The Frax Decentralization Ratio (DR) is the ratio of decentralized collateral value over the total stablecoin supply backed/redeemable for those assets. Collateral with excessive off-chain risk (custodial stablecoins, RWAs) are counted as 0% decentralized.
The DR goes through underlying constituent pieces of collateral that a protocol has claims on, not just what is inside its system contracts. The DR is a recursive function to find the base value of every asset.