Inside Frax Finance: Designing the End Game Stablecoin | Sam Kazemian

Transcript

once this rate is super low once everyone is uh pricing in growth really highly right like once there's a bull market rates are super low they're near zero everyone is like making money hand over fist right like you guys remember everything you don't need motorcycle loans you don't you don't need we're actually in the greatest technology sector in in the world what's up everyone welcome back to another episode of zerx research before we dive into today's episode with Sam kmian the uh founder of fra or one of the core contributors to the protocol uh I want to give a quick shout out to our sponsor hexin the most hardcore security team in web 3 pioneering in ZK and no novel cryptography hexin is trusted by

tier one protocols like polygon including their work on their ZK AVM uh mantle risk zero Lio one inch new bank and more you'll hear more about them a little bit later in the show but today is October 13th and we're very excited to have this conversation with Sam so Sam thanks for joining us it's always a pleasure to be with you guys awesome awesome so frax obviously is definitely taking kind of the more vertically integrated uh approach which is super cool to see not many protocols in the the space are doing that so wanted to get your take on uh frax V3 some of the changes fra has undergone over the past year or two um and yeah if you could just set the stage there we can dive a little bit deeper into the individual components for sure yeah um we we have a

like a unique view on like how we build stuff as as stable coin are as like stable coin stability mechanism so that's why there's uh a few of this stuff like frax lend and and the curvos and stuff but just for like viewers uh listening frax V3 is the the new version of the fra dollar PC stablecoin uh we like to call it it's the the final stable coin design so to speak or other people have said it's like an all-weather uh stable coin in terms of we think this completes the the dollar pegged stable coin design um and what I mean by that is is if you have a stable coin issued uh that's pegged to the US dollar what you want to do is you have want the stablecoin to act like real US

dollars in every kind of Market condition right in in high rates right when the issue of the US dollar itself the US government the Federal Reserve actually pays High interest rates uh for people to hold it as well as in low rates which one they pay near zero or zero uh for people to actually use the dollars as as a medium of exchange right and what we decided to do is uh we wanted to have fra V3 basically able to work exactly as designed before with a few new unique Innovations but as well as bring on the dollar yield curve right from from the near yield curve right which is like uh short data treasuries or just the IB rate uh the interest on

reserved balances for people that that aren't into like finance and stuff which is a Federal Reserve rate that number that Jerome po comes out uh you know every month and he says the IRB the rate will like Rise by you know 0.2 or 0.25% or whatever that's called the IB rate the interest on reserve balances we wanted to design a stable coin that brings all of those things on chain in as uh decentralized uh but but proper manner as possible uh as well as have all of the innovations that the fra stable coin has had uh in in V2 basically protocol and the liquidity able to manage onchain liquidity uh able to have over collateralized safe crypto loans right

the thing that uh maker Dow basically originated and it's uh different kinds of flavors right um and so frag V3 kind of neatly places all of those In Like An Elegant way that we think uh no one's you know done before I love that it really sets the stage for just the vision of of why you're kind of moving to the to this fra feed3 model and I love that you're referring to it as kind of the end State because that's always been like a question that I try to ask is you know what's the end State here so it's fun to actually like really dive into what that's going to be and so one of the core ideas here is moving to a fully collateralized stable coin and that kind of differs from the under collateralized nature of the token in the past and so I kind of want to get

your ideas around like what drove the change in approach here since it's a bit of a change in tune uh and what are the trade-offs in capital efficiency which was like long touted as this really really strong benefit of having this you know marginally under collateralized stable coin yeah defin definely um so fra did extremely well uh during the previous you know bull market or or the growth phase of crypto uh because of our Capital efficient nature as well as just having uh a lot of collateralization but also able to be Capital efficient but not too crazy and and weird like Tera and and the way that that all ended right and as we grow bigger uh and we grow more important and and people use fracks and and these kinds of things

things I think uh our view or at least my view is that if you want to create a very very large uh stable coin you know we're really a long-term oriented team thinking in the next three to five to 10 years right next decade of crypto you want to basically become safer as you get bigger not the other way around right you don't want to become riskier as as you get bigger because that that's not a recipe for for a good ending right you can kind of do these kind of growth strategies or like uh try to take kind of market share like when we launched fracks right everyone was like why why does fra need to exist why don't we use D or use usdc and and these kinds of

things and because of fr's unique design we're able to propel ourselves up there right and now like fra is you know uh top five stable coin and so we answered that question why because more Capital efficient it's it's better you can yield farm with it and it doesn't go to zero like like Terra right um and so but now if if we're going to go up to the billions and tens of billions and in the coming years uh hopefully with stable coins going to hundreds of billions and we want to be uh up there right you can't have the same exact structure and that that's actually interesting thing to think about because as people use money you

want it to be safer right you want the money itself the thing that people use as like a unit of account that has uh their debt denominated in it right that they save in uh you don't want that to possibly go poof overnight right um it's it's the same issue that people you know criticize traditional Banking and right like without FDIC bailouts or something like that if if a bank is is not fully backed by real dollars and like really long-dated loans or like you know Mark to Market if they're insolvent right like we saw with uh Silicon Valley Bank and a bunch of of other Banks earlier in the year uh that's like a recipe for disaster right so the bigger you get you want to be uh safer absolutely yeah that

makes a ton of sense and I love that you mentioned uh kind of that duration mismatch because I something I definitely want to get into later in the episode but if we look at CR today or the collateralization ratio it's around 92% so what's going to be the differen maker to fill that Gap and do you have like an idea for how long that should take uh yeah that's a good question um so for people that don't know FR is like you said fully transitioning uh to 100% CR of exogenous collateral which means outside collateral the actual governance token and stuff does not count uh as collateralization um mainly uh protocol Revenue it's not like there's just a bunch of you know governance tokens being sold or anything uh as you said fra has a bunch of different uh lines of

