Frax Founder: Stablecoins Need to Focus on Single Entity Assets and Matching Interest Rate Environments

Original Title: Sam Kazemian's Vision for Stablecoins

Original Author: Kyrian Alex

Original Compilation: Deep Tide TechFlow

Stablecoins have long been the cornerstone of building DeFi. These digital assets, designed to maintain stable value, play a crucial role in the crypto ecosystem, from trading and lending to remittances and payments. Among various stablecoin projects, a visionary founder—Frax co-founder Sam Kazemian—has proposed a thought-provoking concept: the Single Real World Asset (RWA) theory.

The core idea of the RWA argument advocated by Sam Kazemian is that for stablecoins to thrive and scale in the long term, they should be pegged to a highly reliable single entity asset.

For Frax, this asset is the U.S. dollar, with the Federal Reserve's interest rate being a key reference point.

According to Kazemian, stablecoin issuers should focus on a single entity asset. For Frax, this asset is the dollar. This focus on a single type of asset simplifies the backing of stablecoins and aligns their value more closely with the chosen asset.

The cornerstone of the RWA argument is to directly obtain the interest rates set by the central bank of the largest economy—in this case, the Federal Reserve's interest rates. This acquisition allows stablecoin issuers to respond quickly to changes in interest rates and adjust their operations accordingly.

Kazemian emphasizes the importance of reducing custodial risk when dealing with real assets. By primarily focusing on government-backed assets like the dollar, stablecoin issuers aim to lower the default risk associated with assets like loans or mortgages.

Pendulum Effect

A key aspect of the RWA argument is the recognition of the pendulum effect in the financial world.

The 17th-century research by Newton on gravity and physics, particularly his second law of motion, gave rise to the pendulum theory. However, this theory has appeared in various discussions, including the efforts of investors to understand financial markets.

In financial markets, the pendulum swings between periods of high and low interest rates, creating unique opportunities and challenges for stablecoins.

Imagine a pendulum swinging back and forth. In this view, interest rates are metaphorically represented by the position of the pendulum. When the pendulum is at one extreme, such as when interest rates are high, it indicates that monetary policy is in a tightening phase.

During this period, borrowing costs are higher, which may lead to a decrease in consumption and investment, but it can also help control inflation.

During high interest rate periods, stablecoins face greater demand as users seek higher yields. This creates opportunities for stablecoin issuers to capitalize on token demand.

Conversely, when the pendulum swings to the other extreme (such as low interest rates), it represents a time of monetary policy easing. Here, the cost of borrowing is more reasonable, promoting investment, spending, and economic expansion. If taken too far, it may also lead to concerns about inflation and asset bubbles.

When interest rates are low or declining, stablecoins may face reduced demand. In this case, users often explore alternative investments with more attractive returns.

In this context, the RWA argument suggests that stablecoins should be able to adapt to both high and low interest rate environments. By maintaining a close connection with central bank interest rate decisions, stablecoin issuers can strategically position themselves within this financial dynamic pendulum.

Frax and RWA

Even though Sam Kazemian's RWA argument presents an enticing landscape for stablecoins, it is also crucial to consider its practical application. The goal of the Frax v3 project is to build on this theory, creating a stablecoin ecosystem that relies on the dollar and interest rates set by the Federal Reserve.

Frax's strategy includes:

• Seeking to obtain Federal Reserve interest rates or FDIC-insured assets to reduce custodial risk.

• Establishing partnerships to ensure the stability and reliability of its stablecoin.

• Adapting to market dynamics by providing a stablecoin that maintains value and utility across various interest rate environments.

Conclusion

Sam Kazemian's Single Real World Asset (RWA) argument elucidates a thoughtful and prudent approach to stablecoin creation. This argument aims to ensure the stability and scalability of stablecoins by emphasizing a single government-backed entity asset and the importance of directly obtaining interest rates.

Frax's dedication to this hypothesis, along with its ongoing efforts to match the interest rates set by the Federal Reserve, demonstrates a forward-looking attitude that may influence the design and acceptance of future stablecoins. Amidst the challenges and uncertainties still present in the crypto environment, the RWA argument provides a compelling framework for stablecoin projects to navigate these complexities and stand the test of time.