Crypto and the Future of Money (with Terra’s Do Kwon)
Some people see cryptocurrencies as speculative assets with no real utility at best, a Ponzi scam at worst. For others, blockchain-based currencies represent the bright future of the financial system. Do Kwon, founder and CEO of Terraform Labs, the company behind the Terra blockchain, is firmly in the second camp.
He and Azeem Azhar discuss the Terra stablecoin and its attendant suite of protocols, the growth of the Terra ecosystem, and how Terra eventually could become the currency of a future lived mostly online.
They also discuss:
- How a “decentralized dollar” could rewrite the rules of finance.
- Terra’s approach to attracting the general public into the crypto ecosystem.
- Which future jobs might pay exclusively in crypto.
Is three the magic number? My take on Web3 – Azeem Azhar, 2021
Bitcoin and the Future of Decentralized Finance (with Meltem Demirors, Chief Strategy Officer at CoinShares) – Exponential View Podcast, 2021
Banking without Banks: Decentralized Finance is Coming (with Sergey Nazarov, co-founder of Chainlink) – Exponential View Podcast, 2021
Circle S-4 (Securities & Exchange Commission, December 2021). In the conversation Do Kwon states that Circle “reported losses of more than $100 million last year”. We were unable to confirm this number and were referred to their latest public financial filing.
AZEEM AZHAR: Welcome to the Exponential View podcast where every week I have fascinating conversations about the near future. I’m Azeem Azhar, your host. Now as an entrepreneur and investor, I’ve been an insider in the technology industry for over 20 years. During that time, I’ve observed that exponentially developing technologies are changing the face of our economies, business models, and culture in many and unexpected ways. I wrote about those changes in my book, The Exponential Age, and dig into them every week in my newsletter Exponential View, and of course on this podcast. Now, my guest this week is behind one of the hottest projects in crypto. Do Kwon is the co-founder and CEO of Terraform Labs. He’s behind the Terra blockchain Ecosystem with the goal of building a new financial system altogether. Before we get into the conversation, there are a few terms that come up during our discussion, and it’s worth explaining them up front. So DeFi means decentralized finance, financial products and services that are conducted across peer to peer blockchain projects, where behaviors are often governed by protocols rather than managers. DeFi, decentralized finance, as opposed to CeFi, centralized finance, or TradFi, the traditional finance that we get from our banks and normal institutions. A smart contract is an agreement whose terms are determined upfront, and they are distributed and enforced through a blockchain and executed automatically. TVL is total value locked. That’s the total sum of assets being staked on a given blockchain. NFTs are non-fungible tokens, unique digital assets, the ownership of which is recorded on a blockchain. A DAO, or DAO, is a decentralized autonomous organization. That’s an entity with no central authority controlled by stakeholders with governing rules, once again, written on a blockchain. Finally, mint and burn. Minting is a process that puts units of a cryptocurrency into circulation. Burning is a process of taking it out of circulation. In tandem, these processes help the Terra stablecoin keep its peg. Now, Terra is a fascinating project, even by the standards of the emerging field of crypto. It has a lot of moving parts. The heart of the project is UST the Terra stablecoin, which is a digital currency pegged to the US dollar. Terra forms the core part of the Terra project. The other side, Luna represents its governance token. It’s a way for token holders to shape the direction of the overall project. Terra, the earth. Luna, the moon. Terra is more than its stablecoin and Luna its governance token. It is a suite of financial products, which unlike many crypto projects, allow its users to interact with the real world. These projects include Mirror, a token that allows users all over the world to invest in popular US stocks, like Tesla or Apple, when it might be hard for them to access those stocks from their own country. Anchor, a savings account offering eye-watering savings rates, and CHAI, a payment platform used by thousands of merchants in Korea. The ecosystem is an innovative aspect of Terra and one which is designed to stimulate growth, stability, and uptake of the stablecoin. The idea seems to have caught on. The value of Luna, the governance token, jumped 130 fold in 2021, with a total value of about $30 billion at the time that we recorded this conversation. Terra was then the ninth most valuable crypto project in the world. There is so much to discover, and it’s my pleasure to introduce the founder of Terra, Do Kwon. Do, welcome to Exponential View.
DO KWON: Thanks for having me. Glad to be here.
AZEEM AZHAR: Terra is just such a rich project, though. And at the heart of it seems to be this stablecoin. And I know lots of our listeners will be familiar with stablecoins, but some won’t be. Why are stablecoins important and what differentiates your approach from the others?
