Conversation with the founders of Frax Finance and Aave: Despite competition, it's a positive-sum game; stablecoins will become the largest asset class on-chain.
Original text: The Rollup; Compiler: Yuliya, PANews
In an era of rapid development in 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 field. 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, especially how stablecoins have become a focal point in the industry following the volatility in the crypto market in 2022.
Today, their attention is focused on the GENIUS Act, a landmark piece of legislation that could elevate stablecoins to the status of 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 how stablecoins are shaping the future of the financial ecosystem. PANews has transcribed this dialogue.
The Boom of Stablecoins and Legislative Trends
Host: The stablecoin industry is currently making rapid progress, with multiple versions of legislation being advanced in both the House and the Senate. Although the market share is currently only 1.1% of the USD M1 supply, it seems that 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 all list "AI" and "stablecoins" as the two hottest fields in today's world, with no other industry being 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 transformed into a "regulated digital dollar" route that policymakers are willing to legislate in support of. This leap is significant.
Stani Kulechov:
I fully understand Sam's feelings. Stablecoins are very intuitive and easy-to-understand tools, especially in regions with financial turmoil and currency devaluation—such as Argentina, some African countries, and certain areas in the Middle East—where the financial stability offered by stablecoins is far more attractive than their local currencies.
However, 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 represents a natural evolution of financial technology from "fiat currency → digital currency → on-chain assets." It truly opens up a new paradigm for cross-border value transfer.
Do stablecoins 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 certain regions in the Middle East and Asia. Regarding how stablecoins affect the position of the dollar in the global monetary system, some believe that 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 fact is just the opposite: stablecoins are an "extension" of the dollar, a global extension of the dollar's influence.
We can look at stablecoins from two historical stages:
The first stage is the ideal of a "decentralized algorithmic stablecoin" - relying purely on market mechanisms for stability like Terra, which ultimately ended in collapse;
The second stage is the realism stage we are now entering: if you are pegging to USD, then the "perfect" stablecoin design is actually to gain recognition from the US government - allowing it to directly acknowledge your token as "dollars."
This is the revolutionary aspect of the GENIUS Act. It allows stablecoins to have "legal tender status in dollars" for the first time, meaning that when the U.S. Treasury says "this compliant token is equal to a dollar," it can truly be accepted by all banks globally that accept dollars—it's no longer just a "digital asset" on the chain, but legally a "dollar."
Stani Kulechov:
The US dollar serves as a simple and effective trading settlement tool, and the proliferation of the internet has actually expanded global dollar trade. It is anticipated that stablecoins will experience a similar situation in the future due to the wider reach of the internet. Achieving a more decentralized system requires time and widespread adoption, which is a long-term process. Currently, the scale 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 crypto-native assets. Traditional assets being brought on-chain benefit RWA (real-world assets), mostly priced in USD, which reinforces the concept of USD-settled transactions, but this is not necessarily the final form of the future financial system. The next 10-15 years will witness a shift in trading mediums towards new mediums with unique security and interoperability, which will enhance liquidity and create more ecosystem interest, establishing new ways for future stablecoins and trading value.
Are securities tokens the ultimate form of on-chain assets?
Host: Stani, you just mentioned that in the long run, stablecoins are merely a transition, and security tokens will become the largest asset class on the blockchain, even surpassing stablecoins and native cryptocurrencies. Which specific assets are you referring to? What is the logic behind this judgment?
Stani Kulechov:
This is a broad concept. What we commonly refer to as RWA (Real World Assets) actually also includes security tokens. The scope can range from publicly traded company stocks, private equity, debt instruments (such as government bonds, corporate bonds), to potentially structured financial products in the future.
Currently, many stablecoin reserves are supported by short-term U.S. Treasury bonds, and this asset is already functioning on-chain. However, as on-chain interest rate instruments mature, we will see traditional assets with higher yields and more complex risk layers being brought on-chain — and this is the backbone of the financial system.
In the past, many high-quality assets were illiquid, not because they were not attractive, but because they had high barriers to entry and limited distribution channels. DeFi provides a globally accessible liquidity network that can liberate these assets from "closed" financial structures and 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 mentioned your conversations with Senator Hagerty and other lawmakers. Can you talk about what new opportunities will be opened once the GENIUS Act goes into effect?
