Overview

FRAX v3: The Final Stablecoin

FRAX is a dollar-pegged stablecoin that uses “Algorithmic Market Operation” (AMO) smart contracts and permissionless, non-custodial subprotocols as stability mechanisms. The three main internal subprotocols used as stability mechanisms are Fraxlend, a decentralized lending market, Frax Bonds for peg stability, and Fraxswap, an automated market maker (AMM) with special features. The primary external locations for stability include Curve and Uniswap V3 pools. Additional subprotocols and AMOs can be added with governance allowing FRAX to incorporate future stability mechanisms seamlessly as they are discovered. The V3 expansion of FRAX introduces the following concepts and benchmarks: 1) Full exogenous collateralization of FRAX: The protocol will attempt to keep >=100% CR at all times. Starting in V3 and after FIP188, the Frax Protocol attempts to keep all FRAX stablecoins at a minimum of 100% collateralization ratio (CR) through AMO smart contracts and certain real world assets held by partner entities approved by the Frax Governance module (frxGov). The FRAX CR is calculated as the value of exogenous collateral held on the FRAX balance sheet. The segregated balance sheet of the stablecoin is collateral that is used to stabilize the open market price of FRAX stablecoins. 2) Sovereign USD peg: Once the FRAX stablecoin reaches 100% CR, its peg will track to USD using a combination of Chainlink oracles & governance approved reference rates. If FRAX CR drops, AMOs and governance should attempt to restore CR to 100% and keep FRAX price at $1.000 regardless of prices of other assets such as USDC, USDT, or DAI. 3) IORB oracle: FRAX V3 smart contracts intake the Federal Reserve Interest on Reserve Balances (IORB) rate for certain protocol functions such as sFRAX staking yield. As the IORB oracle rate increases, the Frax Protocol’s AMO strategies will react to heavily collateralize FRAX with treasury bills, reverse repurchase contracts, and/or USD deposited at Federal Reserve Banks that pay the IORB rate. As the IORB oracle reports low/decreasing rates, the AMO strategies will begin to rebalance FRAX collateral with on-chain, decentralized assets and overcollateralized loans in Fraxlend. 4) Removal of multi-signature trust assumptions: FRAX V3 smart contracts will eventually operate entirely on-chain using the frxGov module in addition to Snapshot votes by the community. 5) Frax Bonds (FXBs): Bonds will be issued under face value with various maturity dates in order to intake/lock FRAX and help stabilize its peg. 6) Non-redeemability: FRAX stablecoins are non-redeemable, similar to fiat currencies that do not give the holder a right to assets. Holding a FRAX stablecoin does not guarantee you the right to redeem it for any specific financial instrument or token at any particular time. The Frax Protocol’s only function is to use AMO contracts, real-world assets (RWAs), and governance actions through frxGov to stabilize the FRAX price to $1.000 by using USD oracles as reference. 7) Fraxtal: A modular rollup blockchain (L2) based off Optimism technology. frxETH will be used as the gas token. Includes blockspace incentives (called Flox / FXTL points) that reward users and developers for spending gas and interacting with smart contracts on the network. *FRAX v3 deployment is a gradual and iterative process. As smart contracts are deployed, their address will be added to their appropriate documentation sections. Not all features discussed in this document is deployed at this time.*