sub protocols uh we call them subprotocols maker Dow actually has a cool term subd Dows uh it turns out we're kind of both working on similar uh concept the the whole time so we have a uh LSD um we like to call it an EEG stable coin we have fra chain coming uh at the end of the year um and so we have just a lot of stuff in even just in these markets fra makes about between 30 to 40 uh million dollars of annual revenue counting everything the CRV from protocol and liquidity lending all this stuff uh hopefully that'll be even higher with you know fra chain L2 uh and and these kind of things but I think that one thing that's important is frax

has a lot of locked liquidity which means our our like gauge system slightly different from curve allows people to lock uh liquidity between one to three years and so if you actually just go onchain and look at it like you don't have to trust me on this call or anything and you look at the locked liquidity like fracks paired with d with usdc with all these other tokens uh there's actually uh years one one to two and a half years of lock liquidity that means that uh in balance sheet reporting it's it's an asset because the side that is uh a like d usdc users can actually sell its guaranteed liquidity it's almost like a Redemption through a third mechanism right and so for for years

from now even though I don't expect it to take years you as understand how long it'll take uh there's no mathematical possibility of like a bank run uh or anything like that uh barring you know obviously like smart contract risk or something really unexpected happening um so that's why fra has been super stable because we've been uh very very transparent we have actually a live balance sheet of all the fra collateral that literally updates every block uh and so if there was some kind of like hidden problem where like if enough market actors right now as you know as we're saying this or something redeem fracks and it would all come crashing down or something that would have happened months ago right I'm I'm of the

belief that like uh markets are efficient uh we actually try to help and tend towards efficiency by pushing out as much information as possible and uh because the information is good you know things are are good and so yeah you mentioned maker and some of the similarities between your protocols and there are there of course are many of those and uh one thing they do is they have like the Surplus bluffer and right now they're returning some yield to their SD token um and when they go when they Surplus Rises over a certain amount then actually some of that will be used to kind of be essentially distributed back to the mkr Token through the a special mechanism that they're using we don't obviously don't need to go into the details there but if we fast forward to the estate for fra where the CR is

100 um will that kind of see a similar relationship where in some form or fashion th some of those excess profits will flow back to the ve fxs uh stakers yeah uh in fact not only that but I think because like you said fra is very very like uh vertically integrated and internally with a lot of sub protocols maker actually has two and there's three or four coming we have uh you know fra e fra chain itself uh fra Swap and and everything here and there's actually more stuff that you know like bam and and things like that that uh could be separate discussions uh itself but vfxs is the staking system as you guys know very well uh for fxs it's kind of

similar inspired by by curve I think it was like the second major token after vcv to kind of uh use that system everything that is uh excess profit as you said above the CR right now most of the revenue goes to uh on the balance sheet to actually increase the CR however there's there's a small amount uh you know 20 to $30,000 of of Revenue that's pushed out on VFX say it does not have like a zero yield but it could have much much higher yield right think about staking a governance token that has like a a specific type of rollup it has a a lending Market issues one of the largest stable coins itself uh and also one of the largest lsds I think fra e is number

four uh largest lsds and one thing that I like to say about these kind of subprotocols and and all of this ecosystem is that they're entirely they excel in any kind of uh economic environment and so for example during High rates what's been doing really well maker Dow mkr token right because they have a dollar PEC stable coin they're able to access that offchain IB that Fed rate right and they're you know giving out uh a good amount of it through the DSR and maker that the governance token has gone on a massive run right during High rates this is the exact type of you know protocol or or business however you want to term it type of thing that you

actually want to uh you know be be in right and during low rates you want to be in the high growth Innovative technology business right like lsds like like rollups like blockchains remember when eth was it cost like $30 to transfer erc20 token and the eth protocol every day was burning like what was it like tens eight figures or something something crazy of of like eth uh per day right and it you know the annual projected Revenue was in the billions of of like for for the eth protocol itself right now thankfully it's super cheap to to send tokens and stuff but that also means in high rates the the blockchain business so to speak

right like block space is much cheaper but if you have a dollar business so to speak a stable coin protocol you Excel right and so if you look at fr's uh spectrum of assets what vfxs uh holders basically control govern and and essentially uh have a right to um you see that it's a very very very wide spectrum of of things right and so that's actually super important to us we wanted to make sure that uh no matter what happens the the fra kind of ecosystem is uh systemically very important um and so sometimes some people in crypto get get kind of nervous when they hear systemically important or like uh too big to fail or something but

again with it's a decentralized system right you could argue maybe ethereum is systemically important but it's a fully decentralized blockchain same thing with fra if we buil fra lend it's not like a centralized lending system right it's an autonomous decentralized lending system if frax eth actually uh the the V2 is fully decentralized in every way right so even though we're trying to be kind of everywhere so to speak and in every kind of uh thing it's all still built in fully uh decentralized permissionless systems yeah I actually I I really do love the approach you guys are taking by diversifying your product suite and kind of making the ecosystem more anti-cyclical if you will uh as

blockchain and crypto is is extremely cyclical so far so love to hear that but uh you mentioned uh how important it is to keep a a stable coin Peg to $1 so under fra V3 what are the mechanis mechanisms in place to ensure that uh it is always trading at $1 yeah definitely so uh frax V3 first of all it works similar to uh fra V2 in Theos right protocol control liid on like curve uh minting fra into lending markets like fra lend so that people are able to over collateralize fracks up to points that like governance allows minting and lending caps very similar to a lot of the the same mechanics there's two new

things uh that frax V3 introduces that I think most people will be thinking about during this kind of you know High rate environment one is the staked FRA the S fra volt which targets the IB rate if you if you lend into it and then uh the fra bonds fxb tokens which are basically uh essentially kind of like zero coupon utility tokens they convert to Frack stable coins at a specific Tim stamp so you can kind of think of them like treasury bills but they're not tokenized in terms of that you don't have a right to treasury bills or anything they're just fully onchain systems that convert to uh Frack stable coins and so one thing uh I I kind of wanted to

