Frax Finance (sFRAX & FXBs) STEP Application

Applicant information:

Name: Frax Finance

Address (Headquarters): WILLOW HOUSE, 171 ELGIN AVENUE, FLOOR 2, KY1-1103 Grand Cayman, Cayman Islands

City, State, Postal Code: Grand Cayman

Country: Cayman Islands

Project Links:

Primary Contact Name:

  • Sam Kazmian, Cofounder and CEO, USA
  • Nader Ghazvini, Head of Governance and Integration, USA

Contact Information:

Key Information:

sFRAX (Staked Frax)

  • Expected Yield: Set to a 50% cap rate with a 5.4% IORB floor rate. It is variable based on protocol earnings and RWA yield.
  • Expected Maturity: Flexible; sFRAX can be unstacked at any time.
  • Underlying Asset:
    • RWA
    • Fraxlend LP (Based on Fraxlend AMO allocation restrictions)
    • Curve Stable Pools LP
  • Minimum/Maximum Transaction Size: N/A
  • Current AUM for Product: $53,810,395.18
  • Current AUM for Issuer: $1.0B per DefiLlama
  • Volume of Transactions LTM: Around $11B for both sFRAX and FRAX (Volume should be combined since they are always interchangeable).
  • Source of First-Loss Capital: Protocol treasury of $50m+

FXBs (Frax Bond Tokens)

  • Expected Yield: 3-7% APY, fixed at issuance based on prevailing market conditions and bond terms.
  • Expected Maturity: Varies by bond series; 6 months to 20 years.
  • Underlying Asset:
    • RWA
      • US Treasury Bill maturity equivalent to FXB timestamp
      • Short-dated United States treasury bills
      • Federal Reserve Overnight Repurchase Agreements
      • USD deposited at Federal Reserve Bank master accounts
      • select shares of money market mutual funds
    • Fraxlend LP (Based on Fraxlend AMO allocation restrictions)
    • Curve Stable Pools LP
  • Minimum/Maximum Transaction Size: N/A
  • Current AUM for Product: $14,900,860.19
  • Current AUM for Issuer: $1.0B per DefiLlama
  • Volume of Transactions LTM: Around $25m for all of the FXBs
  • Source of First-Loss Capital: Protocol treasury of $50m+

All data points are as of 04/30/2024

Basics and background

  1. How will this investment improve Arbitrum’s RWA ecosystem?

Integrating Frax Finance’s assets will enhance liquidity, provide stable yield options, and introduce innovative financial products that are pegged to real-world indices such as CPI, fostering a robust ecosystem on Arbitrum.

It will also help Frax expand the already deployed Fraxlend pairs for these assets to Arbitrum by increasing awareness and total supply in the Arbitrum ecosystem. It will also spur Frax to issue more native assets directly on Arbitrum, including future FXB maturities, and build direct redemptions on the chain without bridging back to Ethereum L1.

  1. Identify key management personnel and individual experience. Also include third parties utilized for managing assets and their qualifications.

Frax Finance Protocol issues innovative, decentralized stablecoins and contains subprotocols to support them. Frax Finance is one of the most lindy and blue chip DeFi protocols along with Maker, Aave, Compound etc.

  1. Describe any previous work by the entity or its officers/key contributors similar to that requested. References are encouraged.

Frax Finance has established itself as a pioneering entity within the decentralized finance (DeFi) sector, particularly known for its innovative approach to stablecoin design and management. Since its inception, Frax Finance has successfully maintained a strong track record in developing and managing both stable and yield-bearing tokens.

  1. Has your entity or its officers/key contributors been subject to an enforcement action, criminal action, or defaulted on legal or financial obligations? Please describe the circumstances if so.


  1. Describe any conflicts of interest for your entity and key personnel.

No conflicts of interest.

  1. Insurance coverages, guarantees, and backstops Name of insurer or guarantor Per incident coverage Aggregate coverage

No insurance.

  1. Historical tracking error in your proposed product, or similar to that being proposed Product 2024 YTD 2023 2022 2021


  1. Brief reason for above tracking error


  1. Please describe any experience your firm has in working with decentralized organizational structures

Frax Finance has extensive experience in working with decentralized organizational structures, which is foundational to its operations and strategic initiatives within the decentralized finance (DeFi) ecosystem. It’s also important to highlight that the proposed assets, such as sFRAX and FXBs, are meticulously designed to be fully permissionless. This design ensures that they integrate seamlessly with decentralized ecosystems, including Arbitrum.

