Frax’s Alternative Approach to Scaling LSTs | Sam Kazemian

Transcript

all right everyone welcome back to another episode of bell curve before we jump in quick disclaimer the views expressed by my co-hosts today are their personal views and they do not represent the views of any organization with which the co-hosts are associated with uh nothing in the episode is construed or relied upon as Financial technical tax legal or other advice you know the deal now let's jump into the episode hey everyone welcome back to another episode of bell curve in this episode miles and I are going to be talking with the founder of frax Finance Sam casman this is going to be a great episode frax is an extremely interesting protocol with many different moving parts and part of the reason miles and I were so excited to talk to Sam outside of just

the Furious work that he has executed with an eight-person team which is astounding is there you know he's got in many ways very similar as you'll hear in this episode similar view on what makes liquid staking protocol successful but also has a very different strategy just in terms of the breadth that he of complexity I would say that he is embraced in terms of all just the different product lines and moving Parts on frax finance so this was a fantastic episode I hope you enjoyed as much as the two of us did hey everyone we've got a great episode here but before we do I just wanted to give a quick shout out to permissionless this is the biggest and best conference in all of D5 it's the one that we do with bankless who's a great partner for us last year we had almost 7 000 people there in West Palm

Beach we are moving this year to Austin Texas from September 11th through the 13th and if you are a listener of bell curve any of these last five seasons this conference is basically custom made for you we're going to be talking about liquid staking the theme of this season we've got a bunch of great panels on Mev if you listen to the app chain thesis we've got a bunch of Cosmos folks out there in full force we're talking about the converging architecture of Solana the roll-up space in eth and Cosmos so I would love to see all of you there and to reward you for being such great listeners to bell curve you get a special 30 off code it's bell curve 30 that'll get you 30 off tickets click the link in the show notes and then head over to the permissionless site and make

sure that you get your ticket today again that is bell curve 30 click the link in the show notes alright everyone welcome back to another episode of bell curve today miles and I are joined by Sam kazamian who is the founder at frax Finance Sam welcome to the show hey guys great to be on really looking forward to this conversation I think of all the the protocols that we've talked to so far this season frax definitely has one of the most intricate design and there are a lot of moving pieces for sure so I think we want to start off by actually just describing almost chronologically when I think of frax you know sort of my core memory of fractures of the stable coin but obviously since Inception frax has evolved quite a bit and obviously there's a relatively large liquid staking component I think frax actually

is the largest or the fastest growing liquid staking protocols in it since it launched back in October of 2022. so maybe you can just kind of take us through Sam the evolution of frax is the staple where you've expanded into and then we can kind of tease apart how all of these different components of frax Finance today kind of work together yeah for sure um so exactly as as you said uh frax first launched in like December uh 2020 like kind of at the end of D5 summer it was a uh hybrid algorithmic collateralized stable coin and uh since then it's just the whole ecosystem has grown so I I think it's probably better at this point to kind of call it an ecosystem system or Universe of things

but I think the most important thing that we'll probably get into is how the kind of ecosystem expands because a lot of people think like frax kind of is is doing everything or or might be doing too much or like how do you decide where the ecosystem expands to right and as you said now it's not just a stable coin there's a frax ether which is a LSD kind of uh system we like to call it an East pack stablecoin um and it's kind of like the same thing at least that's how we think about it there's also fpi which is a CPI pegged uh unique Peg stablecoin um it's not pegged to the dollar or another currency and then there's a series of stuff we call sub protocols which help kind of

run uh the stable coin products which is like fraxland which is an isolated lending Market uh there's Frack swath and then recently uh we are um looking into launching cracks chain towards the end of the year which is a uh kind of hybrid roll-up and that's going to be very very cool it's probably the the biggest thing uh we're going to be launching since you know frax ether and the the stable coin the dollar pack stable coin itself nice so so walk us through I mean the I think the vision is extremely bold I want to tease out what exactly that looks like sort of best case in your mind but walk us through that first decision you know in order

the transition from being frax the the stable coin into doing some of these other things and in particular you know maybe we could talk about some of the similarities in between managing a stable coin and being a a stable coin issuer operator and a liquid staking token issuer and we had uh Adrian from Steakhouse Finance on one of the early podcasts of this season he was describing the operations sort of the balance sheet management of a liquid staking token is actually being very similar to a stable coin because what you're doing is you have a you know a liability that you're issuing that is subject to a deposit that can be withdrawn and then you're managing

assets that have to match up with that so with that part of the initial inspiration or like help us like walk through like what was the decision-making process from expanding to stable into liquid staking as well yeah so so one thing uh I actually call myself and a lot of people also uh say it is like I'm a stablecoin maximalist I think a lot of stuff in defy uh looks like stable coins and you described it really well it's a lot of uh balance sheet management right you issue like a liability you can call it an LSD uh you could call it a stable coin and the idea is the way that you essentially get traction is people uh use your liability as currency whether that's you know if

they're doing their Accounting in dollars whether they're doing their Accounting in Ethan they want to earn some interest rate on on the eth you can call it like a liquid staking interest rate or reward rate or whatever um the economics of it are the same it's basically like decentralized banking right you you're doing some kind of uh banking operation using autonomous smart contracts and you're designing protocols that keep the the balance sheet liabilities of uh your protocol uh in check in in most uh scenarios hopefully right and so one of the things is that like I think a lot of things in crypto not everything but part of the whole stable coin maximalist thesis is a lot