Sam Kazemian:
The US dollar has various definitions in the financial system, with the Federal Reserve categorizing different types of dollar assets through M1, M2, and M3 classifications. M1 money refers to currency that is immediately available in the economy, including bank deposits, demand deposits, and money market funds that can be quickly converted to cash. M2 money forms carry more risk, such as bank debts denominated in dollars but not insured by the FDIC (Federal Deposit Insurance Corporation); these assets are more like dollar-denominated investments rather than traditional forms of money.
Since the 19th century, the issuance rights of M1 money have been an exclusive privilege of federally chartered banks in the United States. They can create "immediately available" money, such as checking deposits, money market funds, and so on. 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 act, which they had previously opposed, as they prefer to maintain a 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 currency 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 be recognized in the coming months as more news about banks issuing legitimate stablecoins emerges.
Stani Kulechov:
Although regulatory approval for stablecoins and similar areas seems reasonable intuitively, the key lies in the restrictions that these regulations may impose, especially regarding 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 - the GENIUS Act needs to establish clear and inclusive rules. We must not drive innovators away due to excessive caution. Fortunately, there is now a group of very professional legislative representatives in the crypto industry working hard to advance this process.
Will multiple entities issuing dollars compete with each other?
Host: Traditional banks like JP Morgan and Citibank are planning to issue their own stablecoins. Will there be competition between stablecoins in the future, and could there even be a "dollar inflation" issue?
Stani Kulechov:
In fact, we do not see this as "competition." In our view, stablecoins are more like "payment channels" or "tracks"—each user chooses the most suitable track based on the scenario, such as USDC, GHO, frxUSD, etc. In the Aave ecosystem, many users hold stablecoins for more than 6 months, which indicates that they are not just a medium of circulation but also a means of long-term value storage.
In Aave V4, we also designed the "GSM" (GHO Stability Module: an important functional module aimed at ensuring that Aave's native stablecoin GHO maintains a 1:1 convertibility with other assets.) to accept these stablecoins as underlying collateral, such as USDC and USDT, which are already integrated. In the future, Frax can also be included through the governance process, enhancing the overall flexibility and risk resistance 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 only accounts for 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 in the future, more and more compliant stablecoins will join DeFi, making the entire digital dollar system more diverse and robust. Frax's goal is to become the "base digital dollar" in this system.
The New Landscape of Digital Dollar: Frax and Aave
Host: Sam, you recently transitioned Frax from L2 to L1 and even restructured the original governance token FXS. Is this a proactive move towards "stablecoin compliance"?
Sam Kazemian:
Completely correct. Our overall architecture has transformed from "Algorithmic Stablecoin Protocol" to "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, fiat-compliant payment stablecoin.
We would like to call it "the correct version of the Libra blueprint." Libra initially attempted to build a globally applicable digital currency but failed due to political resistance. Now, with the timing being right and policy support in place, we choose to aim for "compliant issuance of the US dollar" and realize the issuance of stablecoins, cross-chain settlements, and value transfers on the high-performance EVM chain of Fraxtal.
Host: Stani, Aave chose not to issue on L1 or L2, but instead built the "Unified Liquidity Architecture" for V4. 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 fund utilization is higher, and the system risks are effectively isolated. We have also introduced a "risk premium mechanism", where high-risk collateral will pay higher interest rates, thus optimizing the overall cost structure of borrowing.
Frax and Aave Collaboration Concept: Allowing "Digital Dollars" 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 U.S. Treasury bonds in non-custodial wallets.
But I want to go further - allowing frxUSD holders to directly deposit assets into Aave to earn returns through the real lending market. This would make the combination of "digital dollars + on-chain returns" a reality, and also make Aave the first DeFi yield platform to connect with legal US dollars.
Stani Kulechov:
This idea is fantastic and showcases the modularity and composability of Aave V4. We are looking forward to the inclusion of Frax's assets in the governance proposal process and are willing to provide relevant support to turn this "on-chain dollar yield" into a reality.
