After much anticipation, FRAX v3 is on the cusp of release. The third iteration of Frax’s flagship dollar-pegged stablecoin, supercharged with the ability to access RWAs, was not built overnight. Co-Founder Sam Kazemian led the earliest calls to access the risk-free rate of the dollar in November 2022 on Flywheel. The first major upgrade to the protocol since the Spring of 2021 comes at a time when the industry is feeling the full wrath of the bear market, with capital fleeing off-chain to take advantage of interest rates not seen in well over fifteen years. In this environment, not only is it FRAX v3’s time to shine, but firmly fits in the evolution of the Frax protocol itself.
Frax's development has always focused on capital efficiency in the safest manner and its ability to expand the stablecoin design surface. This was first seen with the initial launch of FRAX v1 in December, when the stablecoin could only adjust according to the collateral ratio (CR). Users minted FRAX with only USDC and FXS. As the supply grew, the protocol would decollateralize, lowering the CR and increasing the backing by FXS. The opposite would happen when users wanted to redeem their FRAX; the protocol would recollateralize and increase its collateral ratio. Yet this model did not come without its limits and the stablecoin was subject to the forces of supply and demand. If FRAX were to continue growing, it would need a way to enact monetary policy outside of a simple CR function and into the world on-chain.
Enter FRAX v2. Developed and deployed months after v1’s launch, v2 pioneered the concept of algorithmic market operations (AMOs) which, like a robot on command, allowed the protocol to autonomously take actions on-chain as long as $FRAX stayed at a dollar peg. This could mean minting fresh FRAX and pairing it with vanilla USDC in a liquidity pool or minting FRAX into a lending platform. As long as the action does not lower the collateral ratio and change the FRAX price then it was kosher.
What v2 did was expand the design surface of FRAX beyond just FXS and USDC to any DeFi application as a money lego. FRAX used these powers to build symbiotic relationships with protocols such as Curve and Convex, leading to billions of dollars in growth. Further additions such as Fraxlend allowed the protocol to mint FRAX into lending markets in a safe manner. Frax became and is backed by DeFi.
But just as v1 was susceptible to the market forces of DeFi, DeFi was just as susceptible to market forces off-chain. A one-two-punch of a bear market and 5% interest rates drastically reduced stablecoin supply across the board. Furthermore, the depeg of USDC when Silicon Valley Bank failed only confirmed a worldview that the Frax core team already shared; for a dollar-pegged stablecoin to truly safely scale to the trillions, it requires access to the risk-free rate of the dollar.
With a philosophy of stablecoin maximalism, Frax would go on to construct FRAX v3, an all-weather dollar stablecoin that can thrive in all market conditions. FRAX now has access to near-Fed rate yields from its relationship with FinRes, a non-profit public benefit corporation whose mission is to act as an adapter to the real world on behalf of FRAX. That means that FinRes’ sole purpose is to provide the Frax Protocol access to RWAs (specifically safe cash-equivalent assets and near-Fed rate yields) without seeking to make a profit from this relationship or charge fees. Via FinResPBC, FRAX now has expanded its design surface off-chain with treasury backing. Ultimately, v3 is a landmark upgrade to FRAX making it an all-weather stablecoin for all-market conditions. The key to FRAX’s success over the years is the ability to scale as effectively in downturns as it does in bull markets. No matter the market, bear or bull, low or high yields, FRAX can adjust accordingly on-chain or off-chain. And with Fraxchain is on the horizon, who knows what the core team is cooking up. As Kazemian said in a recent Twitter space with Flywheel “this next year is going to make the prior year look like we were slacking.”