of things in crypto are just stable coin issuers and uh they might not realize it themselves but their business model uh or like the way that the protocol gets traction and and actually uh captures value is being a stable coin issue for example one thing I always say is bridges are stable coin issuers they just happen to the issue a state coin that's the same brand as the the native asset that they're bridging right and then the only way that they can get long form traction is if they're issued stablecoin actually is used like as if it's the native uh stable coin that they took a deposit in right like for example

uh and and that's actually why I think bridges are really dangerous but that might be a discussion for another time but for example uh let's say that there's a bridge that takes in uh die right like some some other chain wants to use the die stable coins well the bridge takes in one-to-one deposits of diamond issues like you know rap die whatever their the original Wormhole die or whatever right and the only way the bridge gets like sticky traction is on the destination chain if everyone trades this Wormhole die as real die and actually uh basically uses it in in liquidity uh pools and and basically uses it holds it and all of these things and then the Bridge itself will then be

forced to decide kind of how it wants to monetize that monetary premium maybe it'll go and deposit some of its real die right that's like idle in this bridge into the DSR or something that maker is like giving yield on and so they'll try to just like you said really well uh time duration uh match the the like liabilities that are coming back from the other chain right and one real die they'll maybe like deposit the the die that they've put into like a close to risk-free place right like a DSR or some other thing the maker might have like a sub Dow that they're creating recently and stuff right um a lot of these things look exactly the same just like you said um lsds are the exact same thing they're basically

effect stable coins they're backed by you know validators or more specifically the ethereum that are locked in those validators right and uh the withdraw queue is is variable right you can't really exactly predict the withdrawal queue that it's gone from three months down to three hours right and so it's it's variable based on macro market conditions and the global kind of ethereum uh space right and so you have to build a protocol that's pretty reliable in in like a spectrum of of these situations right that keeps a a tight Peg on your LSD continues to give uh you know decently good uh interest rate because that that's kind of the

reason why people want lsds they otherwise they will just hold eth right and and then you hope that your LSD that the token that you issue gets included in things like as in liquidity pools and lending systems as like a native kind of currency right essentially replaces uh you know eth in a lot of these places because it's so good that it's basically like uh earning extra yield with uh minimal extra risk that that's that's shouldn't be the goal right and so in in that view we uh expanded to like frax ether because we think we know how to keep like a very very good uh decentralized stablecoin at pick like at

a dollar uh to the CPI right inflation resistant uh Peg and also to eth and so so far it's not only worked really well but also just it's proven like you're saying that our design philosophy has proven correct because I think a lot of people have come to see uh LSD kind of game theory and and issue and says the same thing matching balance sheets whether they they uh say it or not that's what they're doing right and that actually kind of you know maybe in the next few questions we'll talk about frax ether V2 which goes into our second way of thinking which is uh lsds essentially are uh lending markets behind the scenes

at least decentralized ones are it's super interesting I I think like just so I'm got the sequencing of these of these product lines correct it was first we have a you know fraction fractional collateral uh or fractional Reserve stable coin right and that's mainly collateralized by other stable coins as well as eth right um and then the thinking was okay we have you know core competencies in collateral management um stable coins don't look that different I guess was there ever so we should basically we have the ability to launch our own and it can be super

complementary with the other with the other products that you have um was there ever like thinking around just maybe converting as much of the collateral for the USD stable coin as possible into your own liquid staking product um versus completely separating the two products or maybe if it's not that Synergy was the thinking around okay we have maybe frax lend coming out it would be great if we could have our own stable coin to be the canonical collateral for for fraxland um yeah I would just love to hear kind of like the sequencing of the product rollout um and we can get to frax chain because I'm fascinated as well in a bit but

um just to make sure that I've got this correct uh because you know from the outsider's perspective there's a lot of products right there's a lot going on and just would love to kind of get like you know as a a perspective of a fly in the wall um in in some of these discussions that led to you know the product expansion yeah for sure um so the the main thing going back to kind of our our view that the the largest kind of protocols will be things that issue a liability and their liability will be used as money across like a large range of like the digital economy and so in that we think the most important units are dollars

right I think that's a multi-trillion dollar opportunity um across the next like five to ten years and then the the second most important unit I think is like probably eth or very big on on eth itself as like a a unit right as like money or store value and I think the next most important stuff is either like like uh Bitcoin even like we've talked about frax uh BTC uh as like another thing but also inflation resistant units or like something pegged to like uh a non-nation state kind of uh currency that is not volatile right BTC and ether volatile they don't actually track kind of

consumer goods things that you need to keep your standard of living the same so like those three or four currency units like units of stuff I think is the most important uh for the the 21st century that's just basically our and a first principle thinking um and like you said lo and behold like we have stable coins essentially in each of those units right and so um we think that the way to become like a a multi-trillion dollar kind of protocol right something as big as Bitcoin ethereum and like the largest things that are systemically important in crypto is to be able to service those largest units that are the most relevant for the the coming decades right

um and that's why we have a dollar that's why we have eth as a unit a CPI based unit and basically a non-nation state unit and then probably in the future uh frax BTC which we've internally it's it's been uh something we've been working on uh hasn't been released and stuff but that is uh something we're pretty big on so that's kind of the the logic for it the other thing that you said is backing fracks with uh our own LSD there's actually a lot of you know liquidy forks and new types of projects like um I think it's called Athena or something which is like a delta neutral hedge with like lsds or something

