Frax V3 Preview RWA Product Launch Imminent, How Will It Affect the Ecosystem?

Frax V3 RWA Launch Impact on Ecosystem?

Author: Yuuki, LD Capital

FXS has received positive market feedback due to FraxLend’s dynamic interest rate design to protect borrowers during the CRV incident. At the same time, Frax Protocol founder Sam’s governance proposal to promote RWA business on August 4th has also attracted some market attention. This article aims to summarize Frax’s future product plans (FRAX V3, frxETH V2, and Fraxchain) and analyze the possible impact.

1. Frax V3 – Focus on the Development of RWA Business (to be launched within August)

Currently, Frax founder Sam has proposed on the governance forum to expand RWA business through FinresPBC, which is expected to be launched within August. The key points are as follows:

1. FinresPBC is a non-profit company established earlier this year, so all the income generated from the assets held by FinresPBC representing the Frax Protocol, except for operating costs, will be returned to the protocol;

2. FinresPBC does not participate in the development, operation, and governance of the Frax protocol, nor does it engage in any other profit-making activities (collateral, borrowing, pledging, or other business activities) to ensure the purity and stability of the business;

3. The current partner bank of FinresPBC is Lead Bank, which provides compliant financial services for crypto protocols. FinresPBC is also actively expanding more crypto-friendly financial partnerships;

4. The future business scope of FinresPBC includes: minting/redeeming USDP and USDC; earning interest on US government bonds by depositing dollars in IntraFi savings accounts insured by the FDIC;

5. FinresPBC will publish asset details, reserve reports, and operating costs monthly. FinresPBC can provide 7*24-hour custody asset access for the Frax protocol and use reserve funds to repurchase and destroy FRAX or mint USDP and USDC to send to the Frax Protocol AMO as needed.

More architectural details about the FRAX V3 business have not been officially disclosed. However, some information released by the team in Telegram, forums, and interviews can be summarized as follows:

1. Sam pointed out that the operating costs of FinresPBC will be significantly lower than that of Maker or other RWA protocols. If FinresPBC holds $500 million in assets for the Frax Protocol, the annual cost is estimated to be no more than $200,000;

2. Sam mentioned in an interview with Ourodoros Capital on July 28th that Frax V3 will be launched within 30 days. Combining the current establishment of FinresPBC and basic banking relationships, it is speculated that its RWA business will also land in August. Currently, waiting for DAO to vote on proposals and determine initial parameters;

3. FraxBonds will be launched in FRAX V3: Frax Protocol will continuously issue four bonds for anyone to purchase. After the bonds expire, they will automatically convert into FRAX stablecoins. Through FinresPBC, there is no limit to the expansion of FraxBonds. At the same time, FraxBonds will be standard ERC20 tokens, and Frax Protocol will deploy liquidity for them in Curve, allowing them to be traded on the secondary market.

4. In FRAX V3, the Borrow-AMM design for FRAX liquidity does not require an oracle feed price, eliminating oracle risks.

Possible impacts:

1. The scale of the FRAX stablecoin is currently being squeezed by the strong promotion of RWA business by Maker, especially with the current Maker DSR deposit interest rate as high as 8%. Some market participants are turning to holding Dai for interest. The reason why the current DSR yield is much higher than the yield of U.S. Treasury bonds is due to the difference between the scale of Maker’s purchase of Treasury bonds and the interest on Dai held in the protocol. However, this yield is currently unsustainable. The specific details of Frax’s RWA business have not been disclosed, but based on its similarity to the ETH collateral business structure and current known information, it is speculated that Frax can achieve high yields in the early stage of RWA business due to the combination of Treasury bond yields and Crv incentives to complete product launch. In the medium to long term, if, as Sam said, the operating costs of FinresPBC are much lower than those of competitors, Frax’s RWA business may have long-term competitiveness and help expand the market share of the FRAX stablecoin.

The market value of Frax has recently dropped from $1 billion to $813 million.

