Buoyed by the rapid growth of its lending and net equity business, stablecoin issuer Frax Finance is on a roll to kick off the new year. Its governance token, FXS, has nearly tripled this year and is the best performing token since mid-November, shortly after crypto exchange FTX collapsed, according to data from CoinMarketCap. The coin boasts a market cap of $749 million.
FXS has skyrocketed since the dark days of November. Source: CoinMarketCap Frax is partly on a wave of action involving liquid staking protocols. The project launched its frxETH in October, and users have deposited over $100 million to date, according to DeFi Llama. But it’s not just about staking protocol. The total locked-in amount (TVL) on its loan protocol, Fraxlend, rose 77% last month. In addition, the TVL of its platform, Fraxswap, grew by more than 36%. Founder Sam Kazemian insists he’s not trying to compete with DeFi strongholds like Uniswap, Aave and Lido. “Stablecoins are basically my obsession,” Kazemian told The Defiant in a wide-ranging interview this month.
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New Approach
The stablecoin FRAX pegged to the dollar is the result of this obsession. As such, the Frax branded suite of protocols serves a purpose: creating an ecosystem for the stablecoin to thrive. The protocol adopted an innovative approach. The two largest stablecoins by market cap are reportedly backed by cash or cash equivalents. Decentralized alternatives are often overcollateralized to protect against the volatility of the assets that back them. FRAX is sub-collateralized and backed by a basket of cryptocurrencies that includes Frax’s own token, FXS. The name stands for “fractional-algorithmic,” a term that has given people “heebie-jeebies” (seizure) since the $60 billion collapse of the algorithmic stablecoin UST last year, Kazemian acknowledged. But the projects are fundamentally different. According to Kazemian, these differences mean that Frax will succeed where UST failed and become the “risk-free staple asset in DeFi”.
‘Trillion Dollar Narrative’
Kazemian came to crypto while studying neuroscience and philosophy at the University of California Los Angeles. Like many crypto-curious undergrads, he mined tokens – Dogecoin and Litecoin – from his dorm room. After graduating, he founded a blockchain-based, crypto-focused Wikipedia clone with a friend. This project ended up failing. “In 2019, I really thought the third trillion dollar crypto narrative is stablecoins,” he said. “I kind of had this view that none of these assets [existentes] it’s good money.” From the beginning, he knew that in order to create a good stablecoin, he would need to do more than create one – he would have to support it. In September, Frax launched an automated market maker, Fraxswap. In October, it launched Fraxlend and Frax Ether, a liquid staking protocol. Frax executed two rounds of fundraising, with investments from Crypto.com Capital and Ascensive Assets, according to CrunchBase.
Stablecoin Infrastructure
“If you have the biggest and best stablecoin, you need to have the largest amount of debt denominated in your stablecoin,” he said. “That’s why we have Fraxswap and Fraxlend, so that we also have a place where these stablecoins have a good way to be borrowed. What we do is more about building a stablecoin infrastructure than just building a huge number of competing projects or things like that.” He says recent moves in the industry vindicated his point of view. “Whether other projects and the community realize it or not, everyone is discovering this concept in one way or another. It’s almost like financial natural selection,” Kazemian said, pointing to Curve, the largest decentralized exchange, and Aave, the largest lending protocol. Both announced that they would develop and launch their own stablecoins in 2023. The founder believes that it is important to build infrastructure to make stablecoins competitive. With a lending market, the protocol can set interest rates and make collateral decisions. “You also need a place to deploy protocol-controlled liquidity, which is basically just another way of saying an exchange mechanism, which, like, a central bank has, and make money off of it. [taxas de transação]”, said Kazemian. He said Curve and Aave realized that, without being able to issue their own money, they were limited to being a product and not a central bank. Ryan Watkins, for example, co-founder of Syncracy Capital and former cryptocurrency analyst at Messari, agrees – to some extent. “Maker, Aave, Frax and Curve are all converging on the same end game: Stablecoins, stableswaps and loans bundled into full-stack DeFi banks,” he wrote Watkins on Twitter last year. In messages to The Defiant, he said there was no guarantee this approach would work.
Integrate with any project
“Not everything needs to be built in-house,” Watkins said. “Spread out too many resources and you will never be the best at anything – in a world of open source, permissionless protocols, the best of breed probably wins.” The permissionless and open source nature of DeFi means that any project can integrate with any other project. “Why would you integrate with second best?” Watkins said. “It’s not like you’re being forced to buy packs or any other kind of lock-in tactic.” Frax will also have to shake off the skepticism of being a partially algorithmic stablecoin. After the spectacular collapse of UST da Terra, a fully algorithmic stablecoin, these projects were viewed with suspicion, even within the crypto market. Politicians around the world suggested banning them. Kazemian, in the interview, distanced his project from the term. “I don’t think that same sort of algorithmic problem is relevant to us anymore,” he said. “Maybe the brand is still with us. But I think the [nomenclatura] More aptly is that it is basically a fractional reserve stablecoin.” Circle’s USDC and Tether’s USDT are allegedly backed by cash or cash equivalents, although such backing has been questioned before. But both are issued by companies subject to regulatory oversight and approval, a fatal sin in the eyes of decentralization maximalists.
Blue Chip Cryptocurrencies
Decentralized alternatives, meanwhile, rely on collateral in the form of top-tier cryptocurrencies such as Ether, and in the case of DAI, a growing basket of real-world tokenized assets. But these stablecoins are super collateralized. The assets backing the DAI, for example, are worth more than the DAI itself. Frax is seeking 100% guarantee. Even that may be too little for some, wary of the volatility of Frax’s collateral and how it might handle a bank run.
stable assets
According to Kazemian, most of the collateral is in relatively stable assets such as USDC and DAI, with a smaller amount in more volatile assets such as ETH and wBTC. Only 7% of the collateral is FXS, Frax’s governance token. In addition, the goal is to zero this number. “I think your guarantee rate is fine for now,” Watkins said. “Philosophically, I think it makes sense for most stablecoins to gradually reduce [sua] system guarantee fee as your stablecoin becomes more adopted. But it is very difficult to execute.” It’s worked so far: FRAX has maintained its peg to the dollar despite the myriad crypto crises of 2022. “There should be collateral, it shouldn’t look like Terra,” said Kazemian. “Actually, I think Terra was trying to be more like Frax before it exploded. That’s because they basically wanted to have this dynamically changing guarantee index, as opposed to basically having no external guarantee. But they didn’t get there in time.” *Frax Triples Value as Stablecoin System Takes Shape in with authorization from The Defiant Disclaimer: The text in this column does not necessarily reflect the opinion of CriptoFácil. Read also: Coindesk is for sale and Cardano founder wants to buy Read also: Controversial Hard Fork to be executed at Polygon Read also: Bitcoin miners from Brazil form coalition in Paraguay and will propose new crypto law in the country