  1. What is your entity’s current assets under management, assets held in trust, total value locked, or equivalent metric for your legal structuring?

Around $1.0B in TVL per Defillama

  1. How many of these assets held are present on Arbitrum One, if any?

All types of assets are present on Arbitrum One including lending markets, integrations, and utility for them.

Plan design

  1. Please describe your proposed product, including a description of the underlying assets and, if more than one asset, the proposed allocation among assets and general investment guidelines. Where appropriate, include targeted maturity mix and credit quality. Attach supplementary documents as appropriate.

Proposed Products Description:


Staked FRAX (sFRAX) is an ERC4626 staking vault that distributes part of the Frax Protocol yield weekly to stakers denominated in FRAX stablecoins. The sFRAX token represents pro rata deposits within the vault and is always withdrawable for FRAX stablecoins at the pro rata rate. sFRAX APY attempts to roughly track the interest on reserve balances (IORB) rate of the United States Federal Reserve using the IORB oracle. This benchmark rate is generally accepted as the “risk-free rate” of the US Dollar. The FRAX staking vault attempts, but does not guarantee, in any way, to target this rate.

sFRAX underlying assets:

  • RWA
    • Short-dated United States treasury bills
    • Federal Reserve Overnight Repurchase Agreements
    • USD deposited at Federal Reserve Bank master accounts
    • Select shares of money market mutual funds
  • Fraxlend LP (Based on Fraxlend AMO allocation restrictions)
  • Curve Stable Pools LP


FXB tokens are simple, trustless tokens that resemble a zero-coupon bond that converts to the FRAX stablecoin on maturity. FXBs are debt tokens denominated in FRAX stablecoins, not a claim on any other asset or collateral. FXB tokens are only convertible to FRAX stablecoins; they do not guarantee FRAX peg, FRAX value, or yield/interest denominated in any other asset except FRAX. FXBs do not entitle holders to any asset off-chain or on-chain (other than FRAX stablecoins). Thus, FXBs are not redeemable for US Treasury Bills nor any real-world asset, are not directly backed/collateralized by them (or any specific asset), and do not have any utility except trustlessly converting to FRAX stablecoins at the pre-programmed maturity timestamp generated at their minting. This is important and not merely a semantic distinction because it directly defines the normative and economic property of FXBs. Frax Bond tokens only guarantee that they convert to FRAX on a one-to-one basis through smart contracts that issue them.

While 1 FXB will always equal 1 FRAX, the FXB AMO auctions off FXBs at a discount to face value; this discount provides buyers with the equivalent of RWA yield without assuming RWA risk.

FXBs allow the formation of a yield curve to price the time value of lending FRAX back to the protocol itself. Each FXB token is a fungible ERC20 token deployed from an on-chain factory contract. Immediately at the minting time, FRAX stablecoins are minted into the FXB redemption contract for conversion on maturity. This prevents any external actions from being necessary for the complete FXB cycle to occur and entirely remains trustless. Multiple FXB series can be circulating at all times (decided by frxGov), and there is no limit for the minimum or maximum maturity timestamp for FXBs deployed from the factory.

FXBs underlying assets:

  • RWA
    • US Treasury Bill maturity equivalent to FXB timestamp
    • Short-dated United States treasury bills
    • Federal Reserve Overnight Repurchase Agreements
    • USD deposited at Federal Reserve Bank master accounts
    • Select shares of money market mutual funds
  • Fraxlend LP (Based on Fraxlend AMO allocation restrictions)
  • Curve Stable Pools LP

Allocation Among Assets and general investment guidelines

sFRAX: 60%

FXB_20263112: 40%

Targeted Maturity Mix and Credit Quality:

This mix would likely be the most profitable and diversified mixture of dollar-denominated yield that is hedged against short-term rates going down as possible. If short-term rates drop, then long-term rates/maturities rise due to demand for longer-dated tbills which means the FXB positions will be profitable, and sFRAX can be rebalanced to more longer-dated FXBs or other RWA long-dated instruments.

Do investors have any shareholder, investor, creditor, or similar rights?

  1. Describe the legal and contractual structuring for your product including regulatory bodies overseeing your business and the product and identifying all legal jurisdictions interacting with your product. Attach supplementary documents as appropriate.

