Purely algorithmic stablecoins just don’t work: FRAX founder

Sam Kazemian, the founder of the world’s first fractional-algorithmic stablecoin, Frax Finance, said that the growth of the stablecoin ecosystem and liquidity requires a further collaborative approach.

In an interview with Cointelegraph, Kazemian pointed out that there will never be true competition between stablecoins. He explained that stablecoins could grow liquidity proportionally with each other via shared pools and collateral schemes.

The expert stated that the stablecoin ecosystem is not a “zero-sum game, ” adding that tokens are gradually getting more reliant on the performance of one another and the ecosystem.

The FRAX stablecoin is backed in part by collateral and other parts algorithmically. FRAX, like Maker Protocol’s DAI uses Circle’s USD Coin as part of its collateral, a reliance that is only expected to increase as the stablecoins grow.  

Kazemian believes that the projects are interdependent, and any attempt to back off from the relationship would negatively affect the ecosystem:

“It’s not a popular thing to say, but if Maker dumped its USDC, it would be bad for Circle because of the yield they’re earning from them.”

The executive believes that greater transparency about USDC reserves and proliferation across the industry will enable it to act as a crucial medium for collaboration in the stablecoin ecosystem.

Calling USDC a “low-risk and low-innovation project,” Kazemian recognised that the stablecoin serves as a foundational layer for future innovation in the ecosystem:

“We and DAI are the innovation layer on top of USDC, like the decentralized bank on top of a classical bank.”

Addressing the dramatic collapse of algorithmic stablecoin Terra, Kazemian stated that purely algorithmic stablecoins “just don’t work.” Terraform Labs founder Do Kwon emphasised the need to fractionally back Terra with different forms of collateral, including BTC.

“At the end, even Terra realized that their model wouldn’t work,” Kazemian pointed out, “so they started buying up other tokens.”