Founder Series - Sam Kazemian (Founder - Frax)
Covered: Sam's Beginnings, T-Bills backed Yield Bearing Frax?, Frax v3, frxETH v2 and more!
Welcome everyone to the inaugural Founder Series episode where we will speak with Founders to have a glimpse into the minds of those steering the ship. It is only fitting that our first episode is with the Founder of the first project that we covered in our long form research series - Frax! I had the pleasure of spending an hour speaking to Sam Kazemian (Founder of Frax). We covered many topics in the episode but most interesting to me were 1) Frax’s plans to back Frax with yield bearing assets ie. US treasuries, 2) how a T-Bill backed Frax stablecoin could result in more CVX/CRV emissions to frxETH and consequently higher yield for sfrxETH, 3) frxETH v2, 3) Sam’s thoughts on the recent regulatory environment. More in the episode, enjoy.
Transcript
Ouroboros Capital:
Alright, welcome guys to the very first episode of our Founders series. So, this series will be focused on interviews with founders of our highest conviction bags, giving you a glimpse into the mind of the guys steering the ship. For today's episode, we have with us Sam Kazemian. Hi Sam, how are you?
Sam Kazemian:
Great, great, it's good to be here.
Ouroboros Capital:
Pleasure to have you. As those of you listening would recall, our first big long form research report was on Frax. So, very timely for us to have Sam join us for some questions that I hope would benefit those of you who read the report, as well as those who have not, to give you a good introduction to what Frax is currently building, what it's gonna be building, and what is exciting in the next couple of months. So Sam, a question I love asking those in crypto is how did you first get into crypto?
Sam Kazemian:
Yeah, that's actually a good question because it's been a really long time since I've been in crypto. About 2013, 2014 is when I kind of heard about Bitcoin for the first time. So like I was at college at UCLA. I kind of got into it because a friend mentioned it and then they didn't end up really going down the rabbit hole. But then I did and I started mining all the early kind of... proof of work coins, there were script coins back then, Dogecoin was huge, all these kinds of things. And then I remember Ethereum, the original ICO, the original Ethereum newsletter that would go out once in a while with all the announcements of the Ether sale. So someone recently called me your prehistoric or something in terms of that...
Ouroboros Capital:
Hahaha!
Sam Kazemian:
I don't know if I'm that prehistoric because I think obviously the people that are like 2009 or 2010, 2011, those are like the Jurassic, you know, the fossilized guys.
Ouroboros Capital:
Haha.
Sam Kazemian:
But I was like in the next generation of that, like early. You could still, it was the tail end of when you could actually still like... mine BTC before the very first kind of like ASIC, like Bitfury was first,
Ouroboros Capital:
Yeah.
Sam Kazemian:
and then there was like these old scams like Butterfly Labs, and then the real like Bitmain stuff came out, right? And then just like SHA256 was just not possible to mine with anything other than ASIC.
Ouroboros Capital:
Did you get into it initially because of curiosity into mining or is it more of a financial decision where you thought - “Hey, this seems pretty lucrative, you know, just plugging in my processors to receive these coins.”. Where did it stem from the fascination?
Sam Kazemian:
Yeah, well, back then, it wasn't that lucrative. I was just a college student, right? So it was definitely just the idea of the overall thing that was really interesting to me, just crypto in general, these kinds of digital assets that actually weren't custody by anything, right? It was just a network. And honestly, back then, it just seemed like a different kind of video game, right? Instead of like, mm-mm, you know, like... grinding in MMOs or something for gold you kind of like do this automated version of kind of grinding on a computer. So it was definitely the overall like novelty aspect of it. So, you know, it was really interesting. I remember back like a lot of people just missed the history, which was like before Ethereum, there was this thing called colored coins where and like the Omni protocol and stuff in Bitcoin and people were coming up with the same kind of… you know people knew what was coming next. They just didn't know what that exact execution of it would look like and obviously that eventual execution of it was a theory about the Turing complete, you know… chain that you can deploy a bunch of stuff too. It wasn't, you know… Omni or the Opraternfield like Bitcoin and stuff at least until apparently Ordinal's a couple months ago which kind of uses similar kind of some new SegWit updates that kind of does the same thing of putting unique data into the BTC chain. But anyway, overall it was a pretty cool time. Nothing was very profit oriented. I didn't really, you know, back then it was just, I was making like maybe between $10 to $40 a day which was kind of cool, but that's not anything. Yeah. But actually if you look at the prices for today, you'd be pretty surprised how much that stuff is worth in today's prices. But yeah, and then, so fast forward, I founded Everipedia, which is kind of like a decentralized version of Wikipedia after I graduated UCLA with a couple friends and colleagues. That's actually pretty big. The IQ token is huge. It's like traded in Korea and everywhere. It's like on Update and all these exchanges. And so it's like a decentralized version of Everipedia. It's like a decentralized knowledge base. So if Lens is for Twitter, then kind of Everipedia, and it actually is called IQ.wiki now, which is a rebuilt EVM version of the original protocol. And that's doing pretty well. It's like Wikipedia, but for blockchain. But then the main thing I started working on in 2019 was Frax because I actually, so this is kind of interesting. I have considered myself kind of a stablecoin maximalist, which is the idea that the most useful and overall most product market fit of cryptocurrencies for currency usage is stablecoins. That doesn't mean they're not like good investments, obviously, and stuff. They're really good investments, and especially Bitcoin, Ethereum, all these things. But I just never thought that things would be priced in them. I just never thought, you know, there was this belief when I first got into crypto all the way back when we were just talking about it, like they thought the prevailing view was that you'd go to like Starbucks and then like it would actually be like a coffee would be like 0.0001 BTC or something.
Ouroboros Capital:
Yeah. I remember this.
Sam Kazemian:
Right?
