The Frankencoin Pool Share Explained in 5 Minutes

The Frankencoin Pool Share (FPS) is the governance token of the Frankencoin system. It gives its holder both voting power (if conditions are met) and a stake in the success of the Frankencoin.

Voting Power

The Frankencoin Pool Share (FPS) plays an important role in the governance of the Frankencoin system. It’s not just a token; it’s a way for holders to influence the future of the Frankencoin and, at the same time, benefit financially from its growth. The idea behind FPS is similar to holding shares in a traditional company. Holders have voting power, a financial stake, and an incentive to keep the system healthy and thriving.

At its heart, the FPS is a governance token. In decentralized systems like Frankencoin, decisions need to be made collectively by the community. The FPS holders get to vote on proposals that directly affect the Frankencoin system. One of the most critical decisions they participate in is determining which cryptocurrencies can be used as collateral to back the ZCHF. This is a crucial aspect of the Frankencoin as not all cryptocurrencies are stable or reliable enough to serve as collateral. By allowing only high-quality assets into the system, FPS holders help maintain the peg of the ZCHF to the Swiss Franc and ensure stability.

What makes FPS unique among governance tokens is the veto power it grants to large holders. Instead of relying solely on a standard majority voting system, a veto-based approach was chosen to prevent any one party from gaining control. In a traditional voting setup, if one entity acquires a majority, they could dominate the decision-making process. Even without a majority, a standard voting system requires sufficient voter turnout, and that is not always guaranteed.

With FPS, any holder who controls more than 2% of the total voting power can veto proposals they believe could harm the system. The number of votes a user has is calculated by multiplying their Frankencoin Pool Shares by the duration they have been holding these shares. This method rewards long-term commitment and prevents short-term manipulative actions. When shares are transferred to a new address, the votes are reset to zero, preventing vote trading or sudden shifts in voting power.

This adds an important layer of security to the Frankencoin ecosystem. If a malicious actor attempts to introduce risky or unstable collateral, those with significant stakes can block it. This veto mechanism makes it far more difficult for bad actors to destabilize Frankencoin.

Financial Incentive

Governance, although the main use of the FPS, is just one aspect of it. The Frankencoin Pool Share also comes with financial incentives. Every time a user mints ZCHF, they pay a fee. A portion of this fee goes into the system’s equity, and FPS holders benefit from this. Over time, as more ZCHF is minted and the system grows, the value of FPS increases. It’s a win-win situation: the more stable and popular ZCHF becomes, the more valuable FPS is. Take for example the most recent position. This position uses WETH as collateral and contributed 10% of the position size to the reserve. These funds became part of the pool, of which each FPS holder owns a fraction.

However, like in any financial system, there are risks. FPS holders are the last to be paid out in the event of a loss. This means that if the system faces a financial shortfall, such as a significant drop in the value of the collateral backing ZCHF, the losses are absorbed by the system’s equity. Since FPS is tied to this equity, FPS holders will see their token’s value drop as well. This mirrors how shareholders in a company bear the losses if the company underperforms. This dynamic creates a balance where FPS holders are incentivized to ensure that the Frankencoin system remains strong and stable.

A Win-win Situation

One of the interesting features of the Frankencoin system is its self-regulating nature. ZCHF minters (those who create new ZCHF by locking up collateral) must carefully manage their positions. If the value of their collateral drops too low, their position becomes under-collateralized, and it can be liquidated. This is where the community comes into play. Members who identify under-collateralized positions can challenge them and initiate liquidation. If their challenge is successful, they receive a reward, providing a strong incentive for community members to monitor the system actively.

This self-regulating process ensures that the system stays balanced. It’s not just about governance and voting; it’s about creating a network where everyone, from FPS holders to challengers and minters, has a role in maintaining stability. The interplay between these different participants ensures that the Frankencoin system can adapt and respond to changes in the market or within the system itself.

From a long-term perspective, FPS holders are not just passive investors. They are actively shaping the future of Frankencoin. By participating in governance and ensuring the quality of the system’s collateral, they help guide the development of the Frankencoin. This is particularly important in a decentralized system like Frankencoin, where there is no central authority making decisions. The community, the FPS holders, steers the Frankencoin.

For those involved in the system, holding FPS means taking on both responsibility and reward. On the one hand, there is the responsibility of governance and ensuring that the system remains stable. On the other hand, there is the potential for financial reward, as the value of FPS can increase with the growth and success of the Frankencoin ecosystem. However, like any financial investment, there is also risk. If the system fails to maintain its peg or faces significant financial strain, FPS holders will be the first to absorb the impact.

The Frankencoin Pool Share (FPS) is more than just a token. It’s a key part of the governance, stability, and financial success of the Frankencoin system. Through governance, financial incentives, and active community participation, FPS holders play a central role in keeping the Frankencoin stable.