DO KWON: When I first started looking into crypto in late 2016, early 2017 timeline, one of the most fascinating things to me is that for an industry that brands itself the cryptocurrency industry, there were very few people that was actually working on the problem of making better currency. Most entrepreneurs were focused on either building better apps or creating better blockchains. I think, though, that if we are to fulfill sort of the holy grail mission of Bitcoin, which is to become peer-to-peer electronic cash, and then to realize a lot of the innovation that we created in 2020, 2021 of DeFi, it’s really important to have a decentralized dollar. And what that means is a cryptocurrency that retains all the price stability profile of Fiat currencies, like the dollar, the Korean won, the Japanese yen, while at the same time, it also maintains a lot of the programmable and censorship-resistant properties of Ethereum and Bitcoin. So that’s essentially why I think a stablecoin is the most interesting project. And the numbers back this up. So stablecoins make up about 80% of all spot volume across all crypto trading. It makes up the greatest amount of volume in both TVL and quote currency volumes across DeFi and on-chain metrics. So I would say that both from sort of a future-proof perspective and how the numbers speak today, the stablecoin is far the most important product in crypto.
AZEEM AZHAR: That’s a fascinating perspective because we often think of crypto as being a sort of exciting and a juicy place where there’s a lot of volatile assets that always trend up towards the right, except when they don’t. And of course, to hear you say, well, stablecoins are really the most important dynamic I think is quite refreshing. One question, of course, is how do stablecoins maintain that peg to the US dollar or the Korean won? If you look at the price movements of Dogecoin, or Bitcoin, or Polkadot, or Helium, these things go up and down like yoyos, but that isn’t suitable for this idea of price stability. So where does the stability come from in the case of Terra?
DO KWON: Before we talk about how Terra maintains stability, I think it might be important to talk about what’s available in the stablecoin landscape. So the most popular variance of stablecoin are Tether and USDC. So these have market caps of about $70 and $40 billion respectively. And how it works is that basically there’s a centralized firm registered somewhere that vouches to keep a dollar in the bank account for every unit of stablecoin that’s issued. So the idea is that the market can trade the stablecoins at par with the dollar, with the confidence that there’s some auditable or some regulated entity, not really regulated, that holds a dollar in the bank account for every unit that’s issued. Now, the limitations of this approach is that there’s a lot of agency and regulation risk. The financial industry’s relationship with regulators has been that if something can be regulated, it eventually will be, which essentially means that over time, like we’re already starting to see a lot more censorship starting to happen through centralized stablecoins. So basically what that means is that the entire industry of let’s say DeFi or other crypto applications that we built on top of blockchains become meaningless. Their decentralization property becomes meaningless if they’re held hostage by the centralized monies on which they are built, i.e. the centralized stablecoin.
AZEEM AZHAR: It’s also very capital intensive. Of course, if you’re backing every stablecoin with a dollar of real assets, as you grow, you have to have a sort of a virtual vault of those real currencies sitting somewhere.
DO KWON: Yeah. And the operating costs are also massive, both on the compliance and just on the pure operations side. So for example, for Circle, they have more than $40 billion worth of stablecoins that are outstanding, most of the holdings of which are held in treasuries. But Circle the firm reported the losses of more than $100 million last year. So from like a sustainability perspective, it’s just not a really good bet. Now, the thesis that Terra puts forward is that a stablecoin, if it is to be truly used across DeFi and crypto in general, needs to be decentralized. So the slogan, sort of like the founding war cry of Terraform labs was that a decentralized economy needs decentralized money. So how Terra operates is that there isn’t any collateral off-chain that is backing the stablecoins. Rather, it uses a mint and burn mechanism against its native staking token, Luna, in order to guarantee that the stablecoin has stability. So at any given time, a user can trade in $1 worth of TerraUSD against the blockchain itself to get a dollar’s worth of Luna back in return. Vice versa, it can always use $1 worth of Luna to mint one TerraUSD. So this has some interesting properties. So at any given time, when a TerraUSD is trading for, let’s say, 90 cents, arbitragers now have an incentive to buy up TerraUSD, trade it against the blockchain for a dollar’s worth of Luna, and then to sell it to close the arb, thereby capturing a 10% profit.
AZEEM AZHAR: But that arbitrage is reliant on them having faith that at some point, the USD exchange rate will go from that 90 cents back up to a dollar. So what sort of gives that the arbitrager the faith that that would happen?
DO KWON: Ah, actually, that’s the beautiful part of the system in the sense that the arbitrager actually doesn’t need to take any beta risk. So for example, if UST is trading at 90 cents, it’s a no-brainer for the user to buy it at 90 cents, and then to swap it against the blockchain for a dollar’s worth of Luna, and they can sell that dollar’s worth of Luna immediately on some sort of exchange, let’s say Binance. And this allows them to capture a 10% profit without taking on any risk as to whether UST would be able to return to its peg. Through this open market operation, however, more TerraUSD gets bought up when it’s trading below the peg, and therefore it allows the price to recover where it should be, at around a dollar.
