Frax: Building the DeFi Trinity | Sam Kazemian

Transcript

[Applause] right now you can earn 4.8 on U.S treasuries that's right 4.8 on U.S treasuries not in defy how do you do that it's super easy we just partnered with public.com go to public.com open a US Treasury account put your cash to work you can also get access to a bunch of other things like stocks crypto whole bunch of other assets all in one place it's super cool public.com forward slash Empire that's public.com forward slash Empire alright everyone welcome back to another episode of Empire you got me Yano we got Sam casmian uh from frax and then we are we booted Santiago from this one we got Dan Smith uh senior analyst on the blockworks research team joining us so

uh Dan Sam welcome to Empire guests thanks for having me so Sam I'm I'm excited we're chatting because I feel like I've been uh blown up with frax uh Frack stuff for the last like six months uh if you looked in the blockworks research slack channel it's basically 50 defying uh 50 the rest is just consumed by frax info so I'm happy that we're having this conversation I was um I will admit I'm not as in touch with some Frac stuff as the analysts are but as I was researching this my first thought was like I guess kind of found on a Founder to founder note I was like man this guy's there's no Focus here there's no like we've got the like we've got the uh lending stuff we've got the stable coin stuff and the more I read about it the more I realized I was it's

actually completely 180 wrong there's this like core like one line vision and Mission and everything that you build ties back to that so I thought it could be helpful um to maybe start there with like what is the overarching vision and all these products that you build like what are they tying back to and then and then we can get in to some of the more specifics yeah definitely and uh I couldn't have said a better uh you you captured it really well a lot of people uh try to learn about like facts and and so uh they're a little confused because there's like so much stuff we've built now so frax protocol issues uh the best and most Innovative stable coins were stable coin maximalists so to speak and uh I'll explain how that view of like

usually maximalism is not a very you know positive some view but I'll explain why I think you know stablecoin maximalism is kind of uh the the best of all worlds um usually you know when when you say like maximalism it's not really like oh everything else is bad or whatever but frax build stable coins uh right now we have three stable coins they have different pegs that's the fracks stablecoin which is packed to the US dollar it's uh fpi which is crypto's very first CPI Peg stable coin so basket of consumer items and then we have frax ether which is the newest stable coin that we've launched which is Peg to one

eth it's literally just Peg to one and so a lot of people call things similar to that lsds or liquid staking derivatives and so obviously proxyther has a lot of similarities to lsds um we'll talk about that I'm sure but basically one liner of frax it's on our Twitter it's on our community it's we build the best and most Innovative stable coins in the crypto space and we build stablecoin infrastructure and so like that's where for example fraxland Frack Swap and also the the newest infrastructure we've built for our stable coins called frax Ferry which is kind of like a bridge it's kind of not a bridge that's why we called it a ferry because it goes under bridges but it's it's bridge-like infrastructure uh for our stable coins so a lot of people see

this and they're like oh the the frax guys are all over the place they're trying to compete with Ave and then you know with fraxland and then they're trying to compete with Bridges with their uh you know funny named frax Fairy stuff and then they're like trying to compete with Lido with fraxis either no no we're not doing that it's like you said really well it's a very very uh narrow scope Vision like for example we we don't build nft marketplaces right we don't build like uh you know uh nft sets or something or we don't build something really out of left field that has absolutely no you know Synergy with our stable coin vision and the and the very narrow and couple few stable coins that

we're focusing on um and so every single thing we build is about our stable coins we build the most Innovative stable coins and the most important infrastructure to make them uh the most indispensable stable coins in D5 nice all right so overarching vision you're built frax build stable coins and you've got a couple different stable coins and you've got all these different mechanisms and products that you've built to support that Vision when I I guess take us like 12 months ago there were all these on-chain we can call them different things programmatic algorithmic Unchained stable coins today I would say there are kind of four main players it's there's usdc there's tether there's die and and there's the the like

basket of stables that you guys are building and then there's a bunch of other players but why were you guys able to be so usdc and tether are obviously like they're they're not like fully on chain stable so it's really you guys yeah yeah so why why were you guys able to survive when someone like I don't know Tara's probably a bad I don't even want to lump you guys in with that that bucket but like why were you guys able to survive this like colossal deleveraging event when other folks weren't yeah so um one thing I I like to highlight for everyone that might not be following fracks for like the past uh year or so I was like frax has never lost his Peg uh frax is kind of it's a it's a hybrid stable coin in in terms of like difference to building mechanisms but uh

one thing I will actually say is that for our 2023 roadmap what we're doing with frax is that we're actually bringing it to a hundred percent CR uh completely with completely exogenous collateral but it will be algorithmic in the sense that all of this infrastructure all of this on-chain stuff that I just talked about it will run uh with with frax to stabilize the the price spec but it will not have any kind of uh reflexive collateral it'll all be uh exogenous collateral and so we've actually made that pretty uh clear a few times but to drive home the point my personal belief is that if you're trying to go for the you know top dollar pegged stable coin uh market share right

