Do Kwon, Founder and CEO of Terraform Labs – Interview Series
Do Kwon co-founded Terraform Laboratories to use blockchain technology to develop a more efficient payment system. Its eponymous stable-priced cryptocurrency, or stablecoin, attracted 40 million users to work with the company when it launched in January 2018. In an effort to create a blockchain-based payment system, Terra raised $ 32 million from crypto giants such as Binance, Arrington XRP and Polychain Capital, as well as the formation of an alliance of business partners including Korean ticketing giant Ticketmonster and travel service Yanolja.
Why did you choose to focus on stablecoins when launching a blockchain business?
Stablecoins fulfill the monetary mandate of cryptocurrencies and are one of the most compelling innovations in the entire industry. They offer significant advantages over fiat currencies derived from their shared infrastructure on blockchains, and are much easier to understand and serve as the basis for building user-friendly, outward-facing applications from DeFi.
The demand for stable coins on networks like Ethereum is well demonstrated by more than $ 100 billion in the circulation of stablecoins, as well as the idea that stablecoins are cannibalize public blockchains as a preferred means of settlement (as opposed to volatile native tokens).
Terra Stable Coins (e.g. UST) are Fiduciary Anchor Algorithmic Stable Coins designed to be censorship resistant, maintain robust anchor guarantees, and have a low cost of issuance. This makes Terra stablecoins an ideal medium for cross-chain exchange and value transfer that retains the main advantages of the underlying blockchain.
Could you discuss how fiat peg stablecoins are secured by the network’s native LUNA token?
The Terra protocol works much like a central bank. However, the policy is superseded by code and governed by the community. At a high level, Terra relies on LUNA’s supply elasticity to absorb the price dislocation of stablecoins like UST.
The Terra protocol is quite simple:
When the supply of Terra stablecoins (like UST) increases, the LUNA supply decreases.
When the supply of Terra stablecoins decreases, the LUNA supply increases.
The Terra protocol acts as a market maker with the on-chain exchange mechanism using LUNA to create the market. Like central banks, Terra defends its foothold with equities in the free market. But it does so indirectly through inducements to arbitration.
For example, the Terra protocol still allows on-chain exchanges at the target exchange rate built into the protocol, which is 1 UST for $ 1 of LUNA. Anyone can go to the marketplace (i.e. the on-chain trading mechanism) and trade 1 UST for $ 1 of LUNA and vice versa. The on-chain exchange rate is fixed.
This means that significant waves of UST strike / burn (by increasing or reducing outstanding debts) induce one of two scenarios:
Lordship – To hit 1 UST, you need to burn $ 1 of LUNA – contract LUNA supply + expand UST supply.
Contraction – To buy back 1 LUNA, you must burn 1 UST – contract the UST offer + extend the LUNA offer.
Arbitrators take advantage of on-chain Terra stablecoin price dislocations from off-chain sites (like exchanges). For example, if TerraUSD (UST) is trading at a premium on KuCoin, then a trader can hit 1 UST for $ 1 of LUNA on the chain and sell the 1 UST for a profit on Kucoin, simultaneously applying downward pressure on the peg to restore its parity of $ 1 when replicated several times and to size by market participants.
In particular, LUNA does not explicitly guarantee the unpaid debts (for example, UST) of the network. Instead, it functions as the “mining power” of the network that absorbs short-term stablecoins volatility – meaning LUNA can “guarantee” outstanding UST liabilities on a fractional reserve basis if needed. . The system simply funds the pricing of Terra stablecoin through LUNA, which prices Terra at a fixed exchange rate based on the oracle price – the on-chain exchange mechanism.
You can read more details about the protocol here.
What exactly is the Anchor Protocol and how does it allow Terra stablecoin deposits to earn a stable return?
Anchor Protocol is a decentralized savings protocol and money market built on the Terra blockchain. Anchor offers UST depositors a stable APY of 20%, which is derived from the cash flow generated by yield-bearing staking derivatives used as collateral for UST-denominated loans on the borrower’s side.
Basically, borrowers deposit staking derivatives (or later, other yield-bearing assets) as collateral for UST-denominated loans. The return on their collateral is transferred to borrowers based on the utilization rate, where excess return is taken from the yield reserve to support the APY deposit rate of 20% in the event that borrowing demand drops relative to the yield reserve. at the deposit request.
Anchor unlocks the potential of bond staking capital from macro-entangled blockchains of macro-selling points of sale, providing the benchmark and cross-chain benchmark rate for the formation of a DeFi-native interest rate curve.
Anchor’s SDK allows projects and applications to easily integrate Anchor’s high-performance savings into their product with just a few lines of code, becoming the “Stripe for Savings” from DeFi. Along with ETHAnchor, Anchor serves as a cross-chain liquidity venue for high-yield savings where deposits in multiple stablecoins can generate better returns than the variable rates of most DeFi and centralized incumbents.
In 2019, Terra announced a partnership with a payment company called Chai. Could you share Chai’s use cases, its current adoption rate in the market, and how this partnership works?
CHAI was incubated by Terraform Labs and is now a separate company that relies on Terra stablecoins for its settlement infrastructure. Currently, CHAI has over 2 million active users and processes over $ 2 billion in transaction volume per year. With CHAI top-up, users in South Korea no longer even need a bank account.
In 2020, Terra launched Mirror Protocol, a DeFi protocol that enables the creation and trading of synthetic assets. Could you elaborate on what mirror protocol is and how it allows users to capitalize on the movement of real world asset prices?
Mirror Protocol is a synthetic asset protocol built on Terra that allows chain exposure to any asset. Users can hit, trade, and provide liquidity for US tech stocks, commodities, crypto assets, ETFs, and more, all within a single interface.
Mirror is controlled by the community of MIR holders, which means that the mirror assets (mAssets) are voted by the community and the settings saved for trading. mAssets tracks the price of real-world assets, with incentives designed to help them maintain parity with their underlying asset.
Notably, although the massets do not provide direct ownership of an asset like a US tech stock, they do allow people in financially disenfranchised regions to participate in wealth creation in global markets by providing them with exposure to global markets. price. Additionally, with the launch of Mirror V2 next week, mAsset’s composability means that using Anchor UST (aUST) as collateral for creating mAssets allows users to gain exposure to global asset prices. real while accumulating 20% of Anchor’s APY in addition to their position. Composability also enables other creative features, such as creating mAssets with MIR as collateral, building ETFs of auto-rebalancing mAssets, and on-chain asset management platforms built on Mirror (for example, Spar Finance).
Mirror, unlike most TradFi exchanges, taps into a global pool of potential users rather than limited by geographic barriers due to political issues, onerous fee structures, or other barriers to investment.
How does Mirror differentiate itself from competing synthetic asset platforms?
Mirror deploys a different collateralisation model than its main competitor on Ethereum – Synthetix. For example, Mirror’s CDP positions for issue pools are siled, meaning that the collateral ratio may be lower (~ 150%) for UST deposits compared to issue pools. In addition, Mirror is cross-chain, with masses exported beyond Terra to Ethereum, Binance Smart Chain and soon several other chains.
What’s next on Terraform Labs’ agenda?
In the near term, we are launching our next major mainnet upgrade, Columbus-5, as well as the Pylon and Nebula protocol.
Pylon is an anchor protocol-based, yield-generating investment, savings and payment gateway that deploys a “cash-payments”Value exchange model.
Nebula Protocol is an auto-rebalancing ETF protocol for launching and issuing creative ETFs that may contain community-determined allocations for synthetic, crypto, etc. assets based on dynamic market conditions.
Beyond that, there are currently dozens of projects based on the Terra network that we are helping to support in any way we need to.