um there's like a small book growing ecosystem of kind of LSD based uh dollar stable coins frax actually is probably like the biggest along with dye of like LSD utilizing uh stable coins like the dollar pack stable coins because like you said we have fraxland the largest fraxland pair is stake tracks ether and so there's a lot of over collateralized positions that back the frax dollar pack stablecoin with our own LSD in fact that's so profitable like for for the protocol itself because we get interest rate for people borrowing the frax we get uh frax ether tvl like like the amount of the total Supply that goes up

we also get the protocol fees uh which is 10 uh overall from the POS right right of the validators so there's like basically every single layer of of the the stack uh fxs token holders essentially capture value the protocol captures value and I think we're like the only ones that that can do that right now um I think maker does a lot of steath over collateralized positions that the back uh die but they obviously use steath right and so Lido gets all of the uh admin fees so the answer is 100 yes not only have we thought about it but

this is another one of those examples where when you build one thing and then you build the other thing exactly according to like a plan and a reason rather than just because it's like cool uh it makes every part of the stack better it makes it more profitable it makes it more synergistic it makes it more useful and it creates more utility um and so there's a lot of stuff that we're trying to do that expands on everything that's already out so like like fraction and these kinds of things that are coming just to just to make sure that I've got a sense here and it's a very interesting Vision Sam and then miles I know you've got a question so let you jump in but essentially the you know what you're looking at is and I've heard you talk about this the value of

something that's like of true organic demand is that someone wants to hold something right someone has to really view this as money and ultimately want to hold it so it seems like what you've done is looked out into the world and said hey there are kind of these buckets of things that people want to hold right and some of that is this inflation hedge uh type bucket some of this is an actual US dollar right which is uh medium of exchange may be a little bit less inflation hedge but still you know something that people want to hold uh eth is something that people want to hold and if you can sort of stand and be this issuer of sort of synthetics of that asset and successfully manage the risk on the back end man what what a

great business that is if you're competent C is managing risk multi-trillion multi-trillion multi-trillion and then even on top of that you know what you um what you also need right is for those things to be liquid right the liquidity and the trust sort of build simultaneously right so that's where frax lens sort of comes in and says hey like we will help facilitate that and we'll take fees at the same time which will accrue to this single instrument which is fxs is that is that about the size of the the model there yeah and and that's actually uh that's correct and so um there's there's actually like that's actually very well set right and so um I think something that's unique here

is a lot of this stuff just has uh fxs is the governance token and for example maker Dao uh recently you guys probably have read runes like end game plan which is very ambitious it's very cool uh a lot of the parts look kind of similar to the way that we view stuff at frax which means we're thinking about stuff probably correctly just like they are a lot of this stuff is actually uh different so for example uh maker has this idea of a lot of sub-dow tokens right like there's going to be all of these small different you know sub-dials actually we call our sub protocols so there's some similarities but like they have the view that a lot of or all of these will have different tokens right

there's like spark protocol which is similar to kind of their tax lend um and then you know runes made it clear that there's going to be like a spark token um we structurally don't think so uh we think that this is all part of kind of infrastructure that is made for issuing uh liability like currency that that will be used um and part of the reason is like I just personally think like um I think that for fracks share like fxs to become like a top five top ten uh digital asset it has to actually embody like a economy and like an ecosystem as large as for

example ethereum itself today if it's going to actually get ethereum's market cap in the next like five to ten years if you kind of think of the counter factual for a second right think about for example uh if vitalik was like um you know uh I I'm releasing a new token it's called roll up and it's like the the token that's supposed to scale ether or whatever right and like all of the like da is like you need to pay half of it and like roll up token or whatever and then and like summon Ethan stuff he could probably raise a couple billion dollars right he's vitalik like the one of the co-founders of ethereum right and uh it would be super lucrative but he doesn't right he there there's probably

like 10 other examples I could give up I'm sure if he sat down he could probably like think of like tokens to launch or something right uh like a sharding token I don't know there's probably some ways to do that right um and you could maybe make some reasonable arguments of like well imagine if there was a sharding token think of how much fundraising you could do in like the sharding team at the ethereum foundation could be a thousand people rather than like 40 people or something right and it sounds really good but the reason ethereum is the number two uh crypto asset behind Bitcoin is that universe that alternative timeline didn't exist he decided not to do that right um and so our view is is kind of uh is uh kind of the the same way in fact uh

for a while actually we kind of had the the view of uh this the sub down stuff because when we launched fpi so fpi actually has a different governance token called the frax price index share it's the only other governance token in the system fraxland frax ether so if none of them have a governance token and the reason for that is the peg for fpi is pretty risky it has to keep up with inflation and it's like the only other token we we've ever released to kind of separate the the risk and my belief actually is that as the the risk for fpi and the whole frax ecosystem becomes less and less because it's more uh established I actually think um possibly it's a good idea to merge

the fpi share back into the fracture to just general fracture and so like almost kind of like a a merger of the two token distributions so like later like if it makes sense right if fxs holders vote and fpis holders vote just merge them back in uh in some way some kind of bonding algorithm or something and like merge them back into one token distribution because uh I think that that's much more powerful and that's how uh fxs actually becomes like top five digital asset and that's like actually what we're we're going for on like a on like a five to ten year uh time Horizon so that's how we think about it it's not just that uh hopefully you know it'll you know it'll work out or something we're trying to systematically uh get

