“There’s no difference between lending, liquidity, and currency. They are all different parts of the same thing. That is what the DeFi Trinity ultimately is." ~Sam Kazemian, Frax’s Founder
The “DeFi Trinity” concept, originally conceptualized by Sam Kazemian and successfully implemented by Frax Finance, represents a framework that DeFi builders can adopt to create a vertically integrated ecosystem with a growth feedback loop (flywheel). This framework can also be expanded horizontally to emerging blockchains like Ethereum L2s and L3s, further enhancing interoperability while supporting new digital assets.
The framework is comprised of 3 DeFi primitive components:
🪙 Stablecoin
Stablecoins can act as a unified liquidity layer and a stable medium of exchange to facilitate on-chain activities and seamless on/off-ramping between fiat and crypto. As of June 2024, the US Dollar (USD) is the world’s largest reserve currency and stablecoin denomination, with over $130 billion in USD-denominated stablecoin market capitalization. Therefore, incorporating USD stablecoins with seamless fiat on/off-ramps and cross-chain facilities is critical for DeFi protocols to attract TVL (total value locked) and user growth.
💸 Lending & Borrowing Protocol (LBP)
The LBP (or money market) provides a decentralized marketplace where borrowers can take out loans, often in stablecoins, using their digital assets as collateral. The LBP connects lenders looking to earn interest on their assets with borrowers who seek liquidity or leverage, thereby fostering a dynamic and accessible credit market secured by digital assets.
📈 Decentralized Exchange (DEX)
The DEX enables the trading of digital assets through on-chain mechanisms, such as permissionless liquidity pools from the popular automated market maker (AMM) model. These pools can pair various digital assets with stablecoins to facilitate efficient on-chain swaps and price discovery. The DEX also plays a crucial role in the ecosystem by supporting collateral liquidation for lending protocols, enabling composability and liquidity for advanced DeFi market operations.
Learn more about Frax’s DeFi Trinity concept.