Oldie but goodie — Andolfatto is SVP of the Fed Reserve Bank of Louis:
I think that Bitcoin could be the world’s next great safe asset. At least, it certainly seems to have all the properties that are desired in a safe asset. Importantly, it is a “simple” asset. It’s simple in the sense that it’s a pure fiat object–the monetary objects (called /bitcoin/) constitute no legal claim against anything of intrinsic value. Bitcoin is simply a record-keeping technology (and economists have known for a long time that money is memory). It pays no interest. Possession corresponds to ownership (unless counterparties are involved).
These notes are a bit old (from April 2022). I thought I’d already published them, but couldn’t find it on my blog or twitter so…
Guest: Sam Kazemian
Host: Bankless
Sam got into crypto via GPU mining
Worked on wikipedia competitor
Started Frax Finance
Got in crypto 2013, UCLA student, mining dogecoin
One of first to signup for ETH newsletter in 2014 (Vitalik talking about counterparty and colored coins)
First “stablecoin whitepaper” was Robert Sam’s seignorage whitepaper
Two token system – stablecoin + share token / volatile token to represent seignorage / cashflow
There’s a WordPress of stablecoins now – cookie cutter playbook, infra is there
Will be Cambrian explosion for next 12 months
Stablecoins are one of 3 multi trillion dollar crypto narratives
1. Bitcoin
2. ETH
3. Stablecoins
Each are unique assets
Tells short story about central banking – from JP Koenig blog
https://jpkoning.blogspot.com/2018/03/more-fiatsplainin-lets-play-fiat-or-not.html
USDT
Start with each piece of paper has $1 USD behind them
Then limit or reduce redemption
Then say don’t have 1:1 redemption, but have these other assets
Frax created concept of fractional algorithmic stablecoin
Never broken peg (1cent plus or minus from $1)
Billions of dollars of onchain liquidity Frax is partial claims on hard money
RSA: Type 1 Hard money > Type 2 Claims on hard money > Type 3 Fiat money
Frax launched with Frax and FXS
Last week launched price index stablecoin
Frax is $1 stablecoin
FXS is governance token (named after Robert Sams whitepaper)
Algorithmic = expand or contract based on minting or burning FXS
Some people would say 100% collateralized, just part of collateral is FXS (but kinda circular bc it’s kinda like being backed by itself)
Hard assets / reserve = DAI, USDC, CRV emissions, protocol liquidity
Frax is mintable on 12 chains, lots of L2s
versus UST (all algorithmic, aside from Luna tokens and recent BTC purchases)
UST moving more toward fractionalized with recent BTC and AVAX purchases
Only difference is collateral ratio
Maker DAO started with fundamentally sound reserves = $1 stablecoin backed by $2 worth of other assets
Over time, everyone’s learned it’s extremely difficult to issue a USD stablecoin without having lots of actual USD / hard assets
Even Terra works closely with Jump and other market makers
If you want to autonomously be a Central Bank (Terra, Maker, Frax are the big 3) – you need hard assets to do it
When redemption window is open (1/3 of one cent off) – can redeem, get a mixture of assets – get USDC and FXS minted at current collateral ratio
So even last redeemers will still get equal pro-rata shares of the different assets as everyone else – so no benefit to redeeming first
And as the peg is off by 1/3 of one cent+, the collateral ratio increases
Entirely onchain, extremely decentralized approach No legal entity – there’s no off chain assets
Frax takes some of algo stablecoin scalability (Terra), but reduce risk of bank run / crash (Maker)
Lots of stablecoins will move toward Frax model – question is what collateral ratio?
Maker is 150% (?)
Frax is 85%
Terra is 10-20% BTC
People focus too much on collateral ratio and not enough on ability to keep the intended $1 peg
Terra really good at strategy, adoption, also a lot of market making activity from people with interest in Terra / Luna succeeding – eg, Jump Capital – other people with billions of dollars to ensure the $1 peg
No market maker is willing to do this without incentives
Thus all onchain stablecoins like Maker and Frax need USDC
Frax has 40s% USDC / Tether exposure, less than Maker at ~50-60%
Trying to wean off USDC / Tether
Mim – overcollateralized model – tried to work with them but had Sifu episode
Used for a lot of degen leverage
Great ex of overcollateralized – but still risky!
Risk is summation of all market activity
“Frax is as safe as DAI”
“UST is way more safe than people think” – lot of people have very strong interest in UST peg – difficult to quantify, but MUCH safer than the idea that “there’s nothing here” – if actually true they would’ve collapsed in those crazy downturns / dips
Big 3 – UST, Frax, Dai
What drives FXS price?
