A Brief Analysis of FRAX v3's Five Key Features: The Path Toward the "Ultimate Stablecoin"
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A Brief Analysis of FRAX v3's Five Key Features: The Path Toward the "Ultimate Stablecoin"
Frax Finance refers to the v3 version of FRAX as the "ultimate stablecoin," utilizing AMO smart contracts and other "open, non-custodial" sub-protocols as stability mechanisms.
Navigating Web3 tides with focused insightsBy: Azuma
The v3 version of FRAX is gradually being unveiled.
On October 6, Frax Finance officially released the FRAX v3 technical documentation. Although the product has not yet launched, we can already gain a preliminary understanding of this leading DeFi protocol's evolutionary direction through the document.
In positioning, Frax Finance refers to the v3 version of FRAX as the "ultimate stablecoin," which will use AMO smart contracts and other "open, non-custodial" sub-protocols as stabilization mechanisms.
Specifically, the AMO smart contract refers to FRAX’s classic Algorithmic Market Operations module; the sub-protocols are divided into internal and external components. Internal sub-protocols include Frax Finance’s own lending market Fraxlend and AMM exchange Fraxswap, while external sub-protocols primarily refer to Curve’s stablecoin pools.
According to the documentation, FRAX will introduce five major updates in its v3 version, detailed as follows:
1. Fully Collateralized
In the v3 version, FRAX will continue the trend of increasing its collateralization ratio (CR), aiming to maintain CR at >= 100% at all times.
Initially, FRAX was one of the more representative "undercollateralized" stablecoins on the market. However, after the UST collapse, the market became extremely sensitive toward undercollateralization. Influenced by this, FRAX had already increased its CR to 100% earlier this year via governance, achieving full collateralization. The v3 version will further advance this effort, with FRAX’s real-time CR potentially exceeding 100% going forward.
Regarding storage of collateral assets, Frax Finance will approve certain partner entities through governance to hold real-world assets (RWA), and the total value of these collateral assets will be recorded on Frax Finance’s balance sheet.
2. Pegged to USD, Not Other Stablecoins
The goal of FRAX v3 is to achieve full pegging to the US dollar, rather than to other mainstream stablecoins.
When FRAX’s CR reaches 100%, it will use Chainlink oracles and governance-approved reference exchange rates to confirm its peg to the US dollar. If CR falls below 100%, FRAX will utilize the AMO smart contract and governance mechanisms to restore CR and strive to keep FRAX’s price at $1.000.
All related processes will disregard the prices of other stablecoins such as USDC, USDT, or DAI.
3. Dynamic Yield Referencing IORB
In the v3 version, FRAX will adopt the "Interest on Reserve Balances" (IORB)—the interest rate paid by the Federal Reserve on commercial banks’ deposits at the Fed—as a benchmark for certain protocol functions (such as sFRAX staking yields), and dynamically adjust FRAX’s collateral asset composition based on fluctuations in IORB.
Simply put, when IORB is high, collateral automatically shifts to Treasury bonds; when IORB is low, it reverts to on-chain assets, generating yield through Fraxlend.
4. Removal of Multisig
FRAX v3’s smart contracts will operate entirely on-chain via the frxgov module, eliminating the need for trust assumptions through multisignature wallets.
5. Non-Redeemable
Unlike some other overcollateralized USD stablecoins, FRAX will be non-redeemable—meaning holding FRAX does not guarantee users the right to redeem it for equivalent fiat currency.
The sole function of FRAX is to maintain a dollar-equivalent valuation through asset collateralization, AMO smart contracts, and governance actions.
What Does the Community Think?
Overall community feedback is mixed. Some users believe the document succinctly outlines the core upgrades of v3, while others express dissatisfaction—for instance, angel investor 0xSerJaMad criticized four out of the five proposed changes.
From my perspective, FRAX v3’s design reflects Frax Finance’s clear understanding of key challenges facing stablecoins today. To address skepticism about intrinsic value, they’ve opted for higher collateralization. To mitigate systemic risk exposure among stablecoins, they’ve chosen direct USD pegging, severing ties with other stablecoins. And amid the ongoing RWA APY race, they’re dynamically adjusting yield sources by referencing IORB.
As one of the most thoughtfully designed protocols in the DeFi space, Frax Finance has consistently delivered innovative products across stablecoins, lending, and LSDs. How much market competitiveness FRAX v3 will ultimately demonstrate will be a key point of interest in an increasingly competitive stablecoin landscape.
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