2. Maker has earned a lot of profits through the strategy of U.S. Treasury bond RWAs and the on-chain repurchase of MKR, which has been the main reason for the recent rise in MKR. Frax, due to the current partial collateralization of stablecoins, uses protocol revenue to improve the collateralization ratio of FRAX stablecoin. If the RWA business can bring additional income to the Frax protocol and accelerate the replenishment of collateral, the protocol revenue will flow back to veFXS holders or be used to repurchase FXS, which will support the price of FXS. The current collateralization ratio of FRAX is 94.5%; Frax Protocol holds idle USDC worth $280 million, which can generate $14 million in revenue per year at a 5% interest rate, accounting for 75% of the current annual revenue of Frax.

The current collateralization ratio of FRAX is 94.5%.

II. frxETH V2 – Focus on Decentralization and Attracting Collateral (Launching in 50 days)

Sam mentioned on Twitter sLianGuaice that frxETHV2 will be launched in approximately 50 days. In the current frxETH V1, users’ ETH is staked by the team-operated nodes, and the protocol charges a 10% fee. The advantage of frxETH V1 is its use of the advantages of Curve’s governance in the ecosystem, which can effectively guide the liquidity of frxETH. At the same time, the design of the dual-coin model for frxETH and sfrxETH allows the Frax Ether system to have the highest yield in the entire market. This helps Frax Ether to become one of the top three LSD protocols in the LST field as a latecomer.

frxETH V1 pledging process diagram:

In the upcoming frxETH V2 version of the Frax protocol, the team will focus on ensuring high annualized returns while solving centralized issues. The overall design logic of frxETH V2 is similar to Rocket Pool, but it has its own unique features. The key differences are as follows:

1. In Rocket Pool, the ETH deposited by users is accumulated in a deposit pool and cannot generate returns until activation verification. This will drag down the overall yield of rETH. Currently, the deposit pool has a limit of 18,000 ETH. In the design of frxETH V2, user deposits will first be allocated to Curve AMO, and when nodes need to pair with user-side ETH, Curve AMO will allocate the deposits to the Lending Pool. As a result, since idle ETH can earn transaction fees and mining rewards in Curve AMO, the overall yield will be higher compared to Rocket Pool.

2. After the Atlas upgrade, Rocket Pool’s node commission rate is basically fixed at 14%, while frxETH V2 plans to determine the node commission rate through market adjustment. In frxETH V1, Frax was the most efficient and stable team in node operation in the market, and it will also join frxETH V2 to compete for node commission through marketization. The introduction of the competition mechanism and the participation of efficient teams are expected to further benefit users and provide them with higher yields.

Currently, Frax Ether has the most efficient staking.

Product flowchart of frxETH V2

Regarding the frxETH product, in addition to paying attention to frxETH V2, attention also needs to be given to the launch of the redemption function. Currently, while sfrxETH has the highest yield rate in the market, with a growth rate of 4.56% in the past month, it lags behind Lido+5.17% and Rocket Pool’s+7.47%. The main reason is that frxETH cannot be redeemed currently, and can only be exchanged for ETH through Curve in the secondary market. This amplifies the concerns of whales and some users, leading them to switch to using Lido or Rocket Pool.

3. Fraxchain – Focus on its ecological development and the consumption and sedimentation of frxETH (to be launched in early 2024)

Fraxchain is a Layer2 network based on Ethereum, which plans to adopt a hybrid rollup solution (a combination of op rollup and zk rollup). It can provide developers with an easy-to-code environment brought by op and provide users with final determinism, security, and decentralization brought by zk. As one of the top three LSD protocols, Fraxchain and frxETH will also generate synergistic effects. Fraxchain uses frxETH as GAS fees, which will reduce the conversion from frxETH to sfrxETH, thereby helping the Frax protocol compete for higher staking yields in the market. In the future, the complete DeFi product matrix of the Frax protocol will be migrated to Fraxchain to reduce gas fees and bring initial traffic and funds to Fraxchain. It is important to note that Fraxchain is not an application chain. While supporting the current stablecoin ecosystem of Frax, it also aims to expand the ecosystem and increase adoption to better reward the protocol’s native ecosystem.

Overall, Frax has a team with strong individual combat capabilities, efficient execution, and rapid product deployment. It is worth paying attention to the launch of FRAX V3 and frxETH V2 at the moment.