um explain is that because fra now has like a real world asset strategy uh Sim kind of similar to maker a little bit different um we actually have our our own pipeline our own Partners our own custodians so we have a public benefit Corporation Called finr BBC and the idea behind this is it actually can build the offchain relationships it can have Brokers it can have trust uh protected assets it can have the same kind of uh relationships that are uh Corporation can have and the final goal with this uh is that once there's regulatory Clarity once there's like actual stable coin bills that pass Congress or like the the current way

that stable coins work are enshrined into law uh and I'm a believer that they will be right there's there's a skeptical view that this this will never be they're you know super illegal or whatever I think if that's the correct view that happens in in history then we're we're all doing this wrong we're we're in the wrong uh industry so the our whole bet is that that that's wrong but so once this actually happens our final goal for this public benefit Corporation is to have a Fed master account which means an actual depository account at one of the United States federal reserve banks uh that can actually get the IB rate which is what the definition of the IB rate is the interest on reserve balances that that fed Banks pay and so that's our real

world asset strategy for fra V3 right and just you know going forward and and uh it's not a real world asset strategy of like deploying Capital to Emerging Markets or like uh I don't know like now there's like the infamous motorcycle loans or something uh and and the idea again like I was saying is for it to get safer over time that's why our goal is to get an FMA once there's regulatory Clarity once there's some enshrine stable coin uh laws whether they take Years or or not right um the whole point is that the real world asset strategy can tap into uh the risk-free rate the IB rate and and as close to uh possible we're not trying to fund you know

renewable energy in different markets we're not trying to basically we're not trying to back uh the fra stable coin with anything that can default on on its debt right the only thing that can't default on its debt is the issuer of the thing that the debt is denominated in right so which is the the the dollar is issued by the US government the Federal Reserve specifically the only thing that you know most likely cannot default uh although there was an interesting scare with the Deb ceiling earlier this year as well uh is the federal government of the United States right and so that's our real world asset strategy our real world asset strategy is very uh narrow

it does not mean that we're going to slowly try to expand to uh random like other things uh it's a very very safe uh in fact I I I might just you know I call it the single real world asset strategy which is there's only one real world asset like you need on chain which is the the IB rate the risk-free rate right because think about it once once the IB rate is super high right it's like 5% right now maybe it go goes high or maybe it stays really high for a while you need that rate it's basically the most important like interest rate that's grounded in the real world economy right that that's

grounded in like the price of oil the price of Labor and all these things that blockchains are not right it's the blockchains are just digital like cyberspace right and once this rate is super low once everyone is uh pricing in growth really highly right like once there's a bull market rates are super low they're near zero everyone is like making money hand over fist right like you guys remember everything you don't need motorcycle loans you don't you don't need we're actually in the greatest technology sector in in the world right like crypto uh digital assets all this stuff the intersection of digital assets Ai and everything once growth premiums come back and rates go

very low uh you don't need real world assets right like the the the best assets are here on chain right if if everyone remembers like people were willing to pay like 10 to 15% to borrow usdc and Stables on a and and compound because everyone wanted exposure to high growth Innovative interesting digital assets protocols and all these things right those are the environments that are super simple right like th those we're all we're all good we're we're in the perfect area it's only during extremely high rates like you were talking about the cyclical uh type of situation where this part of the cycle you need this singular rate that's efficient scalable on chain and if you

can get that you kind of complete the full full loop right the the full uh design and think about right now is not the time either that you want to uh loan to emerging economies and stuff that's when they're also all defaulting right so that's the way we think about it and so like one thing for people to take away from this is frax v3's real world asset strategy is a singular one uh it's the Fed rate it's the um the yield curve of dollars and treasuries uh on chain so that that's basically it I I I love that explanation and there's like those two points you hit on I kind of want to elaborate on quickly and of course we'll get definitely get into srax and fxb after this but uh I like that you call this like singular approach because it's

singular in another sense too in that everything is running through one entity with fines PBC um and I find that super super interesting because again if you look at maker you know they have all these different uh Partners in in you know kind of pairing with these offchain assets and it makes reporting an absolute mess uh and this is like that's kind of one of their big pain points and this seems to be really really honing in on improving on one of these big pain points so I do have a quick question on specifically on that which is how does having just this one entity change the reporting right like how do you get because you know obviously they're offchain assets and so how do you get that information about offchain assets back onchain yeah that's a great question so first thing so yeah we have

a uh Delaware SE Corporation very similar it's it's a a US corporation uh again our our bet is that crypto will will be great in the US and globally everything um and it's a public benefit Corporation the same thing like optimism PBC or all of these kinds of things and the the reason it's a public benefit Corporation is it does not try to maximize uh revenue or profit by like doing these uh deals with like the fra protocol um it basically is a public benefit of interacting with the fra protocol fall and doubt and then having real world relationships that are able to execute on this you know singular real world asset strategy like it's not trying to increase its Equity value do

raises and and these kinds of things and eventually the the reason the structure exists is like I said eventually the goal is if this can be a public uh resource right to get a Fed master account and be able to actually bring the IB rate on chain in a compliant proper manner then this this is a huge Victory right and you can't actually do that in any other kind of structure like you said otherwise you'd have to work with just various third parties and and things like that um so that that's what motivated us to to do it like this so first of all uh and second of all the reporting is something we take super seriously right whenever like you said it's

offchain uh it's never going to ever uh satisfy 100% of people just because there's no way to uh actually mathematically confirm everything right that people can be like well the Auditors are in cahoots with them or they didn't know this or even just like the the FTX thing you could you know people can say you tricked the Auditors or something like that right uh poorly labeled Fiat account right like for from the the FTX stuff uh but our goal is to actually basically have a realtime balance sheet of both the onchain assets which is super easy it's already there it's fax. fr. finance and then also integrate uh things like plate and apis

