[FIP - 430] Preparation for frxUSD Payment Stablecoin Charter Compliance

Governance Proposals
1

Authors

Frax Core Team

Summary

As the United States Congress gets closer to passing landmark stablecoin legislation and Frax prepares for becoming one of the first legally recognized digital dollar stablecoins, certain changes must be made. This proposal prepares the frxUSD stablecoin for regulatory compliance to become a U.S. payment stablecoin. In response to upcoming legislation as well as application requirements for a U.S. payment stablecoin charter via Financial Reserves and Asset Exploration Inc (currently referred to as FinresPBC for short and will be referred to as FRAX Inc should this proposal pass). The Frax Finance DAO will need to isolate frxUSD’s balance sheet as a fully compliant, RWA fiat-redeemable stablecoin. This FIP proposes (1) establishing two distinct balance sheets—one for Legacy FRAX Dollar and one for frxUSD, (2) ending the migration period between Legacy FRAX Dollar and frxUSD for compliance reasons (3) transitioning FXB redemption flows appropriately, and (4) affirming a separate balance sheet for sfrxUSD and formalizing its yield strategies via AMOs.

Background and Motivation

Frax USD (frxUSD) is the next-generation stablecoin architecture under the Frax ecosystem, designed with modularity, regulatory compliance, and transparency at its core. The Legacy FRAX Dollar stablecoin, while foundational to the protocol’s original growth, operates under a different economic model that would not be compatible with US legislation currently proposed by Congress known as the GENIUS Act & the STABLE Act. These features include the Algorithmic Market Operations (AMO) system and other historical mechanics that do not match the anticipated standards of upcoming U.S. payment stablecoin regulation which frxUSD seeks to comply with.

As Frax Finance prepares for Frax Inc (aka FinresPBC) to pursue a payment stablecoin charter, it becomes necessary to fully separate the two systems and support each one in a positive sum manner. Legacy FRAX Dollar will continue to operate under its AMO-driven, DeFi-native model, while frxUSD will maintain a regulated, RWA fiat-redeemable architecture designed for compliance.

Proposal Details

Separation of Balance Sheets

  • The backing and assets that support frxUSD will be clearly separated from those that support Legacy FRAX Dollar stablecoins.
  • All reserve accounting and reporting will treat frxUSD and Legacy FRAX Dollar as independent monetary systems, with distinct portfolios and liabilities.

Ending Migration Period Between Legacy FRAX and frxUSD

  • The migration from Legacy FRAX Dollar to frxUSD and sFRAX to sfrxUSD will come to an end. While any user can swap between the two stablecoins on secondary markets such as Curve, Balancer, Uniswap etc, the Frax Finance DAO will no longer guarantee 1-to-1 migration between Legacy FRAX Dollar and frxUSD.
  • This removes the de facto unified balance sheet between the two stablecoins if 1-to-1 migration was open indefinitely, allowing frxUSD to maintain a regulatory-compliant, fiat-redeemable status without exposure to onchain mechanisms.
  • To ensure user flexibility and smooth operation during the transition period, Frax Finance will provide incentives for liquidity providers in a Legacy FRAX/frxUSD Curve pool for a minimum of one year. This will allow users to migrate between the two assets at market-based rates with minimal slippage as well potential other pairs per team discretion.

FXB Redemption Path Update & Continued Incentives

  • Frax Bonds (FXBs) initiated on the Fraxtal Network that were converted to pay out in frxUSD upon maturity during FIP-419 will now revert to Legacy FRAX as the redemption asset. This is being proposed for frxUSD compliance for payment stablecoin legislation as there cannot be any source of frxUSD minting outside of the legislative pathways backed by regulated assets custodied in compliant structure.
  • This applies specifically to the following FXB instruments: FXB2025, FXB2027, FXB2029, and FXB2055.
  • This update aligns with the broader objective of fully isolating frxUSD from AMO-originated debt instruments, maintaining a clear separation between the onchain and regulated, offchain monetary systems.
  • It also ensures that the Legacy FRAX model continues to fulfill its redemption obligations in a consistent and sustainable manner with support from Frax DAO core team.
  • FXBs will continue to be supported long-term within the Frax ecosystem. While they will redeem into Legacy FRAX for now, the intention is to back future FXB issuances with RWA-based collateral once legal and technical infrastructure is in place.
  • As an interim measure, FXBs will redeem into Legacy FRAX, with a future governance proposal expected to outline a pathway to migrate FXBs to a fully RWA-backed structure.