things like tether usdc um and things like that you have to be the closest to the risk-free uh asset that that's that's pegged to the dollar and you'll you'll never be the thing everyone flees to in a crisis whether it's a liquidity crunch whether it's like a recession or things like that if you're the most risky thing Peg to an asset so even though we've never broken our Peg uh obviously everyone knows right now de facto the closest thing to risk-free on on chain is usdc right uh die wraps a lot of usdc we have a lot of usdc exposure on chain our Amos have usdc liquidity the frax BP

pool on curve which is this liquidity pool that other people can pair with and get a lot of frax protocol incentives uh proportional to their tvl that is also paired with usdc but this is not our long game our long game is to actually be uh as safe as usdc and just as safe as the closest risk-free stable coins and to get there and to do that we have to have 100 CR of exogenous collateral which we are uh that is the top thing on on the Frac stable coins roadmap this year we have some Innovative stuff that uh we're working on you know in in the back kind of with uh trying to get the closest possible uh collateral to to Fed

deposits right the FED master account system uh that kind of stuff has a little bit hard to predict in terms of like the timeline just because it's not really coding related work even though we're very good at shipping you know smart contracts software and things like that but that's um that's one thing to highlight is I think we've done a really great job showing that we have the technology to stay at Peg we which we've perfectly done we've survived like you're saying the the crisis of 2022 with basically crypto deleveraging macro Market deleveraging Global uh interest rates Rising everywhere right um but that's not enough so like we we don't actually want to just Pat ourselves on the back and be like okay great uh we're awesome too uh we don't have to improve anything no we're going

to consistently try to make fracks uh the the safest stable coin won't happen overnight but we have very consistent plans to make it uh the closest thing as possible to the risk-free kind of stable coin like usdc and what what so getting and Diving deeper into like the how are we going to get um the FED deposits backing fracks like what is the plan to making that possible and how realistic is that to actually get there right because if I think about you know the the United States government working directly with a non-train protocol there seems to be a gap there in their willingness um just given the the risk of them taking that on but you know ultimately

that the way you can view it from the other side is well this is a huge source of demand for U.S treasuries and that's something that the FED would ultimately be interested in yeah usually I don't really like to like speculate around like regulatory stuff because it's so hard to know right like uh we're obviously trying um you know in in the background and things like that um and you know we're very you know attuned to what kind of regulations are coming or or not coming right like uh the bills that are in Congress like the the stable coin act that like um Senator Toomey proposed last year but it's still not really up for voter or any anything close um but like for example that was really

bullish right like that actually had a pathway where stable coin issuers can actually apply for uh a FMA like the FED master account um but I don't usually like to speculate because you know we don't really know how long it'll take but I think I think it's going to happen right like for example usdc has a uh direct relationship with uh BlackRock who manages their there uh they're they're collateral right and BlackRock has direct access to the fed's reverse repo facility which is de facto also just another uh way to essentially get essentially direct access to the FED being your only counterparty right and so they are working towards essentially

what's the same thing I think it's it's set up it might not be fully like live yet but they're they're working towards kind of the the same uh structure right the same structure being basically in order for you to be the closest thing to the risk-free uh asset when it comes to the Dollar on chain you have to be the closest thing where your only counterparty is the issuer of the dollar right the issue of the thing that you're pegging to which is uh issued by the Federal Reserve right um You can't have like 20 different middlemen in between or like 20 different like rehypothecated like you know this is a deposit of a deposit of a deposit of like this entities deposit but it's a dollar right and then at the

end it like backs usdc or like your Fiat stable coin right um it'll never work because something will end up being the risk-free thing everyone flees to right um and if the peg is the US dollar uh my personal belief and I think the facts line up with this is that uh at scale if your peg is the US dollar you're not going to escape government regulation through either fake or Genuine decentralization it just will not work at scale at scale meaning in the tens of billions in the hundreds of billions of dollars of of supply if your peg is the USD if it's something

else like maybe it's a basket of consumer items which again we have FBI if it's something else if it's an eth Peg or something uh it should be able to be totally possible to have a fully decentralized fully uh on-chain stable coin that does not have any custodial risk or real world Asset Risk or or like has to bow to like regulatory pressure or anything off chain uh because it's like Bitcoin it's like ethereum it's the smart contracts actually can work and sustain it on chain in a fully digital economy if your stable coin is pegged to a sovereign country's unit of account which they can issue at size there is no evidence that you can escape uh government regulation or that you

should there's just no evidence um I I would love to talk to other people about how that's possible I know there's a lot of people that um you know say that you know uh use you know X Y and Z tiny tiny market cap stable coin that's like pegged to the US dollar because it you know it's fully decentralized or whatever um that's that doesn't work right like we we know that unless there's like a very secret like uh stability mechanism for pegging something that no one's yet discovered right like and like someone's gonna Discover it and it's gonna be beautiful and and you can at scale Peg to uh whatever unit because like there's