that report Bank balances brokerage balances and all these things and then immediately have them and combine them with the the onchain uh balance sheet on fax. finance so you can actually see literally day by day everything that is the the assets and I think that's very important uh because you can't really do that if there's uh a bunch of different third parties that don't at least go through one uh final you know offchain custodian like finr PBC or something like that because they they'll all they'll all report in some other different way they might post a PDF they might have a monthly situation they might do this or that but here we can actually build the reporting uh

infrastructure as we onboard like different types of Partners and things with finr BBC yeah and that's actually a great flag we'll for sure put the link uh in the show notes to fra fax. fr. Finance because it's an incredible site which you guys have built um and the other thing I wanted to jam on really quickly was you know you mentioned that not only the protocol as a whole is kind of built for this this cyclical nature of the industry but if you zoom in on just the Frack stable coin itself you know like it too is kind of now getting built on the same spectrum of like high-risk assets like crypto and lowrisk assets like uh you know t- bills and cash cash like equivalents and so one thing I'm just not like I haven't really grasped yet is how does the collateral backing of fra stable coin change when

the I IB rate increases let's say like how does the how do the assets actually shift from like uh you know crypto assets and into uh these rwa assets yeah definitely and in fact this is so we just actually launched fra V3 uh two days ago on Wednesday and so it's obviously there's a bunch of people uh using srax way more than uh we're expecting in like the first 12 hours which is great um but as this keeps going um I actually think that what what I'm seeing is exactly as you're saying this kind of fluid movement between you know the onchain you know over collateralized loans protocol and liquidity to uh offchain you know t-

bills cash equivalence based on market demand right so the the way that it works right now is the more people stake in srax right the IB Vault uh that fra that they stake is is able to be converted to usdc Fiat or something else and then uh goes to cash equivalence right uh and then that yield that's generated to close to the IB rate gets return to the Vault uh once every week right as the IB rate increases you could imagine more and more people will just take their fracks and and want access to this uh essentially close to risk-free rate right the IB and that actually pushes the the fra collateralization to become more cash equivalent essentially

becomes kind of like a Fiat coin of sorts right and it's almost like the the design is fluid uh because once that staking bolt goes up right anywhere that you lend fra like fra lend a or all these things you wouldn't lend it if unless the interest rate was above the IB rate right so you pull it out people pull out uh from all these lending protocols to go and get this risk-free uh you know five five perish IB rate right and so it actually changes the collateralization backing based on market demand for uh the the risk-free rate right and it it's just this fluid system and then as the IB rate goes down right let's say it's going to go back

down to zero uh I think that would be great because that'd be the start of a probably a new uh bull market cycle but as people pull out of there right what happens is they either lend on on a lending market right because interest rates are up to to borrow and go long on you know digital assets and and and growth premium on these things right or they might redeem their fracks right and and they might sell it and what happens is the exact reverse the cash equivalents get sold for Fiat Fiat to like usdc usdp uh all all these things and then the Theos push the onchain liquidity so people are able to sell their their fracks through through curve through uh univ V3 and all these things um and then then it becomes more crypto

collateralized right just naturally and so um when we started FRA the the name was a port man to of fractional and like algorithmic like this hybrid model between like collateralization and uh you know like under collateralization which you know is not the the way we're we're going right as as we grow I actually think we did name it right but but it's it's a hybrid model but not of algorithmic and uh collateralized it's a hybrid model of crypto collateralized and Fiat collateralized based on the the real World interest rate of the dollar so it it is kind of fractional but not the type of fractional that we thought

it's it's hybrid between crypto collateralization and and Fiat collateralization so like it's kind of come full circle frax is a hybrid stable coin uh we just didn't know we're we're founding it and creating it in in this way which is kind of cool I love that I love that long-term thinkers you ahead of your time all roads lead to fracks as as you guys say over there I want to give a quick shout out to hexans as we explore today's blockchain landscape let's take a moment to recognize them as a premier cyber security provider in web 3 hexin is trusted by tier one projects like polygon including a Security review on their new polygon ZK evm mantle risk zero Lio 1- inch newbank and more get a

deep dive into your technology stack with the most comprehensive analysis and cyber security Consulting hexin not only uses widely known methodologies and flows but discovers and introduces new ones on a day-to-day basis basis with over $55 billion secured they cover everything from Smart contracts to blockchain to web 2 pentests yeah there's been nearly $7 billion of total value hacked in crypto's nent history so it's safe to say your team has a lot on the line don't skimp out take your security seriously and reach out to hexans don't forget to mention zerox research for a free web2 pen test with your partnership and reach out to hex hex.io find them in the links in the show notes or reach out to them at permission list they'll be at Booth 832 uh but without further Ado

let's get back to today's episode uh I do have one more question before I let Dan go uh go crazy with the S FRX and X fxb questions but a common ridicule of fra has been Reliance on multisig but you guys are launching or have recently launched maybe you can clear that up a governance module how does that change things in that regard yeah so we took a while to develop fra gov uh it's a it's a module that basically makes it so that uh any kind of uh feature which is whether it's a uh proposal to like rebalance Os or like move collateral or things like that uh has to be on chain like that transaction has to be pushed

on chain and it has to be either vetoed or uh allowed a time lock to pass to be able to be executed and basically contract by contract uh you add the the fra gov module as like the admin um and so we're slowly releasing that over a number of months as we're more and more confident of it so for example actually CRA scov is already out it's on chain you can actually see it in in the UI uh frax lend Amo and and frax lend entirely controlled by by fra scuff like as we speak like there's no way for example for a a MIG uh to basically be like oh we're going to Mint bunch of fracks into this uh fra Len pair and then like let