Establishment of Independent sfrxUSD Architecture & Strategy

This proposal affirms that sfrxUSD operates on a fully separate balance sheet isolated from both Legacy FRAX and frxUSD reserve assets. Its yield strategy is designed to optimize returns through governance-approved mechanisms.

  • Independent Accounting: All sfrxUSD liabilities and assets are tracked separately from other Frax systems.
  • frxUSD-Denominated Operations: Since Frax Finance will no longer mint new frxUSD directly, the sfrxUSD vault operates solely using frxUSD deposited by users, with no external issuance. This deposited frxUSD may be used/unwound/redeposited for other approved activities with the end goal being more yield for sfrxUSD.
  • Redeemability: Although sfrxUSD follows the ERC-4626 interface, it will not be fully redeemable at all times. Under no conditions will there be new frxUSD minted into sfrxUSD nor sfrxUSD redemptions guaranteed in any way if there are losses in yield strategies & AMOs. A core team managed frxUSD buffer will be held in the sfrxUSD mint/redeem contract vault and managed by sfrxUSD AMOs, with the majority of capital actively deployed. However, deep protocol-owned liquidity (POL) for sfrxUSD ensures price stability and exit options even when direct redemption is temporarily unavailable due to allocated yield strategies. Lastly, most yield strategies will likely be fairly liquid such as Lending AMOs, Curve POL strategies, and carry trade yield through partnership with Ethena & Superstate. These strategies generally have liquidity unwinding in a matter of hours or days at latest.
  • Governance-Guided Yield Strategy: Yield will be generated through three approved methods:
    1. IORB / T-Bills (held as idle frxUSD with full yield distribution to sfrxUSD)
    2. AMOs (Lending AMOs in Fraxlend, Resupply, Aave, Morpho)
    3. Carry Trades (through holding Ethena USDe and Superstate USCC)
  • Benchmark-Rate Targeting: Designed to track or exceed TradFi benchmark yields through dynamic reallocation.
  • Transparent Reporting: Strategy allocations and APYs will be published via Frax dashboards.
  • Modular Expansion: Additional strategies or protocol integrations may be added through future governance votes.

# Additional Notes

  • Legacy FRAX Dollar will remain active, liquid, and usable across DeFi protocols and chains and supported by Frax DAO core team with incentives and utility for at least one year.
  • This proposal does not affect the usability or redeemability of frxUSD for fiat through FinresPBC/FRAX Inc or authorized enshrined custodian.

Voting

  • For: Approve the separation of Legacy FRAX Dollar and frxUSD, including the end of 1:1 migration period, the routing of FXB redemptions back to Legacy FRAX, and establishment of independent sfrxUSD architecture.

  • Against: Do nothing.

3 Likes
2

What will the CR look like on Legacy FRAX when the separate balance sheet happens?

2 Likes
3

What’s the expected user experience for long-dated bonds (e.g., 2029, 2055)? Without incentives for Frax/frxUSD pairs, how likely is it that these bonds will mature without significant slippage when trying to exit legacy Frax?

Also, what are the implications for veFrax rewards? Will rewards be paid out by minting frxUSD using protocol revenue and then staking it for sfrxUSD?

1 Like
4

This is a strong and well-thought-out proposal; I fully support it. Segregating frxUSD from DeFi mechanisms is a crucial step that will help Frax align with upcoming US payment stablecoin regulations and accelerate the licensing process. Frax is very uniquely positioned to become one of the major first-movers in regulated stablecoins because these new regulations effectively mean a reset for the entire space; nobody else has a payment stablecoin charter, yet. And no other issuer in this category has a complementary DeFi ecosystem as robust and battle-tested as the one Frax has been building since 2020. The institutional partnership opportunities are also massive once the charter has been obtained, potentially bringing in more liquidity and TVL to power Frax’s flywheel in DeFi.

3 Likes
5

FWIW, following the cap’s model makes more sense for sFrxUSD yield strategy imho. We still have time to onboard institutions(like HFTs, PE funds etc.) for creating yield generation strategies through, while ensuring collateral protection.

