Stablecoin projects need cooperation, not competition: Frax founder

Stablecoin projects need cooperation, not competition: Frax founder – Mail Bonus


Stablecoin projects need to take a more collaborative approach to increase each other’s liquidity and the ecosystem as a whole, says Sam Kazemian, founder of Frax Finance.

Speaking to Cointelegraph, Kazemian explained that as long as stablecoin “liquidity is growing in proportion to each other” with shared liquidity and collateral systems, there will never be real competition between stablecoins.

Kazemian’s FRAX stablecoin is a fractional algorithmic stablecoin with part of its supply backed by collateral and other parts backed by algorithms.

Kazemian explained that growth in the stablecoin ecosystem is not a “zero sum game” as each token is increasingly intertwined and dependent on each other’s performance.

FRAX uses Circle’s USD Coin (USDC) as part of its collateral. DAI, a decentralized stablecoin maintained by the Maker Protocol, also uses USDC as collateral for more than half of its tokens in circulation. As FRAX and DAI continue to grow their market capitalization, they will likely need more USDC collateral.

However, Kazemian pointed out that if one project decides to dump another, it could have a negative impact on the ecosystem.

“It’s not popular to say, but if Maker dumped their USDC, it would be bad for Circle because of the returns they get from them.”

USDC is key

The current top three stablecoins by market capitalization in order from the top are Tether (USDT), USDC, and Binance USD (BUSD). DAI and FRAX are both decentralized stablecoins that take the fourth and fifth place among the top.

USDC has seen the most growth over the past year of the three, with its market capitalization more than doubling last July to $55 billion, bringing it almost within striking distance of USDT, according to CoinGecko.

Kazemian believes that USDC’s spread across the industry and arguably more transparency about its reserves should make it the most valuable stablecoin for collaboration within the ecosystem.


He called USDC a “low-risk and innovative project” and acknowledged that it served as a foundation for further innovation from other stablecoins. He said:

“We and DAI are the innovation layer on top of USDC, like the decentralized bank on top of classic banking.”

Algo stablecoins don’t work

Although the FRAX stablecoin is partly a stable algorithm, Kazemian says that pure algorithmic stablecoins “just don’t work.”

Algorithmic stablecoins such as Terra USD (UST), which crashed spectacularly in May, maintain their connectivity through complex algorithms that adjust supply based on market conditions rather than traditional collateral.

“In order to have a decentralized stablecoin on chain, it needs to have collateral. Doesn’t need to be over-collateralized like Maker, but it needs outside collateral.”

The death spiral in Terra’s ecosystem became evident when UST, now known as USTC, lost its connection.

The protocol started minting new LUNA tokens to ensure there were enough tokens supporting the stablecoin. A rapid coin strike drove down the price of LUNA, now known as LUNC, causing a complete retail token selloff, dooming any hopes of a reconnection.

Related: Liquidity protocol uses stablecoins to ensure zero permanent losses

In the weeks before the UST depeg, Terraform Labs founder Do Kwon said his project needed a partial back stablecoin with different types of collateral, especially BTC.

“Eventually, even Terra realized their model wasn’t going to work,” Kazemian added, “so they started buying up other tokens.”

By the end of May, Terra had sold almost all BTC for $3.5 billion.

Terra subsequently took down other projects, including fellow algo stablecoin DEI from Deus Finance, which has also failed to return to a dollar peg at the time of writing.