Frax USD: The Stablecoin That Runs on Algorithms, Not Reserves

When you think of a stablecoin, you probably imagine something backed by cash or gold—like USDC or Tether. But Frax USD, a fractional-algorithmic stablecoin designed to maintain a $1 peg through a dynamic mix of collateral and smart contracts. Also known as FRAX, it doesn’t rely entirely on reserves. Instead, it adjusts its backing in real time using a system that balances crypto collateral with token supply changes. This makes Frax USD one of the few stablecoins that’s partially decentralized and self-correcting—no central bank, no single custodian, just code and market incentives.

Frax USD works alongside its sister token, FRAX, the governance and utility token that absorbs volatility when the stablecoin’s price drifts. When Frax USD trades below $1, users can burn FRAX and mint Frax USD to profit from the difference, which pulls the price back up. If Frax USD goes above $1, users can burn Frax USD and mint FRAX, flooding the market with the stablecoin until it stabilizes. This feedback loop is what keeps it pegged. It’s not magic—it’s math, economics, and active arbitrage. The collateral ratio isn’t fixed. It can shift from 0% to 100% based on market demand. At times, Frax USD is backed almost entirely by USDC or other assets. At other times, it’s mostly algorithmic. This flexibility lets it scale faster than fully collateralized stablecoins while staying more stable than pure algorithmic ones like the failed TerraUSD.

Frax USD is built on Ethereum and also lives on other chains like Polygon, Arbitrum, and BNB Chain. That means you can use it in DeFi protocols, lend it on Aave, trade it on Uniswap, or stake it in Frax’s own liquidity pools. It’s not just a store of value—it’s a working part of the DeFi engine. But it’s not risk-free. If the collateral backing it drops sharply, or if demand for FRAX collapses, the peg can strain. That’s why experienced users watch the collateral ratio like a thermometer.

What you’ll find in the posts below isn’t just theory. It’s real-world breakdowns of similar projects, warnings about unstable tokens, and deep dives into how blockchain-based money actually holds its value—or doesn’t. You’ll see what happens when algorithmic systems fail, how collateralized stablecoins compare, and why some tokens that sound like Frax USD are nothing like it. This isn’t about hype. It’s about understanding what keeps a digital dollar alive when the market turns.