Ouroboros Capital:
This was like a very 2015 to 2018 type of meta.
Sam Kazemian:
Yes, exactly. Right. And that's what kind of led to these funny original kind of like ICO coins like dentists will use this coin and then like, but then also like…
Ouroboros Capital:
Ha ha.
Sam Kazemian:
…coffee people will use that coin. There'll be like these micro currencies and stuff. And that never really had a persuasive thrust for me. So I started getting into like stablecoins because I thought the most important part of crypto in terms of currencies, you know, in the name. is basically stablecoins, right? Especially obviously dollar-pegged ones, but then I've kind of expanded my view in terms of what a stablecoin actually is and what it actually means to basically issue a stablecoin. So that's kind of how Frax came to be born. We were designing basically what we thought would be a scalable, decentralized, non-custodial stablecoin. And so now I think like basically Frax and Dai are probably the largest decentralized stablecoins. Obviously Dai is a few multiples bigger, but Frax has had a lot of staying power and we have so much stuff coming that I just think that the overall view of like how we see the world is very unique. It's very thesis driven. So we'll see what the next 6 to 18 months holds.
Ouroboros Capital:
Yeah, yeah, I remember following Frax since the V1 and it has definitely come a long way to having a billion dollars in market cap. So, you know, really pleased to see so many of the things come to fruition. Have you always wanted to be a founder? What did you study in school, actually?
Sam Kazemian:
Yeah, that's a good question. I was actually in neuroscience and philosophy, double major, so definitely nothing to do with computer science and cryptography and stuff. So I've always just been self-taught in terms of coding, just in terms of figuring out how to do stuff, both like putting together mining rigs and all these things back then. So no, I wasn't originally just a CS person, but I actually did always want to do, uh... start-up stuff actually. Originally I wanted to go to med school which is…
Ouroboros Capital:
Oh wow.
Sam Kazemian:
…why i studied neuroscience and I actually really like the intersection of uh... mind and computers like that uh... brain computer interfaces and stuff which is interesting now with all that A.I. stuff coming out you know the past year or so…
Ouroboros Capital:
Yeah.
Sam Kazemian:
That was kind of my original interest and then kind of went down the crypto rabbit hole I think... which is basically the most important technological innovation since the internet. We'll see if A.I. supplants that or something in the next two to five years.
Ouroboros Capital:
Hopefully it intersects with crypto. I think there will certainly be many intersections with it.
Sam Kazemian:
I think so too. We'll have to see because I think will. We don't want to do something too early or too forced, right? I think obviously people's view about it using A.I. agents and stuff, needing to use crypto and needing to actually move property providence to digital assets and stuff like that is the correct take. When is it appropriate to start thinking about that stuff? I think probably at least a year or two out from now, but definitely.
Ouroboros Capital:
Gotcha. And if I'm not wrong, many of the team members from Everipedia (IQ.wiki) later moved with you to basically be part of Frax as well, right?
Sam Kazemian:
Yeah, so Travis, the other Frax co-founder, is one of them. He was also a Everipedia co-founder. So we started Everipedia together and then Frax. Frax is basically totally separate. And now actually we have what people call a small team. So actually one thing, we have a pretty independent, small Frax core developers team of eight people currently. A lot of people say that's too small for Frax’s TVL and stuff that we ship. But one of the things that we always care about when we bring people on board the core developer team is we want them to be highly technical in multiple areas. So you have to have multiple breadth in terms of both tokenomics, token engineering, smart contract development. Everyone knows how to read code, ship code, and… the FraxCore team is basically, I think, full of people that basically are probably the most technical in crypto that we can find and that want to work on stablecoins and DeFi. Something someone told me before was like, they asked me, how do you ship so much stuff and how do you guys move so fast and everything? You know, Frax is very, very security oriented. We've never had like a critical security incident when people, no one's ever lost, you know, funds and, you know, deposits or anything using Frax directly. And we ship a lot, right? We get audits for every major release. We are only eight people. And so a lot of people said, how do you do this? And someone actually had an interesting comment that they said, well, it looks like every one of those eight people double or even maybe triple as different employees in a normal project. In a normal project you have like a token design person and then you have like that a smart contract developer and you might have someone that only knows React (how to build frontends) but they they've never worked on bloclchain stuff, they never pushed smart contract to Mainnet or something. That's not true with us. Everyone knows how everything works. Everyone is able to do all of these things. It doesn't mean they're doing them all at the same time, right, because that would be like kind of a mess. But it allows us to do things that other projects with eight people can't do. For example, there's internal groupings in Frax in terms of how we do our development cycle, where when someone or like a group of people finish a product - let's say like frxETH v2, which is like the v2 of our LSD system. That goes into internal audits so that we have different groups of two to three people that have not worked on it at all. So it's like a new fresh set of eyes.
Ouroboros Capital:
Mm-hmm.
Sam Kazemian:
And it goes through testing and audits by those people. And it goes through a lot of rounds of internal feedback. And so normal projects can't really like do this, right? Like there might be like people that write the smart contract code and so they're writing all the smart contracts, right? But everyone on the Frax team can read and write smart contracts, right? So it's like a different structure. I think we might be probably like one of the few unique people or projects that structure our whole thing and our groups like that. So that's one of the main things that we do or like we all know tokenomics and mechanism design really well. So we present different types of new mechanisms that get finalized and refined each week when we present it on our core dev sync. So it's a different way of working. And so I think actually in the next six to nine months with Fraxchain and a lot of stuff coming, we're looking to potentially increase the core dev team by two people, maybe even three. And I know that sounds crazy. It's like 11 might sound still too little compared to a lot of…
Ouroboros Capital:
Haha. Yeah.
