It’s legitimate for regulators to try to bring crypto and DeFi into the fold: CEO of Terraform Labs

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Do Kwon, CEO of Terraform Labs, talks about Terra’s explosive growth which is up 5600% year-on-year.

Video transcript

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ZACK GUZMAN: In today’s Crypto Corner, a reminder on stable coins and why they are so important. As we saw this week with the SEC intervening to prevent crypto giant Coinbase from launching a way for investors to earn interest on their stablecoin holdings, there is now a lot of regulatory attention on stablecoins now. It’s worth asking, what exactly are stablecoins? They are special cryptocurrencies designed to remain stable in value or linked to a base currency.

In the case of the largest stablecoins by market cap, this means staying pegged at US $ 1. And it gives crypto investors an easy way to cash in stability during times of volatility without having to cash out in real physical money. But it also raises the question of how these stablecoins remain stable. And one way is to just keep dollar equivalent value in banks. If you have $ 20 billion in the bank, you have 20 billion stablecoins.

The USDC, the second largest stablecoin, has just chosen to do so. Or you can back your stablecoin with slightly riskier assets in the bank, so to speak, with a mix of corporate debt cash equivalents, which the bigger stablecoin tether has been doing for years. And these two stablecoins have received billions of dollars this year.

In fact, Tether’s market capitalization more than tripled in 2021, while USDC saw its market capitalization six-fold to over $ 26 billion. And as wild as the growth has been to them, there is one stablecoin that experienced even more explosive growth in 2021. It would be Terra’s UST stablecoin which has seen its market capitalization increase 13 times this year to become the fifth most large stable currency.

And unlike USDC and Tether, it is not backed by cash or other real assets. It is also backed by the cryptocurrency, Luna, which is up nearly 6,000% since the start of the year. And for more, I want to bring the man behind it all at Terra, Terraform Labs Co-Founder and CEO Do Kwon joins the show here today.

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And Do, thanks for coming over to chat, man. I mean, it’s fascinating to see how it all works because you’ve kind of built a Federal Reserve system here, burning Luna at a rate that keeps the UST pegged to the dollar. But tell me about how it works and maybe why you’ve seen such growth this year.

DO KWON: Yeah, thanks for having me, Zack. So how Terra works, instead of keeping $ 1 in the bank account for every stable coin issued, you have a reserve currency called Luna which helps stabilize Terra’s anchor. So the idea is that at some point, to hit a unit of Terra USD, you have to burn for $ 1 of Luna. And vice versa, if you try to trade with Terra USD, you burn it and then get $ 1 from Luna back.

It is therefore a completely decentralized system, where you can have stable coins issued by a community of Luna token holders. So the reason this is valuable is that there is a lot of regulatory movement from jurisdictions around the world to censor the underlying bank accounts under stablecoins.

And that puts the threat really like all the different DeFi apps that are built on blockchains, which means that even though the smart contract logic for these DeFi apps is decentralized, if the underlying money can be censored, then that sort of defeats the purpose entirely.

The reason decentralized currencies like Terra are important to get a lot of attention is that they are free of these things, in the sense that there is no sensitive underlying deposit, the logic that governs politics. currency of these stablecoins is entirely free from censorship.

ZACK GUZMAN: Yeah, and I should note – I mean, maybe someone looks at this first, you know, you’re not the only algorithm backed stablecoin out there. There are those over there. But you kind of have a big payment system there, in South Korea as well, which makes Terra a little different. So tell me, you know, how that maybe sets this particular project apart from other pieces that have tried to do the same thing you’re trying to solve.

DO KWON: Right. So it’s part of the payment system. But what I will say is that there are a lot of algorithmic stablecoins out there. And to our reviews’ credit, most of them failed. And the reason is that, in order to build an algorithmic stablecoin, the main challenge is not to design a smart algorithm. It is therefore important. The design of the mechanism is indeed critical. But it’s really about building the use cases around the economy.

So, for example, the monetary policy of the US dollar is not necessarily more sophisticated than that of smaller currencies. This is because the US economy is the most robust. And it allows the US dollar to be more stable than other types of currencies.