AZEEM AZHAR: You used the phrase there, an open-market operation, which is fascinating. I think people who are not connected and thinking about the world of finance and how central banks operate may not be familiar with the idea of the open-market operation, which is the way that central banks ultimately implement their policies when they want to change interest rates and so on, They buy and they sell bonds on the market. Is that how you view this sort of algorithmic process that you’ve established, that it is the analogy of the traditional open market operation?
DO KWON: Well, yes and no. So from a literal interpretation of open-market operations, it just basically means that you’re doing something in the open market. So from that perspective, in the sense that these monetary policies were designed with strictly the goal of allowing the currency to remain stable, and that there are participants that are actively engaging with the open market in order to stabilize the peg, yes, I would say it’s an open-market operation. What’s beautiful and decentralized about this system is that it requires no central intervention. There’s no centralized issuer that are actively arbitraging against the peg, nor is there sort of like a buyer of last resort in some sense that guarantees that Terra maintains its peg. It’s just sort of beautifully combined together using a set of game theoretic incentives to the tune of, let’s say $10 billion of TerraUSD outstanding over the course of the last year.
AZEEM AZHAR: It’s a really fascinating, completely different way of thinking how liquidity and money supply should work. Now, I’d love to dig into it more, but we need to bring this home now and start to make this tangible. So you’ve got this stablecoin that flows both in the crypto world, and it’s got this price stability with mainstream currencies, but you also have applications that are being built out on the Terra Ecosystem. So I’m curious about what the relationship between those applications are, the savings products, investing products, trading products, payment products, and the stablecoin, UST. What connects them, and why is it important that they’re related?
DO KWON: When I first started Terra, I really started out with the idea that we can build a better currency on the blockchain. And what that basically meant was that we can create a decentralized money that is easier to spend, more attractive to hold and invest than what we can find in the Fiat world, and that is more convenient than what you can find at Bitcoin and Ethereum. If you start to think about money as a technology, it’s a very simple product with just a couple of features. So you can either hold it, you can invest it, or you can spend it. So Anchor, Mirror, and CHAI-
AZEEM AZHAR: These are all three key products that are enabled by the Terra Ecosystem.
DO KWON: Exactly. So how Anchor works is that it enhances the savings aspect of TerraUSD so that it becomes more attractive to hold. Anchor offers a 19.5% yield on Terra stablecoins as a savings rate. That’s not bad.
AZEEM AZHAR: Which is powered by staking yields that are coming in from multiple different proof of stake ecosystems. Therefore, it makes the UST more attractive to hold. Mirror creates synthetic assets for basically anything in the world that are 24/7 tradable, that can be traded on any sort of decentralized exchange, and has no sort of minimal viable qualifications that people need to cross before they can start trading these things. And therefore, it makes TerraUSD a better conduit for people to get into investing into various different asset classes. And lastly, the payment companies that we’ve built, CHAI, and Mimipay, and some others, make all the returns that they make from Anchor and Mirror, and just Terra stablecoins in general, easier to spend with faster settlement times and lower fees. And therefore, it just makes TerraUSD a more attractive asset by which you can settle in. So all these different products that we’ve built are essentially just features. The only end product that we had at Terraform Labs is to create a form of money, and that is really our principle product, and everything else is a means to an end. The importance of any currency is its ability to be useful in some sense. That’s why the US dollar has been the thing that you find all over the world, even in places where perhaps the dollar wasn’t the local currency. So you’re making UST useful through these applications. I think one of the things that I found fascinating about Terra is it answers the question that you are often asked about crypto projects, which is, but can you do anything with crypto that isn’t to do with crypto? And it seems to be the case that you can through Terra. If I’m in Korea, I can pay for products on an e-commerce service using CHAI. And that, I think, is quite an important dynamic. And one of the things I’m curious about is what the insight was that drove you to build out your own applications from the Terra Ecosystem that connected to the real world and connected to people and their lives outside of their crypto personalities.
