Algorithmic stablecoin platform Frax Finance plans to purchase “billions of dollars worth” of tokens to create a reserve fund for the FRAX algorithmic stablecoin. The founder of the project, Sam Kazemyan, told The Block.

The FRAX stablecoin is backed by USDC, the native token and centralized “stablecoin” of the Frax Shares (FXS) project. The platform uses a fractional reserve system whose parameters depend on the FXS liquidity ratio and the total FRAX supply.

When FRAX trades above $1, the system lowers, lowers, raises the margin rate. At the same time, arbitrageurs can buy or issue FRAX, which contributes to its binding to the $1 target level.

Initially, FRAX was fully provided by USDC, but as the project developed, the algorithmic component began to play a more prominent role.

The idea of ​​using a range of cryptocurrencies and synthetic assets to maintain stability is available in the Frax Finance whitepaper. However, according to Kazemyan, it is only now being discussed as an “inevitable option”.

This approach is similar to the initiative of the nonprofit Luna Foundation Guard. He invested in Bitcoin and Avalanche (AVAX) to build a backup of Terra’s UST stablecoin and increase its sustainability.

Kazemyan said that the platform plans to purchase tokens from all networks where FRAX is in circulation. The majority of the stablecoin supply is on Ethereum, but is also traded on 12 other blockchains, including Avalanche, BNB Chain, Fantom, and Solana.

Kazemyan explained that Frax Finance will receive native tokens in proportion to the demand for stablecoins on a particular blockchain. The balance of the reserve fund will reflect the share of the FRAX supply in each network.

“This strategy means that any Tier 1 network (including Bitcoin) will be interested in having a steady stream of FRAX money in its economy, as this creates huge market demand for its native tokens,” he said.

According to the founder of the project, part of the seigniorage will be set aside to raise funds for these purposes. However, the details of the plan are yet to be clarified – Frax Finance’s management needs to vote on it first.

FRAX’s total bid has crossed the 2.69 billion mark, increasing 250% in the last six months.

Recall that in March 2022, the Fantom project announced the launch of its own USDB stablecoin with highly profitable liquidity pools as collateral.