just this beautiful mathematical you know on-chain stability mechanism uh which I don't think exists but unless that's the only way you could do it is like some kind of brand new thing it's not possible otherwise there's there's no way you can escape uh and so that's why I think you don't have to over comply right like you don't have to like basically you know have like white lists and double blacklists and like be like you have to kyc to touch my Fiat stable corner so you basically have to be reasonable right you have to basically say if I want this stable coin that you know my protocol issues are in usdc's case my company issues or something and the next

five to ten years I genuinely want this thing to be in the hundreds of billions of dollars if not trillions truly in the next like decade you're not going to escape like just being adversarial to to like regulation if your peg is the if your peg is the US dollar so Sam can I try to repeat back to you almost what I feel like um I feel like you've come to the conclusion over time that real world assets are crucial and necessary for the success of a decentralized stable coin but also you've come to the conclusion that the only real world asset that you should have as collateral is a Fed deposit yes okay second second part second part true um so so maybe so like I spent let me

clarify that if yeah yeah so there's a there's a thought that you know the next you know great bull market or something is going to be real world assets that come on chain and stuff and I think that part is true I think that that's great that there's gonna have to be real world assets there's gonna have to be all of this stuff which I'm personally bullish about I think you know uh stuff like you know fraxland or lending markets and stuff should think about lending against these kinds of assets however I think if you're going to back your stable coin with the various real world assets like loans to private companies or things like that you look like a commercial bank that's what commercial Banks do uh that is not the risk-free

asset or the closest thing to the risk-free uh asset on chain right and so what's going to happen is that if you are a stable coin issuer that's going to back your thing with a bunch of commercial paper or like real world asset tokenized commercial paper whatever you want to call it well you're going to end up wrapping a very very large amount of your supply uh with either the stable coin that is only treasuries and fed reverse repo uh contracts or FMA deposits or you're going to have to do it yourself as well right and so that's what you you see in reality you see the market you can have many different opinions we could just

look at the the actual empirical evidence on chain and on the markets and that's what's going to happen we don't want to actually lend to a private uh you know stuff like you don't want to blend to uh private companies car companies this or that you're just creating another Commercial Bank there you want to use it exactly we want to be the closest thing to risk-free like usdc that that's that's our end call everyone quick break from the show to tell you about U.S treasuries that's right but you didn't see that one coming uh U.S treasuries right now can earn up to five percent I think the the exact numbers like 4.8 percent right now I have never I'll be honest with you all really thought about investing in U.S

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credit for this move your cash into a treasury account today hope you guys enjoy it [Music] so what do you think of um I'm just I'm curious to get your what you think of uh I was gonna say maker but actually so when I look at when you look at the kind of C5 companies of the 2016 to 2021 era I'd call them they all started with a different strategy some people started with like like the anchorages and bitcoes and copper started as custodians block five and Celsius and nexo started with like London borrow stuff like that coinbase like other people started as an exchange but as you build you all kind of they all built towards the same thing the exchanges rolled out custody custody rolled out London borrow Len borrow like

block five rolled out their own exchange and they all kind of ended up building the same thing uh I see this happening in defy where and I think it I think either you or someone else has called it the Trinity where like the liquidity providers end up creating a stable coin so I saw you know Ave created their own stable coin you guys created like a Lending Service like so I I see this happening as well in D5 I'm curious what you think of um uh maybe we'll start specifically with maker like when you see maker doing there's a big debate inside of maker where I spend a lot of time with like real world assets right now what do you think of the the real world asset like on maker debate going on right now yeah um first of all yeah I think that was that was me

I don't want to take like a complete credit but like that we'll give you credit we'll get your credit ideas like you just uh you just see this kind of financial natural selection right this financial evolution of there is some kind of you know facts out in the real world right and markets discover them right the other way to think about it is like like physical physics laws right like f equals m a existed in the world and then Isaac Newton discovered it one day right um same thing with financial laws of physics so to speak right I'm a very big believer of that like there's a structure right there's kind of this like so I I was a philosophy major and a

neuroscience major in college so like My Philosophy side is like there's there's basically like a uh a platonic form of markets or if you if you prefer like like hegelian structure to the markets and then like people discover them like the market as a whole structures around the the truth basically um and the truth is Defy is is something like stable coins lending and liquidity everything is different flavors of of these kinds of banking activities um there there are you can build them autonomously without any custodial trust right like um like like maker with the stable coin side and and the lending side like compound and Ave like fraxland

um or you can build them with the custodial trust and you know that's C5 Type stuff like usdc right and like Celsius and stuff with the lending um I think what's going to happen is that the most useful kind of activity is going to become like a uh winner take most market and that's why you see stuff like Ave releasing a stable coin uh curve releasing CRV USD because they're already dominant in one area right and um the only place that they have to go is to expand to the other area which is stable coins and lending so that they can increase their their market share right and so this is all just banking

