A brief analysis of the five major features of FRAX V3, the road to becoming the "ultimate stablecoin"

Written by: Azuma
The v3 version of FRAX is gradually being unveiled.
On October 6, Frax Finance officially released the official documentation for FRAX v3. Although the product has not yet been launched, we can already have a simple understanding of the version iteration trends of this leading DeFi protocol through the document content.
In terms of positioning, Frax Finance calls the v3 version of FRAX 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 operation module; the sub-protocol is divided into internal and external parts. The internal sub-protocol refers to Frax Finance's own lending market Fraxlend and the AMM exchange Fraxswap, while the external sub-protocol mainly refers to Curve's stablecoin pool.
According to the document, FRAX will add five major levels of updates in version v3, as follows:
1. Fully Collateralized
In version v3, FRAX will continue its previous trend of increasing the stablecoin collateral ratio (CR) - striving to always maintain a CR >= 100%.
In the early days of its creation, FRAX was one of the most representative "undercollateralized" stablecoins on the market. However, after the collapse of UST, the market became extremely sensitive to "undercollateralization". Affected by this, FRAX also increased its CR to 100% through governance at the beginning of the year, achieving "full collateralization". The v3 version will continue to be promoted, and FRAX's real-time CR is expected to exceed 100% in the future.
As for the storage of collateral assets, Frax Finance will approve some cooperative entities through governance to be responsible for holding real-world assets, and the total value of the collateral assets will be included in the balance sheet of Frax Finance.
2. Anchored to the US dollar, not other stablecoins
The goal of FRAX v3 is to achieve full peg to the US dollar rather than other mainstream stablecoins.
When FRAX's CR reaches 100%, it will use Chainlink oracles and the governance-approved reference rate to confirm its peg to the US dollar; if the CR is below 100%, FRAX will work through the AMO smart contract and governance module to restore the CR and strive to keep the price of FRAX at $1.000.
All related processes will not take into account the prices of other stablecoins such as USDC, USDT or DAI.
3. Refer to IORB’s dynamic benefits
In version v3, FRAX will use the "Federal Reserve Rate" (IORB, the interest rate paid by the Federal Reserve for commercial banks' deposits at the Fed) as a reference standard for certain protocol functions (such as sFRAX staking returns) and adjust FRAX's collateral asset categories based on fluctuations in the IORB.
Simply put, when IORB is high, it will automatically convert into government bonds, and when IORB is low, it will automatically revert to on-chain assets and earn income through Fraxlend.
4. Remove multi-signature
FRAX v3’s smart contracts will run entirely on-chain via the frxgov module, so trust assumptions via multi-signatures will no longer be required.
5. No redemption
Unlike some other over-collateralized USD stablecoins, FRAX stablecoins are non-redeemable, which means that holding FRAX stablecoins does not guarantee the user the right to redeem them for an equivalent amount of fiat currency.
The sole function of FRAX is to achieve USD-equivalent pricing through asset collateralization, AMO smart contracts, and governance actions.
What does the community think?
Based on the discussions within the community, there are mixed reviews on FRAX v3. Some users believe that this document succinctly outlines the core upgrade points of version v3, but there are also dissenting voices that do not approve of these updates (for example, angel investor 0xSerJaMad is not very satisfied with 4/5 of the changes).
But personally, I can still see from the design of FRAX v3 that the Frax Finance team has a clear understanding of some of the main issues currently facing stablecoins. For example, in response to doubts about the intrinsic value of stablecoins, they chose a higher collateral rate to eliminate doubts; for example, in response to the risk of stablecoins, they chose to directly anchor them to the US dollar and cut off the relationship with other stablecoins; for example, in the current RWA APY war, they dynamically adjusted the source of income by referring to IORB.
As one of the most designed protocols in the DeFi world, Frax Finance has delivered eye-catching products in many different fields such as stablecoins, lending, LSD, etc. How much market competitiveness FRAX v3 can demonstrate in the future will be another highlight in the increasingly competitive stablecoin track.