Likewise, the way we’ve sort of built the Terra ecosystem is that there are many use cases leveraging Terra stablecoins, from savings cases to payments, to synthetic investments in Terra. exposure to prices. And I think these use cases really make stablecoin more stable, because there is a rigidity to the basic retail use case type for Terra stablecoins.

In terms of payments, we launched the payment app called Chai in South Korea about two years ago. And to date, it processes over $ 1 billion in payments per year. And it is used by around 3 million users nationwide. So I think these use cases somehow bolster the stability of Terra stablecoin and make it more useful as a currency overall.

ZACK GUZMAN: Yeah, and we’re still seeing it go up another 3% or 4% today. I mean, movements have been volatile in a lot of these projects that seek to solve real problems. But I mean, in your opinion, something that gets a lot of attention from retail investors is the idea of ​​this savings protocol anchor, as it’s called in your ecosystem, that promises, what, 20% back on deposits.

And anyone looking at this, anyone who criticizes cryptocurrency could say, whenever you have guaranteed returns, people are shouting the Ponzi scheme from the rafters. But why is it different? How do you offer, I guess this is the main question I always hear about Terra and Anchor, how do you offer that 20% on the deposit?

DO KWON: Of course. So right now we have a savings protocol called Anchor, whereby you can deposit Terra Stable Coins into a smart contract. And right now, the interest you earn on these stablecoins is close to 20%.

So the reason why this is possible is that under the hood Anchor is actually just a money market, in which there is a bit like another group of users who take out Terra stablecoin loans which are secured by staking positions on multiple blockchains. So, Anchor’s interest rate is really fueled by block rewards coming from blockchains, such as Ethereum, Terra Solana, and soon Polkadot and Cosmos.

Thus, proof of the returns on investment that accumulate on the underlying collateral is conferred on the lender in the form of a stable interest rate. It sounds pretty complicated. But basically the idea is that we have managed to stabilize the performance of several blockchain systems, which allows you to earn a higher return than you would get at Wells Fargo.

Yeah, what’s interesting too is that it’s all a bit more open, isn’t it? Coinbase was blocked from trying to offer 4% on a stablecoin, and as you put it there, 20%. But that’s because a lot of it eliminates the middleman. DeFi did this. And that’s kind of the intriguing piece to watch here and a question I think is important to answer, so thank you for answering it.

Of course, since you guys kind of looked to build all of this, it was important, as you say, to attract more users and see more activity in the ecosystem. And now you’re committing a significant amount of money to sort of build this, $ 150 million here, to try to keep seeing people building and, I guess, designing things for the Terra ecosystem. Tell me how important this is and why you are making this investment now.

DO KWON: Of course. So, to become a basic financial infrastructure that can be used by tens, hundreds of millions of people, you need a stable system that is immune to security breaches. So we’re going to spend the $ 150 million to stabilize the infrastructure that underpins the Terra blockchain.

So we’re going to invest it in things like allowing the validator nodes that run the blockchain to become more sophisticated and diverse, to make sure that the price feeds used by our DeFi applications are robust and come from multiple sources, and for s ” ensure that the basic technologies that somehow drive the Terra blockchain can be sustainable and become more sophisticated.

ZACK GUZMAN: And obviously, you know, I guess there’s – I’m just going to end on some risks here, as you see them around, kind of a regulatory headwind as the SEC maybe stepping things up, so as the Fed looks at stablecoins, I mean, how do you possibly assess those risks versus what you’re trying to build, given that you’re not based in the US? How do you see these risks?

DO KWON: I think they’re important. And I think a lot of recent moves by regulators trying to bring crypto and DeFi into the fold are legitimate. And I think investor protection is indeed important. So as an industry I think we can do two different things.

First, we can decentralize, so if you’re actually running a brokerage platform, some kind of decentralization theater, if you will, and you’re making tons of money at the expense of your users by being exposed to the risk of them. do not. understand, then it’s probably not appropriate.

But what we can do is make sure that we can self-regulate as an industry and make long-term investments to make sure that our platforms are secure, that our investors have the full range of information on them. risks they face and to make sure that in every way we can work with regulators to make sure we tick all the boxes, so I think that’s basically putting forward the best in an industry so young.

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