activity but just in like a new generation right like the the digital generation the crypto uh generation that that's kind of how I think about it and so the reason frax is just really you know like I was saying stablecoin maximalist in terms of mindset is that I think at the end of the day the most useful and the most profitable uh part of all of this infrastructure is the ability to generate a liability that people you use as their currency right and and that's where most of the the the money or the value will be generated the other stuff is kind of like infrastructure and you need them right you need that infrastructure it doesn't

make them not important they're critical but in order for you to be able to be as important like like systemically important we talk about C5 Banks and stuff being systemically important if you're going to get large enough to become uh very important you need to be able to issue your own liability that people use as currency or or the the asset in in place of right and and what I mean by uses currency is I mean to hold that in spot spot demand spot means just holding it in your wallet or like just sending it as payments without expecting an interest rate to be paid right if you issue a stable coin whether it's back to East whether it's back to

USD whether it's back to anything and and another entity issues a stable coin but people always prefer to hold spot the other stable coin because they have spot demand AKA demand as money that other people call us monetary premium you always have to pay some interest rate in order for people to leave that currency which they use for with zero percent paid to them right to go and just hold yours right and you see this for example uh like die has a lot of monetary premium it was the first decentralized stable coin and it a lot of people projects Dows and stuff just hold die as as a decentralized currency

frax is also starting to get that but it you know Dai is older their die has more monetary premium right now and that's why for example the maker can go to usdp paxos right and it can go to these other stable coins Fiat stable coins right and it can say hey um we will hold like 500 million dollars of like paxos uh if you guys pay us some interest right because no one else is using paxos for example as money as spot right and so in order for paxos to have anyone use its own uh I mean paxus probably does have a little bit right but not anywhere near as much as as die so in order for uh people to for paxos

to get any kind of demand it has to pay an interest rate right it essentially needs makers permission to hold it so that it can kind of make money on its like collateral uh on its treasuries right and pay some of it out to make her so essentially if you issue currency if you're a stable coin insurer like maker like frax which is our entire you know vision and goal you need to be able to be good at creating long-term spot demand for your issuance of your liability that's that's the ultimate thing there's nothing else is like measured uh in terms of like you know how much fees do you make or how much this or that it's how much monetary premium does your does your stable coin

does your liability have compared to other people's uh same pegged stable coin right and that's the ultimate uh test basically yeah this is it seems like a great time to to peel back a layer and get into the crypto economic side of things specifically as it relates to fraxies because you guys use a very interesting two-token model here and it almost allows you to measure that monetary premium that the asset has so frax ether FRX eth that actually accrues no staking rewards and you have to actually opt into the staking rewards so can you just walk us a little bit quickly through what that model looks like and then specifically how that enables you to measure this monetary premium that flows through the base asset the stable coin

pegged frax ether yeah definitely so frax ether FRX eth is our newest uh stable coin and a lot of people were confused by the design I think now a lot of people are getting it which is really cool um which it's a two token design um and what frax eth is it's it's always backed by at least one eth either in validators that are currently run by the team eventually anyone can spin up validators and stuff but they're youth backed and validators or eth that is in different Amos right now there's only a curve uh ammo that manages the protocol on liquidity uh and essentially the idea

is that there's there's two tokens one like you're saying exactly then there's frax eth that gets no interest itself if you if you hold it it's not rebasing it's not interest bearing it doesn't it doesn't do anything uh there's places that you can use it for example we do actually have incentives for you to LP on it right curve also has a gauge which we make sure to upkeep with good bribes and and incentives and things like that there's other places other chains now actually have frax eth liquidity pairs right which we we do help them with incentives and we do partner with them and things like that but the idea is it's just an effect stable coin you you just you mint it one to one with eth uh

The frax Ether protocol takes most of the Ethan just takes it in validator so it kind of looks like an LSD a liquid staking derivative like Lido like rocket pool and things like that it's not really because that's why we keep saying it's it's a stable coin it's an effect stablecoin but most of the the ethers and validators because that's the closest thing to the as close as you can get to the risk-free rate of uh interest paid out by the issuer of eth which is the ethereum protocol right the ethereum network the ethereum blockchain and so a lot of it goes to validators then what you could do with frax ether is you can go and you can stake it in the POS Vault this is

called the S fraxieth Vault the steak frax ether Vault and that gets all the validator rewards that our validators uh are earning so all of the validator rewards minus the protocol fee goes directly to that alt and so you get out the second token called sraxy Stakes frax ether and that is interest bearing that like the virtual price of that goes up right you can use that it's a 4626 compliant very gas efficient token you can use it for Lending you can do a lot of stuff that's like very very very efficient for those specific things for interest bearing places and and that's it's great so it's just it's just frax ether that's interest bearing it's staked in the POS Vault and that's it so it gets like seven to eight