DO KWON: I think it was a couple of things. The first thing that I noticed when I first got in was there are very strong structural incentives for people in crypto to look inwards. What I mean by this is it’s often very profitable to build a very niche product for people that already deploy tens of millions, or if not hundreds of millions of dollars in crypto. So for example, if you build like a very narrow, let’s say DeFi structured protocol, and then this can cater to, let’s say, just a few whales that can put in millions and millions, if not billions of dollars into your protocol, then that case you would be very well financially rewarded. Actually, it’s often the better strategy to do this from a incentive perspective than to try to draw more users in, because getting, let’s say, a thousand whales that are already investing in and using crypto often draws a lot more capital into your project then, let’s say, trying to bring in the next a hundred thousand, the next million, the next 10 million users in, each of which might be deploying, let’s say, $50, $100 into your project. I that’s why the vast majority of the innovation that’s happened in crypto often tends to look inward. But in order to expand the total pie of what’s possible in crypto, I felt like somebody needs to be working on doing the hard work of bringing in the next million, if not the next billion people into crypto. And I think in order to do those things, I thought that it would be far more important to touch upon the base use cases of what people can do with their money instead of building novel structure products that might appeal a very specific niche. And that’s the work that we do today.
AZEEM AZHAR: I found CHAI quite interesting. So CHAI is like a payment system started in the Korean market, as I suppose, as an alternative to paying perhaps via a credit card or some other mechanism. And it was quite interesting that you have a very clear offer to the merchant, which is that the payment fees that the merchant has to pay are much lower through CHAI than through many of the other players in that market. I think it’s about sort of half the rate, which makes it very, very attractive. And I guess that creates a Trojan horse because a merchant enables CHAI, and that then gives them incentives to get their users, or their customers, to start to become CHAI enabled, which then brings those people into the Terra Ecosystem. So I’m curious about how well that approach worked and the extent to which, when you’re someone in Korea who then starts to pay via CHAI, do you realize that you’ve become part of the Terra Ecosystem? Do you then start to actively interact with either the UST or the Luna governance coin, or is that still sort of a couple of steps away?
DO KWON: So to touch upon where CHAI is in its sort of growth cycle, I think lots of different angles, it’s been quite successful. It’s integrated with most of the large e-commerce merchants in the country. So you can buy anything from, let’s say, general purpose e-commerce, to online groceries, to ride hailing, to online games. So you can do lots of these things. You can also hook up, let’s say, a Terra wallet, and then you can sort of funnel your yield from, let’s say, Anchor, or your gains from Mirror protocol, such that not only are you earning within the Terra blockchain, but you can actually actively spend it to do anything that you want in the country. From many different ways, we’ve managed to close the money loop on what the average user needs to do with their money in Korea. The value proposition, as you said, is pretty simple. The idea is that instead of having to wait multiple days and have to pay egregious fees in order to get your settlements through, because it’s really on the B2B settlements there where most of the rent extraction for the payments happen, merchants can get settled very quickly. So instead of multiple days, it could be, let’s say, six seconds, which is the average block time of the Terra blockchain. And then the fees are also structurally much lower. I think about 50% to 60% what merchants are forced to pay on net using traditional payment gateways. Big push that we were trying to make in 2021 is geographic expansion. And then with payments, it’s really a licensing game where if you’re trying to expand into different Asian countries, you do need sort of like the blessing of the local regulators in order to be able to expand. And that’s pretty hard with, let’s say, countries like Indonesia. They haven’t issued a new payment license over the last five, six years, for instance, even to firms like Tokopedia. Coming from, let’s say, a crypto-native or blockchain-native background, we just sort of underestimated how tough some of those regulatory challenges would be. I think the people that are working on the payment side of CHAI they’re starting to internalize and learn from their experience to be better at that.
AZEEM AZHAR: I was curious about how successful CHAI had been in bringing end users into the Terra Ecosystem. And I read a lot of the stories up front saying that there had been tremendous end user acquisition, but when I checked in the last couple of days on ChaiScan to see what the sort of total user base looked like on CHAI, and it seemed like kind of growth was flattening at around two and a half million users. I don’t know if that was accurate or not, but I would love to know how you have assessed the growth of CHAI, and the growth of this Ecosystem strategy and actually bringing people on into the Terra Ecosystem. I mean, is growth still very, very fast from an end user perspective? Has it started to slow down? How many people would you actually say are within the ecosystem across these different products?
DO KWON: Yeah, so I think that’s fair. I would say growth for CHAI has been pretty flat over the last year. Most of the volume and emphasis has been going two different business lines instead of the e-wallet. So one of them is the CHAI debit card. This is sort of like a gamified experience where users can top up into their CHAI debit card using crypto, and then they can spend it. And then on the debit card side of things, it doesn’t actually lead to like an on-chain transaction because it still needs to use like the debit card network. And then it’s also acquired like a payment gateway business where a lot of its emphasis has been going to. But yeah, on the payment side, I think within Korea, after it sort of tackled sort of the novel use cases, so essentially like a lot of crypto-friendly users within the country, growth has been relatively flat.
