Listen to our latest episode featuring Frankencoin and learn how an oracle-free design and Swiss-style optimistic governance make a truly decentralized stablecoin possible.
In this episode, Nertila from Trading Strategy discusses with Johannes Kern from Frankencoin. Frankencoin is a fully decentralized Swiss franc stablecoin (ZCHF) built as an oracle-free collateralized debt platform, governed through an optimistic model where any proposal can go live unless vetoed by just 2% of time-weighted voting power. The Frankencoin Association stewards the protocol, which is the largest Swiss franc stablecoin, holding its peg since 2023 through on-chain collateral rather than a central counterparty. Its MiCA white paper has been published in the European MiCA register, opening the digital Swiss franc to regulated European crypto markets
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Transcript:
Nertila: 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: Hello, everybody. Welcome to today's podcast at TradingStrategy.ai. Today we have a new guest. His name is Johannes, and he works for a DAO, or association, known as Frankencoin. Welcome, Johannes, and thank you for being part of this conversation.
Johannes: Hi, Nertila. Thank you so much for having me here today at your podcast.
Nertila: How did you first get into crypto? Tell us about your journey.
Johannes: Sure. So I've been in crypto for a while now, and actually it started quite interestingly. I did an exchange back in the day in South Africa, of all places. I was studying in Stellenbosch in 2014, and I had a professor there who was teaching a class called Development Economics in Sub-Saharan Africa.
Johannes: And one of the projects he did was a remittance project, meaning people from Zimbabwe living in South Africa would send money back home to their families. And there was no working — or I think there still is no proper working — banking system in Zimbabwe, so people would literally give cash to a taxi driver and ask them to take the money over the border.
Johannes: Now, obviously this is very expensive and very inefficient, so he started thinking of using Bitcoin back in the day to make this more efficient. And this finally came full circle, because a couple of years later I was working with a fund called Eleva Digital, and this fund invested into Celo.
Johannes: And Celo was built as this remittance kind of provider around the world. So that's how I initially got in. Then I did my own startup while I was still a student, but soon after joined Swisscom Blockchain, which was doing ICO consulting, in 2018. From there, I left to join Eleva Digital, the fund.
Johannes: I spent a couple of years there and wanted to change sides, so I left — still working with a single family office — and joined Frankencoin with the inventor, Luzius Meisser, to really scale up a Swiss franc stablecoin and bring this amazing asset we call the Swiss franc into the digital realm, all fully decentralized.
Nertila: So what is Frankencoin and what's your role there?
Johannes: I run the association. So if you look at Frankencoin — I mean, I think the listeners don't really have much context on what Frankencoin actually is — my personal role is running the association. The association is the steward of this decentralized protocol. So Frankencoin itself is fully decentralized.
Johannes: There's no one controlling it, there's no one owning it. But you have the Frankencoin Association, which is somewhat like this third party with a vested interest in bringing this protocol forward. So supporting it on all sides which need be: marketing, development, business development, risk management, and so on.
Johannes: And we're a pretty small team. We're four full-time employees in the association itself, and then a bunch of associated freelancers. And I'm kind of trying to keep everything together — I think that's my role internally. But day-to-day I also see my calling, in a sense, in bringing the Swiss franc to the world.
Johannes: So you'll see me quite often on stage, or in podcasts, or in opinion papers, or whatever it might be, just talking about how we need to break this dominance the dollar currently has in stablecoins, right? The dollar has about 99.7% of all the market cap in stablecoins, and we believe that this should not be, that we should change that, and that the Swiss franc is a vastly superior store of value to the US dollar.
Nertila: So is Frankencoin itself the DAO?
Johannes: No, the Frankencoin Association is an association. The Frankencoin protocol itself is a DAO. The protocol itself is fully decentralized.
Nertila: Do you have any risk management system in place, especially for a DAO like the Frankencoin protocol?
Johannes: When talking about risk management in DAOs, I think a big part of it is the protocol itself, right? The beauty of Web3 is very much that it's self-executing. So you have a set of parameters, or a set of rules, defined in smart contracts, and those give you the framework within which you can operate. Now, in the case of Frankencoin, it's a CDP, meaning it's a collateralized debt platform, a bit like Liquity or MakerDAO. And that means from a risk management perspective there's a limited set of parameters you set: okay, which collaterals are you going to accept?
Johannes: What liquidation price are you going to accept for those collaterals? When are they going to be liquidated? How are they going to be liquidated? What interest rates do you set, and so on. Those parameters are set by the DAO. Now, what makes Frankencoin quite special is two things. One — and I'll get into that in a second — is that it's oracle-free.
Johannes: So there are no oracles, there are no external price sources. It's fully self-contained, and from a risk perspective this removes probably the largest attack vector, or risk vector, that CDPs have. And we've just seen it last week again, where there was another oracle attack, right? Where we had the failure of Ostium, which turned out to be an oracle failing.
