Frax Finance founder Sam Kazemian proposed to repurchase up to $20 million of the DeFi protocol’s own FXS token, to prop up the battered cryptocurrency following the recent marketwide sell-off.
Kazemian believes that the digital asset is “significantly undervalued” and does not represent the true value of the Frax protocol nor the “resilience” of the ecosystem’s fractional-reserve, algorithmic stablecoin FRAX.
FXS, the governance and utility token of the Frax network, surged on the news and rose 12 percent. On Friday, it later pared those gains, falling to $5.89. The token has slumped more than 85% since hitting an all-time-high of $43 in January.
The plan comes amid a market-wide crash in crypto prices that has extended for the past six months and worsened with the collapse of LUNA in May. Since its November highs, the meltdown has wiped out more than $1.6 trillion in value from the market.
“FRAX’s peg is indisputably resilient, has never been in doubt, and has held perfectly since inception. The protocol as a whole has been in excellent shape,” said Kazemian in a new governance proposal he co-wrote alongside founder Travis Moore.
“Thus, the core team does not believe the significantly worse performance of FXS compared to other tokens is justified any longer… [it] seems to be the most undervalued out of all other volatile assets Frax could hold on the balance sheet,” he added.
Kazemian criticizes “market irrationality”
The Frax protocol is split between its stablecoin and a governance token, Frax shares (FXS). FRAX is pegged to the U.S. dollar and keeps that parity by being partially collateralized by USDC. FXS also helps with the peg as it accrues fees and seigniorage revenue.
Kazemian said the protocol made $80 million in annual revenue and had a “formidable warchest and cash flows that it can…take advantage of this mispricing [of FXS].” In his proposal, he stated that Frax will finance the buyback through a combination of available cash and profits.
If approved, the $20 million repurchase program will be done over a 30-day period using a method known as ‘time-weighted average market maker’ (TWAMM). The method allows for large long-term orders to be broken into several smaller orders executed over time to minimize price shocks.
“Frax is strong and profitable enough to take advantage of the market irrationality on its governance token,” stated Kazemian. “Should the proposal pass, the FXS bought back can be burned entirely, placed in veFXS yield, or retained in the treasury until future governance allocates uses.”
Is this simply a temporary relief?
There is about 16.2 million FXS tokens in circulation from a total supply of 100 million, as per Coinmarketcap. Kazemian is hoping that a reduction in supply would help boost the price of the token. But not everyone agrees with his proposal.
[It] seems like a move that would help in the price short run. I would leave it to the market to properly price FXS and focus on allocating the budget to accumulate tokens that can bring yield and stability to the protocol in the long run,” said one user, Messey_Tony, responding on the Frax forum.
Another, identified as Seba, laid out a series of arguments on why Frax should not spend $20 million on the buyback. Seba said the repurchase “won’t be more than a temporary relief and an opportunity for non-committed investors to sell their FXS.”
“The long term investors, the ones that locked liquidity for years, won’t benefit at all from this. Most importantly this buyback does not benefit Frax at all, does not help build a market nor use cases for it, and towards this goal is how we should spend funds,” he complained.