Sam Kazemian:
…projects that have either their own chain, their own LSD. Like Lido is huge, right? Or I think like Rocket Pool alone is much larger than us in terms of number of people that are like actively contributing to the DAO. But with 11 people, for example, I think we're... closer to like 20 to 30 people in terms of normal efficiency. Like that comment that someone said, like you guys double as two or three people, I think is a very good way to put it and think about it.
Ouroboros Capital:
It's like you don't need a whole battalion of soldiers. It's just like the SEAL Team 6. Yeah.
Sam Kazemian:
Yeah, that's also a good way to think about it too, right? One of the things is when you double like a team, you don't necessarily 2x the efficiency, right?
Ouroboros Capital:
Yeah.
Sam Kazemian:
Because you need 20 to 30% bureaucracy and management, which I'm very, very allergic to personally.
Ouroboros Capital:
Yeah.
Sam Kazemian:
I'm just someone that does a lot of technical things and I just don't like meetings non-stop and these kinds of things. I'm just a very, you know... get things done, ship things, ship them well, obviously, with high expectations. But I just don't like the idea of if we double the team, we're going to only get like a 60% increase in efficiency, not 100%. It doesn't double, right? So there's diminishing returns a lot as you get bigger.
Ouroboros Capital:
There's so many things that you've said that totally strikes a chord with me. I think, you know, when, when we first started our research series, the reason we chose Frax was actually very well thought out. I was thinking this is going to be a long series and I wanted to put out a report where I can safely and confidently say that, you know, in a year's time, two years’ time, multiple years down the road. And I look back that this protocol is still around and, you know, they still uphold that reputation that I originally expected them to uphold and delivered at least on a certain degree, those expectations that I had penned down in the report. And the reason we chose Frax is you know exactly because of you know I think the strength of the team it was less so about you know these catalysts, these products, the road map, etc. It was really because over time we’ve monitored the team's high work ethic closely. In that they (the team) have been with you since your previous startup. I think I've seen as well, you know, a statistic somewhere I forgot, could be Y Combinator, but you know, teams that have known each other for I think longer than two years have a much higher chance of success than the others. And I'm sure you know that as well. You probably, you know, see many teams and personally, you know, have been with such a tight-knit team for so long.
Sam Kazemian:
Yeah, that's actually a good point. I didn't think about it like that. But yeah, after you know everyone and you know, you work with everyone really well, I think there's a there's a really good long term outlook. And just overall, in terms of Frax, yeah, not only to we expect to be here and then the next cycle, but our, our goal is to dominate, right. And so our goal is to be everywhere in not just the next cycle, but in in crypto overall. Actually, I think that's a good segue into kind of saying, there's a lot of stuff that's going on at Frax, like all the things that we're actually building, especially with Frax chain in the next six months. So a lot of people think it's not actually very structured, but actually the goal is to dominate. The goal is to actually things that make sense as a next step rather than, you know, some people think, oh, you know, they're just building a bunch of stuff or like they're doing the Sushi strategy, I think.
Ouroboros Capital:
Yeah.
Sam Kazemian:
And it couldn't be further from the truth because the stuff that we're building builds on top of each other rather than kind of this horizontal approach. I think I remember like Sushi had this line of products where there was like, you know, there was... Bento Box and then there was like an aggregator and there was like this ICO kind of launchpad kind of thing. I forget what it was called, Miso or something?
Ouroboros Capital:
Yeah.
Sam Kazemian:
Something like that. And then there was, and some of them had really good ideas, right? And it's like they had the first isolated lending system which actually, FraxLend is kind of like a much more smoother and like... innovative thing on top of it because it has a lot of different features. But the original isolated lending market was from Sushi. What was it called again? It's on the tip of my tongue.
Ouroboros Capital:
Wasn't the Bento Box meant to be the lending market?
Sam Kazemian:
It was, um, no, geez, that's embarrassing. It's now, uh, it's leaving. I think that was like the aggregator, but, uh, anyway, so the Kashi,
Ouroboros Capital:
Yeah, yeah,
Sam Kazemian:
It was called Kashi.
Ouroboros Capital:
That's right.
Sam Kazemian:
Uh, yeah. And, and so like, yeah, it's like, they have so many stuff. I forgot like the name of some of them. Right. And, and so, um, this is not the Frax strategy. So one thing people get wrong is that they think that, um, oh, they're just doing the Sushi thing. No, no, no. The whole thing is there's a reason. this stuff is so synergistic with everything. For example, Frax is the only protocol that has a dollar-pegged stablecoin and has an LSD. And so currently, you're seeing a bunch of like liquidity forks, right? Which are cool and they're value additive to the DeFi space and it's great. They're leverage offerings, essentially leverage protocols, right? But then Frax actually has its own LSD and its own dollar peck stablecoin and its own lending system internally, right? And so... it's able to get increased usage for its LSD, provide leverage, and then also increase the amount of debt denominated in its dollar-pegged stablecoin. It's able to lend FRAX against sfrxETH collateral. And then it's able to earn three layers of fees, essentially. The collateral that basically backs Frax as the Frax supply increases earn fees on sfrxETH right? Like the protocol fees, similar to how Lido and Rocket Pool earn it. And then also interest rate fees right? People pay interest rate for the leverage, right? And so this is a total complete capture of three different levels. I don't think there's any other protocol that does this. But I know that, for example, Maker has a kind of view and like Rune’s Endgame stuff, which is really, really cool and very ambitious, kind of eyes the same worldview, so to speak. And I can see an outlook where Maker might come into this with the same ability to capture three separate layers of revenue. But the main point here is we specifically think of this stuff 6 to 12 months out, and we specifically think of it and have a specific view of the world. And if our view is correct, right, we are able to be in this very dominant position. You know, we’re maybe not number one yet with frxETH right? We're like number three or four in terms of LSD size. But then over time, it becomes easier to be number one, right? As you improve both like the protocol, the decentralization, right, with V2, and then also the synergy, right? The synergy that just keeps getting better and better. over time and so for example with FraxChain one of the things everyone knows is you can use frxETH as gas right from Day 1 and so that obviously is a totally different dynamic no one's been able to do that there's no LSD that has its own chain and so we do these things specifically for a reason so it's totally different if we didn't for example if we didn't have a specific thesis driven view of the world what would we do? We'd maybe, I don't know, we'd maybe build a NFT market or something, right? We tried to take on like OpenSea or like Blur because we're like super bored or something, right? We don't do that. Like we know exactly the area and the things that we want to do. Like the reason we have, for example, FraxFerry, which is a, it's like a, it's kind of a bridge, but it's also a native system to issue Frax-based tokens. The reason we built that, for example, instead of like, try to... take on Blur or Uniswap's new like NFT trading thing is because we knew that in order for like a stablecoin to be dominant, it has to be able to be issued by its own issuer across multiple, basically networks that it needs to actually be in, right, without actually giving up or abdicating issuance and nativity to some other bridges or something, right? And we were like handsomely rewarded. Unfortunately, though. because of the multi-chain blow-up, right? The multi-chain blow-up like Frax and frxETH and all of these Frax-based tokens that are natively issued, for example, on Fantom, are the only things worth anything other than FTM, right? And the native asset that's not bridge, right? And so we think that that's the right way to look at the world. And so far, it seems like a lot of these things, thankfully, we've been right about.