Frax Finance, similar to Maker, is a DAO and decentralized protocol. The assets and yields it sources come from partnerships with real-world asset providers and companies. One aspect of Frax Finance that is unique among DAOs is that it has its own horizontal RWA entity that is a public benefit corporation and onboarded through governance when FRAX v3 launched. This entity that is in the control, oversight, and constant transparency of Frax Core Developers is one (in a number of places) that Frax Finance can hold tbills, RWAs, and receive off-chain yield, which powers both sFRAX and FXBs. Frax Finance also has similar RWA partners as Maker including Ondo, Centrifuge (another applicant for this same program), and more. All RWA partners must adhere to transparency requirements and pass governance by FXS holders & are industry standard top/reputable firms.

  1. Would Arbitrum’s assets be bankruptcy remote from your own entity and its officers/key contributors? If so, please explain the legal and contractual basis. On a confidential, non-reliance basis, provide any third party legal opinions to support the conclusions.

Yes, both de facto and de jure RWA bankruptcy remote partners are used for Frax Finance’s RWA assets.
While bankruptcy remote is a legal term that is very narrow, meaning that offchain assets are held in the benefit of Arbitrum rather than held as an entity asset, Frax Finance has bankruptcy remote RWA partners/entities identical to leading fiat stablecoins and RWA firms.
FinresPBC is not bankruptcy remote but is a public benefit corporation meaning that it does not partake in any other business or for profit activity other than serving the Frax Finance DAO for RWA custody. So even in a bankruptcy process, there would be no other customers or entities in line for there sFRAX or FXB holders to be protected from. Thus, it is de facto protected from bankruptcies due to no competing classes of customers existing outside of sFRAX and FXB holders. Other RWA entities that have been onboarded do hold their assets in trust segregated bankruptcy remote structures so assets there that back sFRAX and FXBs are protected as well.

How are Arbitrum’s assets protected vis-a-vis the bankruptcy of the brokerage or applicable financial institution (e.g., bank deposit insurance, securities insurance, etc.)?

Arbitrum would be first and foremost a counterparty to the Frax Finance DAO and holder as a holder of sFRAX and FXBs. Arbitrum’s first assurance and “line of defense” to be assured on the value of the two assets is that the Frax Finance DAO stands by these assets both in terms of restitution & using all available means to recoup funds in the unlikely event of depeg or value loss including its treasury, sales of FXS tokens for cash, and its annual and consistent 8-figure revenues. Secondly, the RWA assets that back sFRAX and FXBs on the Frax Finance balance sheet are a mix of full de jure bankruptcy remote partners and public benefit corporation with no other customer or commercial activity/risk than custodying assets for Frax Finance so such RWA collateral should be straightforward and transparent to retrieve even in the cases of unwinding/insolvency etc (explained above).

Does the Issuer issue more than one asset? If so, what is the priority relationship between different asset classes?

  1. Provide a detailed cash flow diagram that shows the flow of funds from ARB/Fiat conversion, investment in underlying asset, payment of expenses, sale of underlying asset, and repayment (Fiat/ARB conversion), including the counterparties and legal jurisdictions involved.

The process is fully on-chain for Arbitrum Governance:

Graph: cash flow diagram for sFRAX:

Graph: cash flow diagram for FXB:

  1. Describe anticipated tax consequences (if any) in transacting on the underlying and/or receipt of yield.

Unfortunately, Frax Finance cannot provide legal, financial, or tax advice. Our users and investors should consult their tax advisors for any tax considerations.

  1. Describe the process and expected timeline for liquidation of assets, if given instructions to do so by Arbitrum governance.

sFRAX (Staked Frax)

Liquidation Process:

  1. Immediate Unstaking: sFRAX tokens are unstaked immediately, converting them back to FRAX without any cooldown period, as they are held in a 4626 vault, allowing for immediate liquidity.
  2. Conversion to Stablecoin or Fiat: The FRAX tokens can then be sold on the open market for other stablecoins or fiat currency or used directly in transactions, depending on the immediate needs of Arbitrum governance.

FXBs (Frax Bond Tokens)

Liquidation Process:

  1. Market Sale: FXBs are listed on secondary markets where they are traded.

  2. Redemption: If close to maturity, FXBs may be held until redemption rather than sold, based on cost-benefit analysis.

  3. Conversion to Stablecoin or Fiat: The FRAX tokens can then be sold on the open market for other stablecoins or fiat currency or used directly in transactions, depending on the immediate needs of Arbitrum governance.

