Frax Finance, the issuer of the US dollar-backed stablecoin FRAX, is launching version 3 of its protocol. According to its founders, the goal is to create a “final stablecoin” that can thrive under any economic condition.
One of the main features of the new release is that Frax will now integrate the Federal Reserve's Interest on Reserve Balances (IORB) rate for specific protocol functions, such as the sFRAX staking yield. This essentially means the protocol will offer rates on stablecoins that are comparable to those set by the U.S. government.
In times with soaring government interest rates, such as now, many investors are shifting away from stablecoins, to U.S. treasuries to take advantage of the high yields. Such a shift negatively impacts stablecoin supply and overall usage.
Frax v3 will use a real-world asset (RWA) approach when the IORB oracle indicates high rates. Through its partners, the protocol will purchase low-risk RWAs, such as short-dated United States treasury bills, and optimize for yielding close to the IORB rate.
Users will have the opportunity to directly deposit FRAX into the sFRAX staking vault and earn the IORB rate on their stablecoins. This is expected to attract more users and hence increase the supply of FRAX.
On the flip side, when government rates decrease and market conditions improve, users can deposit their FRAX with any crypto lender to obtain higher rates. This is because, during favorable market periods, stablecoin interest rates tend to rise as everyone seeks leverage.
Another key enhancement in the v3 release is Frax's decision to abandon the algorithmic aspect of its stablecoin. As we highlighted back in February, 98% of the Frax community voted to discard the algorithmic element and set the target collateralization ratio to 100%. According to the team:
“The small algorithmic backing of FRAX creates the perception that FRAX is the less safe option for users to hold, especially after UST’s failure tainted the algorithmic stablecoin concept (whether fairly or unfairly).”
The team's current strategy is to enhance the “money” attributes of FRAX. Essentially, they aim to make FRAX an asset that users feel confident holding as a long-term store of value, without requiring any incentives. Eliminating the algorithmic component was a crucial step in that strategy.
The v3 upgrade also paves the way for further innovations, including Fraxchain, which is likely to be released by the end of this year.
According to CoinGecko, with a market capitalization of over $650 million, FRAX currently ranks as the 7th leading stablecoin.