Can be staked as veFXS – Curve model – 1 week to 4 years – can’t be transferred – then have veFXS balance – get cash flow from profit of Frax market operations
APR is 4.7%, can vary from 3-20% depending on profitability and yield opportunities – entirely cashflow
Entirely self sufficient actual profit, not token emissions
Frax has $2.7B supply – ~$200M of annual revenue
What is FPI?
Second stablecoin in Frax ecosystem (after Frax itself)
First one pegged to CPI of federal gov’t
Custom Chainlink oracle – designed with Chainlink and Vault (Volt?) projects
Worked on it for one year
Grand vision – evolution of stablecoins will look like evolution of central banking – eventually will peg to our own definition of exchange rate, not some external exchange rate
That’s what FPI is – “final evolution of onchain stablecoins”
Eventually weight of basket of goods for CPI will be entirely onchain – not reliant on government or centralized data source
Today was highest CPI reading in 40 years – 8.5%
Can mint FPI with Frax
Eventually FPI can float against dollar
Curve wars / Curve4 pool
New Curve stablecoin liquidity pool
Removing liquidity from DAI (3 pool) and point towards 4 pool (UST, Frax, USDC, Tether)
Talked to Do for awhile – not a surprising move – one of smartest and most ambitious guys in space
Known Do since 2018, when he started Terra, he’s very good strategist
Currency success = how many people using it, how much economic activity it supports, and a mixture of uses is important
Curve is like WordPress of stablecoins or pegged assets (stables, ETH & stETH)
Nothing wrong with Maker / DAI’s strategy – if they wanted to do DAI 4-pool, Frax would work with them like all the other stables
They take a thorough, slow, methodical approach to governance
Maker isn’t as interested because they don’t see Curve at same importance as Frax or Terra
Frax and Terra are aggressive about growth – want your currency anywhere there’s economic activity
Curve is more than just a DEX, it’s an algorithmic savings account, get yield on it
Some people think it’s just a Ponzi game but they’re mistaken
Frax has largest CVX holdings, Terra also has a lot, but Maker doesn’t
4-pool will be massive when it gets going
Just launched on Arbitrum, Fantom and Polygon are already available “Will be the savings account for very large part of crypto industry”
Stablecoin pegs are stronger together – focused on positive sum innovation
Frax has been spot on with thesis of fractional algorithmic stablecoin, and now FPI (first CPI-pegged stablecoin) In 12-24 months, will be consolidation around 3-4 decentralized stablecoins
Are BTC / ETH better as inflation resistance or as “central bank reserves” in crypto
Do Kwan kickstarting BTC as gold narrative, Frax doing same for ETH
So inflation resistance crowd will be captured by stablecoins like FPI, and BTC / ETH will be perfect reserves
And this is a “fractional crypto stablecoin, anime style” according to Stable Diffusion:
Guest: Sam Kazemian (Frax founder, Everipedia founder)
Host: Jason Choi
Defi needs more zero-to-1 moments
Excited for FRAX’S FPI – stablecoin pegged to CPI instead of USD
Defi blue chips trending towards the “Trinity” of stablecoin, lending, and liquidity – clearly the future, strong network effects + consolidated value – it’s the original Defi stack
AAVE adding lending and stablecoin; CRV adding stablecoin; Frax has all 3; Binance does too
Frax is fractionally backed
-Didn’t believe in purely algorithmic stablecoins (like Luna)
-Claimed early that Basis and Terra don’t work
-They’re like banks with no reserves
-Frax is 93% backed by exogenous assets – protocol liquidity, stablecoins – closer to Dai than Luna
-worst case Frax will only de-peg to $0.93 -but 80+% of collateral is USDC (centralization risk)
Stablecoin trilemma – based on Vitalik’s blockchain scaling trilemma (throughput, scalability, decentralization) 1. Tight peg 2. Decentralized collateral 3. Capital efficiency
Fully decentralized ones – eg, RAI, LUSD – collectively don’t add up to much liquidity, hard to scale
“Bear market is bull market for stablecoins”
Expects Frax will approach 100% collateralized if the bear market lasts another year or so
Dai is $7B, Frax $1.5B stablecoin circulating supply
Would love for both to reach $1T supply
To get there, more economic activity needs to occur onchain – but whole industry mcap is only $1T right now
What’s he interested in angel investing?
