The Frax Price Index Share (FPIS) token is the governance token of the FPI stablecoin, and it is entitled to seigniorage, or excess yield, from the protocol. Inflation is taken into account when determining the value of FPI, and the protocol's balance sheet must grow at least at the rate of inflation in order to maintain a 100% collateral ratio.
FPIS is linked to the Frax Share (FXS) token, which is the base token of the Frax ecosystem. Both FXS and FPIS tokens accrue value proportional to the growth of the FRAX and FPI stablecoins. FPIS holders are entitled to a portion of the revenue generated by the FPI stablecoin, and FXS holders are entitled to a portion of the excess yield generated by the protocol. In addition, FPIS grants token holders governance powers such as voting over the methodology of how the CPI is calculated. This presents a pretty interesting scenario where FPI could be an independent measurement of inflation based on digital statistics (ex. Amazon.com, Cars.com, Zillow, etc.) instead of the traditional measurements that the government currently uses to measure the CPI.
FRAX’s balance sheet is made up of a variety of assets such as the FRAX stablecoin and potentially other low-risk crypto-native assets like bridged BTC and ETH, as well as non-crypto consumer goods and services. The protocol then uses AMOs to generate yield, which is then directed to the FPIS or FXS token holders as excess yield.
The FPI stablecoin is designed to maintain a 100% collateral ratio, which means that the protocol's balance sheet must be growing at least at the rate of inflation in order to maintain the value of the FPI stablecoin. As such, the AMO strategy contracts must earn a yield proportional to the inflation rate in order to maintain the collateral ratio. If the AMO yield is not sufficient to keep up with the inflation rate, the FPI stablecoin may use a TWAMM AMO (Time-Weighted Average Market Maker) to sell FPIS tokens for FRAX stablecoins in order to maintain the collateral ratio.
At high levels of inflation, this results in the treasury having to organically fund 7+% annualized returns on FPI, which may not be sustainable. However, assuming CPI normalizes to a more manageable rate, FPI should offer investors a reliable on-chain way to protect assets from inflation risk and maintain value.