Ouroboros Capital:
This is so key and for someone that did such a deep dive into FRAX, I can totally see it. What I don't understand as well is how are these bystanders not able to see it because when you start seeing, and I'm saying it's actually not something that is hidden or away from our view because you see all of these LSD protocols spinning up and the number one question people are always asking is how do they scale? How do they scale the liquidity? How do you intend to make this large enough such that your stablecoin can trade tons of volume? And these are the exact questions that Frax has the answers to, just because it has been building these synergistic layers on top of one another. So I really think that this is the big picture that many so-called fundamental long-term funds are still missing and that's not getting them into Frax. But I think this is also a great segue into a question that I had. You know, you mentioned Maker right? It seems like what Maker is chasing after these days is real yield from RWAs. This is also something that I know you talked briefly about on the Frax public telegram. So I wanted to also ask, you know, if you have any thoughts there, if we can expect a similar product from Frax and how is Frax thinking about such a vertical?
Sam Kazemian:
Yeah, so definitely. I can tell you our own thesis-driven view on it and our own worldview. One is, I kind of have the, for a stablecoin issuer, I have the view of a single real world asset thesis, which means there's only one real world asset that, for a stablecoin issuer, is most important. That doesn't mean that I think, for example, there won't be real world assets, there won't be tokenized real estate or like, you know, tokenized mortgages or whatever on-chain. I think there will there will be DeFi primitives that like you know carve them up and you know there'll be liquidity for these things. However my view on this is that every stablecoin issuer that needs to scale, that wants to actually go for the one trillion dollar stablecoin market rather than stablecoins that stay with only overcollateralized loans; they need one real world asset. The one real world asset is access to the interest rate of the largest economy in the entire world that issues the asset you're pegging to, right? Which means the Fed interest rate, right? There's two or three ways to get access to that, right? There's short dated T-bills, which are the most accessible to people, and stablecoin issuers. There's also reverse repo contracts, which... I either need to hold them through like extended brokerage kind of relationships with like BlackRock or like other brokers or be able to actually trade at the Fed window at the New York Fed. And then there's Fed Master Account Deposits. They also pay direct essentially the Fed rate, right? The exact rate that when Jerome Powell walks into that press room or whatever and then he says... you know, up by 25 bps this month or whatever. He's actually setting the FMA deposit rate. Only obviously banks that have FMA access can just deposit assets in there. Those three things bundled up into the concept of the Fed interest rate is the only real world asset in my opinion that a stablecoin issuer needs. And the reason for that is I view kind of the dollar denominated economic cycle as this kind of pendulum, which means when rates are super high, right, like right now, right, we've had pretty much the highest rates in decades, right, and the speed at which they've gone up, you need access to that.
Ouroboros Capital:
Mm-hmm.
Sam Kazemian:
Or you're going to actually contract your stablecoin supply, right, to places that do provide access to that, right? When that rate is zero... or close to zero or going down or going the other direction of the pendulum. Right. I don't think you need access to mortgages or like car loans or renewable energy or something, because that's when ETH is like pumping to like 10K or whatever. Right? And then the next cycle, that's when Bitcoin is going to go to six figures or something. Or that's when all of the growth assets, which crypto has more than enough of, is going to do extremely well. That's when, if people don't remember, are going to pay like 10, 15% on Compound and Aave to borrow dollars, right? To go long on digital assets, right? That's the other side of the pendulum during low rates, right? During a low rate environment, you actually have this vibrant pro-growth economic activity on-chain itself. During a dovish monetary policy cycle when basically a dovish period of low rates and and high growth value, like growth stocks end up being really highly valued, you have more than enough value to play around with, so to speak, on chain. Decentralized tokens, decentralized lending, decentralized leverage. You don't actually need to take extra custodial risk off-chain. That doesn't mean, again, like those things won't exist on-chain. I'm sure in the next cycle, a lot of them will. In terms of backing a dollar-pegged stablecoin, I don't think it's necessary. What's the minimum necessary ingredient that keeps the issuer profitable and safe is always direct access to the risk-free rate of the largest economy in the world, the issuer of the asset that you're pegging to. You see this kind of structure, for example, if you treat... an LSD as an ETH-pagged stablecoin, which is kind of how we view our own system with frxETH.