whoever has the collateral just run away with a bunch of stable coins that's not possible so like frax L for example entirely uh governed onchain decentralized and we're slowly moving things uh over to the fra SCV module for example when we launched the frax eth V2 system uh as you guys are probably aware all of the contracts deployed there we're we're planning on from day one just having the fra gov module be the uh admin controller right this onchain governance uh fully controlled by the fxs holders no trust needed in terms of uh any kind of signers or anything and yes uh common criticism there's always criticism and trade-offs of everything right common uh concern there is well can the team the team can't act fast in

terms of uh uh emergencies it's like no we can't so like that that's one thing right now if there was an emergency like there are migs on certain contracts we could act immediately without like anyone you know having to stop us on certain contracts to to actually fix things or if there was some critical thing uh for like frax land we can't it's it's now now it's just you know at least it takes 48 hours and um you guys might remember compound had this issue of uh they're like comp tokens were like over emitted or something like that there was some kind of bug uh about 18 months ago close to two years ago or something and they couldn't fix it because they're they're fully

decentralized onchain everything has to go through onchain governance and uh I think it was like for two or three days like something you know there was just like I think what like $50,000 of comp emitted every hour or something which was supposed to only be uh a week thankfully what people didn't lose funds it was just like a bunch of uh compound tokens were like over emitted uh but yeah that that's part of the problem of uh tradeoff of of being fully on chain and not needing to trust any compound core deps so uh fra is systematically using the fra go module frax lend is already like that frax LE V2 once the contracts are deployed is planning on uh being like that frax V3 the uh fxb

contracts and stuff they'll all be fully fra gov uh coordinated so again all of the the new things that roll out fully onchain fully decentralized uh no you know no Mig trust required and of course yes for before anyone thinks yes we can't uh fix any issues very quickly and it also becomes public so that that's there's always that trade-off really appreciate you kind of diving into the trade-offs there I feel like you know sometimes the risks of these things don't get fully fully stated and you know we even have seen like emergency Dows kind of still not really have the ability to act a great example of that is the you know the curve re-entrancy exploit when the we had the bug and the Viper compiler yeah there's a curve emergency Dow but

it doesn't have the ability to Halt pools or halt withdrawals from from these pools because that kind of like gives them the ability to rug users but at the end of the day you it also could have stopped a pretty bad exploit that happened at the compiler level so there's trade-offs and everything and it's just I think it's going to it's I'm it's kind of nice that the protocols are and the and their users are left to the ones to kind of like determine with some Market forces where who has the best strategies but uh so yeah again thanks for pointing out some of the trade-offs there with this design and I I kind of want to take the time now to dive into SRA and you mentioned some early signs of growth and no kidding man that thing's already up to 35 million in

deposits in like you know 48 hours or something like that which is incredible to see and when you think about this like if this kind of feels like the perfect product to me and so like if there's any sort of demand for this thing I I it's hard for me to sit here and say like oh no like people aren't going to love that and if you look at uh demand for SD I think that just broke up to like 1.6 1.7 billion um so the market kind of is proving that there is indeed demand for this and I appreciate your color a couple questions ago on about like actually how that collateral shifts and that's also built on on market demand and so this kind of gets to the point uh that duration duration M mismatch like like if let's say there's some like uh you know hyperbolic

scenario where 100% of the fra Supply is somehow in this SRA contract which again probably not not possible but let's just assume that for a second and it's like all of a sudden you know it's a weekend and everybody wants to withdraw or redeem their tokens for whatever reason like how do you kind of like avoid this duration Mis mismatch that you get when you're kind of dealing with these slightly more liquid rwas yeah that's a good great question right uh I think the the the issue or the limitation right is the t+1 and a lot of t plus2 for for brokerage try brokerage and and stuff uh settlement right for people that that don't know t t plus2 means it takes two days to settle stuff one day for like the wire

to go through and then the actual brokerages that uh settle the shares T bills or these kind of things uh take a while for them to actually settle the real real payment right and then also might be even an extra day longer if if we uh have to convert things to like taxos usdp Circle or something like that right because that that layer also is is added I think overall in the coming few years this stuff will be uh entirely solved even in trafi piping however frax does have some unique uh ways to combat that and keep the peg type uh as well but first the trafi answer is uh fed now right fed now is like the first time the

FED actually is trying to do instantaneous payment settlement uh so you don't need a day for you know wires to they're instantaneous if both sides of the institutions actually have this uh in the future hopefully if again if finr PBC has some kind of relationship to directly to the fed or even just through a partner Bank you can instantaneously at least settle the wires right like there there's still the the way to uh you know need to change it to Fiat coins or something like that but the that kind of settlement dramatically dramatically makes things faster and I think fed now is actually online and it's slowly being integrated by uh trafi institutions the second thing is uh fxbs fra bonds right frag bonds are a like I

said a utility token that has a time stamp on them so there's different ones there's different xpre uh fxp tokens and you can issue them like governance can issue them from the factory the fxp factory and they can convert to one Frack stable coin when they're at maturity right so let's say it's a super long weekend 3 days or something right and uh there's one of those classic crypto panics everyone knows the money is there everyone uh you know again if if you're not uh you know doubting the actual collateralization you know that this is just a time like you said time duration mismatch of being able to redeem versus people wanting immediate liquidity now over like a few days or something right so what you can do is you can issue a short data

uh fra Bond through governance right something that you know uh you know you you sell it now through the onchain auction system people buy it probably at a very very slight discount right so they earn some yield when it converts to fra and for basically allowing uh the protocol to raise uh onchain funds AKA usdc liquidity so people can actually exit all of the fra Supply without actually needing to uh wait for the wire right so fra actually is a very very unique a lot of different levers to fix these situations but I personally don't think it's a problem in the next one to two years due to the actual trafy piping but we actually thought about all this stuff what happens if there's uh I don't know there's um real world asset uh