AZEEM AZHAR: I’m curious about this because getting users to use these systems becomes really, really critical. And I think back to when I first got onto the internet, which was back in 1991, and it was okay when you were in university. The moment you left university, and you tried to do this at home, it was really, really painful. And it took six or seven years from that point before the on-ramps became really simple and straightforward. And you’ve done things that a lot of crypto projects haven’t done in the sense that you’ve gone out to find real world applications. We talked about CHAI, which was kind of, you can use to buy useful things in the real world. And Mirror is really fascinating because Mirror allows people who might find it really difficult to invest in companies like Apple or Tesla to get exposure to those stocks in their markets. And I think Mirror has been successful in Thailand and for that reason. So you’ve gone out and you’ve tried quite hard to bring ordinary users in by making the on ramps easier. But my sense is that you are still discovering what that on ramp product market fit is, that thing that would show that this acceleration of users just signing up is taking off like Topsy. Is that a fair assessment? Are you still experimenting for that really ideal on ramp?
DO KWON: I think you’re spot-on in the sense that I think it’s a combination of two different things. One part of it is just me like experimenting with different types of products. So a part of it is my journey. But the second is also how the macro landscape in crypto is shifting. And that’s sort of like the journey of the entire industry as a whole. So to put things in some context, when we first launched payments, there was pretty much nobody else that was looking to get into crypto payments. So from that perspective, I think building a large network of merchants and users that were willing to transact using a stablecoin was a valid mission. I think today, things look a little bit different where literally every FinTech company that I’ve talked to are looking to integrate stablecoins into their merchant network or into their existing offerings. Even some, shall we say, challenger banks are getting to a state where they’re integrating with things like on-chain analytics platforms in order to do KYC/AML and compliance checks.
AZEEM AZHAR: I think Visa did some deal with circle, which runs the USDC coin.
DO KWON: Yeah. So it’s a completely different landscape where I think payments using crypto are rapidly going to be commoditized over the next two years. And I felt like it wasn’t so much like a unique offering that we can make with Terra stablecoins. But what I had neglected to consider is that it’s not really a situation where you can set money in motion and then capture money at rest. It’s the other way around. If you can get a lot of people to put their household savings into crypto, then in that case, it’s a lot easier to get money in rest in order to get money in motion. Probably out of like our entire suite of products, the one that has found the strongest product market fit is Anchor. When it started last April, it was zero. Now it’s at like 11, 12 billion in terms of TVL. So in terms of deposits and users, it’s increasing very quickly. And I think what’s really attractive about this is that in this very low interest macro environment, it offers a rate of return on your stablecoins that cannot be matched by anything else in traditional finance. So for example, your Wells Fargo is never going to compete with 19.5%. And from a risk-adjusted basis, almost impossible for anything in crypto to compete with. So that’s been drawing in lots of capital and lots of users.
AZEEM AZHAR: Understandably. I mean, 19.5% is really attractive as an annual yield, but of course, the truth of the world of finance is that there’s no return, excess return, improved return without there being some form of risk. So what are the risks that our saver is taking when they are saving through Anchor? And are those things, things that can be enumerated? Are they clear enough to the people who are putting their savings in and Anchor?
DO KWON: The interesting thing is you can sort of think about Anchor as like a … How to put this? Like a mortgage-backed security, except the mortgages aren’t really mortgages, they’re proof-of-stake positions. So how it works is that Anchor is actually a money market whereby the collateral that’s being used are POS assets across multiple different blockchains. So the idea is that when a user is depositing coins, stablecoins, they’re actually really lending out money to borrowers that are collateralizing their loans by putting proof-of-stake assets into the protocol. These proof-of-stake assets then earn staking yields across, let’s say, the likes of Solana, Ethereum, Terra, [inaudible 00:26:48] and so on and so forth, and then these staking returns are then converted to the user in the form of a stable yield. And as you said, these returns are going to compress throughout time. But what Anchor is really doing is that it’s putting downwards pressure on the staking returns of proof-of-stake blockchains across the entire industry, which by a cumulative market cap is well in, let’s say, $700, $800 billion. So I would say that we have a lot more miles to feed, a lot of households to power before we can start to see a lot of these staking yield diminish over time.
AZEEM AZHAR: So there are lots of different blockchains out there. These blockchains allow you to hold particular tokens to stake them, which gives them something called the staking yield. To go off and do that can be a little bit technical and complex. And so what Anchor can do is Anchor can distribute the savings it’s received from its end users across many of these much more diverse tokens, where it’s staking in each of them. It’s made that much easier, therefore, for its end user, but it’s also distributing the risk across perhaps dozens of other projects. And so what is then turned back to the end user is not only easier access to these higher yields, but diversification, which therefore reduces the risk of their savings. And that’s why they’re getting 19%, rather than perhaps whatever excessive staking yield you might get on an individual blockchain.