percent APR Which is higher than other kind of lsds because there's other people doing other things with The frax Ether token that that inert stable coin like providing liquidity like using it in different places we've actually had uh people already messages for integrating it in different places and the ultimate goal as as funny and lofty as it kind of sounds is that after Shanghai so after withdrawals are open we want to have frax ether be a replacement for weath which is the wrap teeth erc20 is compliant wrap teeth token in as many places as possible if we can have extremely deep liquidity in a lot of places a very deep curve pool to kind of bypass the the small kind of

variable wait time of the withdrawal queue right then you can have deep liquidity that can always be uh swap frax eth for eth right so people can still pay gas and things like that but you have this very highly efficient gas optimized erc20 compliant uh eth token that's always one to one uh backed extremely deep liquidity on my curve unit Swap and stuff and that is what hopefully a large amount of the D5 Community will be using as a replacement for weath in in the long term obviously like in the one two three year term but it goes back to the view again of in order for you to be successful as a stable coin is sure no matter what

your peg is people have to want to use your thing as spot demand they need to be making spot liquidity with it or just holding in a spot uh you have to want to actually uh hold it without getting paid some like exorbitant like you know unsustainable yield and things like that otherwise you'll like dump it for whatever the the risk-free closest thing to risk-free stable coin is by some other issue right and so the important thing here is a lot of people call fraxseed and LSD it's probably more uh accurate to call s francaise the LSD the staked frax ether because that thing is the one that is the interest bearing thing and that it's getting all of the uh proof of

stake uh validator yield and frax ether is just an eastpec stable coin it's actually the first kind of hybrid uh LSD kind of thing with the vision being it's just eth money it's just it's an eth stable coin and what we can do with it is actually very unique people haven't even considered what some of the stuff we're thinking about doing with it in terms of the the weath replacement program we call it wether weather and the idea is that in order for us to have this be successful in the future uh we basically need to get people to want to pair with frax ether and also we're going to want to make sure that everyone is kind of positive some uh view that this is not kind of some

kind of uh Zero Sum if it fracs ether uh you know replaces weath and stuff like Lido steath or like rocket pools wreath or something like that is is going to uh lose out in fact something we're exploring because frax ether is is like a stable coin we can partially back frax ether with wreath and Steve again if they're they're they should be super safe which they are their leading LSD uh tokens right and uh currently both of them are are indeed larger than proxy if they're much older but they are larger and so they are uh quite safe so we can actually back uh frax ether with wreath and steath partly depending on the the

weights and the stuff that makes it the most useful as an as a neat stable coin so we are kind of trying to have this kind of stable coin be the kind of successor to weath so to speak and we want to make sure that everyone knows that we can make the closest thing to uh the risk-free closest thing I'm not saying obviously like there's no sufficiently as risk-free caveat but the closest thing to uh a risk-free replacement to uh with by backing it with the the top Blue Chip lsds backing it with partial steath partial wreath and so as fraxseed grows so does wreath so does uh steath right

um and so it's a very positive sum view because because we're not trying to destroy market share in fact we're trying to think of it like once Shanghai is is open right the withdrawals are open how can we make sure that the total amount of stake ether for everyone not just on unlike frax's validator or something but for everyone grows as much as possible Right like I'm personally of the opinion that once withdrawals are open instead of eth price dumping which is like a lot of what people like fought about and stuff each price is actually gonna increase nominally uh obviously given if like the macro conditions in the economy are stay the same and don't get worse or something right but all things being the

same I think each price will actually dramatically rise uh after Shanghai not investment advice because youth essentially becomes interest bearing right now eth is not really interest bearing because there's this huge like time Horizon risk right the week before Shanghai the East devs could be like oh like something huge happened or something we're going to push off Shanghai eight months or six months uh there's no withdrawals right you still have this kind of like Risk where all lsds are kind of bond like right there's like a discount Steve is like a center to fluctuates uh wreath all of these things and so it's not really an interest-bearing asset right eth is not an interest-bearing asset currently but when Shanghai and withdrawals are open

eth becomes de facto an interest-bearing asset you need an e-stable coin that kind of captures this monetary premium we're hoping that it's going to be like frax ether because we've designed the whole system to be like that but the fact that eth essentially becomes interest bearing should increase its nominal price right if you think about it uh if that like that's why increasing the Fed rate right makes dollars more valuable the price of things come down right if eth becomes de facto interest bearing the price of each should go up uh in relative to other things so I actually think post Shanghai all other things equivalent which is not a given but all other things equivalent I think the price of each should dramatically rise and it'll slowly obviously like meet the time Horizon it's not like