compliance problem or this or that or we can't do something for two weeks but the the the collateral is there but like uh given the unpredictable nature of like offchain onchain stuff uh you know we can't redeem everything or things as quickly that's where fra bonds come in in their other use which is you know raising uh funds now at a slight discount to people who are very confident that this is just a Time duration mismatch right the the collateral is all there they'll be more than willing to you know buy an fxb right at like 99 Cents whatever uh on on the dollar or something right and

they'll get one Frack stable coin at peg in like two weeks a week whatever right and so that's very powerful that that lever uh is something that you know governance can always lean on I think frax is probably the only one that can uh really do that I think maker can also maybe do some kind of super fast DSR stuff right or whatever like you know jack up the DSR edsr or whatever to like 8 10 12 it kind of does somewhat similar things um but we've thought about it right and so that's our our answer and I think it would work really well okay that's super interesting so fxbs are they going to exclusive be used exclusively be used as sort of like a a back stop in this certain scenario uh or would they also be used for like other

purposes like I don't know I could Envision where even in like regular climates people would be interested in kind of you know buying an fxp at a discount and kind of creating like almost this yield curve yeah they're they're definitely not uh used for like emergencies they're part of the frax V3 strategy overall but they're very very very flexible right um and so the thing is you can use them in an emergency like I was saying but the main function is to actually like you said bring the yield curve entirely uh on chain right now the short end of the yield curve right the current IB rate is super high so everyone just wants to uh tap into that but as that rate goes down what'll be more enticing is for people to say hey uh you know like a fiveyear US bill has like you

know 4.9% yield or something something or a 10 year has like 5.7 whatever it is right I want to buy that now lock that rate in right now I want to actually uh have that and that sounds good to me uh rates are you know going down I want to have that long dated uh rate locked in well fxbs can do that right if you have a fiveyear fxp uh duration or a 10year one or like a one-year whatever it is right uh these are just utility tokens they just have a Tim stamp and you just buy them on chain through an auction mechanism and then once the time stamp hits you can trustless come and just redeem it one to one for a Frack stable coin that's all it does right and so it

just creates this these dot plots on the yield curve of uh yield over the long period of time to that maturity date right and the thing about it is that even though it doesn't entitle you to like the the T Bill itself it's not like a security offering it doesn't actually mean mean that if you hold a 10-year fxb in some way you can get or redeem or like are entitled to a 10-year T bill because you know you can get a a decentralized stable coin in 10 years it should match relatively give or take uh the the same type of yield right that's how we expect it to work it's not uh like a a legal offering there's no like redemptions early or like a Redemption

to like a a corporation or something that holds it it's just a utility token and so I think that that's how you build a yield curve on chain using you know utility tokens def Primitives and stuff I love that that's that's super super interesting and we think about like protocol revenue is there going to be a fee on the fxb product or the S Frack product uh yeah it's kind of actually built in uh in the sense that you know the like for example the the srax product tries to hit the IB rate but it doesn't guarantee it right again it's not like some kind of legal right or some kind of like uh investment prospectus which is basically just means whatever the real world asset strategy

gets right it will return to the yield Vault every week and so if people are like oh uh this is slightly below the IB expectation they can just unstake and like sell their fracks right and so the the spread between like what the the protocol can take uh as as like a protocol fee and then what it returns can just be set by governance right it's kind of baked into the whole uh structure it doesn't like um it doesn't like constrict the the protocol in some kind of fixed you know fee of like 3% 0.2 or whatever it's just whatever works best for the hitting the Target and then uh the spread between the Target and and the actual real world asset strategy is

it the same for the fxbs just uh any fees Associated will be uh set by governance if any at all yeah and and the the idea with that is the same concept slightly different consideration right like if you have a 5year fxb uh ideally like let's say fiveyear you know T Bill yields like 4.7 or something uh as long as the fxp yields 4.7 or less that spread uh can can be captured by the protocol in some way interesting okay that's super interest that's super cool and so on the SRA Vault then do you know approximately what that take rate looks like today since it's only 48

hours it's too early to tell but like just we we have been looking at it like deeply right um and I would say right now between like Point like one to3 uh percent of the of the tvl right so like the Target right now is around 5% but like uh you know short data T bills and and things yield between five .4 to 5.5 and there's always obviously in trafi there's some kind of brokerage middleman things and stuff so once you slightly take those out it becomes like 5.2 5.3% total yield and then the target is excuse me right around uh 5.0 to 5.1 so that spread is is what uh the protocol

can take gotcha gotcha gotta all right that's that's clear to me now okay so and when I start thinking about the SRA token itself it's seems like a pretty good collateral in Defi and it seems like people would you know be have an attraction to kind of like either you know doing some looping strategies or just using it in general when you think about like protocol Integrations is that something you spend time on is you know it seems like obviously would be a great fit for fraxin and given curves new lending platform it's kind of be an exciting thing for me to see there as well yeah I mean it's like kind of similar to S die which is the even though they're they're kind of seem like they're named the same it's like the DSR die and then the staked fra uh things and they work slightly

differently but they're about the same uh we I've seen bunch of curve pools being made recently both by Mitch and like the extended curve uh community that pairs CRV USD with srax SDI and these kind of things I think they'll be uh huge right I a pillar in in defi in terms of bringing the uh expected IB rate to actual you know defi Primitives amm lending protocols I I think um our goal is just to be the base layer being able to actually provide this right kind of the same way that if you think about it the the FED is just in the business of uh pushing the currency out and adjusting that kind of uh inflation rate

right or and and interest rate as well to to adjust the inflation rate so um our goal is just do our job get the you know fxp yield curve srax IB rate and then let people uh integrated it where it makes sense and obviously we've seen a lot of uh you know a lot of usage in just 48 hours that's awesome yeah no I love it I was uh poking around the the curve telegram yesterday and did see Mitch talking a ton about it so he's definitely got his eyes on it as well but uh you mentioned paos earlier what exactly is the relationship between fra and paos and and kind of how are they assisting you and the team uh yeah for sure first of all the the paxos team is awesome uh I a little bit since they're