DO KWON: I think besides like making it easier for users, it also helps them comprehend the types of risk. So for example, if you’re staking E or if you’re staking Luna, where if you’re staking Sol, then you need to understand what these assets are and understand why they have upside. But if they’re staking each of these assets respectively, then they’re taking price risk in each of these assets. Whereas in the case of Anchor, they just need to deposit something that is USD denominated, and they get interest also in something that’s USD denominated.
AZEEM AZHAR: If I’m in the US or the UK, and I’m getting my paltry, 0.2%, five, 0.5% savings rate, I also know that up to a certain level, I’m likely to have an FDIC or an FSCS-insured deposit, that if the bank or the financial institution fails up to a certain level, someone is going to make sure that I’m made whole. And how do you think that plays out with crypto based products? If there isn’t a chance of a risk, a kind of failure, a diminution of my capital through a savings product like Anchor, and there’s no kind of third party, that’s ensuring against those risks, then I am getting free money. And that kind of idea of free money seems to run counter to some of the fundamental rules of finance, whether it’s centralized finance or decentralized finance, which is there’s no reward without risk.
DO KWON: Yeah. I think that’s a really good question. And I would say that in the short term, DeFi is significantly more risky than what you would find in a savings account or anything else in traditional finance. And that’s because there’s a lot of execution risk in creating something this novel and this new. A lot of the economic assumptions could be less tested than one you can find in TradFi. And a lot of these systems, such as smart contracts with the blockchains on which they’re built, they could experience technical failure. So it is significantly more risky. But I think over the long term, it can be a lot more secure. And the reason for this is that for FDIC, for instance, it actually isn’t able to insure you against wholesale failure of our banking system because the amount of assets that the FDIC holds in its balance sheet is less than what the banks are holding. If the government is forced to bail out a banking failure, then in that case, it needs to print more money. And in the process, that burden is born by the entire citizenry through inflation. But I think over time, as DeFi systems mature, a lot of the economic assumptions and a lot of the technical robustness of these systems are going to be battle tested it and hardened. And I think after that point, then it’s going to be a lot more secure than let’s say the security assumptions of an economic guarantor.
AZEEM AZHAR: We’re less than a decade, since people in Cyprus had to take significant haircuts on their savings. It was rooted to reach as high as 50% or 60% as a condition to getting a bailout from the EU and the International Monetary Fund. So we, within living memory, can remember what happens when these traditional systems fail.
DO KWON: Yeah, for sure.
AZEEM AZHAR: I wanted to just, maybe let’s move up a level and talk a little bit about what maybe happening across the different blockchains as well. So in some ways, interoperability, between and across blockchains, is really built into your plans, as we’ve seen in our discussion around Anchor. How do you see the future playing out between and across different chains? Is it a multi-chain future, or will there be one or two really strong victors that run away with the market?
DO KWON: I think the key reason why I believe in a multi-chain future is because different blockchain architectures are optimized for different things. We’re reminded of this at every bull market. So for example, like Ethereum fees get really expensive, let’s say, if you’re trying to swap out of your USDC stablecoin into, let’s say, SUSD so that you can do something in DeFi. You suddenly notice that your fees get really expensive because there might happen to be, let’s say, a sale of a cat NFT that’s going on in an application that is completely irrelevant to you. And really, I think these types of trade offs that Ethereum has chosen to make, make sense for some set of applications, however broad or however narrow is up to interpretation. But it definitely has trade offs. And I think different types of blockchains with different set of rules governing them are going to make different trade offs. I think depending on the types of applications, a lot of which are going to overlap across blockchains, there’s always going to be a multi-chain future. And I think one of the most interesting things about Terra is that while it’s a layer one blockchain, it’s primarily aimed towards making its stablecoin, the most useful and decentralized form of money there is. So one of the biggest pushes that we’ve been making throughout late last year and early this year is to get TerraUSD adopted more widely in DeFi and application ecosystems of different chains. And we’re starting to see early adoption metrics for that come in. And I think that’s super exciting.
AZEEM AZHAR: The adoption metric is essentially people moving some of their USD Tether or USDC holdings perhaps over into the Terra stablecoin. And that would be the measure of the progress that you’re making.
DO KWON: Right. Correct.
AZEEM AZHAR: So within this idea of a multi-chain future, there is an interesting dynamic. There are a couple of words that you used with me earlier in the conversation a couple of times. You talked about regulation and censorship in the same sort of language. What is the relationship between traditional governments, the governments making the laws and the countries where you are trying to launch payment services, and the governance of this new monetary and financial system that is being built? I mean, how do you connect the two and where do you think you fall on that spectrum of … There is a spectrum of, of people who say, “Well, these are technologies that help us entirely replace the old style governance technologies oof the nation state and the westphalian consensus,” across to those who say, “We actually are going to accommodate both these traditional methods of governance with this new financial system.” I mean, where does Do fit in that spectrum?