The interest rate that the Ethereum protocol issues is the POS rate, right? If you don't have access to that interest rate somehow, you're not going to be able to have the most scalable and the most in-demand, rehypothecated ETH token. People call them LSDs, but they're just ETH-pegged stablecoins, right? And so the same structure is apparent with dollar-pegged stablecoins because sometimes I actually just like to say the dollar is proof of stake, the POS rate is just set by Jerome’s power, right? You can go stake your dollars either at an FMA or like a bank can do it for you or like a broker or you could just buy T-bills, that's basically the LSD token, right? You could swap your dollars for LSDs which are just treasuries. The same exact identical structure exists. in the dollar economic system.
Ouroboros Capital:
I think that is so true. I mean, I obviously have not thought about it in such depth as you did, but you know, if we recall during zero rates environment, funding rates for BTC and ETH on centralized exchanges are, you know, in the 40 to 50%. That basically is the implied cost of capital in crypto, which means crypto actually has an inverse cost of capital curve to, you know, TradFi exactly like you said, right? People would be wanting to... be long shit coins, going full on DEGEN crypto when rates are low and that consequently also protects the protocols revenue generating ability. But you know to the point about pursuing a way to allow Frax to have its assets in you know the Fed implicitly or indirectly wouldn't that sort of make Frax you know, I would say linked to the government or be vulnerable to any sort of government stance towards crypto.
Sam Kazemian:
Yeah, so obviously it would have some custodial risk, right? Which is actually why I have this singular real world asset view. First of all, which is like, there's going to have to be some custodial risk if there's a real world asset strategy. But then the idea is like, what's the minimum custodial risk? Well, it's the government, the Fed custodial risk and nothing else, right? The alternative would be you issue... debt to like renewable energy or just like car loans or houses or whatever, things that can actually default. Then you have default risk and you have custodial risk because you don't know how exactly those loans, if you have to seize assets, if you have to do restructuring or things like that. Essentially, the least risky real world asset strategy is the single. RWA thesis which is what I like to call the single RWA thesis is if you're going to have something that's off chain you should just get as close as you can to holding assets at the actual issuer of the thing you're pegging to which is the dollar. If you're pegging to the dollar, right? You should then just get as close as you can to having things that never default. They're denominated in dollars by the dollar issuer, which is the Federal Reserve, if you want to have a real world asset strategy. I'll actually take this time to say, we'll announce something actually very soon, but we've been working on this slow methodical march to getting an FMA, but then obviously there's like 10 steps before first maybe just get banking partners just be able to hold the risk-free rate through a partner bank, partner banking system, and then next step large partners. You know stuff that Circle for example doing with Blackrock. We're not there yet obviously I'll say that but we are actively moving on that stuff and we don’t like to be super vocal we just like to do things behind the scenes but we will announce something very soon. In fact I wouldn't be surprised if Frax could execute on this real world asset strategy and get risk-free rate FDIC insured assets essentially non-defaultable in a matter of days.
Ouroboros Capital:
Wow, days!
Sam Kazemian:
So I will say that.
Ouroboros Capital:
There you go guys, that's the major alpha leak. Wow, okay, that's really cool. I mean this is something obviously I've been very vocally excited about, both with Maker as well as Frax, and that's also the reason why I'm not just screaming stablecoin season because these coins are going up, but I do believe that the transference of the real yield onto stablecoins is what would inspire a second wave of adoption. Yeah, yeah. So, so moving on to Frax ETH actually. It is obviously a superior product for those who know, you know, higher yield than most of its competitors like stETH and rETH. And also at the same time, it's going into v2, which will introduce more superior characteristics. Sam, can you break down some of the more superior characteristics that v2 will be building towards and how can we actually drive more adoption from users into frxETH?
Sam Kazemian:
Yeah, for sure. So, frxETH, for people that haven't taken a deep look at it, it's our LSD system. We like to call it, it's an ETH-pegged stablecoin. Like I was saying, because there's two tokens, there's frxETH, it doesn't get any yield, and then there's staked Frax ETH (sfrxETH is the ticker) and that actually gets all of the POS yields. So, it's a two-token system. And we've designed that for a very specific reason. A lot of people didn't understand that the real reason there's two tokens is so that you can monetize the monetary premium. The monetary premium of stablecoin is actually just its use as medium of exchange, you know, use as utility, right, like gas on the FraxChain that's coming, all of these things. And so you can actually monetize that, which means the more frxETH tokens are used in places like AMMs and yield farming and used as gas and these kinds of places, there's less frxETH tokens staked as sfrxETH. And so less of the total supply is sharing the entirety of the POS yield from validators. If you think about it, when you go to mint one frxETH, a bunch of validators spin up for all the ETH staked. People go one-to-one to mint frxETH, but not all of the frxETH goes to being staked as staked Frax ETH (sfrxETH) right? And so the total POS rewards get distributed among a subset of the total supply, and that's why you always have sfrxETH, the LSD token, have a superior POS yield compared to like Lido’s stETH or Rocketpool’s rETH. So the thing is if you think about it. There's a lot of people that say well this is you know weird. What if everyone's just gonna go and stake their frxETH token to get POS yield? We thought about that right like the reason we came up with this design is in the worst possible condition where there is zero utility or zero monetary premium. No one is using the frxETH token, what happens is it just turns into literally the identical token as rETH and stETH right? If 100% of the frxETH that's minted just goes to, you know, staking in the sfrxETH contract, right? That's just what stETH is and rETH is, right? They just literally are 100% of the supply of the token get 100% of the POS yield, right? So at the worst case, at the base case, it's equal to the competing LSDs. But as you've seen, and I think as people have probably noticed, as the monetary premium and utility of frxETH grows over time, you get this very sustainable, even at large, TVLs, like half a billion dollars and stuff, of sizable amount of different and higher yield for sfrxETH. Like right now, actually, if I pull it up right as we speak, at this moment, sfrxETH APR is 5.35%. And if you actually go look at Lido’s stETH, it's 3.9%. And a lot of people might think, okay, 3.9 versus 5.31 (that’s not much)… but that's actually over 35% difference more revenue!
