Algorithmic Stablecoin Developer Sam Kazemian Calls for Caution on Regulation

Iron Finance’s epic Titan token collapse last week, where the token’s value went from close to $60 to nearly $0, doesn’t mean that a new set of rules for stablecoins is needed, said Sam Kazemian, the founder of Frax Finance.

Iron Finance’s Titan token is a “fork” of Frax Finance’s project. In tech parlance, a fork is when a team takes another project’s open source code and significantly modifies it then publishes it as a rebranded project. This is a legal and common practice within the open source software industry. For example, Ethereum Classic is a forked version of Ethereum and Bitcoin Cash is a forked version of Bitcoin. 

The underlying concept between Titan and Frax remains the same: both are ‘algorithmic stablecoins’ partially backed by US dollars and a series of profit-generating automated transactions to generate capital. Algorithmic stablecoins have a peg because the automated transactions create positive value, so the theory goes. 

Last week, when large token holders, known as whales, started redeeming the portion of the token that represents the US dollar holdings, the system couldn’t keep up in replacing the departed dollars with capital from the algorithmic side of the operation. As such, the stablecoin’s peg collapsed.

The team behind Iron Finance called this a “bank run” in a recent blog post. 

As a result, Mark Cuban, who was an investor in Iron Finance, immediately began publicly calling for more regulation of the industry. 

Kazemian doesn’t agree that more regulation is necessarily the answer, and rejects the idea that this was similar to a bank run. 

“You can’t apply securities laws created in the 1930s, when our grandparents were children, to the era of decentralized finance and automated market makers,” Kazemian told Blockworks  in an interview, arguing that he’s not against the existence of regulation, but it needs to be smart and competitive pointing to countries like Singapore that “punch above their weight” in this regard.  

A ‘bank run’, according to Kazemian, isn’t the best metaphor to describe what happened and he prefers something along the lines of a ‘protocol failure’ involving code added in by the Iron Finance team.

“It was a few things that compounded,” he said.

Kazemian also noted that the code being used by the Iron Finance team was a very basic early version of the “Frax Token with zero of the safeguards we had built into the system to prevent a bank run.”

He said it would be wrong to equate the failure of Iron Finance as being endemic of algorithmic stablecoins as a whole. It’d be like blaming Ethereum for the failures of Ethereum Classic, or bitcoin for the problems with Bitcoin cash. 

While Frax might not have the same high-profile as Iron Finance, it still has its $1 peg and a market cap of $132.5 million, according to CoinGecko. 

Mark Cuban, who got ‘rekt’ in the collapse of Iron Finance, actually passed on investing in Frax, notes Kazemian, as did Tim Draper. But institutional investors are warming to DeFi Kazemian said, pointing to the growing list of companies at startup accelerator YCombinator in the DeFi category. 

Perhaps next time Cuban will invest in the original, and not the fork.