after Shanghai it's gonna you know like pump 20 in one day once the you know Event Horizon is known right like that there's not going to be any delays there's not like any issues and stuff there should be a dramatic price you could argue that that's actually what's you know currently happening yeah I was about to say the uh the recent price action is making me think anything's possible but um yeah it's clear the the similarities between fracks and frax ether are actually you know strikingly similar um and it's clear that like building out frax is really assisted in building out what frax ether is uh what what it can become but one thing I want to hit on is the interesting bootstrapping mechanism you use so when a user comes to frax and says hey I wanna I wanna Mint one frax

ether the user provides one eth and it's actually 90 so 0.9 of that eth is used to spin up validators and point one is used for Peg stability and so that point one eth is kind of what I want to focus on here because that gets deposited into the curve pool um where fraxied Finds Its deepest liquidity and so what this does is it helps build strong like additional confidence in the asset obviously these uh stable coins need a strong Peg and but it also generates additional income that then gets used for liquidity bribing and you know that kind of spins up a five layer of attracting more liquidity so if you could walk us through what that looks like you know there's been some recent discussions on Twitter on like the safety of this and I'd like to get your take on that side

of it as well right because you know if what happens if the curve pool imbalance shifts in like you know this isn't like it's not backed by facts either is like no longer backed by just eth right it's 90 eth and 10 NLP token that involves Ethan fraxied yeah definitely um so that's uh exactly the the case right right now there's 0.9 for every one eth so 90 goes to validators uh which which back racks ether and then 10 goes to actually uh 10 or 0.1 eth for every goes to uh curve right and it's protocol controlled liquidity um a lot of people have like a hard time uh doing kind of the the virtual math about it and uh so like they they think

okay um this is kind of risky or something like that and uh the answer is two things one is as long as the eth is added single-sided if if the imbalance is more uh if it's under Peg right if eth is at it's single-sided from the protocols market operations if fraxieth is under Peg the collateral ratio actually rises above a hundred percent right because think about it if you add single-sided eth and frax ether is under peg you're buying back your own liability at under the peg price right so the first thing people that are

like thinking about this uh that are listening should should think about the economics is if you add single-sided eth to a amm pool like curve and and the and the stable coins Peg is under the desired peg you're actually Rising the CR above 100 okay so that that's number one um number two is if the stablecoin is perfectly at Peg right let's say it's like 50 50. you can if you're adding uh you know let's say a hundred each you can actually in the market operations contract also mint a hundred fracs ether to Parrot 50 50 together so in total you add uh 200 tokens 100 ether and 100 francs ether

this is that what confuses everyone right this is what people are like oh so it is really uh under collateralized I knew there was some kind of you know like Hocus Pocus black magic going it is it is under back it's not this it people are it's it's hard for people to do simulated math if you think about this situation right there are more fracts either literally on the blockchain right in this example you add a hundred each and 100 francs eth into the curve pool because it's it's perfectly 50 50. okay recall that if it was under Peg you just added single-sided single-sided right and you rise the the CR above 100 because you're buying back frax ether at underpay if

you add these 50 50 think about this anyone that wants to take out a frax ether token from the curve pool at the peg they are sending in one ether plus a small fee into the lp right and now the protocol or the lp token holders they own that one eth that is now in their possession and the user has one frax ether of possession right so the CR remains exactly at 100 in fact it slightly goes above 100 because there's like a tiny tiny feat but uh from from transaction fees right but the CR in all instances stays the same so we came up

with this like right originally like you're saying from the frax dollar packed stable coins curve ammo we came up with these virtual calculations in fact the curve ammo does these virtual CR calculations on chain if you look at the frax stable coins curve ammo you can literally call a view function that's like uh what is the actual claims of collateral on all the lp tokens that the Amo contract has it's actually very uh elegant and so it like actually does all of it it depends on the a factor uh and it's not like if the a factor is different the CR will go below 100 if that's not true it depends on the a factor because you have to know when and how quickly the CR actually goes above

100 because if this a factor is very very large right if it's like 5 000 a factor even as the curve pool gets more and more imbalanced you're still swapping at a one-to-one rate it's almost like a one-to-one minting and Redemption function essentially right and so you intake the a factor as a as a dependent variable whatever it is from the pool you actually simulate all the swaps uh and then you say okay how much in the worst possible case if someone just buys out all of the frax ether um do I have you know know I as the mo do I have claims on on collateral in fact the CR in this situation Rises the thing you're calculating is how much

does the CR rise rather than how much does it go down so it's actually just an example of uh things that look one way are actually exactly the opposite and in fact it's good that people are questioning and in fact there's a lot of people that uh have actually looked at frax the dollar pegged stable coins uh Amos and things like that and it's you know they're like oh this is really cool after I actually took a look you know it's all open source right unlike you know Terra and and other stuff we don't do any kind of like Market making ever we don't send things to like jump or winter meat we don't do any centralizing fracks as a dow nothing we do is off chain so like there's no there's no hiding anything right and so in fact

