Frax Finance founder Sam Kazemian has proposed to buy back up to $20 million of the DeFi protocol’s own FXS tokens to prop up the battered cryptocurrency after the recent market sell-off.
Kazemian believes that digital assets are “significantly undervalued” and do not represent the true value of the Frax protocol, nor the “resilience” of the ecosystem’s fractional reserve, algorithmic stablecoin FRAX.
Frax Network’s governance and utility token FXS surged on the news, rising 12%. On Friday, it later gave back those gains, falling to $5.89. The coin has lost more than 85% since hitting an all-time high of $43 in January.
The plan comes amid a market-wide slump in cryptocurrency prices that has stretched over the past six months and worsened with LUNA’s collapse in May. The crash has wiped more than $1.6 trillion in value from the market since its November highs.
“FRAX’s peg is undisputedly resilient, has never been challenged, and has remained flawless since its inception. The entire protocol is in very good shape,” Kazemian said in a new governance proposal he co-authored with founder Travis Moore.
“As a result, the core team no longer believes it is reasonable for FXS to perform significantly worse compared to other tokens… [it] Seems to be the most undervalued of all the other volatile assets Frax might hold on its balance sheet,” he added.
Kazemian criticizes ‘market irrationality’
Frax Protocol is split into its stablecoin and governance token Frax Shares (FXS). FRAX is pegged to the U.S. dollar and maintains this parity by being partially collateralized by USDC. FXS also helps with pegs as it generates fees and seigniorage income.
Kazemian said the agreement has $80 million in annual revenue and has “strong funding and cash flow…to take advantage of this mispricing” [of FXS]. In his proposal, he said Frax would fund the buyback through a combination of available cash and profits.
If approved, the $20 million buyback program will be completed within 30 days using a method known as a “time-weighted average market maker” (TWAMM). This method allows large long-term orders to be broken up into several smaller orders to be executed over time to minimize price shocks.
“Frax is strong and profitable enough to take advantage of the market irrationality of its governance token,” Kazemian said. “If the proposal passes, the repurchased FXS can be completely burned, put into veFXS earnings, or kept in the treasury until the future. governance allocation purposes.”
Is this just a temporary relief?
According to Coinmarketcap, the total supply is 100 million and there are approximately 16.2 million FXS tokens in circulation. Kazemian hopes the reduction in supply will help boost the price of the coin. But not everyone agreed with his proposal.
[It] Seems to be a move that helps short-term prices. I’ll leave it to the market to price FXS correctly and focus on allocating budget to accumulate tokens that can bring yield and stability to the protocol in the long run,” one user Messey_Tony said on the Frax forums replied.
Another, Seba, made a series of arguments as to why Frax shouldn’t spend $20 million on a buyback. Seba said the buyback “is only a temporary relief and opportunity for non-commitment investors to sell their FXS.”
“Long-term investors, those who have locked in liquidity for years, are not going to benefit from it at all. On top of that, this buyback is not good for Frax at all, it is not going to help build the market or the use case, and making it happen is ours how the funds should be used,” he complained.
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