Do Kwon’s Gonna Terra up the Town

Do Kwon Talks Stablecoins On Fungible Times Podcast 3/23

When I found this interview, it barely had 500 views. It’s finally starting to build some steam, but I thought it could use more attention. I’ve been familiar with $LUNA for a while but never bothered to learn what makes Do Kwon tick. The conversation was entertaining, and the guy has some charisma. As usual, I did tons of paraphrasing, but it saves about an hour of your life if you’re a fast reader. I’ll leave the moral and philosophical judgments to you.

Baby Kwon:

• Moved around a lot;
• Studied computer science at Stanford;
• Discovered crypto in 2016;
• Started building Terra in 2017;
• Served a short stint in the military, where he sparked the idea for WiFi mesh networks. Human peer-to-peer communication networks were part of the military’s antifragility strategy. They didn’t want to rely on a centralized communications infrastructure that could become a target
• Fascination with human radio networks turned into a fascination with WiFi Mesh Networks, which became a fascination with decentralized networks with the help of some friends.

Explain Terra:

• Terra’s core innovation is stablecoins;
• Current supply is over $16B;
• There are 4M active wallets;
• Ethereum is like London: it’s been around a while, and lots of stuff has been built on top of it, but some of that massive growth is starting to calcify;
• Avalanche is like Los Angeles: scaled across multiple different cities;
• Blockspace is scarce, similar to how real estate is scarce in popular countries;
• Terra focuses on maintaining a good stablecoin by making it easier to spend and more attractive to hold. A fully decentralized, uncensorable, and unseizable currency is the goal;
• The Terra community can best position itself to win by being a service provider to create the most decentralized and useful stablecoin available on the most blockchains.

What about TerraForm Labs and Luna Foundation Guard?

Terraform Labs was created to help Terra get built and still functions as an incubator, running developer workshops and accelerators for projects that want to build on Terra.

LFG is the custodian of the decentralized Forex reserve that’s starting to build up significant quantities of exogenous collateral to act as a backstop for extreme volatility.

Exogenous vs. endogenous

Exogenous = external collateral (locked funds, or high collateralization ratio)

Endogenous = algorithmic stablecoin like $UST

Crypto collateralized = capital-inefficient

The reason why stablecoins are necessary is that most financial transactions are and probably will be performed with local fiat currencies since it facilitates transactions that volatile currencies can’t. He gives an example of an employment contract. It’s difficult to agree to take 100% of your life-sustaining paycheck in an 80% vol. asset.

Existing stablecoin models aren’t sustainable. Terra is making something better.

1. Custodial Risks: Meeting some regulatory compliances may require preserving the ability to freeze or blacklist assets or accounts. If we’re trusting stablecoins that are subject to these regulations, it defeats the purpose of DeFi. Regulation has compliance requirements. This defeats the purpose of decentralization. he quotes the old guy, “give me control of a nation’s money supply, and I won’t care who writes the laws.”
2. When demand for leverage dries up, collateral-backed stablecoins also fail…since you need to lock up more than $1 in collateral to mint $1 worth of a stablecoin. If there’s no yield, there’s no incentive to keep your collateral locked up and limit your ability to allocate.

After implementing their ‘price stability module,’ 60% of all $DAI is just wrapped $USDC.

This defeats the purpose of a decentralized stablecoin. $UST, being entirely decentralized and fully scalable, is the opposite. By using a ‘mint and burn’ mechanism to balance supply with demand, at any time, any user can deposit $LUNA or $BTC to mint new $UST. Likewise, you can always redeem $UST for the current equivalent in $LUNA and $BTC.

$UST is the first time a stablecoin has chosen to adopt the $BTC standard, similar to how the US dollar used to be backed by gold. If ever there is so much $UST being redeemed at one time that it threatens to overwhelm the algorithm, reserves can be deployed to keep $UST pegged.

The central bank for the world?

We first focused on payments, but payments that settle in stablecoins are just the start of what we need. To get people comfortable using $UST, we needed to buttress a forex reserve to absorb short-term fluctuations between currencies. They currently have about $3B in reserves and want to grow to around $10B.

“Right now, we don’t have a ‘correct’ model for reserves. We’re making it up.”

The challenge with some of these traditional payments is scaling and competing against platforms like PayPal that spend hundreds of millions of dollars per year on incentives.

What to do with money?

1. Spend it
2. HODL it
3. Invest it

Anchor Protocol solves for HODLing, allowing you to stake stablecoins for a steady interest rate.

Addressing potential bank runs

The only way to collateralize a stable coin is to either over collateralize it or back it up with centralized assets.

If you want a truly decentralized form of money, the only way is to define your own currency.

If we get to $10B in reserves, we will be the single largest holder of $BTC globally (besides Satoshi).

This would stabilize $UST to a point where a failure of $UST would only be possible if all of crypto fails. This aligns incentives for everyone using the Terra ecosystem.

There’s a tangible worry of regulatory overreach that makes developers wary of building everything on top of $USDT and $USDC.

There’s a preference for a sovereign permissionless, trustless, etc.

Terra has become a leading liquidity provider on several chains.

This is an edge that Terra has that is hard for Circle and Tether to get.

The most common way that crypto companies fail is by becoming more corporate. If there’s an inherent conflict of interest that can get exacerbated over time, it will.

Another essential thing is not caring about money. It’s easy to lose touch with what you wanted to build in the first place when you’ve already accomplished everything you wanted monetarily.

Dreams for regulatory improvements

When he first started working with regulators, it was frustrating “they were always trying to find a way to say no.”

There will always be a certain number of people who want to help you regardless of their self-interest if there’s real innovation happening.

As humans, we’re wired to appreciate and value innovation and help others achieve it when we see it happening. He sees good regulators in every regulatory organization who have this genuine desire to see innovation happen. He focuses on learning how to effectively educate and explain to regulators so they can recognize that we want the same things.

Crypto is a freedom technology. It preserves and perpetuates freedom.

Humans are learning to value that freedom, and we’re finding the solutions.

The Bet:

Sometime around the end of February, Do Kwon bet @AlgodTrading $10M that $LUNA price will be above its price at the time (around $88) one year from now (he’s off to a good start so far!).

He regrets doing it publicly. It’s bombarded his inbox with all kinds of insane bet variations.

For the first time, we’re witnessing real product-market fit with this massive demand for stablecoins. There’s no doubt in his mind that LUNA price goes up (NFA, you degens).

What are you working on?

He wants to build things that should exist but don’t yet.

Fungible Labor Markets can solve two different problems: DAOs operate at the scale of a Series A company, which is too small. If you issue “labor time” and allow a bunch of different people to redeem this time, you open up a new paradigm of labor. Labor tokens can have fungible, liquid value, so they could be used as collateral, enabling productive credit.

What currently powers all the yield for DeFi is demand for speculation. The game-changer of fungible labor markets allows DeFi to switch from predominantly speculative use cases to predominantly productive use cases.

How does Do Kwon learn?

Twitter is still the best. Skip the shitposts and keep an eye on the bloggers and threadoooors. We can learn at a pace that wasn’t imaginable before creating this industry. It’s an insufferable cesspool for about six months, but you get used to it.

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