Ouroboros Capital:
That's right.
Sam Kazemian:
Right? Like even though the number three and the number five, it's just like one digit off, that is over 35% more revenue! Its a big difference for like large DAOs for all these things. And is this sustainable? You can actually look at the historic performance of it. It's not like some kind of incentivized thing that we're doing. It's working over time. It's actually increasing the monetary premium and these things are working. And again, like I said, let's say it's not working. Let's say 100% of the frxETH just gets staked in sfrxETH and 100% of the supply shares 100% of the POS rewards. You just end up with stETH, right? It's just like the same thing. You can't lose, right? So that's how we designed it. I think it took a lot of people some time to kind of think about it. And we even built this dashboard (FraxFacts) where you can actually see exactly how much and compare the total amount of revenue you'd earn more compared to Lido and Rocket Pool and Coinbase ETH and stuff, just so people can understand it. For example, over the past month, if you have sfrxETH rather than rETH, for example, you'd earn almost 60% more revenue. 60% more is literally almost twice the revenue, right? Even though the numbers, you look at just the raw numbers like rETH is 3.1 or something, and like sfrxETH 5.35, they look kind of close. It's not.
Ouroboros Capital:
I think alot of whales that I've spoken to, you know, that are less sophisticated often tell me that stETH is safer, it's larger, so I'm going for that. But you know, I think beneath the surface its not actually safer because the validators don't actually put up collateral. So in a way, it's uncollateralized. It's unsecured lending to the validators. I think Lido obviously has a process of screening these validators. But the point is just because it's larger it's not necessarily more robust than Frax Am I right to say that, Sam?
Sam Kazemian:
Yeah, I mean, look, I agree. I think there's a certain sense of, you know, overall this idea of like Lindy, which is just this kind of somewhat hard to quantify thing of - it's just been around longer. You know, the market cap of, stETH is like 20-30 times more than as frxETH or something right now. And there is a certain sense of truth to it. But also every single day that passes where there are like there's zero critical issues with sfrxETH. If we've never had a single slashing issue. No user has ever lost any funds, thankfully, to any kind of hacking or exploit incident using anything like Frax (the dollar peg stablecoin). sfrxETH either, anything. And also, if you look at independent third party rating, validator rating sites, frxETH is the single most efficient, almost always rated as the number one performant validators compared to any other major validator network. If you look at Lido, if you look at Coinbase, actually I can pull it up here. If you go to rated.network, you'll actually see that right now as we speak. Out of Lido, Coinbase, Binance, Kraken, Rocketpool, Bitcoin, 3C, network, OKX, Frax, Ledger, Bitfinex, Stake, all of these things. We have the highest independent third party effectiveness rating out of anyone. Now granted, it's been 10 months or something like that compared to Lido has been close to like two years. So I do want to say that there is some truth to the kind of Lindy thing to it. Like you're saying, after a certain amount of time, you have to kind of think, well, the track record speaks for itself. You're just missing out on like 30% to 60% more revenue, right? But again, I just always want to be fair here and say everything, there's obviously risks. There's obviously different Lindy and different time spaces that things have existed. But these are just objective facts. Like I use rated.network, you know, the objective facts. No one's lost anything using Frax and stuff. I'm not here to try to do some kind of marketing and be like, no, definitely use this or something. But it's just, those are the data points. We're very proud of them. We hope to continue to keep that up and we've been able to keep it up. And those facts speak for itself. It's not easy to be rated higher than anyone else all time across a 10-month period. They should try it, right? Actually the funniest thing I've seen haters or skeptics say is “all of the Frax ETH validators are ran in Sam's basement”. "Uh... i think that that's the funniest part and that’s the funniest comment because if I could run these validators in my basement and be better effective and and higher profitability for sfrxETH users than Lido, Coinbase, Binance, and Rocketpool and all of them across all time. What does that say about everyone else? But obviously, they're not in my basement.
Ouroboros Capital:
That’s funny.
Sam Kazemian:
Right?
Ouroboros Capital:
And there's actually one more angle that I think a lot of people are missing, which ties back into what we've discussed about the real yield into the stablecoin is, if we think about what powers the higher yield in frxETH, it's obviously the portion of Frax’s CRV and CVX emissions that's directed into the frxETH pool. Obviously, some of that goes into the Frax stablecoin as well, but over time as we bring real yield into the Frax stablecoin, then more portion of that can also move towards frxETH. Am I understanding that right as well, Sam?
Sam Kazemian:
That's exactly correct, yeah, because once there's real yield, once there's a Fed interest rate coming in terms of the Frax backing, the Frax dollar stablecoin backing. Then that kind of pays for itself, so to speak. As you said, there's basically an equalization and reason to have access to the Frax stablecoin if there's that kind of interest rate. The other thing I will say actually is there's a chart on Frax Facts that shows the frxETH supply. And just like you said, there is a lot of frxETH that's LP'd in the curve pool, which is what kind of leads to the much higher APR in sfrxETH. Like we were saying, there's a bunch of frxETH tokens doing something else, right? And they're not staked to get the POS yield. But the other stat that seldom talked about that I actually like to look at is the everything else section in FraxFacts, which shows how much of the supply of FraxEther tokens are not in the Curve pool. So they're not actually there to receive those CRV/CVX incentives and stuff. And they're not in the staked sfrxETH vault getting the POS yield. And so that amount is 12% right now as of us talking. That's actually the thing that I look at in terms of our monetary premium thesis is correct because that means those are other places doing other things. For example, those are being used in other AMMs or they're being moved with FraxFerry to... you know like Fantom or something cause like it doesn't have bridge risk it just has issuers credit's going through Frax’s own system and stuff and then obviously with the FraxChain stuff, hopefully large chunk of that is distribute across all the users is going to be used to pay for gas fees right. So as that amount which is not incentivize is like pure utility increases - right where it started off when you look at the chart with like four percent three percent is now 12%. That's actually part of the most important piece of the thesis playing out. That's what I actually take a look at. But you're totally right. Obviously, when real yield comes to the dollar peck stable coin, it's also just more profitability comes to the whole Convex Curve ecosystem that we have a lot of CVX for. We're able to channel that in other places.
