, but rather conducts these large-scale purchases through the decentralized exchange Fraxswap.