Johannes: And we've seen this across many, many protocols, and actually those oracles are the reason why CDPs cannot grow quicker and cannot accept more collaterals. Now, the second one is how the governance is built. As I said, Frankencoin is a fully decentralized protocol.
Johannes: It's a DAO in that sense. However, it has optimistic governance. So what does that mean? You do not need majorities to get anything done in Frankencoin. Quite the opposite. Anyone can come — without holding any of the governance tokens, which are the FPS — and propose things. So you could go to the protocol and say, "Hey, I would now like to have my Nertila tokens as a collateral valued at 10 billion US dollars."
Johannes: People have tried that, by the way. And you pay a fee to propose — basically, it costs you 1,000 Swiss francs. But then you have a veto period. Depending on what type of proposal it is, if no one vetoes it within five days, it goes live. However, vetoing is very simple.
Johannes: Anyone, or any group of people, who holds at least 2% of the governance token voting power — which is time-weighted, so the longer you hold it, the more voting power you get — can veto any proposal. Meaning, if you think of it the other way around, you have to convince 98% of the community that your proposal is not a bad proposal.
Johannes: And this solves many of the traditional DAO governance issues we have. I think we saw that quite recently with a project where someone made a proposal, and because no one was voting, they could get 51% voting power for themselves. Frankencoin solves this problem by putting this barrier very, very low.
Johannes: You only need 2% of the people to be active in the system to make it actually secure. It also skews the system towards being hard to change, and that is intentional, right? You want those protocols to be slow. You want them not to make many weird changes. You want to protect them from governance attacks.
Johannes: And by making it a lot easier to veto something than to bring a change forward, you prevent that. And the system works really nicely without actually needing any votes. So that's how the risk management is thought of from a high level. Now, on top of that, obviously it's all about information.
Johannes: It's about having transparent access to what the parameters are and how they're set, and that's where we see the role of the association as well. The association is non-voting. The association does have some FPS, which it uses to finance itself; however, it is not voting actively. It is always community members that are taking the actual decisions and actually voting.
Johannes: So what does that mean — where is the role of the association? The role is that we prepare information, we run the front end, and we guide interested people through where the information lies. Now, the information itself is all on-chain, so it's all independently verifiable — we just surface it.
Johannes: However, that's not the only place where you can surface it. There are, I think, six independent front ends. And I think that's also what you guys are specializing in, right? Surfacing information, making information accessible, which then allows the people that are voting to take decisions on risk metrics — to take an informed decision on what makes sense and what does not.
Johannes: However, the risk appetite is something the community, or the FPS holders, are deciding, because ultimately that is also the group which is holding the baby. So if there's a depeg, if there's a loss in the system, this loss is carried by the FPS holders, who have the so-called equity pool at risk to cover those losses.
Nertila: So would you say you have solved some of the main issues that DAO governance in general has?
Johannes: You know, "solved" is a very big word. I would not say we've solved it. It's more that it's a different approach to governance, and so far it's worked quite well. Obviously, it comes with downsides as well. It makes everything slower. I like to compare it to political systems.
Johannes: There is not one perfect political system. Now, what Switzerland... I'm not sure — how well do you know the Swiss political system?
Nertila: Not that well.
Johannes: Okay. So when you look at Switzerland, there's a bunch of defining factors. One is that there is no majority/opposition. The executive branch is always made up of the four or five largest parties, and they take decisions consensually. So they're voting within themselves, and — this is important — the ministers are not representing their parties as part of the Federal Council.
Johannes: They are representing the agreement, also towards the outside. That's one thing. Also, there is no president in Switzerland. Well, technically there is, but those seven ministers, or the seven federal councillors, all have the same power within their gremium, coming from different parties.
Johannes: That's super important, because there are no stark changes. It's always a slowly moving drift, and obviously that makes things a lot slower, but that is, I think, not necessarily a bad thing. The second part is that Switzerland consists of 26 different cantons. Those cantons are very independent, and there is one super important principle in Switzerland that says everything should be regulated on the lowest level possible.
Johannes: Meaning, only if you cannot regulate something on a communal level, for whatever reason, does it need to be regulated on the cantonal level. Only if you cannot regulate something on a cantonal level — because, for example, it needs to be harmonized or synchronized — do you regulate it on the federal level.
Johannes: Once again, very decentralized decision-making. No strong central party deciding about one thing. It all makes it slower and a lot more consensus-based. And for Switzerland it's been working quite well, and you could say that the Frankencoin governance is a very Swiss-inspired implementation of this on-chain.
Johannes: It's quite decentralized. You don't have a strong player that can decide. It's always many different players that need to agree for things to happen, because if you have a 2% disagreement somewhere — and 2% is small, eh? — then something will not change and it will not happen.