Ouroboros Capital:
That is so cool. That like 12% of the frxETH is actually elsewhere. Even I didn't notice that and so many points you brought up there about how it's being able to natively bridge to other chains. Also probably the reason why it's being used as a more secure alternative to bridged ETH as well. So it's a good point.
Sam Kazemian:
Yeah, I actually think we should, we can do a better job of actually highlighting that. One of the things just is like, we're builders, so we don't do too much, you know, like outreach and education because like I said, there's only like eight of us. But for example, there's a lot of people, your content is awesome, obviously, and I love your guys' tweets and research. There's also Flywheel, you know, shout out to them, everyone there at Flywheel DeFi, which is an independent thing that closely works with like the Frax community, gets Frax grants and these kinds of things But like they do a really great job and they have their own kind of thing of educating people. I think that more could be done for teaching people about the FraxFerry system and native issuing system is entirely within frax and so there's no there's no bridge risk. It's just issuer risk, which is every stablecoin if you trust the issuer, right? And so I think we could do a better job of getting that across, and I think when we do, there will actually be more and more usage across chains,
Ouroboros Capital:
Definitely. I mean, I know this myself, we're sort of banding together to, you know, help out in the process as well. And I think, you know, from just conversations with several other community members, the community can definitely expect greater activity in terms of that as well. Community members contributing protocols in these sort of ways and these sort of dimensions. Moving on, like, what do you think, you know, about the recent I would say, heightened adversity of the US towards crypto. And do you see that as potential headwinds and what other potential headwinds sort of keep you up at night for Frax? And how do you guys actually think about reconciling these sort of threats and risks?
Sam Kazemian:
Yeah, well, I mean, it's interesting because until last week, Thursday, you know, prior to the XRP decision, things looked much more bleak. And I think that there's just this kind of resounding, in my opinion, victory. And obviously, that doesn't mean things are done. That doesn't mean like that decision can't get appealed or things like that. But I think that was very important. In fact, one of the things that highlighted is that the tokens in all of these crypto projects aren't in and of themselves securities. They're basically just digital assets that they can then be in a investment contract situation, right, in an investment contract relationship. One of the things that people describe it is like in the original Howey test. There's a bunch of oranges right? And those oranges themselves aren’t securities if you pick the oranges in those groves and try to sell them in the farmers market. But the original circumstances of the whole situation, where Howey promises to actually tend to the groves, pick the oranges, sell them and distribute the profits back to people who bought you know the piece of paper the contractual thing that that relationship that was a securities offering. That piece of paper represented the circumstances and the facts of that reality, right? And then the most important part of the XRP case was that the judge clearly said the token does not represent that our priority. It's not actually something that embodies the original circumstances of the token sale - which is why she went and looked at every single situation. Some situations like the original institutional sale looked a lot like promises of profits, it identified issuer and those kinds of things. So she said that was a securities offering, right? But the token itself is never a security. In fact, I wrote like a big Twitter thread on it just to kind of get my thoughts out in total writing form and I think it's really important that people kind of snap out of this psyop where the default view everyone's been fed by crypto critics and also just a lot of policymakers in the US for the past 12 months is that these tokens at first are always more likely to symbolize the original and embody the original sale, creation, promises of developers or like a dev company or something. And so you're basically guilty right? Like you're basically guilty until you prove you're not. Right? And so if you actually buy into that view, that the original thing, the token always embodies the original situation then you're screwed right? That that's the actual environment that basically, I think, anti-crypto people want. The default mental model for the psyop of crypto to be for both crypto people themselves and also for people that don't know crypto or also for the policy makers and regulators how they want those people to think about crypto. And the most important part is the judge said that's not true. She's going to just treat XRP as just a token, just something akin to like digital oranges and then if those digital oranges are in an overall situation like... uh... a issuer promising stuff then it's a security offering. If someone actually just buys it to even just speculate on it, even just if you could think oil, oranges, sugar, gold, all these commodities you could buy it thinking the price will go up cause it's a good investment - that doesn't make it a security right? And so like that was a very landmark decision again obviously is not a supreme court decision that doesn't mean it can’t get appealed but the fact that people snapped out of this last week, I think, is a very, very big turning point. So I'm pretty excited.
Ouroboros Capital:
Yeah, likewise. I think what came out was really progressive and a sense that, like you said, a token doesn't mean security, a token doesn't mean bad. And in fact, when I think about this a lot myself as well, I think there's just so many things that a token can do and the way it functions in a product or a business is just irreplaceable by any other forms or structures - be it equity, securities or incentive structures anyway. For example, how do you in fact give a piece of the ownership of your product as incentive to your initial users? You can't just dish out equity, you know, just doesn't work that way. Yeah, so I just think it's so revolutionary in that nature that I don't think that it can just be simply taken away and labeled as security and put into like a bad boy box. I don't think that it works that way. But yeah, I think we're coming to the top of the hour. I have one last question for you. How should we think about the priorities as well as the timeline in the next 6 to 12 months for the protocol?