  4. What amount of first-loss equity will Sponsor provide to ensure over-collateralization, how is the first-loss equity denominated, and what is the source of capital?

Not applicable, we do not hypothecate collateral in any way other than what is shown and seen on the Frax Finance Balance Sheet in real-time on The assets are backed at all times in real-time so that any holder of FRAX, sFRAX, FXBs can know they are collateralized. In the event of loss/hacks/unwinding (as described above), Frax Finance DAO stands by all its assets with the tier 1 DeFi reputation it has earned by using its treasury, FXS tokens, and other assets.

  1. Describe the liquidity and stability of the proposed underlying assets, including anticipated settlement times from the sale of the underlying to the repayment of ARB.

sFRAX (Staked Frax)

Liquidity: sFRAX offers high liquidity due to the ability to unstake and convert back to FRAX at any time without restrictions on the amount. This feature is particularly advantageous for managing large-volume transactions quickly and efficiently, accommodating sudden liquidity needs or strategic shifts in investment.

Stability: The underlying asset, FRAX, is a stablecoin that maintains its peg to the US dollar through an overcollateralized backing.

Settlement Times: The conversion from sFRAX to FRAX is immediate upon unstaking. Subsequent transactions, such as using FRAX to purchase ARB or other currencies, typically settle within minutes, depending on the trading platforms’ liquidity. This rapid settlement is beneficial for dynamic treasury management and operational flexibility.

FXBs (Frax Bond Tokens)


Pre-Maturity: FXBs can be sold on the open market before their maturity date, providing a degree of liquidity that allows holders to exit their positions if necessary. The liquidity of FXBs in the secondary market depends on the demand and trading volume, which can vary based on market conditions.

Post-Maturity: Upon reaching maturity, FXBs can be redeemed for their full nominal value, ensuring liquidity is restored to the holder without market impact.

Stability: FXBs are engineered to maintain a stable valuation with respect to FRAX, where 1 FXB is always equivalent to 1 FRAX. This one-to-one parity ensures that each FXB token inherently carries the value stability of the FRAX stablecoin, which is pegged to the US dollar. While 1 FXB will always equal 1 FRAX, the FXB AMO auctions off FXBs at a discount to face value. This discount provides the equivalent of RWA yield to buyers without the assumption of RWA risk.

Settlement Times:

Pre-Maturity Sales: The settlement time for selling FXBs on the open market can vary depending on the liquidity of the secondary market.

Post-Maturity Redemption: Redemption of FXBs at maturity is immediate upon redemption.

  1. If relying on the blockchain for any of the transactional flows, please describe any blockchain derived risks and mitigations.

The only blockchain that the proposed assets rely on is Ethereum Mainnet.

  1. Does the product rely on any derivative product (swaps,OTC agreements)?

sFRAX and FXBs do not rely on any specific derivative product but convert to FRAX stablecoins, which is Frax Finance’s flagship dollar-pegged decentralized stablecoin. The FRAX stablecoin is now fully collateralized with a public balance sheet available in real-time at Frax Facts. sFRAX is redeemable for FRAX at all times forever, and it is interchangeable at the virtualPrice of the vault, so sFRAX (similar to sDAI) can be thought of as a yielding version of FRAX itself. FXBs convert to FRAX at a future date, but their maturities and yield rate are matched by RWA treasury bills and/or DeFi assets on the Frax Finance balance sheet as explained above.

  1. List all the third party counterparties linked to your assets including and not restricted to prime broker if any, custodian, reporting agent, banks for derivatives or loans and provide primary contact details for the third party counterparties
  • FinresPBC
  • Charles Schwab Brokerage
  • Lead Bank

Direct leads and human points of contact can be provided upon request and if allocation is being decided on.

  1. Can you explain how is risk management (inv and operational) being done? Can you provide a copy of your risk management policy?

The Frax Finance DAO is a decentralized protocol operated and governed by FXS stakers. All governance and RWA partner/entity onboarding decisions are voted on publicly, debated, and discussed on Frax’s governance forum (similar to this Arbitrum proposal and system).

Performance reporting

  1. What are your proposed performance benchmarks? If this is substantially different from the underlying assets, please explain why.

