While FRAX has largely been successful, one could argue that it is not truly decentralized. This is because it is still partially collateralized by USDC, which is backed by cash reserves held by a centralized entity (CENTRE Consortium - with Coinbase and Circle as co-founding members).
New entrants are trying to avoid this dilemma. They are still gravitating towards the collateralized system but have their distinctive takes, making it difficult to categorize under the existing umbrella of algorithmic stablecoins.
We will cover three examples.
Fei Protocol
Fei launched at the end of Q1 2021. Much like Frax, Fei uses a partially collateralized system but is instead backed purely by ETH. Fei’s stablecoin (FEI) is pegged to $1, which is underpinned by innovative concepts to maintain their peg and ensure the overall financial stability of the protocol.35 Rather than borrow collateral, Fei introduces a mechanism known as the Protocol Controlled Value (PCV). Essentially, Fei purchases ETH from users through newly minted FEI. Fei will then use the ETH to support their collateral-backed liquidity pools. Other common use cases include governance treasuries and insurance funds. During the initial launch, Fei allocated 100% of the PCV funded by the ETH bonding curve to a Uniswap pool using an ETH trading pair.
When the price of FEI is above $1, the protocol allows users to mint new FEI directly from the system at a discounted price (similar to FRAX) using ETH as payment. Traders may then arbitrage the price down until the price reaches its $1 peg. When the price of FEI is below $1, the protocol taxes FEI sellers (whose tax is then burned and removed from the supply), and awards extra FEI to buyers (on top of their initial purchase). The trading algorithm ensures that the tax amount exceeds the amount that buyers would receive.
In emergencies where the price of FEI is below the peg for an extended period, FEI may withdraw their PCV-backed liquidity from Uniswap and
35 Fei Protocol. (2021, January 11). Introducing Fei Protocol. Medium.
https://medium.com/fei-protocol/introducing-fei-protocol-2db79bd7a82b.
buy FEI from the market. At the same time, FEI is also burned. Once the peg is restored, Fei will resupply the remaining liquidity back into Uniswap.
Fei also has a native governance token (TRIBE) which will eventually become the foundation for a DAO. In the future, TRIBE holders will be able to decide on adjusting the PCV allocation and adding/adjusting bonding curves.
Reflexer
Unlike other algorithmic stablecoins, Reflexer’s native token (RAI) is not meant to be a fixed-peg stablecoin. Launched in Q1 2021, RAI’s intended purpose is to become stable collateral and replace existing collateral assets such as ETH or BTC, which are naturally volatile. RAI uses an ETH-based overcollateralized model and has a floating peg that was initially set to $3.14.
Reflexer uses managed-float regime principles, similar to how central banks operate.36 Since prices constantly fluctuate, Reflexer designed a system where market interactions between RAI minters and traders (RAI holders) are incentivized to chase RAI’s redemption price (floating peg) in order to keep the price of RAI relatively stable.
To mint RAI, users need to deposit ETH as collateral with a minimum of 145% collateralization ratio. Users are then charged a stability fee (borrowing interest rate). At the time of writing (May 2021), the stability fee is 2% per annum. However, it is variable and may be amended through a governance vote.
36 Ionescu, S. (2020, October 29). Introducing Proto RAI. Medium.
https://medium.com/reflexer-labs/introducing-proto-rai-c4cf1f013ef.
When the price of RAI is above the floating peg, the system lowers the peg.
This allows users to mint more RAI and sell it back for ETH for a higher return. When the price of RAI is below the floating peg, the system raises the peg. This makes borrowing more expensive and incentivizes RAI minters to repay their RAI loans, thereby removing RAI from circulation and driving the price up.
In emergency situations (Settlement), the protocol shuts down and only allows both RAI minters and RAI holders to redeem ETH collateral from the system at the current redemption price.
Reflexer also has another native token (FLX) which acts as the lender of last resort, governs certain functions, and allows users to stake it in a pool that protects the system. There are also debt auctions, which are created to repay FLX in exchange for RAI - the RAI that is received by an auction will be used to eliminate bad debt from the system. On a longer time horizon, FLX is intended to be an “ungovernance” token, progressively automating the system over time and minimizing governance.
Float Protocol
Float is quite similar to FRAX, where it uses a two token seigniorage model and is partially collateralized by ETH. However, unlike FRAX, Float’s native asset (FLOAT) has a floating rate but has an initial peg price of $1.61. Float’s share token (BANK) also acts as both a governance token and regulating mechanism to support FLOAT’s price.37
37 Float Protocol. (2021, March 22). Announcing Float Protocol and its democratic launch. Medium.
https://medium.com/float-protocol/announcing-float-protocol-and-its-democratic- launch-d1c27bc21230.
Float uses a similar mechanism as Fei’s PCV where users may only acquire newly-minted FLOAT from the protocol. However, Float sells FLOAT through a Dutch auction where prices are listed at the highest possible price and descend downwards towards the minimum (reserve) price. To acquire FLOAT, users must pay with a combination of BANK and ETH. The asset payment ratio depends on the overall demand for FLOAT and the value of ETH in the basket.
If the basket is in excess, ETH is used to purchase FLOAT at the target price, and BANK is used to mint FLOAT. ETH (or any other future trading assets) earned from the Dutch auction is then stored as collateral in the protocol’s collateral vault (Basket). BANK is burned whenever a user mints FLOAT.
When the price of FLOAT is above the floating peg, any user can start an auction. Initially it can only be started if a minimum of 24 hours has passed but this will be removed in the future once the team is satisfied that users are accustomed to the auction feature. Once an auction starts, the system mints and sells new FLOAT, starting at market price plus an added premium. Price will lower over time until it reaches the target price.
When the price of FLOAT is below the floating peg, the protocol offers to buy FLOAT from the market in the form of a reverse Dutch auction. This is where Float offers buyers what bids it would accept at incremental prices.
FLOAT is bought with both ETH and freshly minted BANK.
Float’s initial collateral ratio (Basket Factor) was set at 100% at launch but may be amended through governance voting. During emergencies, assets stored in the basket can be used to support the price of FLOAT if it is below its peg.