Stablecoins and Liquid Staking Tokens: Why they're more similar than different - Sam Kazemian

[Music] foreign foreign foreign [Music] founder of frax Finance we do stable coins so I have a pretty philosophical talk on stable coins for you guys today and let's get right down to it so the topic of today's keynote is going to be about why stable coins are basically taking over defy and a lot of core protocols right and as I'm sure a lot of people in the audience have already heard two of the very most largest protocols in the entire space are on the custom of releasing their own stable coins so I've been thinking and I've been philosophizing about what this actually means in our own belief about stable coins and fracks and I wanted to discuss to you guys with you the key Concepts that I think is extremely important for people to understand stable coins how we think about stable coins at frax and where we think the industry is headed so first things first I just want to highlight stable coins are token Peg to some reference price with a commitment implicit or explicit that they actually be kept at that price so obviously there's multiple ways to keep a stablecoin ad Peg and also ways to not keep a stable coin at Peg as a lot of people know right but it can be picked to anything usually US dollars but also as we'll see there's eat PEC stable coins is how we think about lsds second of all the core concept of this talk that I'm going to try to persuade everyone on in terms of my own beliefs and a decent amount of people on the frax core team's view is stablecoin maximalism and as far as I know this is the first time this actual belief has been explicitly defined and actually talked about is on the stage so stablecoin maximalism says that most crypto protocols converge to become a stable coin in the long term or stable coins become of central importance to their existence so it's actually not saying anything like there will be one stable coin everything else will be destroyed there will be tether orphracts or usdc or something it actually says that everything slowly converges to some kind of stable coin and the last concept is monetary premium and this is pretty simple and I think a lot of people will understand this because monetary premium is just demand for a issue or stable coin to be held and used as money without actually expecting Rewards or an interest rate or any kind of actual payment AKA actual demand or your liability which is extremely important right like when people use usdc you don't expect Circle to pay you an interest rate even though you know they are earning treasuries right they don't pay it to you but you use it because usdc is useful it is actually useful as money so now that we have the core three concepts this is the actual main topic of this conversation which is given sufficient time and given sufficient size almost every D5 primitive converges on becoming stablecoin-like and also the second concept here is every stable coin at scale converges on the same Universal structure so there's many stable coins they all have good stability mechanisms some bats stability mechanisms but the second concept here is really important is every stable coin at scale converges on the same structure so let's take a look at this structure let's just start with the one that everyone is familiar with the classic Fiat coin and the one everyone loves usdc right so the structure of usdc extremely simple as from their last attestation in January they have for about 43 billion usdc they have about 33.6 billion treasuries in their uh balance sheet and they have about give or take 9.8 billion cash in their accounts right and the way that I like to think about it is there's two parts to this the risk-free yield of a stable coins balance sheet and then the swap facility right and one caveat though is that even though I'm using risk-free yield in in quotes everywhere nothing obviously is risk-free any hypothecation is non-zero risk but given that this stable coin is pegged to the dollar the closest thing to risk-free yield is treasuries and debt the US government and actually having the Federal Reserve as a counterparty economically speaking we're not talking about regulation laws we're just talking about economics of keeping a pay so this structure in my opinion is the most scalable and the safest from a peg perspective of a dollar pack stablecoin so let's look at other stable coins or things that I contend are stable coins and see if they share the same kind of structure something that everyone is probably familiar with is frax recently watched frax ether which everyone really calls it liquid staking derivative however we actually said that frax eth is the first eat packed stable coin at least for frax finances protocol and so I wanted to go over this because I think the next Frontier in stablecoin design is liquid staking derivatives there will be a LSD summer there will be more liquid staking projects but the core concept that I think everyone should take to heart is the structure of a liquid staking derivative or an Ethernet stable coin there's a risk-free yield which means in the ethereum ecosystem the closest thing to the lowest risk is running a validator competently and honestly right there's no other place to get closest thing to risk-free yield uh other than proof of stake staking right and there is a swap facility similar to if you're a dollar pack stable coin if you have a curve pool right and we know that Lido incentivizes this with a lot of ldo tokens uh every single Epoch right and so whether you have the swap facility or you pay a lot of money and tokens to rent the swap facility it's the same underlying structure right and this is obviously done extremely well Lido is a great protocol uh Steve is the largest effect stable coin and one thing I wanted to highlight here is