What Is FRAX v3?

Full Collateralization in FRAX v3

One of the major updates to FRAX v3 is the move to full collateralization. Previously, Frax was partially provisioned by USDC and part of its supply was algorithmically provisioned by FXS.

However, in Frax v3, the algorithmic collateralization is being removed and all stablecoins are gradually moving towards 100% collateralization at minimum. This ensures that every FRAX stablecoin is collateralized with at least USD $1 worth of assets. Collateralization is achieved through a combination of real assets approved by Frax Governance and AMO (Algorithmic Market Operations) contracts.

Stability Mechanisms in FRAX v3

To maintain stability and peg Frax to the USD, Frax v3 uses Chainlink oracles and rates approved by Frax Governance. The protocol also integrates the Federal Reserve's Interest on Reserve Balances (IORB) rate, which allows Frax to adjust its collateral based on the IORB rate.

If the IORB rate rises, Frax collateralizes itself with instruments such as Treasury bills or U.S. dollars deposited with the Federal Reserve Banks. In the event of a rate cut, IORB Frax diversifies its collateral with assets on the blockchain or loans through Fraxlend.

sFRAX Vault and Revenue Distribution

Recently, FRAX launched sFRAX, a new vault. Now, users can deposit Frax into this vault and receive their revenue in Frax, which is distributed weekly on Wednesdays.

The yield of sFRAX will start at 10% APY. Regardless of the amount of deposits within sFRAX, Frax will strive to maintain the minimum sFRAX annualized interest rate at or above the IORB rate, which is currently 5.4%.

This is achieved by converting the underlying Frax AMO collateral into the following RWAs:

• US short-term bonds

• Federal Reserve repurchase agreement

• U.S. dollars deposited in Federal Reserve accounts

• Selected shares of funds

Conversion will only take place if AMO Frax's current strategies are unable to provide sFRAX with returns over the current IORB rate. If the IORB rate begins to fall, AMO Frax will convert the collateral back to on-chain yield strategies, maintaining an attractive yield.

Introduction of FXB Token in FRAX v3

In addition to the vault, Frax v3 introduced the FXB token, which can be converted to Frax after a certain period. FXB will be tokenized with an indication of the expiration date, e.g. FXB1-1-2024. To avoid fractionalizing liquidity, they will likely start with annual expirations of up to four years. This allows users to potentially earn low-risk returns by buying and waiting for FXB to reach maturity.

Conclusion and Future Outlook

Frax v3 is the next step in the development of RWA. It is designed to provide stability, full collateralization, and increased returns compared to other stablecoins.

Frax uses a model similar to Maker, leaders in the RWA sector. The Maker token has shown significant growth over the past few months.

At the time when this article was written, the sFrax vault had already attracted almost $30M in less than a day, and the FXS token had already grown by 5%. Will Frax be able to take its rightful place among RWA coins? We can’t wait to see!