there you know one thing I want to want to ask you about is just kind of compare and contrast the Frac strategy for growth and this this uh plan for global domination here with some of the some of what we've heard from sort of the the Lidos and the eigenlayers of this season which is a little bit of a different strategy which is you know if I had to try to sum up the way Lido views the world it would be we want to become we want to actually reduce the surface level of what we do to a point where and decentralized governance so much to the point where it's basically viewed as an extension of ethereum and that they view that as sort of a defensible moat that will allow them to expand and scale their market share so it sounds like you

have a a different approach which includes like income focusing like a little bit more risk potentially on the back end which is sort of the other half of the Ledger of doing more activities like how do you kind of compare and contrast this idea of like really trying to do less like flattening the surface area of your offering and like minimizing governing governance versus doing a little bit more on the protocol and the advantages you get those fees from fraxland and you get to do multiple different assets but there's a little bit more risk to manage on the back end yeah um so I would separate into two things one is like the the governance and decentralization and then two is like the scope of like stuff we do one is I I totally agree with with uh uh

Lidos like our our goal is to build each of these things in an entirely decentralized way if we didn't think so we wouldn't do frax eth V2 which is fully permission unless anyone can run nodes and these kind of things frax lend itself as a protocol is uh more hands-off and decentralized in terms of its interest rates than kind of like maker as interest rates which everyone has to like vote on if they want to change it and stuff on the uh on the utilization curve if they want to change it ours is time dependent so we actually did that to minimize governance it just like doubles after a certain utilization every single like day um and basically a lot of what we do especially with the new frax gov module which is a fully on chain decentralized

no msig at all way of running all of the the frax ecosystem of stuff is to minimize basically uh trust right like you shouldn't have to trust the the core team to do anything or to not be malicious for this stuff to work right there always need to be like smart contracts managing again like liabilities to to assets and stuff so like that's that's obviously uh totally fine as long as the management and running of those smart contracts is actually autonomous you don't have to actually trust that for example uh I don't get comp compromised whether that's like I lose my keys or something or I you know get pressured under duress

and like like by the government or something to do whatever like shut things down or whatever right so uh we totally agree with the first part right which is like everything should be as trustless and autonomous as possible in fact I think I've done a really good job of being one of the uh most autonomous kind of protocols given how much we've built and the stuff we're pushing out actually is completing that that Vision rather than uh centralizing it and we're actually decentralizing it um I think the second part which is like uh which I actually don't know if I even um read it in in the way that you said

which is like uh do less stuff I think uh it's more about just um how big you already are and what your ambition is so for example you were like well uh Lido just kind of wants to go back and and just be like part of the whole thing uh the ethereum ecosystem it's funny for lydo to say that they're like the literally the largest thing in the entire uh uh ethereum ecosystem which is great the congrats to them right um but I think the bigger you get if you have uh Ambitions of uh you know continuing to grow in a decentralized way obviously in an autonomous way pushing out protocols that are

decentralized you will Branch out to a lot of different stuff think of uniswap right they now are doing nft stuff they recently launched uniswap X which is like a totally different Paradigm of like how to trade based on uh what a Trader intends rather than on-chain orders um who knows what they're doing in in the back right they're they're very very good at working on really big stuff quietly and then Boom coming out and being like you know now there's a you know uni chain or something obviously they didn't say that and I don't know anything but like who knows right um and so same thing with maker right maker uh is doing so much stuff or trying to accomplish a lot of stuff because they're already so huge right uh in the end game road map that like ruin

published there was also talk of maker chain I don't know if it's as far along as fraction um it doesn't seem like it I think it's like a multi-year project but they are obviously are eyeing growing in that way so the main thing that I just like to stress is if you're going to grow and if you're going to you know as you're saying take over kind of the world and like expand you need to do it in like a decentralized way yeah right but uh you need to do it in like a way where the stuff you're pushing out uh is is continuing to actually be more and more trustless over time which is very hard rather than gravitate to more and more trust because it's easy to basically be

like oh now uh in order to do this next step instead of actually uh launching frax governance which removes our ability to do anything we could be like well we need this extra permission just just for like a little while right we don't ever do that we're actually going exactly the other way right no that's that's super interesting um and obviously very thoughtful about you know as you expand horizontally making sure that it's done so in a way that doesn't you know centralize a lot of like subjective human decisions right um and I think that you know to your point once you get to a certain size with any of these product lines you get a lot more eyeballs on you um and if part of the value of prop of

interacting with on-chain protocols in the first place is you know counterparty risk mitigation trustless interactions with these decentralized markets um you know you will get pressure at some point for any to decentralize any sort of like central point of risk right and so maybe that leads us to frax V2 and and where you see like the liquid staking side of the of the protocol going um and maybe I'll this is first of all I'd ask you just kind of lay out exactly what V2 looks like what you're opening up now versus you know current state so this is on the validator side I'm

guessing and then what the implications of our are from that um from a risk management standpoint and you know Lido is in a similar position right where they've gone from a curated set um and now they're opening it up to you know basically anybody can uh propose a staking module which could be permissionless to join if you know for for certain conditions and so yeah I would love to kind of hear just a general overview of V2 and then with the implications of V2 how you think about managing the additional risk that comes with it yeah uh that's a good question so so frax ether V2 is a totally uh revamped version of The frax Ether system so right now uh the current

way the The frax Ether system is there's frax ether that the token that doesn't yield anything it's like the stable coin and there's State tracks ether um and then when people mint uh frax ether they get to decide what they want to do with their effects staplecoin they can help it in amms that are incentivized like curve or they can stake it as uh sfax ether right and those people that they could get all of the uh proof of stake yield from validators now validators in V1 they are ran by the the core team aka the other way to say that is it's a curated list of of like people like us that can run the validators right um just like Lido they have a curated list of groups that can uh run these

