Conversation with the founder of Frax Finance: The long-term goal is to make FXS the top five digital assets

Organize & Compile: Deep Tide TechFlow

On a recent Bell Curve podcast, hosts Mike and Myles joined Frax Finance founder Sam Kazemian to explore FRAX’s innovative journey from decentralized stablecoins to Liquid Stake Tokens (LST) and Liquid Stake Derivatives (LSD). Sam shared insights into algorithmic stability mechanisms, decentralized trust, DeFi domination plans, and FRAX V2 decentralization.

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The following is the main content of this dialogue, which was listened, translated and organized by Shenchao, and the main points of view were output:

Moderators: Mike & Myles, Bell Curve

Speaker: Sam Kazemian, Founder, Frax Finance

Original title: “Frax’s Alternative Approach to Scaling LSTs”

Video Attribution: Bell Curve Podcast

Program: link

Published: August 15

The development history and ecosystem of Frax Finance

Sam describes the evolution of Frax. He mentioned that Frax started out as a hybrid algorithmic and collateralized stablecoin, which was released in December 2020. Since launch, the Frax ecosystem has grown and is now more of a multi-functional ecosystem with multiple components.

Sam explained that Frax is not just a stablecoin, but also includes Frax Ether (a liquid collateral token, also known as LSD), FPI (a stablecoin pegged to a consumer price index), and a series of sub-coins called Protocol tools such as Fraxland (an independent lending marketplace) and Frax Swap.

The host asked Sam about the sequence and logic of product expansion, specifically moving from stablecoins to liquidity collateral tokens.

Sam exemplified the similarities between cross-chain bridge protocols and liquid collateralized tokens and stablecoins. Sam Many DeFi projects are actually stablecoin issuers, they just may not realize it. Whether it is LSD or stable currency, it involves balance sheet management and issuance of debt matching deposits. Sam explains why people want LSDs because they can make extra money without taking too much extra risk.

Sam explains how he decides on product scaling based on first principles thinking. The most important monetary units he considers are the U.S. dollar, ethereum, bitcoin, and non-state currencies tied to the consumer price index (CPI). The goal of Frax is to provide a stablecoin for these monetary units.

Sam mentioned Frax Chain, a hybrid Roll-up that will be released by the end of the year and will be the biggest launch since Frax Ether and USD-pegged stablecoins.

Sam highlighted their views on stablecoins, which should be fully decentralized and automated. Their goal is to build a fully decentralized ecosystem that does not need to trust the core team to manage and run the protocol.

Sam also mentioned the role of Fraxland and the FXS token in the overall ecosystem. Fraxland is a sub-protocol of the Frax protocol and an independent lending market. Fraxland exists to allow the Frax ecosystem to better manage collateral and issue debt that matches deposits. Fraxland’s biggest pairing is Staking Frax Ether, a Liquid Staking Token (LSD). Through Fraxland, the Frax protocol can leverage its own LSD as collateral to back its USD-pegged stablecoin.

The FXS token is the governance token of the Frax protocol. FXS token holders can participate in the protocol’s governance decisions and earn rewards from the protocol’s earnings. Sam mentioned that FXS token holders can capture value on multiple levels. For example, they can earn income from the interest paid by borrowers, from the increase in the total supply of Frax Ether, and from the protocol fees paid by POS validators. Both components are important parts of the Frax ecosystem and contribute to the stability and sustainability of the protocol.

Frax’s Governance Strategy & Logic for Expanding Product Lines

The moderator asked Sam what he thought about the competitive strategy with Lido and Eigen, especially regarding how to expand and scale market share.

Sam analyzed two aspects: governance and decentralization, and the scope of what they did. He completely agrees with Lido that everything should be as trustless and autonomous as possible. Frax’s goal is to launch a fully decentralized protocol and they are working hard to realize this vision.