-Really interested in L2 / scaling roadmap -Hardware to accelerate ZKPs
-new innovative stability mechanisms for stablecoins
-new lending / liquidity methods
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Went to India for 6th time, read 100s of books, but traveling there is a deeper and different kind of knowledge
Prefer traveling over reading
What is Conquest’s law (note to self)
Doesn’t see left v right (eg, left wing, leftist politics) as consistent and historical categories
Doesn’t buy that famous / successful people in the past were more abused or had harder childhoods – lots of selection bias, historical bias
Disappointed at how geographically clustered “talent” is – today it’s places like London, NYC, etc
These talent clusters have been such for a long time – seems like an enduring effect
Talent comes from many different areas, but always migrates to these clusters – how good are these clusters at producing talent, versus attracting them?
Problem for SF – may be a more temporary cluster, not much historical persistence
Why did Renaissance blossom in Florence and Venice but not Milan? Hard to understand
High status thing to do is feign humility
Well-dressed 20 year olds (eg, suit / business) are too conformist for what he’s looking for
Nootropics – don’t personally like it, but does seem to work for some people
Doesn’t drink coffee
Believes 15-17 year olds among most neglected talented people – high schools should invite real local experts to talk to them
The best moral instruction (in classrooms) are teachers being good people
“Context is that which is scarce” Kids learn a lot of context in school – even if they can’t memorize as many explicit facts – it’s the residual, it’s what matters
“Super talented are best at spotting other super talented individuals”
There are exceptions, not a science, but there’s some art / intuition to it
Will sometimes chew out certain people, try to light a fire under them
Not an EA (effective altruism) person, but like libertarianism it will continue for quite a long time Need more religions – in the meantime EA will do
Emergent Ventures – applicants are remarkably bi-modal distribution – pretty clear who makes it vs doesn’t make it
Believes a lot of foundations give out too many big grants, not enough small grants – small grants are under-rated
Believes mental stamina / energy can increase significantly (eg, 30%) – but some people are gifted super stamina
Lots of geniuses can’t get out of bed in the morning – they’re stuck and you should write them off
Top level athletic performance is very cognitively intense – this is under-rated – you have to be really smart to practice, lead a team, outsmart competition, “very g-loaded”
“Whoever is the top gardener [in the world] – I suspect I would be super impressed by”
Should be more bullish on immigrants from Africa – hard to get out, so it’s a positive sign
US not into demographic decline yet – maybe so in Japan
Doesn’t worry as much about woke ideology – “if that keeps you down…I’m not so impressed by you”
“Europe isn’t woke enough in a lot of eyes… chauvinist, old fashioned”
Europe is less egalitarian (than America) – Paris is the extreme by status; too few dimensions of status competition
YC more like scalable business school now – could be stale in good sense like Harvard is stale
Novelists can blossom much later, very discrete act – won’t really know until you do it – makes it harder to predict talent
Existential risk matters more than almost anyone thinks – but the things we do to eliminate them are more typical than most EA believers think – also over worry about certain types of risks, “not epistemically modest enough”, eg, AGI alignment
After a modern nuclear war – humanity permanently set back, medieval living standards, feudalism, more violence – no reason to assume you just bounce back, more problems will appear after – crop failures, climate change, disease
“Existence of sex is most pessimistic thing there is” – can’t just stand still or you will die / be defeated – thus sex as requirement to force genetic diversity
Growing up, read a lot of sports and chess biographies
Has blogged for 20 years – importance of constancy – like a public biography
If only had 5 years to live, would focus more on Emergent Ventures – institution building and talent spotting
Most talented people have unique philosophies / worldviews – eg, Peter Thiel (on Gerard, one heretic belief) – need unique way of looking at the world, protects you from other peoples’ idiocy
Doesn’t bet as much on single ideas unlike, eg, Jordan Peterson – rationale is he wants to stay as broadly relevant for as long as possible
Leading by example is number one way we teach – specifically referring to his students at GMU (?)
Bloggers – as people who write publicly on regular basis – have been around for centuries – will survive a long time
Substack encourages posts that are too long, too whiny, too focused on a few topics
The more that progress advances, the easier it is to destroy things, easier to destroy than create – to square his short-term optimism with his long-term pessimism
Fukuyama has changed views often – one of his views is that rest of history is how we’ll manipulate biology “Are you long the market or short the market?” – one of Tyler’s favorite forcing questions
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And this is what Stable Diffusion thinks is a “lunar society, podcast interview, two people”:
