Written by: Azuma, odaily

The v3 version of FRAX is gradually unveiling.

On October 6, Frax Finance officially released the documentation for FRAX v3. Although the product has not yet launched, we can gain some basic understanding of the iteration trends of this leading DeFi protocol through the content of the documentation.

In terms of positioning, Frax Finance refers to the v3 version of FRAX as the "ultimate stablecoin," which will utilize AMO smart contracts and other "open, non-custodial" sub-protocols as its stabilization mechanism.

Specifically, AMO smart contracts refer to FRAX's classic algorithmic market operation module; the sub-protocols are divided into internal and external parts, with the internal sub-protocols referring to Frax Finance's own lending market Fraxlend and the AMM exchange Fraxswap, while the external sub-protocols mainly refer to Curve's stablecoin pools.

According to the documentation, FRAX will introduce updates in five major areas in the v3 version, as detailed below:

1. Fully Collateralized

In the v3 version, FRAX will continue the trend of increasing the collateralization ratio (CR) of stablecoins, striving to maintain a CR of >= 100%.

In its early days, FRAX was one of the more representative "under-collateralized" stablecoins on the market, but after the UST collapse, the market became extremely sensitive to "under-collateralization." As a result, FRAX increased its CR to 100% through governance at the beginning of the year, achieving "full collateralization," and the v3 version will continue to push forward, with the real-time CR of FRAX expected to exceed 100% in the future.

Regarding the storage of collateral assets, Frax Finance will approve certain partner entities through governance to hold real-world assets, and the total value of the collateral assets will be included in Frax Finance's balance sheet.

2. Pegged to the Dollar, Not Other Stablecoins

The goal of FRAX v3 is to achieve a complete peg to the dollar, rather than other mainstream stablecoins.

When FRAX's CR reaches 100%, it will use Chainlink oracles and governance-approved reference rates to confirm its peg to the dollar; if the CR falls below 100%, FRAX will strive to restore the CR through AMO smart contracts and governance modules, working to keep the price of FRAX at $1.000.

All related processes will not consider the prices of other stablecoins such as USDC, USDT, or DAI.

3. Reference to IORB's Dynamic Yield

In the v3 version, FRAX will adopt the "Interest on Reserve Balances" (IORB, the interest rate paid by the Federal Reserve to commercial banks for their deposits at the Fed) as a reference standard for certain protocol functions (such as sFRAX staking yields) and will adjust the categories of FRAX's collateral assets based on IORB fluctuations.

In simple terms, when IORB is high, it will automatically convert to government bonds, and when IORB is low, it will automatically revert to on-chain assets, earning yields through Fraxlend.

4. Removal of Multi-Signature

The smart contracts of FRAX v3 will operate entirely on-chain through the frxgov module, eliminating the need for trust assumptions via multi-signature.

5. Non-Redemptive

Unlike some over-collateralized dollar stablecoins, FRAX stablecoins are non-redeemable, meaning that holding FRAX stablecoins does not guarantee users the right to redeem them for an equivalent amount of fiat currency.

The sole function of FRAX is to achieve a valuation equivalent to the dollar through asset collateralization, AMO smart contracts, and governance actions.

What Does the Community Think?

Overall, community discussions about FRAX v3 have been mixed. Some users believe that the documentation succinctly outlines the core upgrades of the v3 version, while there are dissenting voices that do not recognize these updates (for example, angel investor 0xSerJaMad is not very satisfied with the changes in 4/5).

However, from my personal perspective, the design of FRAX v3 demonstrates that the Frax Finance team has a clear understanding of some major issues facing stablecoins today, such as addressing doubts about the intrinsic value of stablecoins by choosing a higher collateralization ratio to eliminate concerns; directly pegging to the dollar to sever ties with other stablecoins in light of the associated risks; and dynamically adjusting yield sources by referencing IORB amidst the current RWA APY competition.

As one of the most thoughtfully designed protocols in the DeFi world, Frax Finance has delivered impressive products across various fields, including stablecoins, lending, and LSD. It will be interesting to see how much market competitiveness FRAX v3 can showcase in the increasingly competitive stablecoin arena.