The content is for reference only, not a solicitation or offer. No investment, tax, or legal advice provided. See Disclaimer for more risks disclosure.
Conversation with the founders of Frax Finance and Aave: Despite competition, it's a positive-sum game; stablecoins will become the largest asset class on-chain.
Original text: The Rollup; Compiler: Yuliya, PANews
In an era of rapid development in 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 field. 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, especially how stablecoins have become a focal point in the industry following the volatility in the crypto market in 2022.
Today, their attention is focused on the GENIUS Act, a landmark piece of legislation that could elevate stablecoins to the status of 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 how stablecoins are shaping the future of the financial ecosystem. PANews has transcribed this dialogue.
The Boom of Stablecoins and Legislative Trends
Host: The stablecoin industry is currently making rapid progress, with multiple versions of legislation being advanced in both the House and the Senate. Although the market share is currently only 1.1% of the USD M1 supply, it seems that 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 all list "AI" and "stablecoins" as the two hottest fields in today's world, with no other industry being 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 transformed into a "regulated digital dollar" route that policymakers are willing to legislate in support of. This leap is significant.
Stani Kulechov:
I fully understand Sam's feelings. Stablecoins are very intuitive and easy-to-understand tools, especially in regions with financial turmoil and currency devaluation—such as Argentina, some African countries, and certain areas in the Middle East—where the financial stability offered by stablecoins is far more attractive than their local currencies.
However, 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 represents a natural evolution of financial technology from "fiat currency → digital currency → on-chain assets." It truly opens up a new paradigm for cross-border value transfer.
Do stablecoins 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 certain regions in the Middle East and Asia. Regarding how stablecoins affect the position of the dollar in the global monetary system, some believe that 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 fact is just the opposite: stablecoins are an "extension" of the dollar, a global extension of the dollar's influence.
We can look at stablecoins from two historical stages:
The first stage is the ideal of a "decentralized algorithmic stablecoin" - relying purely on market mechanisms for stability like Terra, which ultimately ended in collapse;
The second stage is the realism stage we are now entering: if you are pegging to USD, then the "perfect" stablecoin design is actually to gain recognition from the US government - allowing it to directly acknowledge your token as "dollars."
This is the revolutionary aspect of the GENIUS Act. It allows stablecoins to have "legal tender status in dollars" for the first time, meaning that when the U.S. Treasury says "this compliant token is equal to a dollar," it can truly be accepted by all banks globally that accept dollars—it's no longer just a "digital asset" on the chain, but legally a "dollar."
Stani Kulechov:
The US dollar serves as a simple and effective trading settlement tool, and the proliferation of the internet has actually expanded global dollar trade. It is anticipated that stablecoins will experience a similar situation in the future due to the wider reach of the internet. Achieving a more decentralized system requires time and widespread adoption, which is a long-term process. Currently, the scale 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 crypto-native assets. Traditional assets being brought on-chain benefit RWA (real-world assets), mostly priced in USD, which reinforces the concept of USD-settled transactions, but this is not necessarily the final form of the future financial system. The next 10-15 years will witness a shift in trading mediums towards new mediums with unique security and interoperability, which will enhance liquidity and create more ecosystem interest, establishing new ways for future stablecoins and trading value.
Are securities tokens the ultimate form of on-chain assets?
Host: Stani, you just mentioned that in the long run, stablecoins are merely a transition, and security tokens will become the largest asset class on the blockchain, even surpassing stablecoins and native cryptocurrencies. Which specific assets are you referring to? What is the logic behind this judgment?
Stani Kulechov:
This is a broad concept. What we commonly refer to as RWA (Real World Assets) actually also includes security tokens. The scope can range from publicly traded company stocks, private equity, debt instruments (such as government bonds, corporate bonds), to potentially structured financial products in the future.
Currently, many stablecoin reserves are supported by short-term U.S. Treasury bonds, and this asset is already functioning on-chain. However, as on-chain interest rate instruments mature, we will see traditional assets with higher yields and more complex risk layers being brought on-chain — and this is the backbone of the financial system.
