[Podcast Notes] Empire Podcast | w/ Sam Kazemian | Frax: Building the DeFi Trinity
Notes on Sam Kazemian’s 1 hour interview with Empire. Readable in <7mins.
Understanding Frax’s Mission
On first glance, Frax may seem unfocused. Working on stablecoins, lending, bridging, etc.
In actuality, its driven by a single mission - To issue the best and most innovative stablecoins and build infrastructure that synergizes with them
Stablecoins so far:
$FRAX (Pegged to 1 USD)
$FPI (Pegged to CPI)
$frxETH (Pegged to 1 ETH)
Stablecoin infrastructure built so far:
FraxSwap
FraxLend
FraxFerry
$FRAX
$FRAX never lost peg through 2022’s mass deleveraging event
On 2023’s roadmap are plans to bring $FRAX to 100% CR with completely exogenous collateral (high priority)
Sam’s personal belief is that to be the top dollar pegged stablecoin, one has to be in closest proximity to the risk-free version of that asset
While USDC is currently the closest thing to “risk-free” and is utilized by Frax, the long game for $FRAX is to be as “safe” as USDC by working on obtaining closest possible collateral to federal deposits, likely through an FMA (Federal Reserve Master Account)
The goal is to have the issuer of the asset be the only counterparty
The team has been working and are attuned to movements regarding stablecoin regulation
Obtaining something like an FMA would unlock growth for $FRAX as one of the safest stablecoins
Growing at scale, (> tens of billions in stablecoin supply) government regulation is unavoidable
The DeFi Trinity
2016 to 2021 CeFi companies started with single product offerings (custody, loans, exchange) and over time built in the same direction covering services beyond what they started with
The same is unfolding in DeFi (e.g. Aave & Curve launching stablecoins, Frax building FraxSwap & FraxLend)
The DeFi Trinity as defined by Sam:
Stablecoins
Lending
Liquidity
Strong established protocols will expand out of their field to other areas in order to capture greater market share
While all three are important, Sam believes stablecoins are the most useful and profitable of the trinity
Being a systematically important stablecoin issuer:
One has to be able to issue a liability that people are willing to use as currency specifically in spot
Be good at creating long term spot demand for your liability issuance
That means users hold and transact in spot without expecting an interest rate to be paid (e.g. if users prefer to hold another stablecoin in spot, you have to pay an interest rate for them to leave the other currency to hold yours)
$DAI is an example of having monetary premium where individuals and entities have long felt safe to hold in their wallets/treasuries
With that demand, MakerDAO can go out to other stablecoin issuers and charge them a premium to put their assets to use
$frxETH
A stablecoin that is always backed by at least one $ETH held either by validators or in an AMO (mostly staked with validators due to its risk-free yield)
Two tokens:
$frxETH - Plain stablecoin, no yield from just holding
$sfrxETH - staked $frxETH, earns validator rewards
Goal of $frxETH is to replace wETH in as many places as possible in the long term (1 to 3 years)
With deep liquidity, it can also be a way to bypass ETH withdrawal queue
People tend to misunderstand frxETH as the LSD when sfrxETH is the one that is interest bearing
wETH Replacement Program:
Get people to want to pair with frxETH
Exploring possibility of partially backing frxETH with stETH and rETH
Help the community understand the positive-sum vision for adopting frxETH as the successor to wETH (e.g. as frxETH grows, so does stETH & rETH)
Consider: once withdrawals are open, how can we ensure the proportion of staked ETH for everyone grows as much as possible?
Sam’s opinion regarding ETH price post Shanghai (NFA):
Assuming all else equal, ETH price should increase nominally as it is now properly interest bearing without time horizon risk
frxETH is there to help users capture that monetary premium
The Stablecoin Trilemma
As defined by Yano:
Decentralization
Scalability
Stability
$DAI and $FRAX currently have underlying $USDC risk
$DAI is attempting to mitigate this through RWA (which comes with its own risk)
$FRAX embraces potential centralization and has intentions to obtain an FMA
At scale, any dollar pegged stablecoin will have to forego decentralization at some point in its growth
$FPI and $frxETH on the other hand will remain fully decentralized stablecoins
Alpha on Frax
Developing in stealth BAMM (Borrow AMM)
Slated for 2023
Lend & borrow in spot without an oracle
Allow debt denominated in longtail assets
*Seems to share some similarities with Anja Finance
Governance Update
Targeting Q2 2023, much of Frax’s multisig activities will be fully controlled onchain by veFXS