In this episode of Flywheelpod, hosts David and Kiet are joined by founder of FRAX, Sam, to speak about the endgame for Frax, FrxETH, getting a Fed Master account, and more.
(Frax is the first fractional stablecoin, partially collateralized and partially algorithmic, on Ethereum and 12 other chains)
Read our notes below to find out more.
Current state of Frax
Frax has no exposure to FTX/Alameda.
Peg has been perfect.
Working on FrxETH.
AMOs (algorithmic market operations) has been working well.
More than enough protocol liquidity for every user-owned Frax on-chain.
New design implementations over the next 6-12 months.
Endgame for Frax
Frax’s goal is to be one of the stablecoins in the trillion dollar market cap.
The vision of Frax is to be the base of risk-free asset in DeFi.
Vision is to have two stablecoins, dollar-pegged stablecoin and successor of it such as FPI.
Sam
Not very bullish on real-world assets anymore.
Previously believed that scaling decentralised stablecoins depended on real-world assets.
There is only one real world asset is money deposited at the Fed master account.
Fed master account
There will be multiple large stablecoins in the next 5-10 years
Sam believes the way to be one of the largest stablecoins is to be the CBDC of DeFi.
Definition of central bank kind of stablecoin here is the least risky, not the literal central bank.
The way to do that is to lend money to the Fed instead of taking private sector loans.
Although Circle does not have a Fed master account, they are the closest to this today, being entirely backed by treasuries,
Aside from blacklist risk, Circle looks the most risk-free.
Hence, DAI partially backs themselves with USDC
Aside from blacklist risk, DAI will look riskier than Circle with their private sector loans.
There is a risk premium, in the form of private loans, for the lack of blacklist function.
Sam thinks it’s impossible to have real-world assets of private companies and aim to be the top stablecoins.
Sam does not like structures that have perverse incentives, such as Yuga Labs.
FXS holders will transitively govern the structure.
FrxETH and sFrxETH
FrxETH is backed 1-to-1 by ETH.
FrxETH is a two-token design, FrxETH and sFrxETH, where sFrxETH can be staked and is interest bearing.
Staking in the sFrxETH vault guarantees the risk-free rate.
As more FrxETH are staked in places such as CRV, people staking in the sFrxETH vault get more rewards.
FrxETH could replace wETH in liquidity pairs.
Same structure can be used in other chains, for example FrxMATIC, but no plans to do it.
Sam says they need to have a large say in consensus if they want to be the most important entity on Ethereum mainnet, and that is where FrxETH fits.
Frax Ferry
Needed a safe way to redeem native Frax from other chains to Ethereum mainnet.
Is not a bridge but a variation of a bridge, hence no bridge risk.
Currently supports Optimism, Arbitrum, and Moonbeam.
Happens once every 24 hrs to send Frax between Ethereum and the other chain.
Similar to MakerDAO’s fast withdrawals.
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FPI
Is the first stablecoin pegged to the US CPI.
Being pegged to CPI, FPI is inflation resistant.
Another vision of Frax is to disrupt the dollar-pegged stablecoin industry.
Sam thinks the next generation of stablecoins are pegged to non-nation State units of accounts.
Upcoming veFPIS will be released in stages:
Stake FPIS and get yield.
Vote on CPI gauges with rules and slashing conditions.
Scalability of FPI:
As market cap increases, it will be difficult to find yields as efficient as consumer demand.
Target peg will be known once the basket of items are decided.
Either supply has to be limited or the community needs to decide on the true inflation rate and what basket of items to peg to through voting.
Frax and Curve
David says Frax would not be where it is without Curve and vice versa.
Sam
Sam agrees with David.
A lot of value was created by working together and they are excited to work with anyone to create value.
Ideal world is to have 2-3 stablecoins worth a trillion each instead of Frax being worth 2-3 trillion alone.
Fraxlend and Fraxswap
Sam views lending, liquidity, and currency as the same thing.
No tokens for both.
Same infrastructure for issuing digital currencies, backing it with loans, and having a place with liquidity to redeem or deploy protocol collateral.
Sam thinks it will get more attractive to use Fraxlend and Fraxswap moving forward.
Almost 130 mil TVL in Fraxswap pools.
Over 47 million total supply of Frax, 15 million borrowed, 55% utilisation rate on Fraxlend.
Building on Frax
Frax is integrated with GMX protocol in GLP (protocol liquidity pool).
Building on Fraxswap’s TWAP.
Fraxlend’s pairs are independent.
Possible idea of building a vault manager on Fraxlend to maximise yields.
Sam likes the idea of having a Frax hackathon and FXS grants.
KPI and Metrics
Sam says they don’t have rigid KPIs or metrics
As long as there is clear product market fit and products work as designed.
Created a dedicated analytics page for Frax economy - facts.frax.finance
Locked Liquidity
Sam says there is more than enough locked liquidity.
Sam thinks there should be a CR of 100, redefined as the ratio of dollars at the Fed backing Frax vs AMOs.
Even where there is no locked liquidity, it is not critical to the protocol’s development.
Frax on Cosmos
Open to exploring options.
With Fraxferry, native Frax can be deployed on Cosmos.
No current plans to launch a Frax chain as a Cosmos chain but having some kind of IBC compatibility is crucial.
Immediate Frax roadmap
In the medium term, Sam hopes to see the infrastructure built around Frax, such as FrxETH and Fraxswap, to 10-20x in growth.
They are building these for a particular purpose to accomplish their goals of advancing their two stablecoins.
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M6 Labs is a community of researchers telling the story of crypto through the lens of degens.
Their newsletters filter out the noise of the industry and explain the significance of developing narratives.
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