Listen to our latest episode featuring Frax and learn how a five-year DeFi native is rebuilding its entire stack around a fully backed, yield-forwarding digital dollar.
In this episode, Nertila from Trading Strategy discusses with Sean Kelley from Frax. Frax is a stablecoin protocol that has been building in DeFi for over five years, known first for its fractional-algorithmic FRAX and a family of primitives around it including frxETH, sfrxETH, Fraxlend, and Fraxswap. Its flagship is now frxUSD, a stablecoin fully backed by tokenized treasuries from BlackRock, WisdomTree, and Superstate. Its staked version, sfrxUSD, deploys that backing into blue-chip DeFi strategies including Fraxlend and Aave V4.
- View Frax Vaults and Yields
- Watch the Frax episode on Youtube
- Listen the Frax episode on Spotify
Any questions? Join our community Discord server.
Transcript:
Welcome to TradingStrategy.ai, the podcast where you can learn more about the essentials of DeFi trading in the new world. This is your go-to show for automated trading strategies and market insights. Welcome to the conversation — this is your host, Nertila.
Nertila: Welcome to today's podcast at TradingStrategy.ai. This episode we have a new guest. His name is Sean, and he works for Frax. Hello, Sean, and thank you again for joining me today in our conversation.
Sean: Hi there. Thanks for having me.
Nertila: I'd like to get started with your professional background. When did you start working in the crypto industry?
Sean: I've been following the crypto industry for the better part of a decade now. I started working for Frax full-time about a year ago, but before that I was involved in DeFi for many years. I actually got involved in DePIN originally — decentralized physical infrastructure networks — because my background is as a hardware engineer.
Sean: So I worked in both the medical space and the IoT space as a systems engineer, building out robotics and hardware systems.
Nertila: Oh, that's interesting. How did you switch from the medical space to crypto? What is it you like so much about the crypto industry?
Sean: There are a lot of things I like about the crypto industry. I think what originally got me interested was the decentralized bootstrapping of physical networks. When you looked at early examples of what Helium was able to accomplish — basically creating a cellular network from scratch, built by the community — I think those sorts of initiatives were very interesting to me.
Sean: And then I got into DeFi and saw the promise of being able to provide more opportunity for people around the world. That's what got me interested in the space. In terms of pivoting my career, it is kind of a drastic change to go from a mechanical engineer to someone who works in DeFi.
Sean: But there are a lot of similarities in terms of thinking about systems, understanding risk, and understanding how to build systems that are resilient and reliable. And then I went to a school here in the UK and got a master's degree in blockchain, which covered some of the data analytics and game theory aspects of building on the blockchain.
Nertila: You mentioned that you work for Frax. I'm sure the majority of our audience knows Frax, as it's an established crypto company. But I would like to hear from you about Frax, and what exactly do you do there?
Sean: So Frax has been around for over five years, building in DeFi. At Frax, I am the VP of Partnerships and Communications. So basically I work with partners, we create strategic relationships, and then I also help on the communication side, helping the market understand the value of these relationships and the potential they have as we continue to grow together.
Sean: Frax is mostly known for our original algorithmic collateralized stablecoin, which grew into billions of supply, and we built a series of primitives around that in order to support stablecoins in general. So we had FRAX, which was our algorithmic collateralized stablecoin, and then we released frxETH, which is our ETH stablecoin, and sfrxETH, which is the liquid staked ETH — one of the highest performing liquid staked assets for ETH.
Sean: And then we've built Fraxlend, Fraxswap, a whole bunch of primitives that support the use of stablecoins in this space. But we've kind of regeared our entire offering over the past couple of years towards a GENIUS digital dollar future. So our new flagship stablecoin is frxUSD, and we're presenting frxUSD as a viable competitor to the incumbents, Tether's USDT and Circle's USDC.
Sean: But what we do is take the underlying yield from frxUSD and forward it to our partners as part of a pro-growth, positive-sum model that creates a more sustainable DeFi ecosystem. And so all of our focus these days is on frxUSD and its growth as money. We're starting to see a lot of traction in terms of people trusting Frax, which has this great track record, and then integrating frxUSD because it is the best, from many perspectives, bar none.
Nertila: Interesting. I would like to know if you have any kind of risk management system in place.
Sean: Yeah, definitely. I mean, it depends on which product you're looking at. Risk management comes in many different forms. There's the risk management that exists at the smart contract level, and from a smart contract level, our audits are done by the best auditors in the business.
Sean: Especially now, when you're seeing all these new AI models come out. Every single time a new cutting-edge AI model comes out, we all get together and we run it against our entire code base to make sure that, with the latest and greatest models, there are still no newly discovered vulnerabilities.
Sean: Even though everything has been audited, it's always good to continuously check these sorts of things. So that's at the smart contract level. We also have a bug bounty program. And then, when you look at an entire system, there are risks across the stack, from the back end to the front end.
