Acts as chain editing deubiquitinating enzyme that binds and cleaves 'Lys-48'-linked polyubiquitin chains, with a preference for chains containing four or more ubiquitin molecules thereby modulating protein degradation by the ubiquitin-proteasome pathway (PubMed:19545544, PubMed:17234717, PubMed:21317884). Probably by regulating the IGF-1-insulin-like pathway, regulates lifespan (PubMed:21317884). Regulates germline DNA double-strand-break repair and apoptosis in response to DNA damage by recruiting E4 ubiquitin-protein ligase ufd-2 to DNA repair foci (PubMed:27669035). Interacts with key regulators of transcription and represses transcription (By similarity). Acts as a histone-binding protein that regulates transcription (By similarity). Thiol-dependent hydrolysis of ester, thioester, amide, peptide and isopeptide bonds formed by the C-terminal Gly of ubiquitin (a 76-residue protein attached to proteins as an intracellular targeting signal). Forms a complex composed of deubiquitinating enzyme atx-3, adapter ubxn-5 and cdc-48.1 (PubMed:19545544). Forms a complex composed of deubiquitinating enzyme atx-3, E4 ubiquitin-protein ligase ufd-2 and cdc-48.1 (PubMed:21317884). Interacts (via RRDR motif) with cdc-48.1 (via N-terminus) and cdc-48.2 (via N-terminus); the interaction with cdc-48.1 is not required for atx-3 enzymatic activity (PubMed:19545544, PubMed:21317884). Interacts (via C-terminus) with ubxn-5 (PubMed:19545544). May interact with ned-8 (PubMed:17935801). Localizes predominantly in the cytoplasm (PubMed:17234717). In the germline, following ionizing radiation-induced DNA damage, localizes to foci within nucleoli where it colocalizes with cdc-48.1 and/or cdc-48.2 and ufd-2, proteasome alpha subunit and ubiquitinated proteins (PubMed:27669035). Expressed in germline (at protein level) (PubMed:27669035). Expressed in spermatheca, pharynx, dorsal and ventral cords, some head neurons, hypodermis, body wall muscles and coelomocytes (PubMed:17234717). Expression begins during late embryogenesis and continues in larvae and adults. No visible phenotype (PubMed:17234717). In response to ionizing radiation-mediated DNA damage, the number of germline apoptotic corpses is increased, ufd-2 recruitment to nucleoli foci is impaired, the number of ubiquitin foci is increased and rad-51 retention to DNA damage foci is reduced; the increased germline apoptosis is suppressed in a ufd-2 (tm1380) mutant background (PubMed:27669035). At the higher temperature of 25 degrees Celsius, 60 percent of animals are uncoordinated (PubMed:19545544). Shows resistance to heat stress characterized by an increase in survival and expression of heat shock proteins such as hsp-16.2 and hsp-4 (PubMed:21526185). Expression of genes involved in the ubiquitin-proteasome pathway, motility, cell structure and signal transduction is affected (PubMed:17234717). In a cdc-48.1 (tm544) mutant background, causes a 50 percent increase in longevity, a delay in age-related muscle degeneration and resistance to oxidative and heat stresses (PubMed:21317884). In addition, induces dauer formation in 10 percent of animals and increases gene transcription of several genes including sod-3 and hsp-16.2 (PubMed:21317884). The overall levels of polyubiquitinated proteins is not affected (PubMed:21317884). RNAi-mediated knockdown of daf-16 abolishes the increase in lifespan (PubMed:21317884).