DO KWON: I think the most interesting thing about creating a decentralized useful dollar is that you essentially sort of change the physical laws of what you can do with financial technology in the sense that you have an unstoppable form of a dollar that can be programmed into lots of different internet applications, that can be weaved into some applications that might be a little bit more traditional, like payment applications, or let’s say crypto exchanges. And I think the potential of that is really large because I think it breaks a lot of the overhead that existed for traditional applications to something that becomes unnecessary and irrelevant in the new types of programmable applications that you can sort of layer and stack on top of each other. I think a lot of these end applications are going to have compliance overhead, though, similar to how, even though Bitcoin itself can’t be censored, there’s a lot of crypto exchanges and broker dealers that have to meet compliance obligations. It’s similar to how a lot of the services that interact with gold have derivatives or commodities laws that they have to abide by. But I think like the end state of a lot of these crypto assets or cryptocurrencies is that a lot of them are going to be essentially things that cannot be governed in and of themselves, but really programmable commodities that make the internet a richer place in which you can start to build economies.
AZEEM AZHAR: Technologies always have a sort of politics that is embedded within them, either they confer military advantage, or they enable wealth creation in one area and they diminish wealth creation in another area. But one of the things that has struck me about the crypto world is the very close binding between kind of certain type of politics, a skepticism of existing centralized authorities, and the affordances that are built within the sort of products themselves. I mean, I think of some of your tweets the last couple of weeks, the end of 2021. You wrote this, you said that web 2.0 was akin to digital communism where no one had property, whereas web 3.0 offers digital capitalism, opportunities for ownership and prosperity. I’m curious about how you think about the importance of that politics in shaping the decisions that you make around the products and the protocols and the directions. Is it that the politics drives the product decisions, or is it the product decisions end up aligning with a kind of particular view of kind of property rights and a sort of rejection of central authority? Which is the horse in which is the cart?
DO KWON: One of the strong themes of crypto is that you want to always be minimizing governance in the sense that if you can sort of reduce complex social dynamics into a simple set of rules that are mathematically governed, are fair, are transparent, and are efficient, then you should always opt towards that route instead of something that is determined through human Congress, which is not to say that we shouldn’t have any government whatsoever. But one of the things that was super confusing to me when I was first trying to build out, let’s say, a payments app while I was in college, was that I couldn’t for the life of me figure out how to add a payments module back in 2010 into a mobile application. So I found out that you need to email people and like jump on a call and things like that. And recently, we try to do something with another FinTech company called Plaid, and it’s still the same case today where you have to negotiate rates. You need to jump on a call with like a customer professional with a Silicon valley startup, which I think is a suboptimal outcome. A lot of the things that we can build in sort of traditional finance is layered on top of these human relationships and walled gardens and boundaries and things like that. I think having sort of these property routes that are erected on the internet is going to change the dynamic whereby the internet was a place where we came to play, the real world where we did both work and play. And I think it’s going to flip that dynamic where the primary arena in which we live out our lives is going to be online, or at least we will have the choice to. The application space of the things that we can build out on the internet is going to be significantly more multidimensional because now we have money and property rights that are injected in some of these applications.
AZEEM AZHAR: You said something I, that made me think a little bit there. So part of your observation is that in a lot of these financial systems that you had interacted with, what you had identified was lack of transparency, perhaps an arbitrary nature in the way that systems worked, and that one of the advantages that blockchain and smart contract platforms start to provide is that the rules are available for everyone to see, the mechanism by which the rules changes is also available for everyone to see, and that process is transparent. And for that process to be transparent and trustworthy, it needs to be able to resist any kind of centralized censorship or other sort of attack. Is that a fair summary of kind of what you had observed and part of motivation?
DO KWON: Yeah. I would say that’s largely accurate.
AZEEM AZHAR: One of the things that I’m curious is you talk about how people are going to move more of their behavior online, and that there are parts of our behavior that can’t move there right now because the technologies don’t support that. What do you actually mean by that? Can you paint that picture for us?
