Conversation with the founders of Frax Finance and Aave: Despite the competition, it's a positive-sum game, and stablecoins will become the largest asset class on-chain.

Original text: The Rollup

Compiled by: Yuliya, PANews

In an era of rapid development of cryptocurrency and blockchain technology, Sam Kazemian, the founder of Frax Finance, and Stani Kulechov, the founder of Aave, are undoubtedly two leading figures in the stablecoin sector. In a recent special conversation with The Rollup, they shared insights on the rapid growth of the stablecoin industry, the innovative journey of their own projects, and their views on the upcoming regulatory changes, particularly how stablecoins have become a focal point in the industry following the volatility of the crypto market in 2022.

Today, their attention is focused on the GENIUS Act, a landmark piece of legislation that could elevate stablecoins to legal tender, fundamentally altering the global landscape of the dollar. This article will delve into Sam and Stani's insights on the stablecoin market, their expectations for the bill, and the prospects of how stablecoins will shape the future financial ecosystem. PANews has transcribed this dialogue.

The boom of stablecoins and the legislative windfall

Host: The stablecoin industry is currently advancing rapidly, with multiple versions of legislation being pushed forward in the House of Representatives and the Senate. Although its market share is currently only 1.1% of the USD M1 supply, it seems the entire industry believes "this is just the beginning." As core players in the industry, what are your thoughts on this timing?

Sam Kazemian：

To be honest, I find it hard to contain my excitement. Every day I read investment reports and ETF briefings, and without exception, they list "AI" and "stablecoin" as the two hottest fields in today's world, with no other industry able to compete. As a founder of a stablecoin protocol, it feels amazing to see this industry finally understood and accepted by the whole world.

We spent years researching and building Frax, which started as an experimental "hybrid model" and has now transitioned into a "legal digital dollar" route that policymakers are willing to support with legislation; this leap is significant.

Stani Kulechov:

I completely understand Sam's feelings. Stablecoins are very intuitive and easy-to-understand tools, especially in regions with financial turmoil and fiat currency devaluation—such as Argentina, some African countries, and certain areas in the Middle East—where the financial stability provided by stablecoins is far more attractive than their local currencies.

But even in Western countries, the value of stablecoins lies not only in their "stability" itself, but in their ability to transform the yield of DeFi into something that mainstream users can understand and use. This is the natural evolution of fintech from "paper money → digital currency → on-chain assets." It truly opens up a new paradigm for cross-border value transfer.

Does stablecoin threaten the US dollar?

Host: You mentioned the value of stablecoins expanding into markets where good currencies are hard to obtain, such as Argentina, African countries, and some regions in the Middle East and Asia. Regarding how stablecoins affect the position of the dollar in the global monetary system, some believe stablecoins threaten the dollar's dominance, while another viewpoint is that stablecoins actually extend the global influence of the dollar. What are your thoughts on this issue?

Sam Kazemian：

I think this completely misunderstands the role of stablecoins. The opposite is true: stablecoins are an "extension" of the US dollar, a global extension of the dollar's influence.

We can look at stablecoins from two historical stages:

• The first phase is the ideal of a "decentralized algorithmic stablecoin"—maintaining stability purely through market mechanisms like Terra, which ultimately ended in a collapse;
• The second stage is the realism stage we are now entering: if you are pegging to USD, then the "most perfect" stablecoin design is actually to obtain recognition from the U.S. government—making it directly acknowledge that your token is "dollar."

This is where the GENIUS Act is revolutionary. For the first time, it makes stablecoins "US dollar legal", that is, when the US Treasury says "this compliant token is equal to the US dollar", it can really be accepted by all banks around the world that receive US dollars - it is no longer just a "digital asset" on the chain, but a "US dollar" in the legal sense.

Stani Kulechov：

The US dollar is a simple and effective tool for transaction settlement, and the proliferation of the internet has actually expanded global dollar trade. It is expected that stablecoins will experience a similar situation in the future, as the coverage of the internet becomes even wider. Achieving a more decentralized system requires time and widespread adoption; this is a long-term process. Currently, the scalability of technology is reflected in the expansion of existing value.

