Thread by @samkazemian

I want to introduce a new concept from @fraxfinance called the Decentralization Ratio and how we've brought our fiatcoin collateral reliance to below 60% and soon <20% while keeping the tightest algostable peg.

A 🧵 on stablecoin decentralization

Some background, $FRAX is the only algostable to keep a perfect peg, never breaking once since launch in 2020. But a common criticism is that FRAX is just fractional USDC. Indeed, at launch, the only collateral that partially backed FRAX was USDC.

Even though our stability mechanism was novel. Before FRAX, no onchain stablecoin had consistently kept a peg without 100%+ collateralization. We now have an objective algorithm to measure how decentralized our protocol actually is.

The Frax Decentralization Score (DR) is the ratio of decentralized collateral value over the total stablecoin supply backed/redeemable for those assets. Collateral with excessive off-chain risk ie fiatcoins, securities, & custodial assets such as gold/oil etc. are counted as 0.

The DR goes through underlying constituent pieces of collateral that a protocol has claims on, not just what is inside its system contracts. The DR is a recursive function to find base value of every asset. It’s not easy to game by depositing USDC into @iearnfinance for yUSDC.

Let's go through an example with $FRAX itself. You can see a lot of FRAX is still backed by a mixture of @CurveFinance LP tokens but also a diverse basket of useful, yield producing, decentralized collateral+liquidity.

339.8M total FRAX

59.4M algorithmically stabilized
191.7m FRAX3CRV Curve LP tokens
30.6m FRAX minted in lending markets w/ Rari/Cream/Aave AMOs
82.4m USDC in Compound, Yearn, & Aave+idle.
15.2m non-FRAX Curve LP tokens
~$13m of hard assets on balance sheet: ETH, CVX, OHM, etc

FRAX3CRV LP are 50% FRAX so remove that. Can't back yourself w/ yourself. Other half is ~50% 3CRV which is 66% fiatcoin 33% $DAI (which is itself ~60% fiatcoin). So each $1 of FRAX3CRV LP only has about $.13 value coming from decentralized sources for us. 191.7*(.13)=$25.7m

Obviously the $59m supply of algorithmic FRAX is as decentralized as you can get. 30.6m FRAX minted through Lending AMOs also counts as decentralized since borrowers overcollateralize their loan w/ crypto sOHM, RGT, etc. This is the same reason $DAI's vaults give it high DR.

69.4m USDC deposited into Yearn, Compound, Aave count as 0. Remember that the DR is recursive. It tracks the underlying claims of a protocol to see if the value is from off-chain sources. It doesn't matter if the USDC is not inside FRAX contracts, it's still 0 DR value.

When you add this up entirely, you get

59.4m(1.00)+191.7m(.13)+30.6(1.00)+82.4(0)+15.2m(.63)+13m(1.00)=

($137.5m decentralized value)/(339.8 total FRAX) =
40.47% DR

That means FRAX is about 40% entirely decentralized and 60% reliant in some way on a web of centralized collateral. This is extremely promising as we started with 100% USDC & 0% DR just 8 months ago! If our DR reaches close to 100%, we can truly say we've reached our vision. 🙌

NOTE: the DR is a generalized algorithm that can be used to compute any stablecoin's excessive off-chain risk. Other stablecoins like @LiquityProtocol are much easier to calculate. Their DR is 100% :) Their mechanism is very simple.
@feiprotocol also does quite well, ~90% DR! :D

You can see Maker has a very similar DR to FRAX, just under 40% DR. Note that the DR also counts $WBTC as 0 since it looks at every custodial asset+every fiatcoin.

The DR algorithm will be displayed in real time at app.frax.finance soon. We're always striving for more transparency & stablecoin research at @fraxfinance. DR specs will be documented if anyone wishes to create a full stablecoin ranking based on decentralization ratios!🚀

This sets up FRAX to create even more innovative AMOs in the future by taking the DR into account directly onchain in its monetary policy. Imagine a stablecoin protocol that algorithmically optimizes for its own decentralization!

The future of France has never been brighter! 🇫🇷