DO KWON: Sure. So an easy way of understanding this is that in the real world, somebody who is extremely successful, let’s say a billionaire, has a lot of property. That property is always in the reality. If you look at in the digital world, there’s no concept of digital scarcity. So you can artificially create this scarcity, but in reality, it doesn’t actually mean that much, which is why let’s say if you were adding like a special banner or a special color into, let’s say, a social networking website or something like that’s usually free. And even if some of these goods are charged, let’s say in a game, the unit price has to be low because the scarcity isn’t fundamental. It’s artificially contrived. But imagine a world where the assets that you have earned or produced on the internet have mathematical scarcity, and in some cases, mathematically guaranteed uniqueness. And this is what cryptocurrency provides in the sense that you have mathematically verified, scarce ownership of public goods. It can be a decentralized exchange. It can be of a specific commodity like Bitcoin. And then in some cases, like the things that you own through mathematically proven provenance, are yours as stored in some globally available ledger. If you look at like most of these NFTs that you can collect, they’re pretty dumb. They’re super stupid. And it’s like very unclear why people are buying them. But I think it’s because there’s a lot of pent-up demand for people to own things on the internet. And for people that are spending 12 hours, 14 hours, 15 hours a day, looking into the screen already, like owning things in reality, let’s say a nice house or a nice car, actually means nothing. So for me personally, for instance, like that means nothing to me, whereas if I can spend money on the internet to sort of enhance my online life in some way, that is an expenditure that I would happily make. And I think the reason why people are buying some of these NFTs, which leave a lot to be desired, honestly, I think is a representation of that demand.
AZEEM AZHAR: There’s a couple of interesting ideas that this makes me think about. One is this idea of constructing digital property rights. It’s an idea that ties back to libertarian thinking. And the idea also then of having sort of digital property is about also constructing status signals. The fast car in the physical world is a status signal. A Bored Ape NFT might be a status signal in the digital realm. I’m curious about what space you think there is for other political economic approaches, whether it is things like public goods, or commons-based management of resources, or things that don’t look as if the sort of fundamental primitive is property ownership from which all other political rights then develop?
DO KWON: And I think there’s a couple of observing here. Number one, if you can have these sort of alternate digital realities in which you could be spending lots of time, and that you know that this world is going to persist for at least as long as your natural life would persist, as it’s governed by economic interests that people would be interested in by choosing to spend their life in this alternate reality, then in that case, it could be a worthwhile endeavor to be spending tons of times in this space as versus to other realities, including the one that we physically live in today. So like an interesting reality is that there could be, let’s say, a village that could cost real money to build, like to the tune of millions, if not hundreds of millions of dollars, and it could be hosting something that is economically valuable, let’s say, a decentralized autonomous organization with like the halls of Congress and so on and so forth. Then let’s say that the physical laws of this alternate reality mean that dragons can attack you, or that could be a natural disaster every few months or so. Then that case, this DAO would be willing to expand economic resources to create full-time jobs, let’s say paladins, for instance, which are knighted warriors, which can protect the village from dragons. So that could be a full-time career for somebody. So if that sounds ridiculous, then it could be something that’s a little bit more primitive and basic. So for a DAO that is secured by open source software, it could be full-time white hack security researchers that are working around the clock to make sure that there’s no security vulnerabilities from new network configurations and no deployments that happen in order to sustain this alternate reality.
AZEEM AZHAR: Of course, we did in the primitive multiplayer online worlds, like World of Warcraft and EverQuest, years and years ago, start to see people sort of build businesses, build careers within those worlds. And that was very early days. I want to just ask just one last question, if I can, Do. Really enjoyed our conversation and so many more places we can go. What is the final goal with Terra? What will success look like? And how are you going to know that you’ve got to where you want to be?
DO KWON: I think building a real economy on the internet is something that is of value. And the reason why I think this is of value is because while reality is constricted by physical laws, and admittedly, this is part of what makes reality beautiful, but at the same time is what makes reality broken. The only thing that limits us on the internet is human ingenuity. So the types of things that we are able to build on the open web are going to be significantly more sophisticated, significantly more value-additive than the things that we can construct in reality. The applications that we create, the only goal is we want TerraUSD to be the money of this future.
AZEEM AZHAR: That is a very, very clear and farsighted goal. Do Kwon, thank you so much for taking the time to talk to me today.
DO KWON: Thank you so much for having me.
AZEEM AZHAR: Well, if you enjoyed today’s episode, dive into previous episodes with Sergey Nazarov, co-founder of Chainlink, who talked me through what a financial system without brokers might look like, or Meltem Demirors, chief strategy officer of CoinShare who discussed the potential and politics of cryptocurrencies. To become a premium subscriber of my newsletter, go to www.exponentialview.ca/listener where you’ll get a 20% off discount. To stay in touch, you can follow me on Twitter. In US, I’m @Azeem, A-Z-E E-M, and then elsewhere, it’s @Azeem, A-Z-E-E-M. This podcast was produced by Mischa Frankl-Duval, Fred Casella, and Marija Gavrilov. Bojan Sabioncello is the sound editor. This podcast is a production of E^pi I+1 Limited.