FRAX Protocol Analysis– FXS

A week of correction in the market that leaves us with an accumulated monthly result in BTC and ETH close to -10%. Despite these bearish movements recorded in recent weeks, both in $BTC and $ETH, the rising lows since the end of January are still respected, which leaves this uptrend in force in the market.

If we analyse the market further, we find some tokens that have also made this corrective movement during these weeks, but that is in a more favourable technical situation as in case of FXS, the FRAX Protocol governance token, which has a monthly gain of +30% after the breakout movement at the end of March.

FRAX Protocol is the first fractionalized algorithmic stablecoin system. To understand this concept, it is necessary to know what types of stablecoins we can find in the market.

Before FRAX, stablecoins were divided into three different categories: fiat collateral, cryptocurrency overcollateral and algorithmic unsecured. Frax is the first type of decentralized stablecoin to be classified as fractional algorithmic, marking the beginning of a fourth category.

FRAX is a single stablecoin with parts of its offering backed by collateral (stablecoins such as USDC or DAI) and parts of its algorithmic offering (with its FXS governance token).

The ratio of collateral and algorithmic depends on the market price of the FRAX stablecoin. If FRAX trades above $1, the protocol reduces the margin ratio. If FRAX trades below $1, the protocol increases the collateral ratio. I share this image from their website where you can see the variation of the margin ratio.

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FRAX is an open source, permissionless and completely on-chain, currently implemented on Ethereum (with possible cross-chain implementations in the future).

The ultimate goal of the Frax protocol is to provide highly scalable, decentralized algorithmic money instead of fixed-supply digital assets like BTC.

In addition to their FRAX stablecoin which always follows a narrow band close to $1, they also have the Frax Shares (FXS) governance token which is used to accumulate fees, income and excess collateral value and is traded on the market.

The FRAX stablecoin supply is dynamic and always changes to keep the price at $1 due to its fractional algorithmic monetary policy. Frax Shares (FXS) token supply is capped at 100 million tokens at genesis with no inflation schedule in the protocol. The FXS token is the governance token that accumulates all the value of the new FRAX, fees and excess collateral. FXS is an investment and governance asset, while FRAX is the stablecoin token.

We are going to analyze the price evolution of FXS which as we mentioned at the beginning of the post is in a better technical situation than other assets with higher capitalization.

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In the chart we can see how after the corrective movement in January, the price found support at $16. From there it has bounced on several occasions showing strength, as we can see in the MacD which generates upward divergences with each support in the medium.

During the last days of March, the price managed to break out of the downward trend, generating a bullish crossover of the RSI to the 70 zone and with a significant increase in the trading volume, which drove the price from $20 to the ATH zone  $44 in less than a week.

This momentum generated a higher high, which should be confirmed with a higher low from the previous one before a new upward momentum can be expected.

After this breakout move the price found resistance at $44, and generated a pull-back to $26-28 resistance zone in February, which is currently serving as support after the breakout.

If we enlarge the image, we can see that this pull-back has generated a short-term bearish guideline, which creates a wedge with the upward trend of recent weeks.

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This bearish guideline seems to lose strength as the days go by and we see how the price has broken out of the trend line, but it has not managed to make a higher high from the previous one in this short-term movement so we cannot yet consider this trend as broken.

In the event that there is an upward movement that confirms the break-out of this bearish trend with a higher-high from the previous one (approximately $37), it is very likely that the price will test its ATH at $44 where we need to pay attention and be ready for the possibility of a breakout to the upside, especially if the volume continues to mark new gains.

On the other hand, if we see a continuation of this downward trend with a new low, the most relevant support zone is $16 as we have already mentioned, although an area of great confluence is also detected at $20.

Lastly, remember that nothing discussed in our articles can be considered as investment advice, each one of us must do their own research and analysis and develop their own operating strategy. From the Belobaba Crypto Fund team we only show our analytical tools and how they help us in our operations, when making decisions.