Performance benchmarks of sFRAX, FXBs can be sDAI and sUSDe

  1. Describe the content, format, preparation process, and cadence of performance reports. This should include proof of reserves, if appropriate. Please include a sample report.

Frax Finance (to our current knowledge) is the only protocol with real-time balance sheet reporting and on-chain transparency to the level of Frax Facts.

  1. Who provides the performance reports in respect of the underlying assets?

The Frax Finance Core Developers and governance process/requests.

  1. Describe any formal audit process and timing of such audits.

The Frax Finance balance sheet updates in real-time every block of the Ethereum blockchain. The RWA assets are reported live using professional grade Plaid APIs integrated with FinresPBC’s brokerage and banking accounts on a daily basis.


  1. Provide a copy of your standard contract, or one similar to what is being proposed here.

It is fully permissionless, and no off-chain contracts are needed.

  1. Fee summary: Inclusive of the full scope of services requested. Product Fee schedule If asset-based Fee calculation for our plan if asset-based Annual fee if flat fee Any other fees (including redemption or minting fees)

There are no fees on proposed products. Frax Finance makes fees on revenues generated from other parts of its protocol and DeFi suite. There are no direct fees on sFRAX and FXBs.

  1. Describe frequency of fee payment and its position vis-a-vis payment priority compared with other expenses (i.e., cash waterfall)

The yield generated from staking sFRAX is distributed weekly on Wednesdays. This regular payout schedule provides sFRAX holders with consistent, predictable returns on their staked assets.

FXBs are zero-coupon bonds, meaning they do not pay periodic interest. Instead, the full value of the bond, including the accumulated yield (implicit in the discounted purchase price), is redeemable at the bond’s maturity date. This structure simplifies the investment, as investors do not need to manage frequent income receipts but can anticipate a lump-sum payment upon maturity.

Smart Contract/Architecture

  1. How many audits have you had and name of auditors? Please provide a copy of reports.

Information about Frax Finance Audits and reports can be found here : Audits | English 🇰🇾 | Frax ¤ Finance

  1. Is the project permissioned? If so how are you managing user identities? Any blacklisting/whitelisting features?

No, it’s permissionless.

  1. Is the product present on several chains? Are there any cross-chain interactions?

Yes, sFRAX is available in different chains through Frax Ferry, and for FXBs, the transfer can be done through a native bridge.

  1. Are the RWA tokens being used in any other protocols? Please describe the various components of the ecosystem

Frax Finance’s RWA tokens, specifically FXBs and sFRAX, are actively utilized in several other protocols, underscoring their versatility and integral role within the broader DeFi ecosystem.

FXBs (Frax Bond Tokens)

Use in Fraxlend: FXBs are utilized as collateral within Fraxlend, a decentralized lending platform developed by Frax Finance. This integration allows holders of FXBs to engage in borrowing activities, using their bond tokens as collateral. This capability enhances the liquidity and utility of FXBs, providing token holders with flexible financial options without necessitating the sale of their holdings.

Liquidity Provision in Automated Market Makers (AMMs): In addition to lending, FXBs can be used to provide liquidity on AMMs such as Curve. By contributing FXBs to liquidity pools, holders can earn trading fees and other incentives, thus generating additional yield while supporting the market’s depth and stability.

sFRAX (Staked Frax)

Collateral for CDPs and Lending Markets: sFRAX serves as collateral in collateralized debt positions (CDPs) and various lending markets. This utility allows users to leverage their sFRAX holdings to engage in further financial activities, such as generating loans or creating leveraged positions in other assets. The use of sFRAX in these capacities highlights its value as a stable yet productive financial instrument within DeFi.

Liquidity Provision on AMMs: sFRAX is also widely used for liquidity provision on popular AMMs, including Curve and Balancer. This involvement in liquidity pools helps to stabilize sFRAX’s value and ensures its integration into the broader ecosystem of token exchanges. Liquidity providers who stake their sFRAX in these pools benefit from trading fees and liquidity incentives, which can significantly enhance the returns on their staked assets.

  1. How are trusted roles/admins managed in the system? Which aspects of the solution require trust from users?

The only aspect of trust within the entire Frax Finance protocol is the publicly known and labeled 3 of 5 multisig treasury operated by the Frax Core Developers who are all reputable industry veterans & known persons (no anonymous signers).

  1. Is there any custom logic required for your RWA token? If so please give any details.

N/A aka none required

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