In the past, many high-quality assets were illiquid, not because they were not attractive, but because they had high barriers to entry and limited distribution channels. DeFi provides a globally accessible liquidity network that can liberate these assets from "closed" financial structures and 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 mentioned your conversations with Senator Hagerty and other lawmakers. Can you talk about what new opportunities will be opened once the GENIUS Act goes into effect?
Sam Kazemian:
The US dollar has various definitions in the financial system, with the Federal Reserve categorizing different types of dollar assets through M1, M2, and M3 classifications. M1 money refers to currency that is immediately available in the economy, including bank deposits, demand deposits, and money market funds that can be quickly converted to cash. M2 money forms carry more risk, such as bank debts denominated in dollars but not insured by the FDIC (Federal Deposit Insurance Corporation); these assets are more like dollar-denominated investments rather than traditional forms of money.
Since the 19th century, the issuance rights of M1 money have been an exclusive privilege of federally chartered banks in the United States. They can create "immediately available" money, such as checking deposits, money market funds, and so on. 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 act, which they had previously opposed, as they prefer to maintain a 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 currency 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 be recognized in the coming months as more news about banks issuing legitimate stablecoins emerges.
Stani Kulechov:
Although regulatory approval for stablecoins and similar areas seems reasonable intuitively, the key lies in the restrictions that these regulations may impose, especially regarding 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 - the GENIUS Act needs to establish clear and inclusive rules. We must not drive innovators away due to excessive caution. Fortunately, there is now a group of very professional legislative representatives in the crypto industry working hard to advance this process.
Will multiple entities issuing dollars compete with each other?
Host: Traditional banks like JP Morgan and Citibank are planning to issue their own stablecoins. Will there be competition between stablecoins in the future, and could there even be a "dollar inflation" issue?
Stani Kulechov:
In fact, we do not see this as "competition." In our view, stablecoins are more like "payment channels" or "tracks"—each user chooses the most suitable track based on the scenario, such as USDC, GHO, frxUSD, etc. In the Aave ecosystem, many users hold stablecoins for more than 6 months, which indicates that they are not just a medium of circulation but also a means of long-term value storage.
In Aave V4, we also designed the "GSM" (GHO Stability Module: an important functional module aimed at ensuring that Aave's native stablecoin GHO maintains a 1:1 convertibility with other assets.) to accept these stablecoins as underlying collateral, such as USDC and USDT, which are already integrated. In the future, Frax can also be included through the governance process, enhancing the overall flexibility and risk resistance 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 only accounts for 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 in the future, more and more compliant stablecoins will join DeFi, making the entire digital dollar system more diverse and robust. Frax's goal is to become the "base digital dollar" in this system.
The New Landscape of Digital Dollar: Frax and Aave
Host: Sam, you recently transitioned Frax from L2 to L1 and even restructured the original governance token FXS. Is this a proactive move towards "stablecoin compliance"?
Sam Kazemian:
Completely correct. Our overall architecture has transformed from "Algorithmic Stablecoin Protocol" to "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, fiat-compliant payment stablecoin.
We would like to call it "the correct version of the Libra blueprint." Libra initially attempted to build a globally applicable digital currency but failed due to political resistance. Now, with the timing being right and policy support in place, we choose to aim for "compliant issuance of the US dollar" and realize the issuance of stablecoins, cross-chain settlements, and value transfers on the high-performance EVM chain of Fraxtal.
Host: Stani, Aave chose not to issue on L1 or L2, but instead built the "Unified Liquidity Architecture" for V4. 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 fund utilization is higher, and the system risks are effectively isolated. We have also introduced a "risk premium mechanism", where high-risk collateral will pay higher interest rates, thus optimizing the overall cost structure of borrowing.
Frax and Aave Collaboration Concept: Allowing "Digital Dollars" 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 U.S. Treasury bonds in non-custodial wallets.
But I want to go further - allowing frxUSD holders to directly deposit assets into Aave to earn returns through the real lending market. This would make the combination of "digital dollars + on-chain returns" a reality, and also make Aave the first DeFi yield platform to connect with legal US dollars.
Stani Kulechov:
This idea is fantastic and showcases the modularity and composability of Aave V4. We are looking forward to the inclusion of Frax's assets in the governance proposal process and are willing to provide relevant support to turn this "on-chain dollar yield" into a reality.