Betting on RWA: Current Performance and Future Outlook of Frax V3

Original Title: Frax Finance: FRAX v3

Original Authors: CHULIE, HUMBLE FARMER ARMY RESEARCH

Original Compilation: 深潮 TechFlow

Given the lack of on-chain activity, low trading volumes, insufficient leverage demand, and persistently high interest rates in traditional financial markets, tokenized treasuries are currently the only sustainable source of real yield in the crypto space.

Therefore, we expect the RWA sector to continue to grow and remain strong until some significant change occurs.

Frax Finance

Most readers may already be familiar with frax.finance, a well-established DeFi protocol whose products span the entire vertical: FRAX (stablecoin), Fraxlend (lending market), Fraxswap (AMM), frxETH (liquidity mining protocol), and Fraxferry (cross-chain bridge protocol), and at some point, they will launch Fraxchain, their own L2 execution environment.

Given Frax's extensive coverage across multiple domains, they can benefit from favorable factors supporting different industries. For example, FXS participated in this year's LSD season, and frxETH remains a healthy grower:

Is this time different, or can Frax also benefit from the RWA narrative?

This article will focus on FRAX v3, the latest version of their native stablecoin.

Historically, FRAX has been partially backed by crypto collateral and partially by FXS collateral. Over time, FRAX has been moving away from FXS support towards a fully collateralized stablecoin. Their efforts in FRAX v3 further develop this step as they introduce RWA as collateral.

FRAX v3

By integrating FinResPBC (a public benefit corporation primarily providing RWA access for Frax), Frax now has an integrated mechanism to bring treasury market yields into its ecosystem. This is the largest update to FRAX since its launch at the end of 2020. Unlike MakerDAO, which relies on a series of counterparties to access "real world" yields, FinResPBC acts directly on behalf of Frax, without extracting intermediary fees in the process.

FRAX v3 will still rely on Frax's AMO mechanism to maintain peg stability (as shown in the above image) and depend on the DAO's significant influence in the Curve ecosystem to incentivize liquidity. Similarly, FRAX v3 also welcomes the complete on-chain governance using fraxGov (Frax is no longer limited by multi-signature trust assumptions). However, for us, the more interesting developments in v3 are related to the introduction of sFRAX and FXB.

sFRAX allows FRAX holders to participate in the short end of the yield curve (money markets), while Frax Bonds (FXB) represent the long end. The yield on sFRAX varies with changes in the overnight repo rate, which is tracked using an oracle that quotes the Interest on Reserves Balances (IORB). The yield paid by Frax Bonds will vary with changes in the interest rates of the underlying bonds that match the term. Each week, based on the amount of FRAX collateralized in sFRAX and IORB, Frax will transfer the necessary RWA amount using FinResPBC as an intermediary. The process for FXB will follow a similar flow, where Frax uses FinResPBC to deploy RWA strategies to match the term of bonds sold on-chain. Ultimately, Frax is forming an on-chain representation of the yield curve.

The first version of FRAX v3 went live on Wednesday night (Eastern Time), with sFRAX yielding 7.37%, and it has achieved good results so far:

Of course, as FRAX flows into sFRAX, this yield will decrease over time, but the initial adoption is promising, confirming our argument that interest-bearing dollars have a strong product-market fit.

Looking Ahead

Just as the growth of DAI signifies the success of MakerDAO, the growth of FRAX's market cap will be a straightforward indicator of success. Similarly, the growth and diffusion of sFRAX as collateral will be crucial. There are expectations that Curve will enable sFRAX as collateral to mint crvUSD, which could provide strong growth momentum. FXB has not yet launched, but similarly, we expect supply expansion and its use as collateral to be key performance indicators.

TVL is generally a low signal indicator for crypto projects, but in this case, the growth of stablecoin market cap drives the growth of RWA support, which is directly related to the increase in yields and thus the protocol's revenue and profitability. While the initial residual profits will be used to bring FRAX to a 100% collateralization rate, FXS will be the ultimate beneficiary. If FRAX v3 succeeds and we see significant growth, we expect the market to factor this growth into the price of FXS.

Historically, Frax has been criticized for doing too many things at once without becoming a leader in any one vertical, but ultimately their products are highly synergistic and often run together; for example, sfrxETH can be used as collateral to borrow FRAX on Fraxlend and then collateralized as sFRAX. We believe that labeling them as "narrative chasers" or similar is pejorative, as the Frax team has a long-term perspective and is simply building different parts of the tech stack as needed over time.