The model for sFRAX is simple. When a user deposits FRAX into the sFRAX ERC-4626 vault contract, the DAO authorizes a similar amount of stablecoins held in the treasury, USDC or USDP, to be off-boarded to Finres' account with Circle or Paxos. Finres then swaps the stablecoins for cash and invests in approved short duration assets.
Finres purchases interest bearing assets through Kansas City-based Lead Bank and plans to expand to other service providers. Recently they announced a partnership with Ondo Finance to acquire its USDY, its tokenized note secured by short-term US Treasuries and bank demand deposits.
Once a week, the yield earned by Finres is transferred back to DAO control and then queued up into the sFRAX contract for linear deployment over the next weekly epoch. According to the Frax v3 docs:
Every Wednesday at 11:59:59 UTC the Frax Protocol adds newly minted FRAX stablecoins into the sFRAX vault. This newly minted FRAX is one-to-one proportional to the earnings of the Frax Protocol over the prior week and thus fully backed at 100% CR. Each sFRAX epoch is 1 week and identical in length and start time as the FXS gauge and sfrxETH epoch.
The sFRAX contract is governed by the DAO through the frxGov module, who can set specific parameters, such as the maximum yield cap. Currently, the maximum yield is 10%. There is no minimum yield. In this first epoch 50,000 FRAX is slated as yield rewards. If a whale deposited $100m, the yield would trend towards 0% for the current epoch. Rates would readjust the next week. This lagging reward model is similar to sfrxETH, where staking rewards are only updated every 2 weeks. As TVL grows in sFRAX, reward volatility should decline and settle around the IORB rate.
The yield model sFRAX employs is similar to MakerDAO's sDAI, which also offered a high initial yield that declines towards a terminal rate. However, MakerDAO's rate offering was a one way street, once the yields declined, they would never be raised. sFRAX yields are responsive to the total supply deposited into the pool, if users unstake, the yield increases for all participants and could potentially rise to 10% again.