Observations and personal views from BonnaZhu of Nothing Research Partner; the following content does not constitute any investment advice.

Direct beneficiaries of the U.S. stablecoin bill: Frax Finance

I estimate that many people may still associate Frax with its algorithmic stablecoin phase, but in reality, it has quietly transformed into a fiat-collateralized stablecoin. Founder Sam has also been deeply involved in drafting the U.S. GENIUS stablecoin bill.

Even though Frax has been paying for the bubble of its algorithmic stablecoin in recent years, the team has attempted directions like LST and L2 but has not been able to escape the low market value, instead giving the market the impression of 'doing everything, but not doing anything well'. However, Sam has never given up. This time, he chose to refocus Frax on the stablecoin track and go all in on the U.S. market:

1. frxUSD: A payment stablecoin targeting the compliant market

frxUSD is a new stablecoin launched by Frax in January this year. Unlike the old version of the Frax stablecoin, which relied on partial collateral and algorithmic adjustments to maintain price stability, frxUSD is a fiat-collateralized stablecoin supported 1:1 by U.S. treasuries and cash, custodially managed by partners BlackRock and Superstate (BUIDL and USTb).

This design directly aligns with the compliance requirements of the GENIUS stablecoin bill, aiming to become one of the first legally compliant payment stablecoins in the U.S.

(Genius Act: A Guide to the US Senate’s Stablecoin Legislation): Stablecoin issuers must hold 100% of the value in cash or cash equivalents.

The significance of the GENIUS stablecoin bill lies not only in providing a legal basis for stablecoin issuance but also in formally incorporating stablecoins into M1 currency, allowing them to directly enter the U.S. banking system and participate in interbank settlements, payments, and other core financial activities. The stablecoin market size is $200 billion, accounting for only 1% of the M1 size, indicating huge potential.

2. FraxNet: Crypto bank accounts, an on-chain upgrade of M1

The current supply of frxUSD is $75 million. Although it is still small, the Frax team plans to achieve rapid growth in the scale of stablecoins by building a financial application—FraxNet. FraxNet is positioned as a 'Crypto bank account', with the core strategy of allowing users to directly log into their traditional financial accounts, converting the funds in their accounts (so-called M1) into frxUSD and enjoying real-time treasury yields.

FraxNet not only allows users to earn treasury yields on the underlying collateral of stablecoins, but it is also reported to have enabled enterprise-level on-chain payment scenarios through collaboration with Stripe, allowing frxUSD to be used in real-world payment scenarios, such as corporate payments and cross-border settlements.

In simple terms, FraxNet is somewhat like a Web3 version of Alipay, where users can deposit funds (M1) at any time, convert them into stablecoins (frxUSD), and enjoy stable returns (4-5% APY from T-Bills). Users can also use frxUSD for payments via Stripe, balancing both yield and liquidity needs. This design allows traditional users to experience the convenience of on-chain finance without needing to delve deeply into cryptocurrencies, gradually expanding Frax's market share.

3. The User Path from Compliance to DeFi

Although the Frax team is all in on compliant payment stablecoins, it does not mean that its DeFi product line is useless. In fact, the Frax team possesses top-ranking product design and engineering capabilities in the industry and has developed the following product suite:

Lending: FraxLend
Swap: FraxSwap
Derivatives: frxETH, sfrxUSD
AMM: BAMM

Frax attracts traditional users through frxUSD and FraxNet, converting some users into advocates of the DeFi world, achieving dual-track growth in compliance and DeFi. The core of this strategy is that FraxNet acts like a funnel; after bringing in traditional users, some will be converted into DeFi users, who can then enjoy various advanced products on the DeFi side of Frax.

4. Fraxtal: From L2 to L1

All of the above is issued and settled on Fraxtal. Fraxtal was initially built by the Frax team as a finance-focused Ethereum L2 based on the OP Stack, but after this transformation, Fraxtal will actually evolve into an independent L1 chain. This marks a shift in the underlying infrastructure of the Frax ecosystem from relying on Ethereum's mainnet L2 to upgrading to an L1 with its own consensus mechanism and settlement layer, and the old governance token FXS will become FRAX and serve as the gas token and staking token for Fraxtal:

FRAX as a gas token:
Replacing frxETH, using FRAX as gas for on-chain interactions

FRAX as a staking token:
Future introduction of FRAX-denominated validator staking

Thus, FRAX is no longer merely an application token valued through P/E, but is gradually transforming into an asset that can capture L1 premiums.