Sam Kazemian:
Yeah, that's a great question. So we push stuff out, like I said, in terms of like a thesis driven view. The big things coming in the next couple months is frxETH v2, which we briefly kind of talked about, which is decentralizing those validators that I was talking about. Like right now we have the best performing validators, but making the entire system fully trustless, fully decentralized, anyone can come and run validators. It's a unique system. And so the frxETH v2 is basically the thing that's coming in the next two months maximum, maybe even one month. There's just a lot of testing that has to go on because it's not just smart contracts, it's just the way that people can spin up validators and things like that. Second thing, this might actually come out before frxETH v2, which is Frax v3, the dollar-pegged stablecoin, which includes a systematic structure for all of the stuff that I was alluding to. The ability to tap into the Fed yield. We actually have a very unique system. It's not just we're just going to have someone custody it or something. There's actually going to be ways in which that yield is actually distributed, so to speak, into the DeFi ecosystem that Frax is a part of. And Frax v3, the dollar-pegged stablecoin is the other major release. And then one thing I will say about that, that's where it's a fully complete structured system. bAMM is a part of that, the unique lending and liquidity system that's kind of similar-ish to CRVUSD's llama. It's our take on how to do that, and it's something that's not been done. The closest thing is crvUSD, but there's a lot of new things that come out with Frax v3 that I'm like very excited to share publicly soon. Then the last big thing is right towards the end of the year I think it'll probably be January 2024 most likely that's the plan itself.
Sam Kazemian:
That itself can be a whole one-hour episode and I'd love to discuss it with you and others and there's just a lot of people that want to know the very large thesis driven view on it. The thing I will say is just, it is not an appchain. Like we're not just trying to do this kind of like, a lot of people say, “oh Uniswap should just launch its own chain, Uni chain or whatever”. Or like I know as part of the MKR Endgame, like Rune alluded to Maker chain, and I'm gonna give them the benefit of that and say it's not an appchain as well since they have very, very large views of stablecoins and DAI and where it's place in the world is. And so the thing I want to highlight is it's not an app chain. The stuff that we're going to be doing on FraxChain directly is unique and it's basically an entirely new ecosystem. It's an ecosystem that has the ability to always give developers access to the best interest rate yields, whether that's Frax Ether, whether that's Frax dollar-pegged stablecoin, whether that's some other stuff that I'll probably allude to a little later. But it's a very, very unique take on an ecosystem chain. It's not just, “oh, we have an ecosystem, we give grants, we give duties”. No, no, no. It's definitely a very different view
Ouroboros Capital:
Definitely, And I want to add to that. So one of the major use cases of most stable coins is spending, right? Actual real life use case. And if everyone knows, Frax is largely on Ethereum now. When we move to FraxChain, one of the views that I have is because it's a layer-two that will basically enable very low gas transference of Frax from one wallet to another, which will then facilitate the real life use of it in credit cards and what not. And I do know, because I am sort of involved in some BD efforts there that we are trying to sort of make that happen as well. I know I said that that's the last question, but one last question that ties into this whole thing about community BD and also a shout out to basically any protocol that helps to work with Frax. Do you have a list of say like top three protocols that Frax would love to work with.
Sam Kazemian:
Um, yeah, that's actually a great thing to end on. I will say not necessarily like a top three. We love to work with anyone and truly like anyone that's positive sum in terms of growing the overall size of the pie of the whole DeFi crypto ecosystem. And I've said this a lot and I really mean it, in the sense that we don't try to take market share from anyone. We try to grow the whole market. and then grow the most into it. And so for example, this is why we have like the FraxBP system. Also why we have the Frax Ether weather program which is like any pair that pairs with Frax Ether on Curve will also gets rewards. They can just deploy those kinds of pairs entirely. So we like to work with anyone, and anyone that has the same mentality. And to be honest with you, even people that don't have that same mentality. For example, I love Rocketpool. They're great, but they've been very kind of frenemy type of view. We actually already incentivize a frxETH/rETH Curve pool, and they don't do that. They don't actually either pitch in or they don't have anything and they've said multiple times, “oh, Frax ETH sucks or it's ran in Sam's basement or whatever, all these things”. That said, we still try to increase the size of the pie for everyone because we think if we can actually grow the whole ecosystem, Frax and Frax Ether and everything we're building will be the largest beneficiaries of that. So far that's proven true, right? As more and more ETH is deposited in the beacon chain, for example, Frax Ether has proportionally by percentage the largest growth rate. And then like same thing, if we can increase the amount of Curve liquidity on dollar pegged stablecoins, Frax usually has the largest, most diverse, both TVL and the number of BP chains, BP pools (base pools) that are paired with the dollar peg stable coin, right? And so that thesis has worked out really well. So if you're a project, if you want to work with us, we definitely want to work with you 100%. There's just so many things we can actually do.
Ouroboros Capital:
Definitely, this is also an attestation to the team's quality of trying to grow the ecosystem as a whole and not seeing it as a zero-sum. Before we wrap up, Sam, is there anything else, last things that you'd like to add or anything that I've not asked that you think I should have?
Sam Kazemian:
No, I think that was a very comprehensive thing and thank you for the really thoughtful questions. Like I said, the three big things, FraxEther v2, Frax v3, and FraxChain are the big things coming. And lastly, just, you know, if anyone wants to connect with us, we're huge on Telegram, on Twitter. I'm really available all the time. I'm basically on the community Telegram. So, love to chat with any projects, anyone, either funds, analysts, anything,
Ouroboros Capital:
Perfect. Thank you. Thank you so much for being the first guest in my Founders series. It's been a pleasure. I think it's extremely great that we have you as the first guest. I hope the audience enjoyed this episode and anyone that wants to get in touch with Sam as well, feel free to ping us as well. We'll be very happy to facilitate that as well. Thank you.
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