Frax Ditches Algorithmic Backing, Citing Terra Failure

98% of community members have voted in favor of becoming a fully collateralized stablecoin

article-image

Keerthi Satheesh/Shutterstock.com modified by Blockworks

share

The community governance for stablecoin issuer Frax has voted to increase the collateral ratio for its stablecoin to 100%, removing the small algorithmic component which contributed to its value.

Frax, once known as a protocol that partially backed its stablecoin with collateral while stabilizing the rest with smart contract algorithms, it’s now gradually moving towards full collateralization.

“The costs of being slightly undercollateralized now far outweigh the benefits – especially because it can undermine the perceived safety of FRAX,” Frax finance admin Hameed wrote in a proposal.

Quorum for the proposal, which was set to 7.2 million FXS ($81 million), was well surpassed by 43 million FXS ($484 million) in total. Over 98% of community members voted in favor of implementing the changes.

Following the collapse of algorithmic-backed stablecoins such as UST, there has been a wide perception that they are less safe assets for users to hold.

“UST’s failure tainted the algorithmic stablecoin concept (whether fairly or unfairly). There is very little benefit in maintaining the current CR of 92%,” Hameed wrote. “Gradually shifting the protocol to 100% CR is the best path forward for the long-term health and growth of the protocol.”

The Blockworks Research team agrees.

“With Frax’s gradual transition to a 100% backing for its stablecoin, the token becomes less risky from a regulatory point of view,” they said. “This is a step closer to Maker’s model, where DAI is overcollateralized, which prioritizes safety.”

The proposal was designed to focus more on the end result — increase the credit ratio to 100% permanently — but does not touch on how the community plans to achieve this. 

“There is no imminent need to increase the CR and there are many ways of reaching the target CR,” Hameed wrote. “Ideally growth, asset appreciation and protocol earnings will increase the CR to 100% over time.”

It is important to note that minting FXS to increase the credit value is not under consideration. 

“This is effectively an investment in the future of Frax that will increase protocol assets and remove the need for FXS emissions towards locked liquidity,” Hameed wrote.


Get the news in your inbox. Explore Blockworks newsletters:

Tags

Decoding crypto and the markets. Daily, with Byron Gilliam.

Upcoming Events

Javits Center North | 445 11th Ave

Tues - Thurs, March 24 - 26, 2026

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

Old Billingsgate

Mon - Wed, October 13 - 15, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

Unlocked by Template (1).jpg

Research

As AI supercharges surveillance, privacy becomes a prerequisite and the winning stack will combine confidentiality with selective disclosure. Zcash’s Tachyon, composable standards on Ethereum/Solana, and compliance-aware pools aim to make private rails the new norm.

article-image

Pineapple begins deploying its $100 million Injective Digital Asset Treasury, staking INJ to earn yield and fund onchain mortgage ambitions

by Blockworks /
article-image

Staking levels in the ether funds will depend on protocol unstaking queue times and anticipated redemption activity, firm says

article-image

ETF inflows, miner strength, and tightening supply drive Bitcoin past its prior peak amid renewed demand for scarce assets

by Blockworks /
article-image

The Guidestar team, led by Alex Nezlobin, will join Uniswap Labs to enhance automated market maker design and smart order routing

by Blockworks /
article-image

Zac Prince spearheads Galaxy’s push into consumer banking with high-yield cash, crypto, and stock trading features

by Blockworks /