Corporation I'm a little bit limited on exactly what I'm allowed to say uh but other than saying uh they're super cool they've been very very helpful and and Innovative uh especially with recently working with PayPal to issue py USD uh what we are thinking of of doing and and working together is that if there's a way for basically the fra protocol and and like paos uh and like paxos issued stable coins to achieve goals of like for them on chain liquidity onchain uh reliable you know protocol owned liquidity and for us uh being able to work with Partners through finr BBC and our custodians and stuff to be able to

service SRA fxbs and these kinds of things I think they're the the perfect partner in that way and that's basically what a lot of the the discussions have been around uh I think that we'll be able to actually announce some more you know concrete uh Stu pretty soon especially with uh with their end letting me you know talk about it yeah absolutely absolutely and I don't this kind of might be the same type of question than just given you know paypals the another Corporation kind of has some limitations around what they can say is going on but uh I know you talking about py USD when it came out and any interesting things you can tell us about the Integrations between fra and py USD yeah like uh one of the things that will be really cool is that I think as

PayPal uh really gets going and accepting py USD internally in in their system for as as dollars right uh all of the merchants that accept Paypal which is like pretty much as much as visa and MasterCard right uh will immediately be able to accept uh py USD and like overnight that's like a very very big switch like just turned that it's like you go from you know maybe like what is it right now a million Merchants worldwide or something like that accepting some form of crypto or whatever to like 80 million or something insane right like an 80x uh overnight and and I think that's one of the things that uh we're really looking forward to

by basically making sure PUSD has onchain liquidity uses and things like that for when that kind of inflection point happens because I think you guys know there's like all these uh news uh things that are like hyped and then they always like fall flat or they they don't uh in crypto meet expectations or something it's like JP Morgan is like thinking of doing like this thing and then you never hear about it again right or it's like you know the this like Bank of America just started their blockchain division and like nothing ever happens right I think this is the one that actually once it's like you know the the switches flipped where it's like all pay with PayPal stuff uh the dollars are abstracted to the the stable coin as well as you know just you know Bank

wires too at in in one point of sale thing that's one of those things that there will be a very very big uh overnight uh impact that that's my view yeah I couldn't agree more with you there this is like one feels like it actually has legs just given all the the the infrastructure I guess and and screen time they have on everyone's phones so uh definitely rooting for that one and excited to see that flip get switched but I do want to I know we're coming up in an hour here and I want to be courteous of your time but I do want to hit on the LST side of things you guys uh deployed that two token model between s fra eth and and fra eth and it's worked really well yields have been consistently pretty much the highest and the peg has been very strong um are

those the two main takeaways that that you would have as well and and how do you think uh fra e has gone so far uh yeah great uh great question because uh fra e uh is our LSD for for people listening uh we like to call it an ethc stable coin right like the there's a two token system here uh which is just frax ether which is you could just mint it with one eth right it's just uh and then actually soon there be a Redemption contract too in addition to whatever you can do on the curve pool you can actually just redeem it and and eject validators uh with it as well so um it's just an eth stable coin literally does not get any yield or anything and then you can stake the fra ether in a staking Vault called sraa ether so sounds kind

of familiar right it looks almost uh identical and economic structure to fra and SRA and the reason for that is that's how money works right there's like a risk-free rate internal to the system literally like for people listening it doesn't mean no risk it means the closest thing to the low lowest risk uh interest in in ethereum is running validators by a competent and honest party right that's basically the lowest risk uh interest in in the actual system for dollars again it's it's lending shortterm to the Federal Reserve or the US government right and so you can come mint these frax ether stable coins you can either use them in LPS you can use

them uh as like you know a we replacement in fra chain they'll be able to be used as gas payments itself for for the actual rollup uh they have utility right you can use this token or you can just come and stake it in the staking bolt that gets all of the the POS rewards from uh validators right and like you said because there's people using it for currency for LPS on curve for other Integrations bridging them to to other chains there are uh less people that uh or less fra ether that shares the total validator rewards right so if if all there's a bunch of validators and they make some amount of yield uh if half of the supply of fra ether is just being

used as money right just being used as stuff and then only the other half are sharing all of the POS rewards that's twice as high uh APR for srax E than something like wreath or steeve uh where the interest rate is always paid out to everyone and there's no way to actually build a monetary premium there's no way to issue like a currency uh so to speak because you're you're forced to pay the interest rate on everyone like whether people are using it as as a currency or not you your token must pay the interest rate equally uh and so that like you said that's why the uh system has worked so well uh that's why we always like to say it's

like a eth St stable coin and LSD system because if you think about it that's how all of the best dollar Peg stable coins work Die s Die fracks s Frack right and and they have monetary premium and then people go and get the you know the risk-free rate internal to the system right when they want when they need when it's high enough when it makes sense and uh that's kind of the same way that trafi works right you have a checking account and you have a savings account right your checking account you make payments in it usually gets much less interest rate right like nearly uh insignificant but then you have a savings account whether it's used to put money in Money Market funds or like uh it it pays a much higher interest

similar to the the risk-free rate and you move money based on if you're using it for you know as cash you know as settlement Media or as a savings as a uh you know savings account right and so we have the same model for fra ether uh as we do with fra and as you can see like maker has with with d and EST and I think that proves it's definitely on the right track right when you see more and more uh things using uh this design this economic model right so it's been it's been really good love to hear that as well and and you're right you can there are some striking similar areas there it's almost like you guys have a master plan or something but uh you know you just Shi frax V3 so it's kind of even weird to be like okay well what's next

