Terra's token LUNA is available for buying and trading on the Voyager app. Our team spoke with Terra Luna Co-founder, Do Kwon, to help educate others on Terra and to find out what's next for the Terra Network.
Voyager: Hi, Do. Thank you for taking the time to speak with us today. To start, can you provide us with a summary of Terra and its core mission?
Do Kwon: Terra is a permissionless blockchain network that is based on a suite of fiat-pegged stablecoins collateralized by the network’s native token LUNA. The idea is that the path to widespread adoption of crypto is largely based on stability and composability of the underlying network, which is what Terra excels at -- providing a fast and secure settlement layer for building financial applications on top of. These applications can range from payments (Chai) to investing (Mirror) and savings (Anchor).
The core mission is to extend the adoption of Terra’s cadre of stablecoins, such as UST. By increasing stablecoin demand, the supply of LUNA contracts (making LUNA more scarce), and accrues higher network fees to LUNA stakers on the network who participate in governance. As a result, increasing stablecoin adoption creates a mutually beneficial relationship between users (gaining from the utility of stablecoins and their corresponding apps), and long-term LUNA holders who secure and govern the network.
V: What are three core problems in the world of finance and the global economy Terra was created to solve?
Do Kwon: Concerning improving the traditional finance (TradFi) world -- better settlement infrastructure for payments (e.g., Chai), censorship-resistant and globally accessible investment tools (e.g., Mirror), and stable, high-yield savings vehicles (e.g., Anchor).
Compared to the crypto market, Terra was built to move the needle on mass adoption via the cadre of its underlying stablecoins. Adoption is currently one of the primary barriers to DeFi realizing its full potential, and Terra’s emphasis on trivially usable stablecoins and applications that rely on them is designed to ease barriers of adoption for crypto.
V: How does the native coin LUNA fit into the Terra Network, and what are its unique value propositions?
Do Kwon: LUNA collateralizes the stablecoins on Terra. With increasing stablecoin demand, the supply of LUNA contracts as more stablecoins are minted via the on-chain mint/burn feature in the protocol. For example, if demand for UST is increasing and the UST peg deviates above $1, then LUNA holders are incentivized to burn $1 worth of LUNA for 1 UST and sell it on the open market for a riskless profit.
The reverse is true when the demand for Terra stablecoins contracts -- arbitrageurs purchase UST at a discount on the open market and swap it for $1 worth of LUNA for a riskless profit.
LUNA’s functionality extends beyond stablecoin collateralization, however. LUNA stakers, who bond their tokens into the network, can participate in governance proposals on the network weighted by the amount of LUNA staked. LUNA stakers also accrue the fees generated by the network’s tax, meaning that as stablecoin adoption increases, so does their cash flows.
V: In our research, we saw that Terra stablecoins offer instant settlements, low fees, and seamless cross-border exchange. How does Terra innovate and improve on the existing stablecoin network ecosystems currently available?
Do Kwon: Stablecoins today exist in several different models. First, are the centralized (custodial) stablecoins like USDC. In these models, a third-party custodian holds a specific amount of the pegged currency in a bank account at a 1:1 ratio of circulating, tokenized representations of the currency. For example, USDC represents a 1:1 peg with USD held in a custodial account, which increases or decreases based on demand for the stablecoin. You can think of these models as an IOU, with the digital stablecoin representing the tokenized claim on dollars in the account.
The issue with these is that they’re centralized, meaning the issuer can blacklist specific addresses and is prone to regulatory control. The upside is that they are intuitive to understand and use, plus, they are capital efficient.
The second major class of stablecoins is over-collateralized stablecoins like Maker’s Dai. In such a model, a decentralized money market functions as the issuer of a stablecoin -- in this case Dai. Users deposit crypto assets into MakerDAO’s collateralized debt position (CDP), to mint Dai at a 150 percent collateral ratio. Meaning that it takes $150 worth of ETH deposited into the CDP to mint $100 worth of Dai.
The primary limitation is capital efficiency since the user is locking up an extra $50 of collateral that is effectively dead capital. Additionally, users are exposed to the downside volatility of the underlying collateral (e.g., ETH) that can lead to a liquidation of their position. The capital inefficiency of decentralized, over-collateralized stablecoins leads to an inability to scale effectively. The positive side is that they are censorship-resistant, meaning they have congruence with the broader ethos of crypto and DeFi.
Finally, the last class is algorithmic stablecoins -- the area in which Terra’s stablecoins fall. Algorithmic stablecoins intend to collateralize a stablecoin simply via the dynamic of supply/demand adjustments. The basic idea is that should demand increase, the supply increases to maintain the $1 peg, and vice versa. However, simple “rebasing” stablecoins like Ampleforth have proven to be exceptionally reflexive in their directional price corrections, leading to volatile price conditions around the intended peg band. This is not ideal, since the stablecoin is not stable.
Terra is different in that it collateralized its cadre of stablecoins via LUNA, an asset with governance and cash flow features imbued. Fluctuating demand for stablecoins (e.g., price volatility) is absorbed in the short-term by LUNA stakers, who accrue value in the long-term by the adoption of the network’s stablecoins via apps built on top of Terra like Mirror, Anchor, and Chai.
As a result, Terra stablecoins can remain stable while fending off the capital inefficiency of over-collateralized stablecoins and censorship vulnerabilities of centralized stablecoins.
V: How are developers able to use and develop on the Terra Platform?
Do Kwon: Developers can build on Terra via the Terra/Cosmos SDK. For more information, check out developer documents.
V: What can we expect to see next on Terra’s product roadmap? What’s on the horizon?
Do Kwon: We’re currently in the process of building a 2021 roadmap. However, Anchor, a savings and money market protocol built on Terra, is expected to go live in Q1. Anchor comes on the heels of the launch of Mirror -- a synthetic assets protocol built on Terra and released in December.
V: What would you say are the biggest obstacles the crypto market has to overcome to reach mass adoption?
User-experience and simplicity. Using DeFi apps is not just complex due to the underlying nature of the protocols but because gas costs are prohibitively high and it’s difficult to mask the underlying mechanics with good UX. Throw in a bunch of decentralized yield farming, DEXs, money markets, food-named protocols, memes, and novel financial engineering, and the reason why it’s so confusing to a mainstream user begins to crystallized.
Only until DeFi reaches the point where major social media and e-commerce apps have achieved in user-experience will it truly realize its full potential.
V: We get the sense that you guys are on the bleeding edge of our current digital economic revolution. With this in mind, what does the future of finance and crypto look like to you?
Do Kwon: Much more inclusive and distributed. DeFi is all about democratizing access to financial tooling, including asset management, payments, insurance, trading, yield farming, and more. The pace of innovation right now in DeFi is astounding, and we anticipate its growth merging with TradFi -- blurring the lines between crypto and finance.
V: We really appreciate you joining us today. How can our readers learn more about Terra and become a part of your fast-growing community?
Do Kwon: You can find a list of resources below. We welcome everyone to the Terra community!