Sean: And every single one, we look through step by step and see where the vulnerabilities are and make sure that we reduce those. So we have a five-year-plus track record without major security incidents, and we're very trusting of the system we have in place from that perspective.
Sean: And then I know, from Trading Strategy's perspective, when you're talking about risks you're often looking at vaults themselves and where the risk is in terms of the investment strategies. And so for us, where that really applies is sfrxUSD, which is our staked frxUSD product. frxUSD itself is built to be compatible with the GENIUS Act, which means that it's fully backed by tokenized treasuries from leading institutions like BlackRock, WisdomTree, and Superstate.
Sean: And so frxUSD, from a risk perspective, is the lowest risk possible stablecoin you can hold. From a transparency perspective, it's more transparent than any other stablecoin on the market, because any time you want, you can look at the blockchain and verify that frxUSD is fully backed. And that's even better than some of the leaders, who publish monthly attestations.
Sean: And we're actually going to be working with DefiLlama to release a proof of reserves that will report on this on-chain hourly — look forward to that. And so for sfrxUSD, from a risk perspective, we take the underlying frxUSD in sfrxUSD and we invest it in blue-chip DeFi strategies.
Sean: So that's a combination of our own Fraxlend strategies, but then also Aave V4, where frxUSD is one of the top stablecoins right now. That is where a lot of the frxUSD underlying sfrxUSD is currently located.
Nertila: That's quite a holistic approach that you guys run for risk management. In your opinion, are the current regulations more helpful for startups, or do they work against them? What's your opinion about that?
Sean: I think from a regulatory perspective, there are many different things to look at. But in general, the landscape has changed a lot over the past year, especially with the passing of the GENIUS Act, to allow for more innovation. That's what these regulators are trying to get to.
Sean: They want America — the US dollar stablecoin — to be the leading innovator in the space, because it's actually strategically very important for stablecoin growth as a way of exporting US Treasuries to the world and maintaining that position. So strategically, it makes a lot of sense to have innovation and competition in these areas, especially as they're nascent and growing, rather than just giving them to legacy banks, where they might take a long time and develop slower.
Sean: So competition is a good thing. Regulators are beginning to warm up to the benefits of stablecoins, tokenization, and blockchain-based financial systems. More and more regulators are coming around to that, and we're seeing that with the GENIUS Act. We're seeing it with the CLARITY Act at the highest levels of government.
Sean: So from a regulatory perspective, things have improved a lot since the Gary Gensler SEC days.
Nertila: Where do you think the profit and risk will accumulate in the future?
Sean: This is a great question. One of the great things about DeFi is that you see capital allocation across markets in real time, and you can see the trends changing in a market over time. I think what we're seeing right now — and we were talking about this a little bit before we started recording — is that each cycle kind of has its own drivers of capital.
Sean: And I think as the market matures, we've seen risk become more appropriate, whereas before we might have seen loans done without due diligence that ended up blowing up. We still see that today, but I think with each one we get a reminder that the industry itself is professionalizing, especially as you see institutions coming in.
Sean: And the biggest capital driver we'll see is the rise of real world assets. Besides stablecoins, which have the potential to unlock trillions — but from an investment standpoint, stablecoins aren't as interesting. The most you can do with a stablecoin is what Frax itself is doing, which is sharing a hundred percent of the underlying yield.
Sean: If you want to get more than the risk-free rate, you do have to take some risk. And so the market is maturing in this sense, and they're looking towards real world assets for that next layer of yield. I think we do have some concerns that, if we continue to borrow without due diligence, real world assets can also result in drawdowns.
Sean: And so if we don't have clarity on the underlying structure of these real world assets, problems can also arise there. We've seen that with some of these long-tail real world assets, where it's not entirely clear how these markets are created and who's supplying liquidity, and then all of a sudden things dry up.
Sean: So there are definitely things to be worked on, and luckily there are a lot of people working in this space in terms of bringing clarity to these markets and making sure that due diligence is performed from a curator side. Trust is built over years and lost in an instant.
Sean: And the most important thing you can do is find someone who has a good track record, and that track record is based on actual procedural methods rather than just luck. Frax is one of those providers, having operated in the space for five-plus years, across many products, across billions in TVL, and has not had a security incident.
Sean: And that doesn't happen from luck.
Nertila: Interesting that you mentioned security. What's your insight on the latest hacks that have happened in the DeFi space?
Sean: The hacks have been awful, for sure. They've been extremely damaging to the industry, and there are a number of repercussions from it. One thing I think is interesting to note is that people believed AI was going to cause the end of DeFi — some people were calling for AI to find all these exploits in all these protocols that already existed, and that it was going to be very damaging.
Sean: And since these new groundbreaking models have come out, we actually haven't really seen a rise in exploits from that. Partially because the models themselves can be used to shore up your security systems. But the main reason is that a lot of these exploits come from social engineering and poor OPSEC.
Sean: So it's actually not related to the underlying smart contracts, it's related to operational security, where keys get mismanaged. And that's something Frax takes extremely seriously in terms of key management. We use hardware keys for everything, even pushing code to our code base.