Sam explained Frax’s governance and decentralization strategy, including the new Frax Gov module, a fully on-chain, decentralized, multi-signature-free way to run the entire Frax ecosystem. Sam believes that as projects get bigger, they will have to expand into many different areas if they have the ambition to continue to grow in a decentralized manner.

Sam mentioned MakerDAO’s expansion plans, including a possible Maker Chain. He emphasized the need to do so in a decentralized manner when scaling.

Sam also mentioned that Vitalik Buterin may release a new token called “Roll Up” to scale Ethereum. But Vitalik didn’t do that because he chose not to go that route.

Sam and Vitalik have similar views, they both believe that centralization should be minimized. Sam mentioned FPI (a stablecoin pegged to the Consumer Price Index), which has a separate governance token. But as the risk to FPI and the entire Frax ecosystem gradually decreases, Sam sees the possibility of merging the FPI token back into the Frax token.

Sam introduced their long-term goal to make FXS a top 5 digital asset. They are systematically working towards this goal.

Competitive advantages and challenges of Frax V2

The moderator mentioned the plans of Frax V2 and liquid staking, and asked about the specific content of V2 and the difference from the current state.

Sam introduces the Frax V2, a completely redesigned version that differs significantly from the V1. In V1, validators were run by the core team, while in V2, anyone can run validators in a permissionless manner.

A validator can borrow a validator and take control of it simply by submitting some ETH as collateral and paying an open market rate. This open market mechanism encourages competition as validators need to offer the best service and interest rates to attract users.

Sam explained the motivation for this design, thinking that this is the most general way to build a fully decentralized LSD system. He compares it to other protocols such as Rocket Pool and Lido and explains the similarities and differences between them.

Similarities: Sam Kazemian mentioned that Frax V2, Rocket Pool, and Lido are all LSD (Liquid Collateral Token) systems that allow users to stake ETH into the protocol and get a token that represents the collateral. These tokens can be traded on the market or used in other DeFi protocols. In all three protocols, users can earn validator rewards by staking ETH.

Differences: The main difference between Frax V2 and other protocols is the selection and management of validators. In contrast, Lido has a curated list of validators, selected and managed by the core team. Rocket Pool allows anyone to be a validator, but it has a different market mechanism and governance structure.

Sam Kazemian also discusses the advantages and potential challenges of this design. He believes that this design can achieve complete decentralization and trust minimization, and this market-driven approach ensures the efficiency of validators, because only the most efficient validators can stand out in the open market.

But it could also put pressure on small validators and amateurs who might not be able to compete with the larger validators. Sam responded that while this is a challenge, the market mechanism ensures a level playing field as all validators have an equal chance of attracting users.

Sam highlighted their views on stablecoins, which should be fully decentralized and automated. Their goal is to build a fully decentralized ecosystem that does not need to trust the core team to manage and run the protocol.

Chain Aggregation VS Wallet Abstraction

Sam and Mike discuss two different aggregation models:

1. Aggregate all activities into its own chain, that is, aggregate the data and functions of multiple blockchains into a single chain, so that users can access and use different blockchains and protocols on a unified interface;

2. Or abstract the chain at the wallet layer, that is, abstract different blockchain technologies and protocols into a unified interface, so that users do not need to care about the underlying technical details.

Sam and Mike discuss how the concept of chain abstraction and aggregation layers can affect user experience and market dynamics. The chain abstraction and aggregation layer can simplify the user experience, allowing users to easily use different blockchains and protocols without knowing the underlying technical details. This can also promote competition in the market, as users can more easily switch between different blockchains and protocols.

The two models of aggregating all activity into its own chain can simplify the user experience, making it easy for users to use different blockchains and protocols without having to understand the underlying technical details. However, this model can lead to centralization, as all data and functions are concentrated on one chain.

A model with chain abstraction at the wallet layer can remain decentralized as users can directly interact with different blockchains and protocols. However, this model may increase complexity for users as they need to manage multiple wallets and interfaces.