Frax V3 and RWA Strategy Launch

Frax V3 is a major milestone in the protocol’s 2023 roadmap. The addition of sFRAX to the product suite should drive demand for FRAX, whose supply has fallen from a peak of $2.9B in March 2022 to $670M today. The addition of Fraxbonds (FXBs) will allow market participants to purchase FRAX at a discount and redeem their funds at maturity, with implied yields being competitive with offchain yields. These stablecoin yield products offer the risk averse investor an opportunity to access offchain yields in a high interest rate environment while keeping their funds onchain. Further, integrations of FXBs and sFRAX within Curve’s and Frax’s lending markets will open the door for market participants to effectively access high rates with leverage. 

When compared to MKR, FXS trades at roughly 1/3rd the circulating market cap, but offers more variety in its products, primarily through its high-yield LST. With combined revenues from sFRAX, FXBs, RWAs, and frxETH, there is substantial upside potential to be captured through a long position in FXS, as long as broader market conditions remain stable. Increased revenue will first be used to bring FRAX’s collateralization ratio, which backs the stablecoin’s peg, from 91% to 100%. After full collateralization is achieved, excess revenue can be distributed to veFXS holders or utilized to buyback FXS, depending on what governance deems appropriate.

Key risks include broader market instability, smart contract security, and regulatory uncertainty. However, given Frax’s diligence through an extensive audit with Trail of Bits and a legally registered offchain entity to custody treasuries, we believe these risks are mitigated, although as with all cryptocurrencies, will have to be monitored on an ongoing basis.