frax ether is already third or fourth largest liquid-saking derivative or youth back stablecoin I actually think that this is from coin gecko but they did not include CBE for whatever reason so depending on what you think it could be fourth ranked or third rank but one thing that is important here is even though for example rocket pool uh increases in price it is a stable coin there's an implicit view that attracts Eve you can see the seven day moving average all of these track even right there's an implicit expectation that these things actually follow the underlying each price whether there's rebasing mechanism that makes your balance of return exactly the same and and the price of one unit returns teeth or you track the actual each price entirely just like uh wreath so let's take a look at fraxied which is frax finances pack stablecoin so proxyther is actually composed of two tokens one is the stable coin that gives you no yield if you use it you're using it for some other reason whether it's to LP in some other place hold it use it for something in the future that might uh be useful to you thank you and there's snake tracks either which is the risk-free yield Vault if you stake fracts either stable coin in there you will get the POS rate and as you can see the structure looks fairly similar there's a fraxi heath curve pool that's managed by an Amo smart contract and one thing that I think really highlights the design here is the frax eat Supply and the monetary premium that's actually growing for the stable coin if you look on the right you'll see that the blue is the fraxied supply that's growing that gets staked in the POS vault if you look at the the gold uh color up there it's the Frac seat that's LPD in the curve pool right in the swap facility if you look at the small amount that's actually growing that's grayish that is everywhere else that fraxied exists in other amms and other wallets anywhere else there's a lot of other places so we don't actually track it it's just an everything else slice and as you can see the supply of fraxied is obviously growing very very fast but the monetary premium or the thing that people actually do with fraxseed is slowly increasing over time that's sandwiched slice at the very top is becoming a larger and larger piece of the proportion of the total Supply and we actually track that you can go to facts.frax.finance raxi and actually check what people are doing with the Praxis each pack stable coin so here's continuing along the view of stablecoin maximalism right I wanted to bring up Bridges bridges in my personal opinion are stable coin issuers whether they know it or not okay Bridges the ultimate Network effect for Bridges is not just the commodity service of passing messages between two different chains the most lucrative view of of a bridge is a stable coin issuer let's say this is a bridge that actually issues wrap die right because die doesn't for example it's not issued on phantom for example right if you have a bridge like multi-chain that actually takes mainnet die and then mince a stable coin that's fully backed by dye on Phantom what are you doing you're doing something like this you're issuing a stable coin it happens to be called rap die because people want to see it being called die in its name and they want it to be actually backed by die and not some algo recursive mechanism right but what you want is a bridge issuer a bridge stable coin issuer is for this rap die to be in the curve pool on Phantom you want people to move around and use this rap die for everything on Phantom right and my contention and my belief is that given sufficient time if there's substantial monetary premium and the bridge actually wants to monetize its use of the ability of its monetary premium it will look for the place that is the closest risk-free place to actually hypothecate its held collateral and so for example this would be the DSR as people are familiar with maker Dow they have a volt that sometimes pays a yield for literally just staking die it does nothing with it right maker Dow doesn't re-hypothecate it just pays interest right that is as close to risk-free of any interest rate you can get for die right and my view is if there is a sufficiently Lindy bridge for rap die anywhere in the long term it will look like this so we can see how this fares in the future or maker Dao can just issue native die on every chain this structure won't appear right that's the other view but if this does it'll look like this that's the claim and one thing that's been really interesting is while I was making this PowerPoint I was looking at the bridge tvl rankings on defy llama and lo and behold the top Bridge or at least what the phylama classifies at the top bridge is the thing that looks most like a stable coin the thing that has the most monetary premium defy Lama says that wbtc is a Bitcoin Bridge that's not up to me they classified it as that but I just thought that that was very very interesting because what's the largest bridge tvl here the one that has the most monetary premium everyone uses WBC on eth everyone has it in curve pools everyone uses it collateral if they want BTC it makes sense it checks out fracks right obviously this is a frax keynote so we wanted to talk about frax and frax actually started out as a fractional algorithmic stable coin as probably a lot of people know and we recently through governance in the community voted to fully collateralize all of frax frax was about 93 92 percent CR it is going to be 100 in the near future and given that we believe this kind of structure is kind of the underlying form of a lot of defy Primitives this is what frax is going to look like in the long term and I think everyone can see it looks pretty familiar right and in fact our frax BP curve pools and other swap facilities are extremely