Fractional Stablecoins

Fractional Stablecoins are a type of stablecoin and cryptocurrency that combines collateral backing with algorithmic stabilization. Stablecoins, in general, are digital assets based on blockchain technology that aim to maintain a fixed price, typically $1. They are designed to provide stability and reduce the volatility often associated with cryptocurrencies like Bitcoin and Ethereum.

To ensure the usability and credibility of stablecoins as a payment method, they must be backed by collateral. This collateral can be fiat cash, cryptocurrencies like Bitcoin or Ethereum, or on-chain tokens that can be redeemed or exchanged. Traditional stablecoins are backed 1:1 with the corresponding collateral, meaning that for every stablecoin in circulation, there is an equivalent amount of collateral backing it.

However, fractional stablecoins operate differently. They have a collateralization ratio of less than or equal to 100%, which means that they can be backed by a fraction of their supposed total value in real dollars or cryptocurrency. This approach improves capital efficiency by reducing the amount of idle collateral required. In other words, fractional stablecoins have a larger circulating supply of tokens than liquidity or collateral.

The core concept of fractional stablecoins remains the same, regardless of the specific model used. Some fractional stablecoins are backed by liquidity, meaning that the stablecoin can be redeemed for a proportional amount of the liquidity pool’s underlying assets. Others allow for partial redemptions, meaning that the stablecoin can be redeemed for a fraction of its face value.

Fractional stablecoins incorporate algorithmic mechanisms that incentivize economic behavior and game theory to maintain their peg to a target price. If the price of a fractional stablecoin exceeds $1, the algorithmic systems generate new stablecoins until the price returns to $1. Conversely, if the stablecoin is overcollateralized, the algorithmic mechanisms may burn some stablecoins or tokens to maintain the stability.

One example of a fractional stablecoin is FRAX, which was founded by Sam Kazemian. FRAX is an open-source and permissionless project that aims to bring a truly trustless, scalable, and stable asset to the future of decentralized finance. It is the only fractional stablecoin that has consistently maintained its peg since its inception.

Sam Kazemian, the founder of FRAX, is an experienced blockchain entrepreneur and crypto enthusiast. He co-founded Everipedia, a blockchain-based knowledge base, and has been actively involved in the crypto space since 2013. Kazemian started his crypto journey by mining crypto in his college dorm room at UCLA. He is also a frequent guest lecturer at UCLA, covering topics such as crypto, computer science, and entrepreneurship.

In summary, fractional stablecoins are a type of stablecoin that combine collateral backing with algorithmic mechanisms to maintain a fixed price. They are backed by a fraction of their supposed total value in collateral, which improves capital efficiency. Fractional stablecoins use algorithmic adjustments to generate or burn stablecoins or digital tokens, ensuring their stability and usability as a payment method.