Frax Finance Community Votes on Using BlackRock's BUIDL as Reserve Asset for Frax USD Stablecoin

The Frax Finance community has officially opened a vote on a groundbreaking proposal to use BlackRock’s USD Institutional Digital Liquidity Fund (BUIDL) as the reserve asset backing its upcoming stablecoin, Frax USD (frxUSD). The voting process, which began on December 26, has so far seen unanimous support from the decentralized finance (DeFi) lending protocol’s token holders (FXS). All the comments in the discussion surrounding the proposal have also been in favor of the motion, signaling a strong community consensus. The vote is set to remain open until January 1, 2025.

A New Era for Stablecoins: The Benefits of BUIDL as a Reserve Asset

The proposal’s supporters argue that integrating BlackRock's BUIDL into the Frax USD stablecoin could offer numerous benefits, including enhanced yield opportunities, deeper liquidity, and more transfer options. Additionally, using BUIDL as collateral is expected to reduce counterparty risk, thanks to the fund’s institutional-grade backing by BlackRock, a prominent player in traditional finance.

BUIDL, which was introduced in March 2023, is a digital liquidity fund backed by U.S. government securities. With a 1:1 peg to the U.S. dollar, it offers daily accrued dividends paid to investors monthly through a partnership with Securitize, a real-world asset tokenization platform and the broker-dealer for BlackRock's BUIDL. Since its launch, the fund has grown rapidly, surpassing $500 million in assets under management (AUM) within just four months.

Bridging Traditional Finance and DeFi

The proposal, initially introduced by Securitize, aims to bring institutional-grade, tokenized real-world assets (RWAs) into the DeFi space, further bridging the gap between traditional finance and decentralized finance. A user named achaffee, participating in the December 22 discussion about the proposal, emphasized that tokenized RWAs are an ideal way to integrate traditional financial assets into the blockchain ecosystem.

“In the past nine months, we’ve seen major players, including DAOs and decentralized protocols, put out large, public RFPs to explore how they can most effectively bolster their treasuries or back their stablecoins with RWAs,” achaffee noted. “These early explorations mark a significant evolution in how decentralized players manage their financial resources and consider cross-industry asset strategies.”

The inclusion of BUIDL could be an essential step in this evolving landscape, offering a more secure and liquid backing for Frax USD.

Tokenized Treasury Funds on the Rise

BlackRock’s BUIDL is part of a broader trend where tokenized treasury funds are making significant inroads into the DeFi ecosystem. As of now, over $3.4 billion worth of tokenized treasury funds are on-chain, according to Dune Analytics data compiled by 21Shares. These funds are helping to fuel the growth of decentralized finance, as more protocols and DAOs explore ways to manage their reserves with institutional-grade assets.

Frax Finance is not the only protocol exploring the possibility of a BUIDL-backed stablecoin. Ethena Labs, the developer behind the synthetic stablecoin USDe, also revealed plans for a BUIDL-backed stablecoin, USDtb, in a September 2023 announcement. USDtb went live on December 16 and has already accumulated $89 million in total value locked (TVL), according to data from DeFiLlama.

Looking Ahead: What’s Next for Frax USD?

As the Frax Finance community votes on the proposal to adopt BUIDL as the reserve asset for Frax USD, the outcome could pave the way for a new generation of stablecoins backed by real-world, tokenized assets. The Frax Finance protocol, known for its innovative approach to DeFi, could further cement its position in the ecosystem by providing users with a stablecoin that combines the security of institutional backing with the advantages of decentralized finance.

With the vote set to close in just under a year, the Frax community will have ample time to discuss and refine the proposal. However, the early momentum suggests that the integration of BlackRock’s BUIDL could be a game-changer for the Frax USD stablecoin and the broader DeFi space.

In the coming months, it will be interesting to watch how other projects, like Ethena Labs’ USDtb, continue to develop tokenized treasury-backed stablecoins and whether these offerings gain traction among DeFi users.