these validators that that doesn't mean that there's anything else that's like off chain right like the withdrawal address or is it like a smart contract is the treasury of the protocol um all of these things the rest of it is entirely on chain there's Amos that balance and keep the the collateral of frax ether token there everyone can audit it there's like a balance sheet and all this stuff however the validators are not able to be ran by everyone in V1 right it's it's not like what rocket pool is like V2 anyone can come and and run validators in a permissionless way they don't have to be like curated or even like voted on and the the main way they do that is they post some some eth collateral right

and then they get to borrow essentially a validator by basically putting their their validators address and then it gets spun up and then they get to control the validator as long as they're paying this kind of interest rate which is an open market interest rate of uh what the Market's willing to to pay to run validators and get the the rewards themselves right um they get to run those validators right they basically pay an interest rate and put up some collateral sounds a lot like just taking out a loan right except the the differences instead of taking out a loan of like you know dollars or something uh the loan is the the right to control like a validator yourself right um the reason we built it in that way is we actually think that's the most

generalized way to uh build a fully decentralized LSD system like for example like you said Lido has the system where people can propose like you know the staking modules right which is like the way that they want to essentially Define what they will do uh what like collateral they'll put up or how they'll guarantee like something and then be able to run some validators right um that's like the same thing that's basically like writing the terms of some loan and then being able to actually uh run the validators get basically 32 eth allocated to you and uh you can repay that hopefully right without getting

slashed and then losing the value anytime that the protocol wants you to repay it so the the reason we we build frax c3v2 this way is we think it's actually the most General way to to do it um just a open-ended lending Market if you think about like for example how rocket Pool Works right now right people come and they they give their eth right and then they mint wreath tokens which is like their LSD token right the wreath token is basically like a a lending receipt right if you go to Ave and you deposit eth into Ave right what do you get you get a if right and what happens in in Ave is someone borrows the

eth right and then they start paying interest your a eth that you got for Lending into Ave it slowly goes up in value right because you're earning the interest someone else is paying right this is exactly what like a decentralized lending uh LSD system is it's just a lending Market you you go and you can call it something like hey mint wreath Mint or LSD token what you're doing is you're getting people to give your uh to you your protocol eth and then they get an LSD AKA a lending receipt right and people whether you curate a list of borrowers or you let anyone be a borrower they get to come and then they take the eth and they get to spin up validators right otherwise

you wouldn't be an LSD protocol you just be a lending market like office right uh so that they get to spin up a uh validator and then those people whether they're decentralized you don't know them or they're people you've like whitelisted and curated they have to pay back some of what they earn to the the lenders the people that like minted the wreath token otherwise why would people mint wreath tokens right that doesn't even make any sense right so that basically that dynamic between mentors of LSD tokens AKA lenders of eth that put it into the protocol and the other side people that come in take that eth spin up validators and run them well

run them competently run them efficiently and earn a bunch of uh rewards and pay some of it back to the LSD token mentors aka the lenders uh is how this healthy two-way Market actually works right and you can kind of call it again we can go back to like stablecoin maximalism or whatever you could call it whatever you want like I think when I first started talking about proxy W2 this way a lot of people in rocketpool were like rocketpool is not a lending Market you just you totally don't even understand anything like you're so stupid um and because they have these different names for them which is fine like you could call it like there's node operators and then there's there's like uh wreath stakers which means you just

swap your eth for wreath at the virtual price exchange rate the same virtual price exchange rate you get like compound C tokens or a tokens in Army right and so um structurally they're identical they're structurally economically if you abstract it away they're the same thing so then we asked how do you optimize this in like such a a way that it is perfectly optimized for LSD markets for people to come borrow validators and then the the people that come and borrow them they can be anyone they can be from anywhere you don't have to trust anything or or anyone to curate these people and there's some actual Market mechanism that makes sure that

these people are always at the The Cutting Edge there's some incentive for people to be actually competent uh run these things at uh good Market scale right they that there's an efficient market there and for example the way that ours works is there's a dynamic interest rate the same way we've we've designed it for fraxland where as long as you're a competent validator uh person running a validator and you are okay with paying the interest rate you get to keep borrowing them and you keep running them profitably you take a lot of the profit yourself and you pay whatever the interest rate is at the market a lot of uh what some people criticize this for uh that I hear is like oh

um only really competent or like a small Kabbalah very uh very you know low cost it like destroys the hobbyist at home or something right um the this is the main thing that people uh said I think a lot of it was even from the rocketful community which has a lot of hobbyists I actually don't think it's going to do anything to to that because I think generally uh most hobbyists are pretty competent and if they're not this is like Bitcoin mining right it's like you don't like the it's it's an efficient market and you you want to basically reward people that are the most efficient as part of

the design but I actually think that most hobbyists are pretty efficient so I I don't even really see it as as an issue but that's like one of the only things that uh I think people have said is is like possibly a concern I don't even really think it's it's even a concern because the protocol is trustless so it's almost like saying like uh I don't like how it's trustless we need to make sure that uh we need to like intervene to uh make sure other people do it so that's kind of the general overall uh aspects of it um the maybe the most Salient uh critiques of it I try to include in in there as well um and so that's that should entirely decentralize any kind of trust assumptions like like right now when uh

