ppl on this app r increasingly jaded, claiming crypto has no good use cases.
meanwhile stablecoins r taking the world by storm, literally banking the unbanked, hedging against depreciating local fiat currencies, and facilitating cross border payments.
Just thinking out loud about use cases… it’s a bit like water because once you’re in crypto, you just take the surrounding water for granted:
—
Stablecoins: Ability for anyone in the world to get, store, and send USD to anyone else (like USDC, USDT)
Bitcoin’s long-term store of value (measured against USD and gold)
Uncensored instant low cost global payments (ability to send eg, $10 or $1M to anyone anywhere for a 10 cent transaction fee)
Internet bonds: Ability to earn more of a token just by holding that token (like Ethereum or Solana staking)
Permissionless speculation with lower fees and potential for larger returns than traditional venues like casino games, penny stocks, and sports betting
Trade assets instantly and permissionlessly (including increasingly complex financial products like derivatives, interest rate products)
True digital asset ownership (self custody, no or fewer middlemen)
Permissionless prediction markets (Polymarket)
Unlimited self-custody bank accounts (self-custody wallet) that can be shared (using multi-sig), sold, transferred (via private key)
Borrow and lend money permissionlessly (like Aave, Compound)
Earn higher asset APYs than traditional options like money markets, high-yield savings accounts, and short-term bonds
Tokenization: ability to turn any digital asset (and increasingly, real-world assets too) into an instantly priced and tradable token (via AMM) that can access an ecosystem of onchain financial infra
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
Got into crypto buying mushrooms on Silk Road
Lost money in Mt Gox
Worked at Consensys
Started Spankchain
Started MolochDao
Started Reflexer / RAI
Moloch gave Tornado its first grant – this issue is personal for him
Big Maker / DAI fan through 2018, 2019 – Spankchain couldn’t get bank accounts; cypherpunk money Wanted to fork it when Maker added USDC (went multicollateral), more centralized governance (to set stability fees)
-right now it’s 20% ETH collateral, 80% USDC
-governance – vote to set interest rates (stability fee)
-DAI was first stablecoin that Ethereum could use that wasn’t volatile
-Nikolai the cofounder didn’t want to peg it, but lost political battle – pragmatists wanted dollar peg to help growth
-Black Thursday (March 2020) – ETH crashed 2x% in 24 hours, added peg stability module to allow minting of DAI for USDC
-Ameen believes USDC is Trojan horse for Ethereum – now USDC is 80%
Now there’s governance proposals to make DAI free floating
RAI is single collateral, only ETH RAI allows negative interest rates – just changes peg price to incentivize sellers
Transparent rules based engine to stabilize itself, not dependent on peoples’ votes
RAI peg started as pi dollars ($3.14)
When loses peg, say there’s demand for RAI and it goes up 5%, the peg starts to drop at a specified rate; creates incentive for holders to sell RAI to bring the price back to peg “Money god always wins”
If you’re trying to manipulate price of RAI, it should be expensive for you
Those who are aligned with stabilizing price of RAI stand to make money
RAI referencing dollar still makes it a dollar-denominated asset, subject to dollar strength / weakness
Big RAI price change happened in first 3 weeks – sponsored attack on own system, offered incentives to LP RAI, pumped up price 10-12%
Took 3 weeks to fix it
Rates got to -70% to adjust the RAI price back
Currently you have to pay 14% to hold RAI – so why hold it?
~$15m RAI outstanding – DxDAO was one of holders but negative rates caused them to sell
If you care about decentralization / not being blacklisted, RAI might be for you
RAI can only ever be backed by ETH – can’t change that anymore
Even stETH depends somewhat on Lido governance
A better opportunity is to make more RAI-like things – stable coins that aren’t pegged to dollar; mechanisms to stabilize themselves
RAI price started at $3.14 (pi), now it’s around $2.92 RAI isn’t mean reverting – doesn’t matter what starting point was “Stability is in eye of beholder”
In hyperinflation scenario, RAI should be in equilibrium with rates to borrow DAI, etc
RAI’s controller response time is ~a few months
Ungovernance meme – progressively remove governance over aspects of protocol
Want to automate controller – still figuring it out
System has been in production for 1.5 years
Re: price oracles, system depends on Chainlink – which isn’t ideal
FLX – same as Maker – buyback and burn revenue model; protocol makes money from stability fee and liquidations
Stability fee is 2% – may be locked in forever – Maker uses SF as monetary policy tool, but it’s supposed to reflect price of collateral
Tornado cash OFAC sanction – USDC froze all USDC in those contracts
DAI has $6B USDC
Rune realized need to reduce exposure to USDC
Most effective knob is to reduce redemption price over time, make it progressively less attractive to mint DAI for USDC – RAI has already proven negative rates can work
He wants Maker to reclaim monetary sovereignty for DAI – doesn’t need to be pegged to USD
End game isn’t dollar-denom assets – in time crypto will have own price indexes other than fiats
USD reference for now is easy, liquid, stable
Brian — USDC is obvious target to control / regulate crypto
Vitalik article on Terra — if stablecoin can’t unwind in a down market, it’s basically a Ponzi scheme
Friederike – feels like mainly an oracle issue – main reason we don’t have real world assets – no good price feeds
Ameen – When ETH hits $75K, decentralized stable coins can scale – maybe we’re still in experiment stage, it’s a good reason why stable coins should be sub-$100M dollars
Wants to work with devs that can fork RAI and improve / change it