extremely popular on ethereum people's stake in them people earn yield in them through CRV CVX and fxs tokens and it's been it's been very good there's been a lot of people that have partnered with frax BP and curveballs there one thing that I thought was funny was uh this headline says that frax is going to retire its algorithmic backing amid stablecoin regulatory Crackdown and I just wanted to obviously say that there's no uh this was not the reason we obviously wanted to do 100 backing given that we have a pretty comprehensive world view of what sabalcoins are going to look like because we think this is the underlying structure or at least I do of all D5 Primitives given sufficient time so we don't have any you know no no rumors no Wells notice nothing we don't have any issues it's not because of anything we're scared of we just think this is the superior structure and the other way you could think about it is everything becomes fractional Reserve banking given sufficient time it just hopefully has to be properly safe fractional Reserve banking which is why we have the risk-free yield structure instead of extremely risky yield structure with a with a swap facility right it has to be the least riskiest proposition for the asset that you're pegging to so one thing uh I wanted to obviously highlight is I'm sure a lot of people are thinking about as they're listening to this is what happens in this view to uh stable coins that don't Converge on the structure right there's a lot of stable coins that don't do this right there's uh many of them smaller market cap there's many of them being started and the main premise and the main uh conclusion that I personally have is that they don't scale we haven't seen any empirical evidence of stablecoin scaling outside of this underlying structure what you need is whatever asset you're pegging to it has to have a two-prong mechanism the closest thing to the risk-free yield that you can monetize the least riskiest possible thing in the universe financially to the asset that you're pegging to and then a swap facility if that's not somehow the underlying structure it's not going to scale and so this is the the claim uh about what happens to stable coins they'll be Niche stable coins people will love them people will use them I love many stable coins for xbp has a lot of pairings against a lot of stable coins but if you want tens of billions of supply and in the next five to ten years hundreds of billions of supply for your stable coin that structure is what needs to be converged to in terms of scaling and safety so the other question what happens to protocols that don't become stable coins and fail to embrace stablecoin maximalism right and I just made up stablecoin maximalism but I'm going to try to make it really really persuasive right uh I think that they'll lose market share to projects and developers that think in stablecoin maximize terms maybe there there aren't any and so a lot of bridges will just compete among themselves with with like fees for swaps and they'll basically just be uh swap facilities between chains and passing messages between themselves but if there is a bridge that Embraces stablecoin maximalism given sufficient time it should in theory out-compete ones that don't embrace stablecoin maximals and then the last thing is I genuinely believe this regardless of whether anyone thinks stablecoin maximalism is true or not is monetary premium is the strongest Network effect not social media Network effect not any other network effect monetary premium is the strongest Network effect and the strongest value accrual mechanism right it is the thing that is the most important the the ability to issue a liability that people will use as currency in and of itself without actually expecting an interest rate or reward and no one can Fork that no one can can build that quickly it's built over years Blood Sweat and Tears right it is the most important it is what you know is the reason tether is on all centralized exchanges and hundreds of millions and tether doesn't pay them it's the reason all of us use usdc don't expect Circle to pay us it's the reason people are using fracks and die and have monetary premium and and don't expect every single time to hold fracks in their metamask and get rewarded for it right and lastly uh I just wanted to share that this is kind of the evolution that I think is uh going to evolve right we had the first air where everyone knows things are stable coins second era where there's stable coins but they're a little bit harder to like see you know there's like the rapper tokens amm's releasing their own stable coins lending protocols and the third era which we're in right now which is liquid staking uh Bridges and and more right we'll see other protocols like derivatives projects GMX all of these trying to scale and create large stable coins which will be really exciting and finally I just want to wrap up and end on this which is a lot of people tell us that frax we're building a lot of different things we're building fraxland we're building you know an LSD uh and I want to highlight that we're extremely extremely consistent on this world view so this is just a picture of our Twitter and there's a picture of the first page of our Docs we know that staple coins are one of the most important infrastructural pieces in crypto and we build stable coins so everything we build is universally for making sure our stable coins get the most amount of monetary policy and monetary premium and the safest uh stable coins at scale across multiple years right we have a vision of actually being hundreds of millions in in size and in market cap in the next five to ten years hopefully so that's it thank you hope you guys found it intellectually interesting and uh catch me on Twitter telegram follow us thank you [Applause] [Music]