Lido has the curated list of validators that run uh their their validators for all of the the amount of people mint steath with right they they mince teeth by putting in Eat Right Lido has to take that the the lender is whoever's minting Steve right and they have to take that and they have to give it to a curated uh list of validators um Lido basically hopes that uh they are totally good they're they're not malicious or compromised and they're correct because they do a very very good job of of curating it however the thing is you you have that specific trust

assumption in that model so um that's that's the main difference uh so fraxies V1 is like Lido right now uh fractured V2 is kind of like rocket pool in the sense that it's totally uh decentralized and then there's just no more press assumptions that's the big trade-off right is when it's completely curated you can rely on reputations as being actually an extraordinarily like valuable amount at stake right reputation is like uh I think it was John Charbonneau said is basically equal to like your future discounted cash flows if that's your business right and that scales really well um when you open this up to be

permissionless I think that that's where you know you run into some friction on the scaling side um and I'm curious just to make sure I understand it sounds like once we open this up so maybe beforehand it's just the frax team that are running these validators right full 10 commission goes to the protocol um and there's no bond that's associated with the validators and that makes sense because it's a curated set and it's not only your reputations it's the entire protocol right you open this up and just so I understand the what is the magnitude of the bond that uh validators will need to post to join the set and

then is this lending rate basically the equivalent of a floating commission fee off of the staking yield um just maybe to make sure I understand like the change in the economics it's for it's the same as the rocket pool right it's four eth that they have to post uh so rocket pool right now as far as I know it's it's 80 they lowered it from the original 16. um and for us in our modeling it's it we've seen that we were able to actually service this kind of decentralized Landing Market with four eth um I think rocket pools also started saying that they've they've thing think that uh they can do for eth as well which I expect them to go down into

however just as an aside um this is this should be obviously uh set through vfxs governance and and like the the community because the risk is the the slashing conditions right this the risk is that um usually the slashing conditions for almost everything is like one or two eth Max because you're either accidentally double sign something or like you your uh you're behind in some way that you attest that you you weren't supposed to right but the way that the slashing penalties are uh calculated in in POS is how contentious is something and so obviously we haven't seen any event at

all where there's like a partition of like 20 or 30 percent of uh you know validators that sign something wrong and then they lose and then you know the other 50 60 percent sign the majority right the canonical uh chain and then they keep their eth um in those situations the slashing penalty goes up a lot instead of two e it's like 4 8 12 in Crazy scenarios I actually saw this tweet the other day I forget who uh put it out but um if for example the majority client uh I think it's prism right now if I remember correctly

um I actually don't even know if their majority anymore that means by over 51 but if there's a client that's like around that there's like a bug where everyone in that uh client double signs they don't mean to it's just like it's some crazy weird bug um and they they all double sign so they all get slashed but it's 51 of or like 50 something the majority amount of the clients that uh in the in the validator set that don't do this they lose nearly all 32 eth which is insane um it's it's actually like I mean I don't think it'll happen right but like uh yeah yeah but

um there are scenarios where you can get almost all of your things slashed so like the only way to be safe in every single possible you know uh modeled out scenario that's like possible in the universe is to ask for 32 each of collateral which rocketpool never did uh they're only at eight now they're thinking of four uh we're thinking of starting the the system with four um and so it's a trade-off it's a trade-off for how Capital efficient you want to be with your decentralized uh lending market right of your LSD Market how much Capital they put up the bonds so to speak as Miles said right um but they can definitely be insolvent

in in like uh certain kind of Black Swan scenario areas Sam Maybe to close we could talk a little bit about uh frax chain and it was funny I um you know one of the reasons miles and I were really excited to to chat with you is just it seems you know in in many ways you agree with kind of the the Dogma I would say of LST providers but you've also taken some very different design decisions as well um and you know you use the example of uniswap before um but I you know uniswap I think is a phenomenal protocol but I I do think what they're doing is kind of like they're taking every layer of the stack right there's the the wallet and front end that they've got they've got their

desktop front end now they've got uni wallet and then they've got the aggregation layer at uniswap X they've got the liquidity layer at four and then there's been speculation forever about the last layer which is settlement I'm not sure if you just swap X it makes that redundant or something but who knows but that I think what they're doing is vertical integration right they're taking every single player of the stack would you describe that as the strategy for frax moving forward would you describe your strategy as something outside of vertical integration and if so like where does the chain where does frax chain sort of fit into that whole strategy Vision I think it depends on your definition of vertical because uh like or or like how high is it that is

horizontal basically in your view because like with uh with frax like I said we're kind of uh stable coin Maximus so we think there's a few units um if those things become ubiquitous in the digital economy they're the things that we issue that are pegged to those units like uh CPI dollars if Bitcoin right um then we essentially uh are ubiquitous we're just the the frax system is kind of everywhere kind of like uh like like ether right right which is what metallic named ethereum after right it's just it's kind of flowing everywhere right um and so we don't actually do anything uh or too much in terms of like uh

payments or trying to get um you know like uh like payment apps or something like the PayPal how recently uh you know is launching their own stable coin which I think that's like really cool but we're never gonna release like a frax PayPal app or something um that's outside of the scope that I think uh matters because I think again the most important thing is that people use your unit and then everyone else will build like payment systems or they'll build like an nft Marketplace that uses your thing that's why open C uses Ethan usdc right they they will use it right because everyone uses units and dollars right and so

