This doc is stolen with ❤️ from frax.finance.
XUSD is a partial-collateralized and partial-algorithmic stablecoin protocol. XUSD is open-source, permissionless, and entirely on-chain – currently implemented on Ethereum (with possible cross-chain implementations in the future). The end goal of the XUSD protocol is to provide a highly scalable, decentralized, algorithmic money in place of fixed-supply digital assets like BTC.
XUSD is a new paradigm in stablecoin design. It brings together familiar concepts into a never before seen protocol:
Partial-Algorithmic – Parts of XUSD supply are backed by collateral and parts of the supply algorithmic. The ratio of collateralized and algorithmic depends on the market's pricing of the XUSD stablecoin. If XUSD is trading at above $1, the protocol decreases the collateral ratio. If XUSD is trading at under $1, the protocol increases the collateral ratio.
Decentralized & Governance-minimized – Community governed and emphasizing a highly autonomous, algorithmic approach with no active management. We will set the
owner_address in the smart contracts to a burn address and transfer the timelock admin to a multi-sig address when the protocol is stable, after that, all decisions must be made by community voting, and executed through the timelock contract. But before that, we would like to maintain some control over the protocol so that we can react fast to emergencies or new opportunities.
Fully on-chain oracles – XUSD uses Uniswap (ETH, DAI time-weighted average prices) and Chainlink (USD price) oracles.
Two Tokens – XUSD is the stablecoin targeting a tight band around $1/coin. XUSD Shares (XUS) is the governance token that accrues fees, seigniorage revenue, and excess collateral value.
Swap-based Monetary Policy – XUSD uses principles from automated market makers like Uniswap to create swap-based price discovery and real-time stabilization incentives through arbitrage.