This can actually take frxUSD more closer to institutions and real world and can be used as a great way for distribution.

2 Likes
6

“The migration from Legacy FRAX Dollar to frxUSD and sFRAX to sfrxUSD will come to an end. While any user can swap between the two stablecoins on secondary markets such as Curve, Balancer, Uniswap etc, the Frax Finance DAO will no longer guarantee 1-to-1 migration between Legacy FRAX Dollar and frxUSD.”

What about those of us who are still locked on Convex FRAX pools, like eUSD/FRAXBP? We should be allowed to leave those products early so that we can convert FRAX to frxUSD.

1 Like
7

Hello @amirnader
Could you provide more detailed information about Financial Reserves and Asset Exploration Inc to the community?

8

Thanks for you question, we are working on the separation of balance sheets and once we are done we will share the numbers on Balance Sheet section of each asset on Frax Facts.

1 Like
9

FXBs will continue to be supported long-term within the Frax ecosystem. While they will redeem into Legacy FRAX for now, the intention is to back future FXB issuances with RWA-based collateral once legal and technical infrastructure is in place. also it worth to mention that liquidity incentives for FXB pools will be there to support these assets.

Also regarding the veFRAX rewards as we discussed it in our FIP-428 will be in sfrxUSD and as you mentioned they will be generated by minting frxUSD using protocol revenue and then staking it for sfrxUSD.

1 Like
10

Thanks for sharing your opinion and Yes, following the cap’s model for each strategy for sfrxUSD makes sense and we will have more governance proposal regarding that in near future.

11

As we discussed in here

we will continue our incentives for FRAXBP program so your position will be supported and meanwhile you can always post a proposal on governance for creating a ragequit function for your specific vault as we have same mechanisms for other pools before.

12

You can learn more about it here:
Official Website: https://www.finrespbc.com/
IQWIKI: FinResPBC - Decentralized Finance | IQ.wiki

14

Hello. I already made some ragequit proposals some months ago, and they were rejected. Anyway, I’m not asking to leave those products. I’m just worried about what is going to happen with my FRAX when I can finally unlock. I joined that pool expecting to be able to convert those FRAX to $1. I can’t keep up with every protocol change, I simply deposited money in a stablecoin pool and expect to be able to get a dollar for each of those stablecoins, the same I paid for them.

I’m not sure of what your proposal entails, but what you are saying about just being able to redeem FRAX for frxUSD for a year doesn’t sound good, as my locks expire after that. What is going to happen with my FRAX after that? Please clarify what is going to happen to people in my situation.

15

What I want to know is the certificate of incorporation and the operating members.

16

This proposal is up for voting here

17

After reviewing your posted proposals I didnt find any specific proposal for ragequit for eUSD/FRAXBP pool. I think if you post a specific proposal for this pool then you would have a better chance to get it passed instead of creating a general proposal.

18

I’m not asking to leave the pool. I’m asking what will happen with my FRAX when I can finally unlock it from there, which will be at the end of next year. Can you please clarify that?

I want to make sure that when I can unlock, I’ll get $1 per FRAX, as that’s what I paid for them when joining the pool. Convertability into frxUSD should always be possible. Either that, or let people leave those Convex FRAX pools without any penalty if you are changing the game’s rules.

19

Legacy FRAX will be supported by Frax DAO and if you think exiting from gauges without fees should be discussed in the governance , its a good idea to propose a new proposal about it after approval of FIP-430.

20

Sorry, I’m just an investor and can’t keep up with everything happening in every protocol, so I’m lost regarding this topic. What does it mean that FRAX will be supported by FRAX DAO? Is it going to follow the same mechanisms as now to keep it at $1?

As I said, I’m fine staying locked in those Convex FRAX pools, but if the protocol has decided to change how FRAX works, then users should be able to leave those Convex FRAX products if they want to, with no penalty, as the game’s rules are changed. Either that, or offer some kind of migration to new products, like moving from eUSD/FRAXP to a new eUSD/frxUSD/USDC pool.

21

@amirnader , could you please clarify what’s going to happen with our FRAX when we can finally unlock those Convex FRAX products?