but you know fra e has uh has its V2 coming in so what can people expect to see some major changes around uh to the the model there because one of the common criticisms of fra e is like oh Sam's just running all the validators in his basement so how can we get that to change yeah uh I run very good validators in my basement top rated on unrated Network the the best but anyway uh but uh so the the V1 uh for fra e as you said um the validators are basically Whit listed similar to Lio right the that hat that keeps a white list of people who can or organizations that can run the validators fra V1 is exactly like that the the people that can run

the validators are whitelisted to keep things simple we've whitelisted just the fra core team that that runs the value so it's like uh basically it's it's us and our you know obviously professional infrastructure the the funniest joke is like it's uh it's it's me but it's actually our our team led by Alex and and and a few other guys uh they actually have better performance than uh anyone else uh when you look at rated network but yes the V2 is much more like uh rocket pool which is anyone can run a validator with some amount of collateral it works slightly differently by kind of abstracting all of the you know lingo of like a node operator or this or that and

it's actually about uh a person coming and lending their eth and getting out you know fra eth right and then a another person person being able to borrow that eth to put inside validators and pay some interest rate just like a lending market and uh if you think about it all LSD systems are just a single two-sided lending market right when someone comes in to Mint the LSD token right whether it's steth reath uh or or fra eth or something like that they're lending their eth into the protocol right and they're getting out this receipt that's supposed to you know on on demand uh because it's pegged able to give back eth right and for them to do

that they must get paid some interest rate they can call it the POS rate like you know rocket pool does or like the the rebasing rate or the rewards rate like Lio does uh or you could just call it economically what it is an interest rate that you get paid for putting your eth into the the LSD protocol then borrowers come and borrow that eth right and we call them node operators because all they're doing when they borrow the eth is staking it in a validator and running the validator right and and basically paying an interest rate for the right to run the validator hopefully they make some profit that's the only reasonable reason they would do that right to pay some interest and keep some of it and it's a it's a lending market and so fra V2 formalizes that anyone can

come into fra V2 mint fra e and then anyone can come and borrow that eth to put inside validators that they control right and then they obviously have to since anyone can do that they obviously have to put up some more eth as collateral in case they they get slashed or they're they're not competent or something like that but then once they borrow it and they're running the validator they uh there's a market set interest rate just like how frax works just like how a works the market at interest rate is uh based on the the amount of eth Lent and then the actual amount of Interest validators are paying right if the interest rate goes too high validators think okay well I'm paying more interest than I earning in like uh block rewards and meev and stuff I'm

going to eject repay my my loan the interest rate slightly goes down if the interest rate is super low people who are really good at running nodes they're like oh wow look the interest rate is only 5% I can make 9% with Mev or whatever and stuff let me borrow as much eth as I can spin up a bunch of uh notes and and pay this interest rate right and it slightly Rises right just like a market set interest rate and so we actually formalized that I kind of made like a long Twitter Thread about it and and stuff and what's really cool to see actually is I think it was Justin Drake or someone else maybe at the eth foundation uh recently um they actually made like a proposal for some kind of

possible enshrinement of uh eth as an LSD just in in the eth protocol itself like in ethereum on the consensus level because of all of the recent discussions about like Lio and and like lsds can get too big and and these kind of things and what's really interesting is if you go and read that uh post it was either on eth researcher or some uh another one of the the research forms it sounds exactly like everything I said with fra C V2 being a lending Market in fact I think vitalic even briefly talked about how it's like a lending Market I don't think they they're like super deep in fracks or even really know about fra either but they like mentioned rocket pool and I

was like uh I think you mean FR e V2 but I you know kind of give them a a little bit of break because we're not even really out yet with fra eth V2 but it's identical to to that and and Rocket pool is a lending like system too they just have different way of calling it The you know mint your LSD rather than lend the eth right uh the the POS reward rate or something is the interest rate that that gets paid to the lenders right these are all the same thing these are economically uh identical and so it was cool to see the uh eth Foundation guys like coming off with their own you know possible enshrined LSD concept and I'm like this is just this is just literally exactly fraxy V2 we'll just we'll share

the code base with you guys if you want H that's great I was trying to quickly pull it up I want to say that post was from Mike neuter but I'm not 100% either but uh yeah I'm not sure was it was it uh it because there was a few people that talked about it um oh okay it was it was uh Justin Drake and he Mike Mike shared it on Twitter that's where I saw it okay cool uh but yeah no that's that's awesome yeah it's sort of like this this thesis validation if at the bare minimum right of course there's much more to it but it's great to hear that um you know this it's an exciting design and and so we're we're super excited for that as well and as a a stake fra e holder myself I'm very fortunate for the quality of your

your basement validators because I'm glad you mentioned rated. Network I was Poke I've been poking around on that site quite a bit recently just doing some uh some work and it's impressive like you the fra validators are in a very impressive set so whatever you guys are doing over there it is most certainly professional grade and and it's impressive so thank you of course Alex is the the leader of that and uh he is not in my basement I can definitely confirm that definitely hope so hope not I love it but thanks again Sam this has been such an exciting conversation it's always a pleasure to have these great conversations with you we're super excited for the you know congrats on the launch of fra V3 and uh good luck with the launch of the future launch of fra

fra eth V2 um you know we're we're super excited so I'd like to give you the chance just to give the audience um you know where they can learn more about fra or find you on Twitter of course you're more of a telegram guy yourself but yeah I'm I'm on uh Telegram and Twitter mainly just at Sam casian is just my name and then obviously uh fra Finance both uh Telegram and Twitter same thing uh we're always around so like I think you guys know to like just show up uh literally I always have it open as I'm working uh all day and night only time I might not be around is if I'm sleeping so uh join us there and uh we have a lot of really cool stuff coming like you said and a few more that we we didn't get to obviously in in a one hour discussion so

thanks for having me yeah no kidding we could probably have you on for a whole podcast just talking about the future L2 so there you know this won't be the last time we get to hear from Sam K on ZX research but thanks again [Music] cheers