What is Frax Finance v3?
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🟢 The simple version
Plain English — no jargon. Start here.
Frax Finance v3 is the latest iteration of the Frax stablecoin protocol, moving from its original "fractional-algorithmic" model (partially backed by collateral, partially by algorithmic stabilisation) to a 100% collateralised model backed by assets including Ethereum liquid staking tokens and RWA (real-world assets) like US Treasury bills — while also operating frxETH, one of Ethereum's leading liquid staking derivatives.
The Frax story — from fractional-algorithmic to fully backed
Frax launched in 2020 with an innovative "fractional-algorithmic" stablecoin model: FRAX was partially backed by collateral (USDC) and partially stabilised algorithmically by the FXS (Frax Shares) token. If FRAX traded above $1, the protocol reduced the collateral ratio (less backing, more algorithmic). If below $1, it increased collateral. This variable collateral ratio was novel — no stablecoin before had dynamically adjusted between fully-collateralised and fully-algorithmic.
After the Terra/LUNA collapse in May 2022 (which demonstrated catastrophic failure modes for algorithmic stablecoins), Frax's governance voted to progressively increase the collateral ratio toward 100%. Frax v3 (2023) represents this trajectory — FRAX is now backed by a diversified collateral portfolio including USDC, sFRAX (savings FRAX earning yield on US Treasuries), and liquid staking tokens, moving away from the fractional-algorithmic model entirely.
frxETH and sfrxETH — the liquid staking product
Frax's most used product post-v2 is frxETH — a liquid staking token for Ethereum. Users deposit ETH and receive frxETH at 1:1. frxETH does not automatically earn staking yield (it is yield-non-rebasing). Instead, users can stake frxETH in the sfrxETH (staked frxETH) vault to earn amplified staking yield — because some frxETH holders keep the liquid form without staking, sfrxETH holders earn yield from a larger pool of ETH than their share. This amplified yield made sfrxETH the highest-yielding major liquid staking token on Ethereum.
sFRAX — the yield-bearing savings FRAX
sFRAX is Frax's equivalent of sDAI — FRAX deposited into the sFRAX vault earns yield from Frax's RWA investments (primarily US Treasury bills held in Frax's RWA programme). sFRAX targets the Federal Funds Rate as its yield target. Total supply: FRAX has no hard cap (algorithmically managed).
Is it legal in India?
Yes. FRAX and FXS are VDAs under Indian law. 30% tax and 1% TDS apply. See India regulation.
🟡 A bit more detail
For when you want to go a little deeper.
The Frax v3 collateral framework
Frax v3's "Algorithmic Market Operations Controller" (AMO) system manages FRAX's collateral. AMOs are smart contracts with permission to mint and redeem FRAX within defined constraints, deploying collateral into yield-generating strategies. Current AMOs deploy collateral into: the Curve FRAX/USDC pool (earning Curve fees and CRV), Aave v3 (earning lending yield), the sFRAX vault (earning US Treasury yield via RWA), and other strategies. Each AMO can mint FRAX up to its collateral contribution — maintaining the collateral ratio without requiring manual management.
FRAX has been one of the most widely integrated DeFi stablecoins — listed as collateral on Aave v3, included in Curve pools, and accepted across dozens of protocols. frxETH/sfrxETH gained significant adoption as a high-yield ETH staking alternative: at peak, sfrxETH offered higher APY than Lido's stETH because the non-staked frxETH portion provided subsidised yield to sfrxETH holders. The sFRAX RWA yield-bearing product competes with Spark's sDAI for the "yield-bearing stablecoin" market. FXS governance controls Frax's AMO strategy and fee parameters.
Frax's Curve Wars participation
Frax became one of the most aggressive participants in the "Curve Wars" — the competition among stablecoins to accumulate Curve Finance's veCRV governance tokens, which control CRV reward allocations to Curve pools. By accumulating veCRV (through Frax's own holdings and the Convex protocol), Frax directed significant CRV emissions to FRAX/USDC Curve pools, making FRAX trading highly liquid and incentivising FRAX liquidity providers with CRV rewards. The Curve Wars strategy was central to Frax's growth from a small stablecoin to multi-billion dollar supply.
Key Frax metrics: FRAX collateral ratio (approaching 100% is healthy), sFRAX TVL vs sDAI (competitive yield-bearing stablecoin position), sfrxETH APY vs Lido/Rocket Pool (liquid staking competition), FXS governance participation, and FRAX circulating supply. Live data: CoinGecko · Frax.finance.
🟣 The full technical picture
For the technically curious.
The AMO architecture — autonomous collateral management
Frax's AMO (Algorithmic Market Operations) system is a modular architecture where each AMO is an independent smart contract with authority to deploy and recall collateral within defined risk parameters. The core invariant: the sum of all AMO-controlled collateral must equal or exceed the FRAX minted by that AMO. An AMO that generates yield increases the effective collateral ratio (yield > FRAX in circulation = over-collateralised). The AMO controller tracks each AMO's collateral contribution and prevents any single AMO from creating net under-collateralisation. This design allows Frax to deploy capital productively (unlike simple USDC-only collateral that earns nothing) while maintaining mathematical collateralisation guarantees.
Source: Frax Finance documentation. docs.frax.finance · Frax GitHub: github.com/FraxFinance
sfrxETH's yield amplification mechanism
The sfrxETH yield amplification works as follows: assume 100 ETH deposited, 70 ETH staked as sfrxETH and 30 ETH held as frxETH (non-staked). The 100 ETH earns 4% annual yield in aggregate = 4 ETH. All 4 ETH goes to the 70 sfrxETH holders, not the 30 frxETH holders. The sfrxETH APY = 4 ETH / 70 ETH = 5.7% — higher than the baseline 4%. The frxETH holders earn nothing from staking but maintain liquidity optionality. As more frxETH is held non-staked (higher "sfrxETH multiplier"), sfrxETH APY increases further. This dynamic creates incentive alignment: DeFi use cases absorb frxETH (as LP tokens, collateral), while yield-seekers hold sfrxETH.
Frax's RWA integration for sFRAX uses an off-chain trust structure: Frax's treasury holds US Treasury bills through a regulated custodian (similar to how Sky/MakerDAO holds RWAs). The on-chain representation: the sFRAX vault tracks an "interest rate" set by Frax governance (targeting the Federal Funds Rate) and accrues yield to sFRAX holders based on this rate. The off-chain Treasury bill holdings generate the actual dollar yield that backs this on-chain accrual. The design requires trusting Frax's governance to accurately report off-chain yield — a centralisation risk explicitly acknowledged in Frax's documentation. This is a common design in RWA-backed yield protocols (cf. Sky/MakerDAO's RWA programme).
Key facts
- Stablecoin: FRAX (moving to 100% collateralised)
- Governance: FXS (Frax Shares)
- Collateral system: AMO architecture (modular, yield-generating)
- Liquid staking: frxETH (1:1 ETH) + sfrxETH (amplified yield)
- RWA yield: sFRAX (US Treasury-backed)
- Founded: 2020 (Sam Kazemian)