Stablecoin Projects Require Cooperation Over Rivalry, Says Frax’s Founder

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Sam Kazemian, the creator of Frax Finance, believes that stablecoin projects need to work more together to increase each other’s liquidity and boost the ecosystem as a whole.

In a recent interview with Cointelegraph, Kazemian claimed that as the stablecoins’ liquidity is expanding through shared liquidity pools and collateral schemes, there is unlikely ever to be a dispute between them. 

Kazemian’s FRAX stablecoin is a fractional-algorithmic stablecoin, with some of its supply guaranteed by collateral and other parts supported algorithmically.

The stablecoin ecosystem is not a “zero-sum game,” according to Kazemian, because each token is progressively linked and dependent on the functioning of each other.

FRAX uses Circle’s USD Coin (USDC) as part of its collateral. Additionally, USDC arsenic collateral is used for a significant portion of the successful token circulation in DAI, a decentralized stablecoin governed by the Maker Protocol. Therefore, they will likely ask for a lot of USDC collateral as FRAX and DAI continue to increase their market capitalization.

Meanwhile, Kazemian drew attention to the fact that dumping one assignment could have negative repercussions on the ecosystem if it were to happen to another.

The Game-Changers

The current bet is on USDC as it is placed as the essential stablecoin along with Tether (USDT), and Binance USD is one of the top three stablecoins at the moment according to market capitalization (BUSD). DAI and FRAX fall 4th and 5th, respectively. 

 According to statistics from CoinGecko, USDC has grown more than any of the other three over the previous 12 months. Its market valuation has increased more than three times since July to $55 billion, placing it well above USDT’s grasp.

Kazemian considers that USDC’s expansion across the industry and possibly increased openness regarding its reserves should mark it as the astir valued stablecoin for cooperation within the ecosystem.

Moreover, he agreed that USDC is the fundamental building block for further innovation from various stablecoins. Still, he also described it as a “low-risk and low-innovation initiative” and predicted that it would not be a game changer.

Are Algo Stablecoins Ineffective?

Regarding Axenic algorithmic stablecoins, Kazemian said, “they simply don’t function, although the FRAX stablecoin is algorithmically stabilized to some extent.”

Kazemian also said that algorithmic stablecoins like Terra USD (UST), which successfully crashed in May, support their peg with defensible algorithms that provide condition-based connected marketplace circumstances as opposed to acceptable collateral.

Having collateral is necessary for a decentralized on-chain stablecoin. It requires external collateral but does not require over-collateralization like Maker.

The death spiral is effective. When UST, now known as arsenic USTC, lost its peg, Terra’s environment became apparent.

To ensure that the caller LUNA tokens could support the stablecoin, the protocol started issuing caller LUNA tokens. Rapid minting lowered the conditions of LUNA, currently known as simply LUNC, which caused an implicit retail sell-off of tokens and ended unrealistic prospects of a re-peg.

On the other side, Do Kwon, laminitis at Terraform Lab, indicated that his duty was to partially backmost the stablecoin with several types of collateral, primarily BTC.

Per the market reports, Terra had sold all of its $3.5 million worth of Bitcoin.

In the wake of this, several successful initiatives were abandoned, like the renowned Algo stablecoin DEI from Deus Finance, which as of the time of writing, has also failed to participate in the dollar peg.