Johannes: And this is just a different form. I'm not saying we solved it. It's just a bit of a different approach, which seems to work quite well. It has downsides, though. It comes at the cost of slower growth, for example, because you cannot put all the resources into one thing.
Johannes: You always have to find the balance between all the participants to get there.
Nertila: I know that in the US a DAO can register as a business entity. What about in Europe? How does a DAO like Frankencoin fit under MiCA regulations?
Johannes: Yeah, but that's the other way around, right? In the US, a DAO can choose to have an LLC, which allows them to interact with the real world in that sense. In Switzerland, the Frankencoin DAO could also choose to open an LLC — I think it's in Wyoming — to do that. But per se, it's a properly decentralized protocol.
Johannes: This is actually an interesting question, because if you look at regulation — and obviously for Frankencoin, MiCA is quite relevant so that it can operate in Europe, in the Eurozone — MiCA has this specification for decentralized projects. And funnily enough, Frankencoin does have a MiCA white paper, so any European regulated exchange can list and touch Frankencoin with no issues.
Johannes: And that goes into this definition in MiCA of decentralized projects. But then the question becomes: well, what does decentralized actually mean? Is it decentralized control? Is it decentralized front ends? Is it decentralized decision-making? Is it the decentralized flow of value?
Johannes: Where does the value accrue? And so on. And there's been a quite interesting study done by the MiCA Crypto Alliance — it was based on LSTs — which asked exactly this: what does decentralized actually mean? And they define, I think, 14 different dimensions against which to measure that.
Johannes: And Frankencoin scores really highly on basically all of those measures. The lowest was the front-end one, but as I said, there are now six different front ends which are run independently of the association and through which you can access the Frankencoin ecosystem, or the Frankencoin protocol.
Johannes: So, truly decentralized. You could argue even more decentralized than other protocols, because there is no oracle — and an oracle often introduces this centralization vector by being dependent on an external price source, which Frankencoin is not.
Nertila: What are some of the hardest lessons you have learned so far?
Johannes: Probably the hardest lesson is that, unfortunately, the crypto market — or especially the stablecoin market — is still very much an extractive place. Meaning many players, especially in LP liquidity provision, exchanges, wallets, and so on, instead of trying to sustainably grow the pie and grow the system, are looking to extract value, and it's very short-term thinking, I believe.
Johannes: I think LP providers are the best example here, right? When the only thing you care about is extracting as much incentive and value as possible short-term, obviously that will not lead to sustainable projects. That will lead to Ponzinomics, and to projects that are more scammy because they are further down the risk curve.
Johannes: Obviously they can pay higher short-term yields, and that is not sustainable at all. And I think what you guys are doing with the Vault Tracker goes in the right direction, where you need to figure out, okay, how sustainable are those protocols? It's not just about who pays the highest yield short-term, because that is a completely ridiculous and made-up number.
Johannes: It's about who has a system behind it that can, over the long term, actually generate alpha and add value to the whole industry.
Nertila: Is there something you would like to tell our listeners?
Johannes: In general: make useful things. It's as easy as that. Make things which people actually use. We started with this big idea of "let's make the financial system open and accessible to everyone across the world," and I think that is still what we want to build for, and we've come really, really far with that, I believe.
Johannes: When I'm on stage with banks, everyone goes, "Hey, this is going to be the financial system of the future." And now the question is: how do we implement this in a sustainable and stable way? I think you could sum it up with this credo of "make banks optional." Banks have a role.
Johannes: Banks are important. Banks are right now extracting a lot of value because there are no alternatives, and with decentralized systems you now have alternatives. And that, I hope, will make the world better for everyone, because then banks also need to become more efficient and less value-extractive.
Johannes: Many of the things I say circle around this maxim of value extraction versus value creation. And that's really what this is about. We build more open, more efficient, more transparent systems, which in the end creates a better world for everyone.
Nertila: And that's the last question. What's next for you and for Frankencoin?
Johannes: Oh, we have a massive six months ahead of us, right? As I said, from the association side, the white paper has been published and accepted at the end of June. That has opened our way into all the regulated players in Europe. We are launching a new version of the governance token.
Johannes: We are onboarding a bunch of really cool collaterals, which allows Frankencoin to scale, obviously. Because, as I said before, since there are no oracles, we can have a bigger universe of collaterals. And the challenge was always: hey, but what assets actually exist on-chain?
Johannes: And we have a really nice shortlist, and we're working on really cool stuff there. Bottom line, it's all about growth. It's all about making the Swiss franc on-chain more known and, I think, just showing that there is an alternative to the US dollar in this space — and it's there, it's liquid, it's stable, and you can use it today.
Nertila: Johannes, thank you so much for joining today's conversation. That was indeed a very interesting interview. Hope to have you on our podcast again in the future.
Johannes: Yeah, thank you so much for having me — and, you know, let's see where the industry goes.