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
Click to access A-Note-on-Cryptocurrency-Stabilisation-Seigniorage-Shares.pdf
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:
