Delphi Digital analyst Jonathan Erlich hosts Do Kwon, Co-Founder and CEO of Terraform Labs, to discuss all things Terra. The conversation dives into Terra’s vision and impressive 2020, as well as into Chai and some exciting recent developments such as Mirror and Anchor.
Delphi Digital analyst Jonathan Erlich hosts Do Kwon, Co-Founder and CEO of Terraform Labs, to discuss all things Terra. The conversation dives into Terra’s vision and impressive 2020, as well as into Chai and some exciting recent developments such as Mirror and Anchor. The full interview transcript is available below!
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(1:30) – (First Question) – Do Kwon’s Background and what brought him to Crypto.
(3:18) – How Do Kwon defines Terra?
(6:41) – Terra´s Stablecoins Walkthrough.
(9:01) – Peg Stability.
(11:06) – Thoughts about Chai / Chai´s Success.
(16:01) – UX from the Merchant Perspective.
(18:53) – How Terra benefits from Chai?
(23:01) – 3 Announcements around Chai.
(31:13) – Smart Contracts for Terra.
(37:50) – Mirror’s Competitive Advantages.
(40:34) – Thoughts about Value accrual in Mirror.
(43:47) – Mirror Regulation.
(46:33) – Mirror’s Sustainability / The liquidity mining campaign ends, What’s Next?
(50:45) – Anchor: A new Savings and Lending Protocol.
(56:48) – Thoughts about Anchor’s development.
(57:28) – What can we expect from Terra for 2021?
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- Do’s Twitter: https://twitter.com/d0h0k1
- Terra Site: https://terra.money/
- Mirror Site: https://mirror.finance/
- Anchor Site: https://anchorprotocol.com/
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Okay, so hi everyone. I’m Jonathan Erlich. I’m an analyst at Delphi Digital, and I’m really excited to be hosting Do Kwon today. Do Kwon is the CEO and co-founder of Terraform Labs. The company behind Terra, Anchor, Mirror and Bosslink. Yeah. Really nice to have you on, Do. Thanks.
Do Kwon (00:00:27):
Yeah, it’s good to be here. Thanks for inviting me.
Thanks, man. Yeah. So before getting into all things Terra, I would love to learn more about your background and how you got into crypto.
Do Kwon (00:00:41):
Sure. Yeah. So I studied CS at Stanford and I used to be an LP engineer at Microsoft for a while. And then, after that I went into the startup space. And then prior to founding Terra, I used to run a Wi-Fi direct mesh networking startup called Anyfi. So we offered full stack enterprise networking solutions for large venues, like amusement parks, airports, retail locations and so on and so forth. So how the technology worked is that, user devices like user’s phones and then laptops would connect to each other via Wi-Fi or Bluetooth. So the idea was that, even if you don’t have direct access to a Wi-Fi access point or LTE, you would still be able to connect to the internet through networks of other people. So building that network is really interesting because you need to think through things like, how to route packets on a network where all the users are highly mobile. So I did that for awhile.
Do Kwon (00:01:55):
And then towards the end of 2016 or so, a friend of mine randomly invited me to this Facebook chat that had eight people. And then they were talking about, Ethereum and Monero and some interesting things like that. And then I just started to Google these keywords to see what they were, and I found that to be really interesting. So spent a lot of time in 2016, 17, reading white papers, getting into heated debates about what protocols of the various people until I finally decided to work on crypto full-time towards the end of 2017.
That’s nice, man. That’s nice. So, I love listening to this, getting into crypto stories. So I’m getting into Terra now. I wanted to begin picking your brain about what Terra is, because for me it’s completely different based from any other crypto project in the sense that, it’s a stablecoin system in one side, but it’s also a platform for apps to be built on the other side. So I wanted to get your take on what Terra is, how you define it. And also curious if that understanding of what Terra is has changed across time.
Do Kwon (00:03:28):
Sure. I don’t dwell too much in this anymore, but when I was first getting into crypto, one of the things that really struck me about different crypto projects is… Because if you look at Monero for instance, the technology is very fascinating, right? Or for a lot of the layer ones. From a developer’s perspective, there are lots of things that are happening that are very, very cool. Even looking into DeFi now, and this was particularly much, much more true in 2017 is that, most of the projects that are being printed in crypto look inwards, which means that there’s already users that are interacting with lots of different crypto projects, or exchanges, or trading and different things like that. So a lot of the use cases are geared towards making these things easier. So in 2017, they didn’t even try to do that.
Do Kwon (00:04:25):
So most there are scams, but now, there’s a lot of interesting things that are coming up. But in terms of DeFi, all the use cases are looking inwards. But the way that I thought about it was, there aren’t enough people trying to bring crypto outwards, right? And it takes longer to educate people that don’t know anything about crypto, it could be less rewarding in the short term. But at the end of the day, if we don’t find a way to efficiently allocate capital to bring in millions of users to benefit from crypto networks in a way that they can’t get from traditional finance, then all of this is for nothing, right? If we keep this as incestuous pool of 200,000 users at all trading points with each other, then crypto is never going to go anywhere. Right. So that’s the founding premise behind Terra, and then largely over the last few years nothing has changed.
Do Kwon (00:05:20):
So I think Terra is unique in the sense that, we try to think about, what makes money the way it is, and then we try to think about money as a product, and then everything that the company does is various products like Mirror, Anchor, Chai. Chai is to come up with ways to enhance the features of this new money to make stablecoins more useful.
I love that, man. I love that and you certainly noticed that for example, for me, it’s clear that Terraform Labs is one of the most outward looking TMC crypto and all of those teams looking to bring the mainstream into crypto and develop crypto based solutions for a mainstream audience. So man, getting at the heart of Terra, there’s your stablecoin mechanism. And I would like to explore it with you. It now backs more than 200 millions in assets in USD and Korean won. I would like for you to explain it, how it works and how our apps are currently using it.
Do Kwon (00:06:46):
Sure. So right now, we have about four different stablecoins that are Live. There is Terra USD, that’s pegged to the dollar, currently at about $185 million market cap. Most of which is Mirror by the way. And CARROT, which is the Korean won peg stablecoin currently, I think close to $100 million in market cap. Most of that coming through payments applications in Korea. MNT, pegged to the Mongolia national currency and SDT pegged to the IMF SDR. There’s about 10 other Theo currencies coming, most of these are in the top 10 of Theo marketcap.com. So basically how the ecosystem works is that, you have all of these different stablecoins that are each pegged to different PR currencies, and they can each be swapped with each other with a simple transaction, paying a flat fee of 25 basis coins. Now, how each of these stablecoins remain stability, is that there is an ecosystem token called LUNA, that absorbs the volatility in the price and supply of the stablecoins.
Do Kwon (00:08:02):
So for example, if Terra USD, for instance, is trading at let’s say 90 cents, the protocol guarantees that the price of Terra USD is going to return to normalcy by agreeing to swap one Terra USD for dollars worth of LUNA at any given time. So what this means is that, a Terra USD is trading for 90 cents, users can buy up Terra USD from the market and then swap it for a dollars worth of LUNA, and then sell it in the open market for a dollar. So that price tag mechanism constantly creates arbitrage pressures to sell the currency if it’s trading above a dollar and to buy up the currency if it’s trading below.
That’s really interesting, man. And I’m curious, how have you seen the system working in the world? And if you have seen the pegs from the peg, and how have you solved that?
Do Kwon (00:09:03):
Yeah. So I think up until now, Terra USD and CARROT aren’t really used respective to trading purposes. So in some sense, if you have retail payments users that are interacting with the currency, they’re not acclimated to speculating on whether stablecoins are going to keep its price. If you tell them it’s going to be worth a Korean won, they’re going to think it’s going to be worth a Korean won. So there’s been less threats to the peg. It’s been very recently when the peg has been put to serious test with the kimchi premium. So kimchi premium is a concept whereby, crypto assets in Korea are trading at significant premium to global average due to capital controls. And then in 2017, it was crazy with Bitcoin trading almost twice the price in Korea as it was trading everywhere else.
Do Kwon (00:09:53):
But today it’s around five to 6%, premium to global prices. So what that means is, there’s been an arbitrageurs corridor for people to buy CARROT, swap it into US Terra, and then sell it on let’s say Qcoin or several BETSIs to be able to buy up crypto assets on the cheap, and then to create that arbitrageurs. So that has seen significant volumes cycle into Terra Korean won, and then swap volumes to USD and then so on and so forth. But what’s been interesting is that, there’s also been a decent amount to swap volume in and out of LUNA, which means that arbitrageur is also noticing that slowly mechanism is there to normalize prices when it’s getting too aggressive. So we’ve seen situations where, Terracare volume was trading at some premium, let’s say 5%, but it’s always been brought down back again to normal levels. So I think right now it’s trading at maybe one to 2% premium at the moment.
Nice. Nice, nice. Thanks. So up until now, I think that the story of Terra couldn’t be told without talking about Chai, right? Which was the first stop to be built on top of Terra. And as you said, Chai is a payment tab that uses Terra such as its payments rail. It had a massive 2020, it now boasts 50,000 monthly active users, it generates more than 1 million daily transaction volume. The fees generated by Chai have made Terra the third largest blockchain by fees generated. So I was curious, how has this process with Chai been, and what do you attribute Chai’s success to?
Do Kwon (00:11:56):
Sure. So to go back to Terra’s mission statement, the way that we think about it is, the only product that we create is the Terra stablecoin. And basically the way that we think about it is, to create features around this money that make our stablecoins easier to spend and more attractive to hold. So Anchor for instance, is a savings protocol that makes yields on Terra stablecoins more attractive than what you can get at traditional banking, what you can get in other DeFi protocols. So it makes it more attractive to hold. Mirror, makes our stablecoins a gateway to be able to purchase any asset class through synthetic price exposure. So it makes the stablecoins more useful like that. Chai’s role, as well as other payment companies that we are hooked up to, or we found, are intended to make our stablecoins more easier to spend. Yeah. I think we’ve had some interesting success with that. We’re doing about 1,000,000,005 in annualized transaction volume, activated about 2.5 million users in Korea, we’ve acquired a payment gateway called IronPort currently doing about $3.2 billion in volume.
Do Kwon (00:13:18):
Yeah. Attraction has been decent, cumulative fundraising, including the likes of SoftBank $88 billion. So I think it’s a strong start. So the reason why I think using crypto as a payments rail is really interesting is because, the interests of the people that are involved in the payment stack is intended to be adversarial against you. So for example, for a payments processor, the most profitable thing to do is to delay the settlement time as much as possible, because they can both earn an investment interest from the money that they’re custodying for you. So you can actually deploy that capital to earn returns on various different types of things.
Do Kwon (00:13:59):
And also they’re incentivized to extract as much rent as possible. But it turns out that both of these things might work in some payment context, but it’s actually one of the greatest impediments to getting digital payments adopted in many, many different parts of the world. For example, if you look in Japan, the average settlement time for payments is around seven days. Southeast Asia, it’s in excess of 10 days. In Korea, it’s somewhere between five to seven days at this point. And the interesting thing is that, if you are an SMB, right? Or if you are, let’s say a restaurant, or if you’re a cab driver, you can’t wait several days in order for your payments to be settled to you. If you’re a cab driver, you need your fares right away in order to be able to buy fuel for the next day’s rides, and to be able to put food on your family’s table. Right? So that’s why if you go to places like Singapore, if you go to Vietnam, cash is king, there’s not that many cabs that would take credit cards, right?
Do Kwon (00:15:02):
But if you are able to vastly speed up some of the process by which money reaches the merchants, then in that case, that’s a game changer. Because it means that you can get a payments process right away, while at the same time, preserving a lot of the benefits of digital payments like, nobody can steal your money, your money can’t be damaged, accounting is easier, and so on and so forth. So Terra payments can settle to users in six seconds, which is the average block time of the Terra blockchain, as opposed to, having to wait several days in order for payments to be settled to you.
Do Kwon (00:15:39):
So in a brutally competitive ecommerce setting as in Korea, whereas, it’s more than $100 billion in GMV across all the different ecommerce sectors, making one of the largest ecommerce markets in the world, but it’s also highly competitive. So you have a lot of platforms and ecommerce merchants wanting to get settled as fast as possible. And I think our initial product market fee largely came from that in the sense that, merchants saw a greater value proposition both in terms of reduced fees and fast settlement times than anything else that they can get from traditional payment services.
Yeah. I love that. I love that. So it’s reduced fees and they get their money basically instantly. Right? And I’m curious, how’s the UX from the merchant perspective? What do they do with their crypto? How do they turn it into Korean won? What happens there?
Do Kwon (00:16:37):
Yeah. So in the beginning it was very bespoke. So when we had just team on, one of the merchants and maybe onwards on. It was basically a very manual coordination between our finance team and theirs. So it was, everybody trying to figure out how to do X, Y, Z. The app looks sleek in the front end, but admittedly in the back end, it was total shitshow. There was a lot of hand-holding that needed to be done. Now we have more of a sleek admin interface where merchants can hook up to it, manage their assets, settle out periodically if they so choose to. We’re starting to build sediment rails on top of this that can actually turn it into a product. Which makes it much, much easier to integrate with lots of different merchants. And in terms of total merchants, we’re about 50 at this point. So we definitely needed to have this inward.
That’s awesome. That’s awesome. And I imagine the vision for the future is that, at some point they just trust KRT so much that they just keep it, right?
Do Kwon (00:17:51):
Yeah. So interestingly, this is how Alibaba went about it. So in the beginning, when Chinese merchants received payments over Alipay, in order to be able to hook up to the remainder of their supply chain, they had to cycle out to renminbi. For example, if you’re a restaurant, you can’t pay with Alipay to your vendor, right? Well, you couldn’t five years ago. But what Ant Financial has been doing over the last five years or so, is that they’ve been hooking up into a B2B pipeline, such that even in a B2B context, people don’t have to leave the Ant Financial ecosystem. So you can settle to merchants or hook up to the supply chain in Alipay coins, if you will, which is amazing. Which means that in some sense, Ant Financial at this point represents a digitized version of the Chinese won. Which makes it a very easy on-ramp for CBD seats as they’re coming up.
Do Kwon (00:18:56):
I think the way that we aspire in the Terra, Chai ecosystem, it’s pretty much the same. So we want to be able to build that ecosystem where, by hooking up deeply and deeply, more deeply into the entire commerce sec, we’re able to use CARROT as a means denominating our currencies in a way that CARROT cannot.
That’s awesome. That’s awesome. That’s awesome. Man, can you comment on how Chai generates a lot of fees for Terra, right? Transaction fees. But there’s another side of the story which Chai also benefits Terra from senior edge, right? Could you comment on how that works and also in the context of all the other apps that are being built on top of Terra?
Do Kwon (00:19:53):
Sure. So if you look at two pillars of economic policy in any fiat money context. There’s monetary policy, which controls the supply of money to achieve economic goals. And then there’s fiscal policy, which dictates government spending. And this includes things like subsidies and direct government spending to be able to achieve social goals as well as economic goals. So the interesting thing about blockchains is that they aspire to be a monetary policy for everyone. And then they generally to some extent have, to varying degrees, a robust monetary policy. So if you look at most crypto researchers and economists, they spend a lot of time thinking about the monetary policy, but really only a handful of projects to think about a fiscal policy. Which means, how do you come up with systems whereby you achieve social justice or at least develop efficiency by coming up with a way for the community to think about how to allocate funds to different types of things.
Do Kwon (00:21:03):
So the fiscal policy in Terra is pretty simple. So every time that a new unit of Terra is minted, a portion of those goes into a community pool that is covered by a set of LUNA stakeholders. So in the beginning, we didn’t have this governance module. So we had a system whereby as new Terra was being minted, a portion of those funds were being burned, and a portion of those funds were being kept to fund tabs like Chai so that they can do interesting things for users. And most of those benefits came in the form of promotions. In the very beginning, based on the network, given that the supply of CARROT was zero, seniors was massive, lots amounts of CARROT was being printed. And the promotion stock in those days correspondingly was very, very large.
Do Kwon (00:22:00):
And now we’re transitioning more into a down model where the community funds can be voted on by various different people in the ecosystem. So it’s already been implemented. And as more currencies start to enter the cycle, there’ll be more seniors that will go into different tabs. As an interesting story, we’re also transitioning to an overall down model as well, where we’re putting a significant chunk of LUNA into the community pool such that more than just the stablecoins that are entering circulation, people will be able to vote on how to spend the allocation of LUNA that was previously held by Terraform Labs as well.
Oh, I love that, man. So the LUNA is basically the senior or does it correspond to something else?
Do Kwon (00:22:54):
That’s more of like, before we were cutting a lot of grants directly from Terraform Labs. So in 2020, we issued a lot of grants, and then we also invested in a few projects that were strategically beneficial to the Terra ecosystem. But more and more as we do this, it seems to make things faster and lead to better judgment. To have the community be the decider of how the funds should be allocated. So it gives both, greater transparency. So if everything is on chain, and then everything’s off their public discussion, then you can have a healthier debate and more transparency around how the funds are spent. And B, you just have so much more ecosystem support behind it.
That’s really nice. That’s really nice. So man, to close on Chai. I wanted to circle back and touch on three recent announcements you made around Chai. The first one was, you raised 60 million series B round. So I wanted to know basically what those funds are going to be used for and what’s the play there.
Do Kwon (00:24:10):
Sure. So the race number was tricky because there was exchange rates between Korean won and USD, and some investors wired in USD, some investors wired in Korean won. The figure is a little bit closer to 70. So the series B brings Chai’s cable funding up to $88 million. So the use of these proceeds are very simple, and it can be largely divided up into three buckets. So number one is geographic expansion. So we’ve kept this on the down-low, but we’ve started to set up a growth team in Singapore that is headed by this guy called Rahul. So he’s the former head of strategy for Uber APAC. So he was the guy that wrote a lot of the playbooks on how Uber entered different markets in Asia and Southern London as well. I think it’s a great fit for something like us. Because we need to write a playbook into entering other different markets as well, as fast as possible.
Do Kwon (00:25:15):
We’ve also set up an engineering office in India, and the goal is about, what would be handling the growth side of our business, such as bring forward integrations, localizing the app into lots of different settings. So you can expect to see Chai enter different markets in 2021 powered by the series B. The second is, were sent the very gate our offerings to merchants to make Chai even more attractive besides just fast settlements. So some of the things that we’re doing is for example, really putting the gears on the Chai card. And why the Chai card is really interesting is because of this feature called boosts. So how boost works is that, every time that a user makes a transaction, he earns a different coin, it’s called Bolts. And then once you accumulate enough Bolts, there’s a page in the app where you can cycle through the various different types of promotions. And then, you can turn on a specific promotion that you would like to use Bolts on.
Do Kwon (00:26:23):
And the reason why this is interesting is that, every day Chai users are logging into the Chai app, to figure out and see all the different types of promotions that are available. And this creates a discovery funnel for merchants that are looking to offer promotions on the Chai app in order to get a brand exposure and revenue lifts for their sales. And this is huge, right? It’s basically a Rakutens, Ebates or the honey model whereby you create a marketing forefront for merchants to be able to get revenue lift on inventory that they can’t clear. So that’s one of the things that we’re doing. We’re also looking into doing things like revenue based financing, whereas merchants can take out loans simply on the basis of their transaction history with Chai, without having to submit complicated paperwork, or have to visit bank branches or anything like that. So it’s very similar to, let’s say Stripe Capital, it’s analog in the US. Yeah. The last thing is just to pay for operations as we’re growing in headcount.
That’s really nice, man. It’s really exciting for Chai in 2021, and it’s expansion. It’s really cool. So the other announcements you made recently was, one, the acquisition of import, which you touched upon. It’s a large payments aggregating Korea. And also the integration with Samsung pay. Just wanted to know how you’re thinking. Yeah, what’s going on there.
Do Kwon (00:28:08):
Sure. So Impot, it’s been around for a while, so it launched in 2011 and basically it’s very similar to Stripe in the US. So they offer integration STKs in, think over 10 programming languages supporting most of the payment options. So there’s very little payments fragmentation in the US, but in Korea and most of Asia for that matter, there’s hundreds and hundreds of different ewallets, right? So basically every large corporation has their payment module, and then it’s very hard to offer support for all of these different things. So, in some sense, Stripe’s value population is even greater in Asia than it is in the US. So what Impot does is that, it offers support for 10 plus integration STKs, and then it supports all of the different payment options. It supports Chai, it supports Coupa pays, supports Toss, supports Payco, supports all the credit cards.
Do Kwon (00:29:07):
So by writing just a few lines of code for a merchant, it becomes very trivial to integrate a payments module directly into their app. So starting from 2011, it was quite small. So we closed the year with about $3.2 billion in transaction volume. We think we can get it to hit 7 billion by the end of the year. So what’s interesting is, the Impot team was only five people when we acquired them. So that’s fantastic, right? Because they were all developers. So they didn’t have a single salesperson on the team while running a B2B sales business. Specifically to how Impot helps Terra and Chai is that, it becomes a merchant acquisition at work for the Chai payment system. Right? So what that means is, Impot currently services around 1700 merchants.
Do Kwon (00:30:02):
And even though it offers the ability to support lots of different payment options on its plugin, it can also do this. So, number one, we can hit up merchants in Impots network to prioritize Chai in their checkout flow. Number two, and the interfaces that work with Impot, we can own the checkout page if you will. So to prioritize Chai as offering lower payment fees in any other option in the stack. So these are really interesting ways in which we can put rocket fuel to Chai’s growth in a way that would have taken a lot longer to do independently. So what was the second thing that you asked for?
Samsung Pay integration.
Do Kwon (00:30:50):
Right. Okay. So Samsung Pay is the largest payment service in Korea. Samsung, they make phones, that’s a Korean company, it’s actually the largest Korean company. I think they’re responsible for about 30, 35% of GDP. So naturally unless, I don’t know. You’re really into Instagram or something, most Korean people have Samsung Galaxy phones. And the thing is, just by adding your card into Samsung Pay, you can easily tap your phone against a PoS machine and it’s still natively in. So everybody uses Samsung Pay. Obviously does tens of billions of dollars in transactions volume annually. So what Chai has done is that, it’s added the Chai card to be supported in Samsung Pay. And generally, they do have support for a lot of the larger bank backs, credit cards and debit cards.
Do Kwon (00:31:50):
But in terms of the cards that come from FinTech companies, they don’t really have too much support for that. So what’s interesting is that, Chai by being added into an option into Samsung Pay, it can easily hook up to the entire longterm of millions and millions of different merchants that otherwise would have taken us a long time to physically visit and sign contracts for. So Chai has always had a head based strategy where we tackled the largest ecommerce merchants and get them integrated. Hooking up to Samsung Pay means that we can get access to long tale without having to do direct sales. So it’s truly meaningful, and I think in a lot of ways, a game changer.
Amazing, man. That’s amazing. I’m really excited for Chai in 2021 and beyond.
Do Kwon (00:32:41):
So man, switching gears a little bit here, I want to start talking about our Mirror, and Anchor, and the new announcements. But before doing that, I wanted to touch on one key piece of infrastructure that I think is what’s enabled all this innovation to happen, which is smart contracts, right? Your recently launched smart contracts capabilities for Terra. So I wanted to get your take on that, how important is that for Terra?
Do Kwon (00:33:19):
Do Kwon (00:34:12):
So the reason why the additional smart pump checks becomes very, very interesting is that it hasn’t been that easy to build things on top of Terra before. You could use the stable coins for transactional purposes or to create centralized services on top of these stablecoins. But it hasn’t been easy to build things natively on top of this infrastructure to be able to do anything that you want in a trust this way. The additional CosmWasm definitely accomplishes that. It’s allowed us to create the core pieces of infrastructure that is Mirror and Anchor, but we’re also starting to see a lot of third party teams start to build things on top of our infrastructure most recently around Mirror. And there’s plenty of reasons why that’s attracted to do.
Oh, that’s really nice, man. That’s really nice. Can you share what teams are building and what has been the response from developers and what response you’ve seen until now?
Do Kwon (00:35:17):
Yeah. Maybe it’s easier to talk about why Mirror is exciting and then to talk about ways in which developers are happy to build things on top of it. It’s basically a synthets protocol that allows there to be a synthetic token for any type of asset. So there can be a token that tracks the price of an Apple stock, a token that tracks the price of, let’s say a piece of real estate, a token that tracks the price of let’s say, the volatility of staking rewards. So the possibilities are endless in so far as the asset has a continuous price signal. It’s very easy to do. Now, the assets that are Live today are 13 of the most attractive equities in the market. There’s a proposal to add about 40 more into the set. And what this means is that you can use the synthetic stocks for users anywhere across the world to buy price exposure into US equities in a truly permissionless fashion without kind restrictions. So you can trade this 24/7, fractional ownership, so you don’t have to buy the entire stock, you can buy up to a millionth of the stock.
Do Kwon (00:36:31):
And you can do this in purely synonymous kind of way. You don’t have to reveal any real identity as you’re making the purchase. Now, some people say, “Hey.” When Bitcoin and Ethereum are ripping the way that they do, equities as an asset class, isn’t all that interesting, is it? Right? But that’s not the point, right? The point is that Mirror becomes an infrastructure where you allow people to synthesize anything. And if you see the rise of stablecoins, such as Tether, USDC, Terra, it’s not so much that people want an additional dollar by sacrificing a dollar when they purchase a Tether stablecoin, they like to be able to do things with a dollar in a crypto specific context.
Do Kwon (00:37:15):
And that’s why stablecoins have done really well. And in some sense, the stable coin is a synthetic of the US dollar, right? And if you expand that social space, such that anything can be synthesized, then that’s a total game changer. It means that instead of having to build DeFi or primitives that are just useless food coins, it means that you can actually bridge and start to bring lots of external world value on chain in a synthetic context, and to build truly meaningful pieces of infrastructure on top of that. So how more interesting would compound be when you can leverage on, let’s say equities, leverage on things like real estate, instead of leveraging on, let’s say, I don’t know, pickle or, there’s probably a burrito coin or something like that. That’s just way more interesting. Right?
Do Kwon (00:38:08):
And it’s not to say that these points are useless, I am, no, no. I’m not saying that these coins are useless, but the thing is, there is significant value to be said for bringing lots of assets on chain as well. So now on to some of the projects that are being built. So the things that you can build on Mirror are obvious, right? So there’s a group of people that are looking into how to support pre IPO contracts, on top of Mirror. So for example, what brought this about was the coin-based listing, that is slated to go on Q1, Q2 of this year. So that’s interesting. There is also a team that is setting up to build social trading on top of Mirror, which means that a trading professional can declare a trading strategy on top of Mirror.
Do Kwon (00:39:02):
And then the smart contracts that are watching this smart contract replicates a trading strategy of the master contract. And then in exchange, a portion of the profits goes to the master contract in exchange for providing this valuable service.
Do Kwon (00:39:19):
Yeah. And all of these different projects that are launching on top of mirror, we’re steering them towards applying for grants from the community fund once they’re leaving, we’re ready to share their plants. So it’s going to be both transparency and then the decision of whether to fund them is going to be committed to each other.
Cool, man. Cool, cool, cool. So talking about our Mirror now, there’s already competition in the traditional space, you talked about it like, Robinhood and Ethereum, but there’s also competition in crypto with, for example synthetics or FTX. So I want to get your take about what the competitive advantages of Mirror are and how do you see Mirror winning here?
Do Kwon (00:40:15):
Sure. There’s a lot of exchanges that have started to dabble into the stock space, like Bitfinex offer, Tether settled, ETF futures. So mainly I think the SMP 500. The plan to punch single stuffs too. Bittrex recently did something similar, they started to offer lots and lots of different single at Bittrex global. FTX obviously did something very similar. I don’t think the real promise of this is that, oh, we allow you to buy stocks with Bitcoin, but I don’t think that’s the point. It’s just that, because they’re centralized, they can’t be issued as decentralized assets, that can be composed into different things. And once you can have that, this whole point of this, except that, you save the OnRamp problem for people that had made a good crypto. And it hearkens back to what I said before, about a lot of the crypto infrastructure and products looking inwards, trying to offer products that makes it easier for crypto people to do things and trade out sets.
Do Kwon (00:41:24):
But the real goal here is to build cool things that offer a value proposition to millions and millions of users outside of crypto that finds real value to come in. I think that’s the core differentiation with Mirror. It’s goal, isn’t to allow people to buy stocks with Bitcoin, which is looking inwards. But the goal is to allow people that currently don’t have quality access to be able to purchase it A, and B for different derivatives and products on top of Mirror to be built in a way that simply can’t exist in traditional finance.
Totally. Totally. DeFi allows these synthetics to get super powers, right? To get abilities that you don’t see in the traditional space. I liked a lot the idea of having yield burying stocks and also the idea of having all crazy access be created when this synthetics products mature. So really excited about that. Now I want to talk about value accrual in Mirror. Mirror token, it fairly launched. The way in which the fee mechanism works is right now, users basically pay 1.5% fee whenever they close a CDP. Right? It incentivizes opening CDPs but this incentivizes closing CDPs, which in that sense prioritizes growth at this point in the protocol, rather than value accrual for the Mirror token. Right. I wanted to have your take on that and what’s behind the decision of that fee mechanism behind Mirror.
Do Kwon (00:43:33):
Sure. The easiest way to think about how Mirror captures value from it’s very synthetics is to charge a transaction or trading fee. And this is the decision that synthetics made. So if you look at the various sense that are trading on the synthetics platform, it’s a closed off internal exchange. So all the synths can be traded at each other at a fixed spread, right? And then every time that a synth is being treated, a small fee is charged which benefits SNX holders. So the main benefit of this is twofold. Number one, you can have greater liquidity, at least internal to the exchange. And number two, you are able to charge fees on this exchange. But the downsides of this is that you can’t have these assets being separated out and then trade on various different DeFi protocols and projects.
Do Kwon (00:44:32):
Right. Because in that case, the rent extraction model becomes broken. Right. And we made a conscious choice to recognize that if the mirrored assets were to do redeveloped, we cannot control the manner in which they’re all been traded. So mirrored assets could end up in a centralized exchange, for example, Binance for instance, right? In which case we wouldn’t be able to control fees from how these assets are being traded any way. Or if it crosses a bridge into Solana Serum, for instance, or Ethereum’s uni-swab, then in that case, that’s not a fee extraction model that we can control. Right. What we can control is when these assets are minted and redeemed, which happens natively on the mirrored protocol on the CARROT chain. And we decided that, in order to allow as many of these M assets to be minted as possible, it’s good for the initial parameter to not charge rent on the minting side, but to charge rent on the redemption side.
Do Kwon (00:45:29):
So how it works is that whenever a CDP is closed, a portion of the fees goes into buying back Mirror tokens from Terra swab, and then these Mirror tokens that have just been purchased gets distributed to people that are sticking there. So there’s a buyback in dividend mechanisms.
Yeah. That makes sense, man. That’s interesting. So one of my main concerns regarding Mirror is a crack down attempt from US authorities as it’s already happened before with platforms such as Sabra. I wanted to get your take on this. How concerned are you about it and how do you see this playing out in the future?
Do Kwon (00:46:19):
Yeah, so people that are coming into the Terra ecosystem for the first time as we launched there, I think we’re very careless with regulations, but we run a fully compliant and licensed FinTech business. So we know what that game is all about, and we’re very serious people. So we don’t take it lightly. The decision that we made when we were first launching there is for us to capture new value from it. That was a really great part of the decision, and it’s not easy. Because putting developer hours and time into developing something there is not trivial. And then we have full intent to continue to support in whatever way we can as the Mirror protocol grows. But what we did is, as we were designing the protocol, we set aside no tokens for the team, no tokens for the investors. I received some Mirror tokens as a function of having my LUNA stakes. But at the end of last year, I committed to give all that away to people that actually built the protocol.
Do Kwon (00:47:30):
So I have nothing, Terra has nothing. And we have no governance rights as a consequence of that. So this is something that we do not control, right? So even now, there’s 30 different proposals that are up on governance. I think it just passed yesterday. None of those proposals were from us, it was entirely from the community, and the engagement as a consequence of being decentralized is huge. It’s early days of the protocol, but the way that the community is engaging with the protocol, and suggesting changes, and different things like that is just fabulous. The way that I think about it is, at this point, we don’t control or own any portions of the Mirror protocol. All we did was write code. And you cannot be prosecuted for what you do not control and nor do you profit from. So I think that’s the decision that we took.
Do Kwon (00:48:20):
And number two, we’re not really under the US nexus sector, Abrol was a bunch of us persons with the company based in the US. Then there was a lot of issues with that, but we have no assets to season the US, nor do we profit from this. So I feel pretty comfortable at it, and did.
Thanks, man. Totally, totally. And I love the aspect that you’re giving away your tokens to people who are building the protocol, that’s really nice. So man, my last question regarding Mirror is around sustainability. Right now, users are being incentivized to meet synthetic assets because of the liquidity mining campaign. Right? But what do you see happening when the liquidity mining campaign ends? What’s going to keep people incentivized to meet assets and provide them to the market?
Do Kwon (00:49:26):
Yeah. So I think you’re exactly right that right now, the mining subsidies are playing a big role in the demand for M assets. But the thing is, I think really what we expect the majority of the demands for M assets to be driven from is new apps that are built on top of Mirror, integrations with existing services, and this user firming program that we recently announced. So for example, M assets become eminently more interesting if it gets added as a collateral to let’s say compound or cream. Because it means that you can lever up on different types of equities in a way that’s difficult to do in a traditional finance context. Lots of countries have laws against leverage based trading. So offering that in a permissionless context is something that’s going to have large demand for, in my opinion. So anybody that has held PESTEL stock over the last year or two knows that if you had the option to lever up 10X, you would’ve done it. Yeah. Anyways missed opportunities.
Do Kwon (00:50:44):
Yeah. So there’s those things. Interesting thing that we did also when we first created Mirror, is that we worked with one of the ecosystem players called Kaiser pool to develop a mobile trading interface premium, it’s called Mirror Wallet available on both iOS and Android. And I think as an initial start, it’s very sleek. I think it’s competitive to Robinhood in terms of the user experience that can be offered. Now, the interesting thing that we plan to do with this as well as we’ve already done with our WebEx, is that this is going to be fully open sourced and encouraged report. So the idea is that we just put up a guideline on our community on how developers can fork these different types of applications and then acquire users as a consequences of that. So for example, a developer in Malaysia might take the Mirror wallet, add localization, add a local OnRamps, and then try the adoption for users that are looking to gain access to their mirrored assets in their local jurisdiction.
Do Kwon (00:51:47):
In that case, after he acquires let’s say 100,000 users, he can issue advanced proposal to the community fund on chain, and then Mirror holders can vote on whether the size of the grants and the proof that the developer offers is adequate. So basically it’s a way for developers to firm MIR tokens as a consequence of acquiring users. It’s never been done in crypto before. Because in crypto, you have a bunch of incentives to benefit traders or developers that issue tokens, but developers that actually issue or create applications doing the most interesting and innovative work, they’re always overlooked. So if you look at most of the applications that were built on top of crypto, even the ones that are helping in DeFi which a very hot category, a lot of them went bankrupt during the bear market.
Do Kwon (00:52:35):
And it’s because there no sustainable business model for them to benefit from the frocky to market. But this enables a business model for people that are actually bringing users into Mirror in a way that’s never been done in crypto before. And the decision making is entirely driven by the community and governance procedures. So we’re quite excited to see how those efforts turn out in terms of growing the adoption of mirrored asset.
Yeah. I’m really excited about that as well, man. And I agree with you that in the longterm, the sustainability of Mirror should be driven by natural demand for these synthetic assets. Right? But yeah man, moving on to another exciting topic, I know we’re getting out of time, but can you please talk about, which is a recent announcement you made and savings and lending protocol you’re launching soon.
Do Kwon (00:53:44):
Yeah. So it’s one of those things that people forget when they’ve been in crypto for a long time, but no matter how well Bitcoin does over the next 10 years, the reality of it is that most people in the world don’t invest assets. Unless the United States hits Zimbabwe status, everybody is going to still denominate their savings and wealth in terms of the US dollar, at least for the foreseeable future. And to be honest, even if Bitcoin does well, I don’t want to live in a world where the United States looks like Zimbabwe, and the impression for the dollar is that bad. So-
Do Kwon (00:54:21):
I think everyone, including people in the crypto space is incentivized to make sure that the world doesn’t burn in such a way. So anyway, it’s like most people in the world denominate their savings and network international Theo currencies, and let’s assume that that’s going to stay the way it is for the next few years. The big problem with the macro climate today is that, essentially there’s no interest that you can earn on bank deposits. Banks are offering either negative interest rates or nothing at all, which doesn’t defend you against inflation. So this puts the traditional banking infrastructure at significant risk. Now, on the other hand, if you look at DeFi, you have things like compound, the different types of lending protocols that are offered year yield on the dollar or stablecoins. And then you have things like YEFI that earn interest from let’s say, airdrops and liquidity firming schemes that a lot of DeFi protocols are doing.
Do Kwon (00:55:22):
But the problem here is that, at the end of the day, the interest rates that are going to each of these positions is driven by speculation. So if you remember, demand for compound is driven by demand for people that are looking to lever up on different types of crypto assets, like Ethereum, like VAT, different things like that. So it can go high, right? So sometimes you would see 12% yield on compound, or maybe 5% yield on compound or something like that. But in most cases it’s very, very low. So you have extreme volatility in the interest rate that you can earn. But if you put yourself in the position of a 50 year old farmer from Idaho, and then you somehow figured out this amorphous way to get your dollar into stablecoins, and then you put your thing into compound after going through the whole matter mask shitshow.
Do Kwon (00:56:18):
It offers you 12% in one day. So you’re pretty happy about that. But then three months later, you come back and it’s only earned 0.6%. Then you are not happy about that because that volatility in terms of interest rates is not something that most people look forward to when they try to plan their lives against stable savings. And this is where Anchor comes in. So the way that we think about it is that, Anchor offers interest rates on stablecoin deposits, namely Terra, that is both stable and attractive. So the way that you are able to do this is that, instead of tapping into demand for leverage to power interest rates, it’s taps into staking returns from multiple different ecosystems. So let’s say in Ethereum, Terra, Cosmos, Poker Dawn and so on, Solana, and so forth.
Do Kwon (00:57:08):
So the idea is that, when a user makes a deposit, a portion of those deposits are used to acquire staking positions across multiple different ecosystems. And then the staking returns that accrue to those positions gets conferred to the depositor in the form of a yield. So in some sense, you get interest rates from your stablecoins, that is a diversified stream of staking returns from multiple different ecosystems at the same time. And the reason why this offers more stable returns is because the monetary policy of most PoS networks is fixed. So there’s a fixed percentage of tokens that are being printed every year in order to power staking returns on the Anchor deposit. And this makes it fundamentally attractive. Because it might fluctuate a bit, but you’re not going to see 30, 40% changes in the staking rate over some period of time.
So you’re going to have people that hold staking assets offer them in the platform. And you’re going to have people looking for savings come to a platform for interest as well. Right?
Do Kwon (00:58:22):
That’s the interesting part. So we will have that interface, but I think the most exciting thing about A, for the product is that, it gets packaged into a B2B savings STK. So basically the way that we’re positioning ourselves is that, it’s strike’s tagline was add payments to your app in seven lines or quarter less, and then they had beautiful STKs where it became very easy for mobile developers, FinTech companies to integrate payments with the app. For Amper, it’s going to have a similar STK, and then the tagline is going to be add savings to your app in seven lines or quarter less.
Do Kwon (00:59:01):
So the idea is that for any traditional FinTech company, for a digital financial institution to be able to hook up to the Anchor, STK, to be able to offer interest on unused deposits, that the user is custody with them. So this becomes fundamentally a game changer because we’re not trying to build a bunch of crypto native interfaces on this app. We will do those things. But what becomes interesting is if let’s say, Revolut hooks up to the Anchor STK, Terra definitely is going to hook up to the invest STK. Such a millions of millions of users can benefit from Anchor savings in a way that they couldn’t before, that’s the game changer.
That’s really exciting. Bringing the mainstream to crypto. I love it. I love it, man. Can you comment on how development is set with regards to Anchor?
Do Kwon (00:59:57):
Yeah. So we finished yesterday, entered audit sometime ago. So they started to look at the code base a little bit ahead of time. So two firms are auditing the code base at the moment. So Kwon sent these undergoing audits, and this company corporate panics is also auditing. So I think the end result is going to be great. Yeah.
Oh, that’s really exciting, man. That’s really exciting. So man, wrapping up, clearly Terra has a lot of stuff going on from payments, to synthetic assets, to savings. Putting this all together, what can we expect from Terra in 2021 and beyond, and where the priorities are at right now?
Do Kwon (01:00:54):
So largely, the two things, it’s going to be, number one, we’re going to keep doing the same thing that we’ve been doing. But number two, the way that we’re doing it, is going to change significantly. So number one, our focus is going to always be on looking outwards. So how can we bring as many people into crypto as possible? How can we offer things that are natively good about crypto and offer that and package that into a value proposition that millions of retail users can understand. That focus is going to be the same across our savings products, across our synthetic products, across our payments products. And that’s never going to change in the lifecycle of the firm in Terraform Labs. The way that we’re going to be running these things is going to change a little bit though. So in the first couple years of the projects, it was very centralized in the sense that, you had a few centralized businesses that were building on top of the Terra protocol, mainly as a way to get things done faster.
Do Kwon (01:01:59):
And then you had centralized decision-making in terms of how the assets around the project was being spent, and around how data was being controlled across the project. In 2021, we look forward to moving to a more community driven model, namely two different types of ways. Number one, assets that are being held by the Terra projects, so mainly the Terraform Labs, which is the company that I run. It’s going to get decentralized into a community fund. Which means, that it’s going to get easier for different companies to spin up in the Terra ecosystem, with or without the consent or the approval of Terraform Labs. It’s going to also lead to more transparency, because if you put the user community funds up for a governance spoke, then it becomes very easy for people to see and understand why decisions are being made the way they are, in a way that involves a lot more stakeholders than it did before. So in some sense, we expect information asymmetry to be reduced significantly in 2021 compared to previous years.
That’s nice, man. So thanks a lot for your time. It was an amazing conversation. Do, how can people reach out to you and find out more about Terra and join the community if they want to?