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. Probably by regulating the IGF-1-insulin-like pathway, regulates lifespan. 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. Interacts with key regulators of transcription and represses transcription. Acts as a histone-binding protein that regulates transcription. 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. Forms a complex composed of deubiquitinating enzyme atx-3, E4 ubiquitin-protein ligase ufd-2 and cdc-48.1. 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. Interacts (via C-terminus) with ubxn-5. May interact with ned-8. Localizes predominantly in the cytoplasm. 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.