In the next 2-3 years, stablecoins will become the largest asset class on-chain, and within 5-7 years, security tokens will surpass the total of stablecoins and native crypto assets. The tokenization of traditional assets brings benefits to RWA (real-world assets), mostly priced in USD, which reinforces the concept of USD-settled transactions, but it is not necessarily the final form of the future financial system. The next 10-15 years will witness a shift in the medium of exchange towards new mediums with unique security and interoperability, which will enhance liquidity and create more ecosystem interest, establishing new ways to transact with future stablecoins and trading value.

Is a security token the ultimate form of on-chain assets?

Host: Stani, you just mentioned that in the long term, stablecoins are merely a transition, and security tokens will become the largest asset class on-chain, even surpassing stablecoins and native crypto assets. Which specific assets are you referring to? What is the logic behind this judgment?

Stani Kulechov:

This is a broad concept, and what we often refer to as RWA (Real World Assets) actually includes security tokens. The scope can range from publicly listed company stocks, private equity, debt instruments (such as government bonds, corporate bonds), to potentially future structured financial products.

Currently, many stablecoin reserves are supported by short-term U.S. Treasuries, and this type of asset has already been functioning on-chain. However, as on-chain interest rate tools mature, we will see traditional assets with higher yields and more complex risk tiers also being brought on-chain—this is the backbone of the financial system.

In the past, many high-quality assets had poor liquidity, not because they were unattractive, but due to high entry barriers and limited distribution channels. DeFi provides a globally accessible liquidity network that can liberate these assets from the "closed" financial structure, allowing them to be priced and traded directly on-chain. This will reshape the entire capital market structure.

The core impact of the GENIUS Act: Who can "print dollars"?

Host: Sam, you talked about the conversations with Senator Hagerty and other lawmakers. Can you discuss what new opportunities the GENIUS Act will open up once it takes effect?

Sam Kazemian：

There are various definitions of the U.S. dollar in the financial system, and the Federal Reserve distinguishes different types of U.S. dollar assets through classifications such as M1, M2, M3, etc. Among them, M1 money refers to the currencies that can be used immediately in the economy, including bank deposits, on-demand deposits, and money market funds that can be quickly converted into cash. M2 money, on the other hand, is riskier, such as U.S. dollar-denominated but not FDIC-insured bank debt, which is more like a U.S. dollar-denominated investment than a currency in the traditional sense.

Since the 19th century, the issuance rights of M1 money have been an exclusive privilege of federally chartered banks. They can create "immediately available" money, such as checking deposits, money market funds, etc. Now, the GENIUS Act has granted this ability to stablecoin issuers, allowing some entities that are not chartered banks to flexibly and innovatively issue M1 money. This is why some banks now seem to be on the verge of supporting this bill, which they previously opposed vehemently, as they preferred to maintain their monopoly on the issuance of M1 money.

The GENIUS Act and payment stablecoins are historically significant as they allow non-chartered banks to issue M1 money under strict regulations for the first time. These regulations require that stablecoins must be backed by high-security assets such as money market fund securities, treasury bills, Federal Reserve reverse repos, and FDIC-insured certificates of deposit. Currently, FRXUSD is striving to become the first payment stablecoin chartered entity. This development has not yet been fully priced in by the market, and it may gradually gain recognition in the coming months as more news emerges about banks issuing legitimate stablecoins.

Stani Kulechov:

Although it seems reasonable to intuitively regulate and approve areas like stablecoins, the key lies in the restrictions that these regulations may impose, especially in terms of innovation. Before entering DeFi, I also worked in fintech, where P2P lending and crowdfunding platforms were initially very active, but the subsequent regulatory framework forced many small startups to exit because they could not afford the high compliance costs.

So, the key is that the GENIUS Act must establish clear yet inclusive rules. We cannot drive innovators away due to excessive caution. Fortunately, there is now a group of very professional legislative representatives in the crypto industry who are working hard to advance this process.