if you don't believe something uh go and investigate it ideally don't make like a a weird tweet about how first you think it's like super like suspected stuff and it turns out like you actually don't understand you could but which is usually people's favorite thing to do but um but it's uh it's been checked obviously don't trust me verify but also don't tweet and then verify right like first verify and then uh but the idea the the point here is a lot of stuff that might look uh one way uh actually are exactly the opposite when you tell someone actually this right raises the CR if they're they're like their mind is

blown sometimes right rather than oh this makes it like an algo Ponzi under collateralized thing but the opposite is also true too people should really be careful so I like the skepticism it's really good things that look fully backed or or like the things that intuitively originally uh are like oh this is totally safe might be really really messed up in in the back once you really do the accounting and just like how this looks kind of weird uh when you when you look at it but it's actually like becoming over collateralized slowly rather than under collateralized the opposite is also true so I we we like the fact that everyone is you know doing their their part in and not trusting but verifying Sam I I want to pull this back out for a

second just because I have two like overarching uh I have two like maybe higher level questions for you one is um do you ever so you talked about these like business rules or like Mark free market rules or whatever um one thing that I feel like is true and in business is like you going Niche tends to going Niche and then once you cap tends to win and then you like go you I think a good business strategy is like go Niche capture the niche win the niche and then expand out um do you ever think that like the better strategy would be to like like Lido Lido is just focus on uh liquid staking and they've like dominated that market or like usdc Circle used to do all these things remember back in 2017 they had like one

of the biggest OTC desks they had the retail app they sold everything and then they just focused on usdc and they've been able to win so far at least the stable coin Market do you ever think like hey maybe we should I'm not trying to tell you how to do things obviously but I'm like there's another world where you try to like dominate one market and then go into another market and then go into another Market instead of doing all these different things I'm just I just wanna I don't even know the question there I just want to hear your thoughts on that yeah I mean I I totally agree I think the difference is that we think that narrow Market is stable coins just strictly stable coins uh like not nfts not uh like a blockchain phone or something I think Solana is doing that

somehow or something um and and the reason is that if you if you look for example people have this categorical uh issue I think or like they're they're like either too narrow or they're too broad which is what I think you're criticizing correctly is like for example uh no one tells binance or coinbase you should just focus on the spot Market your centralized exchange is just focus on just just the spot mark because in their mind centralized exchange is basically like a lot of custodial services like like Leverage uh you know uh Fiat on off ramp and like swapping tokens and all these things right

um it's not just the spot order book right uh otherwise you'd have people being like Oh I don't like the fact that like binance is you know doing a launch pad and then BSC its own blockchain and all this stuff um they have a conception of centralized exchange it's just they do a bunch of stuff that's custodial in in nature that that's what it means right I think because uh it was really hard from a technical perspective to build a lot of original D5 Primitives people think that oh like an amm is just its own like Market segment and like you just you should just focus on on like an amm or like a lending thing a contract like Ave

or compound that matches uh borrowers and and lenders that's just its own industry and you should just you know kind of stay in your lane or something like that or like if if you uh issue like a stable coin right like like maker with die you should just do that and um the issue is those are all the same thing that at least that that's my that's my view and the reason we're working on infrastructure like fraxland Frack Swap and frax ferry to to basically uh you know support our stable coins uh if you think about it we've been very consistent like we're not uh making fracks Ferry this generalized token

Bridge coming like Bridge your you know uni tokens or or like mkr tokens and it we're never planning on doing that right like we're very uh methodical in in the scope our scope is just something that people intuitively think is is too much but I think they're going to come to realize and and as you said very well like curve is issuing a stable coin obvious issuing a stable coin um and all this stuff people are going to intuitively realize in like the next six to 18 months oh actually those were the same thing right the they are the the same scope like we're not Bill we're not trying to be with open C or blur or like you know um Yuga Labs with with like nfts and

in-game Phi and stuff right we're competing with like uh I wouldn't really say competing but we're in the same area as as basically like serious Finance with uh with blockchain you know non-custodial Primitives right that's basically what the scope is okay so then okay so my next question would be so there's this blockchain trilemma right which is uh Security decentralization scalability in stable coins I feel like you also have a a similar trilemma which is uh uh decentralization scalability and then replace security maybe with stability uh the price stability and I think there have been a couple of different models so far of decentralized stables so like USD excuse me UST they were like

decentralization plus really scalable but they didn't have the stability so they depegged then like LUSD is decentralized and super stable but they can't scale and then there's dye and frax which I'd say are really stable um really scalable but there's probably like Risk from usdc um because like right you you mentioned like the risk-free risk-free rate or risk-free asset and Define right now usdc is that risk-free asset and that's like die and frax kind of have like underlying usdc risk so you guys there's two different strategies like I'd say die is starting to is look going down this kind of real world asset route where like they're starting to be like backed more and more by loans from