um if you if you look around the most important prize is to uh become the the unit right or become the issuer of of the unit uh no matter how you call it whether you say you're like a bridge or you're like a LSD protocol or like a decentralized stable coin or like a uh CPI inflation resistant stable coin or whatever right um uniswap actually is taking it like you're saying an interesting approach because like they're like this is our Silo like like trading uh you know high frequency trading like like uh Mev capture or like return to users map protection um the like wallet uh kind of stuff right like their phone app which is

really nice actually um I like it and then uh it depends it goes to be seen if they ideologically think that settlement like like uni chain or their own kind of uh block space you know like monetizing block space uh into their protocol is part of their Vision um I don't know I don't know maybe if if Hayden uh comes on here you guys can can ask him it's uh it is part of our vision that's obviously why we're uh getting ahead of stuff and launching fraction it'll have our own LSD uh and and like frax eth as gas right um and so it'll also have you know extensive usage for when account abstraction is possible you can you know

pay with frax the dollar Peg stable coin or you can hold fpi to get yield and also pay for gas when that stuff is possible right um but like we think that that's a huge part of our stack right like block space making sure that people that are using your your currency also uh have a you know turning complete ledger to also build on top of right uh that has native issuance of of your currency it's not like a wrapped bridged version that someone else gets the issue on your block space right um but that's interesting I I don't know and actually uh I I'd love to know what uniswap like the the team there thinks about their own kind of do they see it as vertical the way that you're you're talking about or do they kind of see it

as a circle or more horizontal I have no idea it also they have they have multiple entities that are involved they have the labs and they've got the foundation and from my understanding those are pretty separate at this point but I yeah I have I I I'm not speaking on behalf of uniswap I just want to make clear I this is my own just looking at it uh sort of thought but um but yeah Sam I look I I appreciate the time I know you're a busy guy and you've been super generous if if people want to find out more about you follow you um figure out more about uh sort of fracks and get involved or whatever what's the best way to do that yeah um I'm always on uh Telegram and Twitter and uh both frax's Telegram and Twitter and my Telegram and Twitter are at the

same mine's at Sam casbian we're both and then frax's at frax Finance for uh both and so I'm always around unless I'm like working or coding or on a on a podcast uh so um literally anytime if you hop in the uh frax telegram uh or uh hit me up on Twitter What's the timing for for frax ether V2 and and frax chain given the listeners a little bit of alpha here Sam you gotta drizzle out the alpha definitely um so for fraxies v2 uh we have the uh audit uh final audit lined up for early September very early event so hopefully if uh nothing uh goes wrong uh which usually doesn't so that that's that's a

good thing with our releases um towards the end of September maybe um or early October um after the audit's done and then for frax chain uh we are looking at at least the test net by the end of the year for sure and then the goal is mainnet by uh January 2024 so that's coming up very very soon nice and that's just around the corner basically um well congratulations and good luck on everything and uh we'll have to do this again soon of course thanks for having me us all right miles what an interesting episode you know I mean it was great to hear from Sam himself and this was a really interesting episode because in many ways I think he affirmed some of the ideas that we've been

talking about all season but I think in many respects frax has a very different approach to liquid staking than any of the other protocols that we've talked to this season as well obviously they start it is a stable coin so yeah it's just a lot to dig into in this episode I think yeah I wouldn't view this as some a project that yeah as you mentioned like started as a liquid staking protocol and is now expanding into other verticals this is a project similar to maker right it was a CDP protocol that produced a stable coin they looked at kind of what their existing core competencies are which is managing collateral right and and issuing something that people want to

hold um and can be used in lots of other D5 protocols and they said you know that sounds a lot like liquid staking sounds a lot similar to what we do already um and is highly complementary with the other products that we want to launch like fraxland um and so instead of you know I guess he's made the point that they partner wherever it makes sense wherever it grows the pie but in this one case you know I guess the bet is that they can create you know the most usage of a liquid staking protocol within the frax ecosystem if it's under their own control right and then they can decide exactly how to you know create the most

utility for it um and again we talk about training wheels a lot this season um and the training wheels initially were that you had to trust frax the protocol to manage the validators on the other side um and if you're already trusting frax the protocol to say manage the collateral for your stable coin then you probably can get around with this idea of you know frax the protocol managing the validators but that's not sustainable to make this you know a multi billion dollar maybe even trillion dollars he said um you know liquid staking protocol and so that's where frax V2 comes in

um and gets super interesting about you know how they can maybe make it open up like permissionless supply side for the LST but uh leverage some of their existing capabilities in terms of having a lending market and things like that to make it more scalable than say you know rocket pole in the in the the challenges that they faced and scaling that permissionless supply side yeah well I think the interesting one of the most interesting insights of that podcast was sort of where we started about the back end and the operational uh sort of competencies that are needed to manage a stable coin are very similar to managing uh liquid staking token and

maybe to connect that insight into some a trend that's happening across the rest of defy that many of these Protocols are converging on the same sets of offerings so I wonder if many protocol operators out there had a very similar realization to Sam that we made this analogy to Prime Brokerage in 2019 before where everyone starts from a different part of the stack and maker started from the stablecoin part of the stack obviously started from the borrow lend part of the stack and probably at some point all of them woke up and said you know what really what I'm doing is managing assets and liabilities here for maker that is liabilities in the form of dye and assets in the form of Whatever Gets

