The founder of Frax Finance, Sam Kazemian, stablecoin projects should consider a collaborative approach as an ecosystem to grow each other’s liquidity.
Sharing his opinion with Cointelegraph, Sam believes that as long as the growth of the liquidity of stablecoins is proportional to each other because of the collateral schemes and shared liquidity pools, there won’t be any form of competition among the projects. He explained that the stablecoin ecosystem runs in a way that growth is not a zero-sum game and each token in the ecosystem is reliant on the performance of another.
Kazemian’s Frax Finance has a stablecoin named FRAX, and it runs the fractional algorithm model. Part of the stablecoin’s supply is backed algorithmically, and the other part is backed by collateral. A portion of FRAX collateral is in USDC. In the same way, DAI is using USDC as the collateral for its total supply. By implication, as the market cap of these two stablecoins expands, they will need more USDC for collateral, which will, in turn, boost the performance of Circle’s USDC.
The downside, Sam mentioned, is that the entire ecosystem will be affected negatively if a project decides to dump the other.
USDC is Strategic
Currently, the three leading stablecoins are Tether, USD Coin, and Binance USD (in that order). DAI and FRAX are just trailing behind them in the fourth and fifth positions respectively. The growth of the USD Coin last year has been quite massive than the other two in the top three projects. USDC doubled its market cap last July to hit a $55 billion market cap.
According to Kazemian, the reason USDC is the best value project for collaboration in the stablecoin ecosystem and across the entire crypto industry is the transparency about its reserve. Kazemian referred to the USD Coin as a low-innovation and low-risk project and also acknowledged that the project serves as the base layer for other upcoming innovations in the ecosystem.
Algo Stablecoins are not Working
Even though a part of Frax Finance’s FRAX is partially backed algorithmically, the project founder says Stablecoins running on pure algorithms don’t work.
Rather than using traditional collateral, these tokens maintain their peg via algorithms that adjust the total supply based on market conditions. An example is Terra UST which fell dramatically in May.
Weeks before the dramatic fall, Do Kwon, the founder of Terra Labs, mentioned that he needed to back a fraction of the stablecoin with other forms of collateral.
Terra went down, not just alone but with others like Deus Finance’s DEI, fellow Algo stablecoin, which has not returned to its peg up to the time of this writing.