private companies with like these intermediaries and like people are trying to figure it out a little bit frax on the other hand the way I'm hearing from you tell me if any of this is wrong it's like you're planning to hopefully get this like fed master account where you can get um uh fed deposits and that's like that is a that that's a trillion dollar idea right there like that is a CL I see the vision I totally get it isn't it contingent though on getting the FED account like what happens if you can't get the FED account uh I think we can get it did I get that like overview right and is that like yeah so you you totally got it right um and again I think it's important to talk about that that stable coin

trilemma because you said it well it's like uh you know the issue is and it goes back to what I was saying is at scale if you're a dollar Peg stable coin I don't think you can uh Escape kind of Regulation or interaction with the state uh at scale and like for example you know you said the the stable coins here in in our in your example like die and cracks they're like the only ones that have at above a billion uh market cap uh that are like decentralized right like the on-chained meetings right um and it's very obvious it's just it's very hard to continue to scale these things uh with a dollar Peg without

having some kind of Link link to just one real world asset right that one real world asset is you know treasuries FMA deposits just pure cash right like like like uh reverse repo contracts right just basically the FED is the counterparty right uh or the closest way to get to the FED counterpart and if you don't have that uh which we don't right now and maker doesn't you wrap something that's the closest thing of them right like right now Fiat coins are essentially real world assets for the good ones right they're the real world assets for uh treasuries without the yield right uh and and like um fed reverse repo facilities right

like which is what basically circles trying to do um so that's the issue the issue is that at scale you you can't this trilemma limits you there's no evidence that any fully decentralized stable coin like like LUSD Rye all of these things there's there's no evidence that they can scale uh the dollar Peg right like Rye has this fluctuating Peg albeit but it is kind of fixed to you know the arbitrary 3.14 kind of Pi dollar value right um and so uh fpi and frax ether are not in any way constrained by this this view of like uh they can and will and and should be fully decentralized

non-custodial fully on chain uh stable coins and they they are currently um but the dollar pegged ones I don't see how it's it's possible to ever be and and so like our view is there's there's a one real world asset model right one real world asset you don't need more than that um especially if you're trying to be the SIM simplest and least risky a dollar stable coin at scale you don't need a bunch of you know private loans it'll be more profitable so like one thing there's nothing wrong with for example makers real world asset uh stuff it'll it might actually make them much more money right and that's it's more risky so they get more interest from the

private companies that can actually uh by definition default and like the the US treasuries get uh paid out all the time I know we have a hard stop in a couple minutes here so I just I want to uh I want to see if there's any frax Alpha you can uh you can share with us or anything that uh maybe you haven't shared with folks um that you're open to sharing with Empire here yeah so um some of the stuff so some people probably uh like read all of our tweets and stuff but we we are developing kind of a a new thing called uh the the BAM b-a-mm which is called the the uh borrow amm and it's uh it's like this stealth thing uh it's gonna come out this year

and uh it's kind of something that we think is a zero to one Innovation for for defy essentially and you can you can borrow uh stuff and also have spot liquidity without really an oracle there's no like external Oracle and things like that and so the idea here is for fracks and all of our stable coins to capture the long tail market so have debt denominated in uh long tail assets have it not be uh risky like like long tail assets because those need like chain link oracles before they this right they all need to have like very very deep liquidity on chain we're trying to do it the other direction go at it from first principles uh people don't know what this does and I don't

actually want to reveal it but it's on a roadmap on the roadmap we're also don't reveal exactly what it is because we we're like uh very um you know kind of deal about it but you heard it here first we're working on something called the BAM b-a-m-m uh it's totally different from anything in in defy sometime in 2023 it should be out all right Dan any last thoughts here yeah no that's exciting now I'm gonna have to keep sliding those DMS of yours and bother you about something else I'd love to hear it uh I guess so you know we've talked about decentralization so real quick you know I know you're working towards removing the Reliance on multi-cigs from frax um and that's gonna be like a gradual process and using that six of eleven

governance system that you guys are sort of pioneering as well do we I know he was going through some audits do you have any timeline on one that could uh implementation yeah definitely uh I actually think this is even a good uh governance and stuff is a good uh podcast episode in of itself yeah so just to answer super quickly it's uh about two months give or take uh away from you know having actual uh parts of the protocol be fully uh using it and we hope to do it like sometime Q2 and uh it's still fully set to to do that it's an interesting thing I I know you wrote about actually I link your uh report uh a lot so so people can know so a lot of

the stuff that frax currently does uh using an msig will be fully on chain uh which is basically uh controlled by ve fxs holders and so it'll be it's a really interesting structure I know that you know exactly how it works uh hopefully Q2 is the answer nice Sam I know you got a jump man this is this is awesome I have a feeling this will not be the last time you're on Empire so I really appreciate you coming on man of course thanks for having me guys awesome Cheers Cheers [Music]