Sean: That's not smart contract related. I think we reached this point where people are saying DeFi's over. But since then, since the recent exploits, I think things have been on a better path and everybody is kind of banding together to be more careful when it comes to these things.
Sean: But ultimately it's up to each team, and for users to trust those teams, and there certainly has been capital flight from DeFi. What we're seeing now is more structures where people are trying to remove risk from the equation by issuing, for example, synthetic assets against real assets, so that LPs always have control of the underlying collateral, things like that.
Sean: But ultimately, for true decentralized DeFi, you can't do stuff like that, and that still needs to exist. But when it comes to real world assets and institutions, we're seeing a lot more protections put in place. We're seeing tranching of risk. We're seeing insurance — basically just maturing of the industry.
Sean: These are just the growing pains of an industry where capital is at stake when it comes to code. But I'm confident DeFi isn't going anywhere just because of hacks.
Nertila: What are some of the hard lessons you have learned so far?
Sean: Yeah, I think the hardest lesson to learn — at Frax we're builders by nature, and we've built a lot of incredible products. I think the hardest thing to learn is that there's more to an offering than a great product that might, on paper, be more capital efficient and have more benefits than the alternatives.
Sean: I think what we're beginning to see in the market is that the most important thing is distribution. Even if you don't have the best product, if you have distribution you can monetize really any product. And the best example of that we've seen recently is Robinhood Chain, and the protocols that were paying to be a part of Robinhood Chain and their app.
Sean: And so at Frax, we're really focused now on building net new use cases that users are demanding, and providing that in a package where they are a part of our ecosystem, rather than the past, where it might have just been individual LPs yield farming or lending on their own.
Sean: We're trying to provide an all-in-one experience for users to manage their wealth however they see fit — from an investment side, from a lending side, from a real-world payment side when it comes to a card — all in a non-custodial manner. That is the vision, and I think Frax is uniquely positioned to be able to deliver that.
Nertila: Is there anything that DeFi, or the crypto industry in general, can improve? What do you suggest to get the ecosystem in a better place?
Sean: Yeah, I mean, there are so many things DeFi can improve, obviously, and we've talked about a number of them here. So one is security. These exploits — we need to get better about operational security, we need to get better about smart contract security, all these things. There are just too many exploits happening.
Sean: Two, we need to get better about distribution and expanding outside of our CT-native audience. There are apps that are starting to do this successfully and finding ways to abstract away all the complexities of crypto when it comes to wallets and approvals and all that stuff.
Sean: You're seeing more and more apps today where you can just log in with a social login, email, Gmail, passkey, anything like that, and the infrastructure on the back end creates all the wallets for you and handles that, which is great. I also think there's too much degen risk in crypto.
Sean: And in addition to that, there's too much focus on high risk without understanding the underlying, which is hard to do because there's a perverse incentive for providers of high yields to not disclose how they're obtaining those high yields. Which has always ended badly.
Sean: Which is why we position frxUSD as slightly higher than the risk-free rate, and it's invested in blue-chip DeFi protocols. We consider it to be the highest risk-adjusted yield in DeFi. But we're not claiming to give away 10% or anything like that, because over the long term that is unsustainable and you'll see drawdowns.
Sean: So there are a lot of things DeFi can improve, and I would love for the DeFi natives like Frax, and others we are working with, to be the ones who cross the chasm into this new era where more retail and more institutions are coming on-chain. And you do see there's a select few DeFi protocols who have really nailed their product and their offering, and have proven themselves over time, and will be able to make this transition.
Sean: But there are a lot of projects that just won't survive, and we're seeing projects close down. Frax is here for the long haul. We've been building for five-plus years, we've got a lot of exciting things in the pipeline, and so we're going to be one of those ones that cross the chasm.
Sean: But what I would hate to see is all of DeFi just ending up being the institutions themselves coming on-chain, and that's it at the end of the day. I would rather see it come from the innovators in DeFi, who've been experimenting all this time, finding a way to turn those experiments into something successful long-term.
Nertila: Okay, so what's next for you?
Sean: We're just continuing to build out frxUSD as money. Every single partnership and deal that we do is to advance frxUSD as money. So, across the board, whether it's institutions using frxUSD in their treasuries, whether it's blockchains like Sonic or Somnia that are using frxUSD to power their ecosystem-native stablecoins, whether it's top DeFi protocols like Aave that are using frxUSD as one of the top stablecoins in their V4.
Sean: And then we have 30-plus projects who are pairing their stablecoins with frxUSD on Curve. We work with Aerodrome, we work with Hydrex. We work with really just anyone who wants a more sustainable ecosystem, or sustainable products. So that's from the AMM side, that's from the vault side.
Sean: Any partnership benefits from having a more productive stablecoin like frxUSD. And so we're just slowly building out those network effects, and over time those compound, and we believe that frxUSD will be a default stablecoin — top three by the end of the decade.
Nertila: Thank you so much for joining me today.
Sean: Thanks for having me.