Can multiple entities issue USD, will they compete with each other?

Host: Traditional banks like JP Morgan and Citibank are planning to issue their own stablecoins. Will there be competition among stablecoins in the future, or even issues related to "dollar inflation"?

Stani Kulechov：

Actually, we don't think of it as "competition". In our opinion, stablecoins are more like "payment channels" or "tracks" - each user chooses the most suitable track according to the scenario, such as USDC, GHO, FRXUSD, etc. In the Aave ecosystem, many users hold stablecoins for more than 6 months, which shows that they are not only a medium of circulation, but also a long-term store of value.

In Aave V4, we also designed the "GSM" (GHO stable module: an important functional module aimed at ensuring the 1:1 convertibility of Aave's native stablecoin GHO with other assets.) to accept these stablecoins as underlying collateral, such as USDC and USDT, which have already been integrated. In the future, Frax can also be included through governance processes, enhancing the overall flexibility and risk resilience of the protocol.

Sam Kazemian：

I completely agree. The digital dollar is a positive-sum game. The global M1 market size is $20 trillion, while the total market cap of on-chain stablecoins currently accounts for only 1%. This means that the penetration rate of the entire industry is still very low.

frxUSD has only been launched for three months and is currently applying for integration into the Aave ecosystem. I believe that more and more compliant stablecoins will join DeFi in the future, making the entire digital dollar system more diverse and robust. Frax's goal is to become the "base digital dollar" in this system.

Digital Dollar New Pattern: Frax and Aave

Host: Sam, you recently moved Frax from L2 to L1 and even restructured the original governance token FXS. Is this a preemptive layout for the "stablecoin compliance"?

Sam Kazemian：

Absolutely correct. Our overall architecture has transformed from an "algorithmic stablecoin protocol" to a "digital dollar issuance + settlement network." The original Frax Share (FXS) has been renamed to Frax, becoming the gas and governance token; while frxUSD is a brand new, legally compliant payment stablecoin.

We would like to call it "the correct version of the Libra blueprint." Libra initially attempted to build a globally universal digital currency but failed due to political resistance. Now, with the timing being right and policy support, we choose to aim for "compliant issuance of the US dollar" and realize the issuance, cross-chain settlement, and value transfer of stablecoin on the high-performance EVM chain, Fraxtal.

Host: Stani, Aave chose not to launch L1 or L2, but instead built the V4 "Unified Liquidity Framework". Why did you choose this path?

Stani Kulechov：

Although V4 has not yet been launched, the proposal was adopted last year and is currently nearing the end of development. We believe that in the future, the types of assets on the chain will be extremely diverse, and the risk curve will also be lengthened. Therefore, V4 introduces the design of "Liquidity Hubs + Spokes". Different asset classes (e.g., RWA, high-risk DeFi assets, etc.) can be allocated to different "sub-markets" but still centrally manage liquidity through "hubs".

This way, the user experience is simpler, the efficiency of capital utilization is higher, and system risks are effectively isolated. We have also introduced a "risk premium mechanism," where high-risk collateral will pay higher interest rates, thereby optimizing the overall cost structure of borrowing.

Frax's Collaboration Concept with Aave: Allowing "Digital Dollar" to Directly Participate in DeFi Yields

Sam Kazemian：

Then I will "publicly propose" it once. We plan to launch the FraxNet reward program in the Frax fintech app, where users holding frxUSD can earn risk-free returns equivalent to US Treasury bonds in non-custodial wallets.

But I want to go further—allow frxUSD holders to deposit assets directly into Aave to earn returns through the real lending market. This will make the combination of "digital dollars + on-chain yields" a reality and position Aave as the first DeFi yield platform to interface with legitimate dollars.

Stani Kulechov：

This idea is fantastic and showcases the modularity and composability of Aave V4. We look forward to the inclusion of Frax's assets in the governance proposal process and are willing to provide relevant support to make this "on-chain dollar yield" a reality.