The deal ends any prospects of new clubs Gold Coast or Greater Western Sydney signing Frawley, one of Melbourne's most important long-term key position players as an uncontracted player.
Melbourne list management general manager Tim Harrington said it was a great show of faith from both player and club.
Few players in the AFL have received four-year deals in recent times, although teammate Aaron Davey signed a similar deal last year and Hawk big man Jarryd Roughead also locked in the same timeframe recently
"For James to have the confidence to commit to the club for four years and for the club to have the confidence to commit to James for four years is a pretty big thing - you don't do too many four-year deals," Harrington said.
"Given we see him as a mainstay of the backline for a long period of time, it was a pretty easy decision."
Frawley, the nephew of former St Kilda captain and Richmond coach Danny Frawley, has started to make a name for himself this year.
The 21-year-old shone against Richmond in round four, collecting a career-best 25 disposals. He then backed it up by keeping Lions champion Jonathan Brown to just eight touches and one goal in round five.
Harrington said Frawley's core strength, which means he can now hold his own against the likes of Brown, plus his speed and leadership were part of the reason he was re-signed.
"The footy department put in place specialist coaches to really develop our list and James has really worked hard on his strengths," he said.
"His kicking was one thing that needed to be worked on, prior to him being drafted and that was the one question about James. Specialist coaching with Kelly O'Donnell and Kevin Ball, has really helped James' kicking, which is now not an issue."
Frawley said he could see the club starting to turn things around, with signs already pointing to a brighter future ahead for the Demons.
"The last few years have been pretty tough, but hopefully the times are looking up and it'll be good to be part of the young group and hopefully challenge for a premiership soon," Frawley said.
"It'll be good to stick with a few of these young boys and hopefully a few of them will get on board and sign, so we'll go forward together."