deposited in maker for Ave that is you know liability you're matching up borrower lenders and then you're taking on the liability of defaults and Ave is the you know the equity cushion essentially but it's very similar skill set and I think Sam probably cottoned on to that before long before many others in the space ultimately did and that's probably why you're starting to see many of these different product lines converge I think an open question for me is how they are complementary to one another and I think that has still to play out that said I did I think Sam painted a very clear vision of like wanting to be the issuer of many different assets that people want to hold and finding a way to balance sheet manage the risk on the

back end of that but in I'm in the in the sort of curve versus maker versus Ave go Wars I I am yet undecided on that yeah no I I it is funny I think you're right between both protocols that facilitate borrow and lending um you know CDP protocols and I would say like liquid staking protocols and bridges as he mentioned right like a lot of this is is inventory management um and those you know I think it's trying to weigh the trade-offs again saying okay this is a core competency here's how launching you know this synergistic product could actually make

the other products better the sort of concept of cross-selling is not new right um in in the benefits of control that you get with that to to actually execute on it are significant but again this like I think we tried to tease this out on the surface it seems to fly in the face of hey here's what protocols do really well which is being super dumb and unopinionated and minimizing the amount of subjective human making right these the these are the that's kind of like I would say the consensus way to build the protocol that will last for decades or hundreds of years

um and yeah I think that we're going to see this a lot going forward as as some of these like winners start to emerge and look at other you know adjacent areas and see core competencies um we've talked about Lido and like restaking um as as one that could be like you know just from an outsider's perspective an obvious Synergy but weighing those trade-offs against you know increasing the bloat of and and scope of governance um will be super interesting but I think it's a bold bet um to manage all this under the purview of one governance you know uh and I think that they're they're making that

bet so it's interesting to hear maybe what would seem to be a little bit more of a contrarian's perspective versus the a lot of the folks that we've talked to this season I think that that's a fair thing to say I think one of the other points that that you made was Sam probably did figure out there's maybe an operational model of fully in-sourced lsts versus completely outsourced partnering and then a middle ground done in the form of anchor which looks more like a whitelisted sort of model where you have a protocol like Lido or rocket pool operating the back end validator set but then it's branded as you know the the anchor protocol or whatever and if I had to guess I bet you Sam will not be the frax will not be the

first protocol to first of all understand that the core competencies that makes it D5 protocol successful today are much more widespread and apply across many different product sets and we'll probably want to control a little bit more of the risk around liquid staking delegating to validators that you don't trust I mean miles what's the best way to mitigate the principal agent problem you make them the same you know um right so I feel like I feel like that's not I feel like that's not going to be just frax that takes that approach the the other interesting point I thought I was finding myself thinking that the frax Lend part of that business looks a little bit like similar to the concept of protocol and

liquidity in a sense because one of the things that you have to do as an issuer of a something that you want to be as liquid and fungible as a money is you need to be liquid and a great way to do that is if Sam said this in his own words to control your own destiny so instead of hoping that you know Ave adopts steith which is really what helped Propel Lido into the stratosphere I think you could have your own borrow lend protocol and control your your destiny a little bit more even having staked flaxseed as a gas token on on the chain on frax chain that would also be a source of demand so you kind of got demand and liquidity there and I don't know it came to me after the interview

so I we didn't get a chance to ask Sam if that's the correct mindset but that's something I was thinking about no I think that's totally fair um you know I like at reverie we work very closely with osmosis and um I think that a lot of these themes are similar to sort of the the cosmos mindset maybe not in the sense of uh hey let's do one thing like one app and do it amazing but hey let's let's really leverage this like governance and um we'll take as much control as possible right um and with with osmosis we have things like super fluid staking which is a you know a type of liquid staking in a sense

almost reverse liquid staking that helps the protocol um and I think that that's things that you can do really when you have like a diversified product set and also control the block space is super interesting um that's where it seems like they're going here with with frax chain um yeah of course the main difference being that you know the liquid staking component is not their own chain it's actually the base layer um that and they're making a bet on that as an asset that people want to hold but yeah I think that this is as close to you know a full vertical and horizontal integration like basically a D5 chain um that you will see on eth for for a

little while and it it's again like a bold swing um and it will be super interesting just to see like how those trade-offs actually play out um and and maybe if the trade-offs the downsides are not as you know apparent as people think that they're going to be um we'll see more of this right like I could totally see synthetics moving to its own you know defy chain or something like that um but yeah no a very very different approach than everybody else that we've spoken to and um I think that's why we wanted to have them on I would imagine that many of these like synthetics I guess they they

I'm gonna blank on the name is it vertex whatever their sort of aggregator their aggregated liquidity layer is uh maybe negate that is the one thing I I let me see if do you view it this way in a sense these aggregation layers which end up doing a lot of things off chain might dampen the value proposition of having your own app chain in a sense I mean yeah I think they do I think yeah I think that's right I think that's right it's it's chain abstraction um it's chain abstraction yes versus aggregating everything to your chain right um and making your chain come at the center of activity and I think that yeah

that's both are going for this General play of aggregation because both understand the challenges of of ux today um but you know are you going to deal with that complexity off chain and and maybe maybe even the wallet level um or are you going to basically vertically integrate to have the amount of control you need to abstract all that complexity um and yeah that's just even outside of liquid staking that's like a broader Trend that that we see especially throttling both sides between ethereum and Cosmos it's tough I mean by the way whenever we say how is this going to play out the people tend to put these things in very binary terms right

the answer could be both and there's room for multiple models so stuff to say all right buddy this was a fun one um I will see you see your uh same time next week [Music]