Frax Finance is a decentralised finance (DeFi) platform focused on the creation and management of algorithmic stablecoins and financial instruments. The project was launched in December 2020 with the goal of introducing a scalable and partially algorithmic stablecoin protocol that combines on-chain collateral and algorithmic mechanisms for stability.

At its core, Frax Finance operates a complex multi-token ecosystem designed for stability, yield generation, and decentralised governance. The project includes several key assets and protocols:

• FRAX (Stablecoin): A USD-pegged stablecoin designed to maintain a $1 peg using a fractional-algorithmic model, where the protocol balances collateral backing and algorithmic adjustments to stabilise the price.
• Frax Price Index (FPI): A stablecoin pegged to a basket of consumer goods instead of the US dollar, designed to hedge against inflation by tracking real-world price movements.
• frxETH & sfrxETH: frxETH is a liquid staking derivative token pegged to ETH, while sfrxETH (Staked Frax Ether) accrues staking rewards from Ethereum validators. These tokens facilitate liquid staking and DeFi integrations for ETH holders.
• FXS (Frax Share): The governance and utility token of the Frax ecosystem, used for decision-making, fee distribution, and protocol incentives.

• Fraxlend: A permissionless lending platform where users can borrow and lend Frax assets.
• Fraxswap: The native automated market maker (AMM) of Frax Finance, based on Uniswap V2, with time-weighted average market maker (TWAMM) features for efficient on-chain trading and rebalancing.
• AMOs (Algorithmic Market Operations): Smart contracts that manage the protocol's collateral and liquidity autonomously, balancing the supply of FRAX and interacting with external DeFi platforms.
• Fraxtal: A modular Layer 2 (L2) blockchain using frxETH as the gas token, designed for scaling Frax products.

Frax Finance continues to expand with multiple stablecoin models and financial instruments, balancing algorithmic mechanisms with decentralised governance.

Frax Share (FXS) is the primary governance and utility token within the Frax Finance ecosystem. It is a volatile, non-stable asset that plays a central role in protocol decision-making, revenue distribution, and economic incentives. Unlike FRAX, which is a stablecoin pegged to USD, FXS is designed for market-driven price discovery and value appreciation.

FXS was introduced alongside the FRAX stablecoin as part of a dual-token model where FRAX stability is maintained using both collateral and algorithmic adjustments, while FXS captures the governance power and protocol fees.

Key characteristics of FXS include:

• Total Supply Cap: The maximum supply of FXS is fixed at 100 million tokens.
• Token Emission: The token supply decreases over time with scheduled halvings and buybacks through AMO profits.
• Volatile Asset: FXS is a market-priced asset and not a stablecoin.

FXS has multiple roles within the Frax ecosystem, primarily focusing on governance, fee accrual, and protocol incentives.

• Governance Participation: FXS holders can vote on key protocol decisions, including gauge weights, collateral management, and fee structures. Users can lock FXS to obtain veFXS (vote-escrowed FXS), which grants enhanced governance power and increased rewards for long-term stakers.
• Fee Distribution and Protocol Income: All revenue generated by Frax Finance, including Fraxlend interest, Fraxswap fees, and AMO profits, is distributed to veFXS holders. The protocol may use profits to buy back and burn FXS, reducing the circulating supply.
• Protocol Incentives and Emission Management: The FXS gauge system determines how token emissions are distributed across liquidity pools and strategies, with veFXS holders voting on emissions allocation.
• Seigniorage and Collateral Adjustments (V1 Only): In the original model (V1), FXS was required to mint new FRAX stablecoins alongside USDC. In later versions, minting FRAX no longer requires FXS directly.
• Hedge Against USD Inflation: As a non-stable, market-priced asset, FXS can act as a hedge against inflation compared to the USD-pegged FRAX stablecoin.

Frax Share (FXS) and the entire Frax Finance ecosystem were created by Sam Kazemian, a blockchain entrepreneur and developer. The project was officially launched in December 2020. Kazemian envisioned a partially algorithmic stablecoin protocol that could balance collateral backing and algorithmic mechanisms for stability and scalability.

The initial model was inspired by the concept of seigniorage shares, where a stablecoin's supply and price stability are governed by market forces and protocol adjustments. Over time, the protocol evolved from its initial design (V1) into more sophisticated iterations (V2 and V3) with additional collateral mechanisms, algorithmic market operations, and decentralised governance.

The development and ongoing management of the Frax protocol have become increasingly decentralised, with veFXS holders participating in governance through on-chain voting mechanisms.