Interview: Terra CEO Discusses Luna, Mirror, Chai, Terraswap, More
If you’ve been following the DeFi space at all, you must’ve heard of Terraform Labs. This team is the nucleus behind several projects in DeFi, many of which are just now experiencing due notoriety.
Do Kwon is the cofounder and CEO of Terraform Labs. He recently spoke to The Tokenist to literally discuss all things Terra: Terraswap, Luna, Mirror Protocol, Chai, Anchor—and everything in between.
Tokenist: Hi Do Kwon, thanks for taking the time to speak with us today. We’ve been following Terra for quite some time, and are aware of the really cool things your team is doing in the DeFi space! We’re very eager to share more info on the Terra ecosystem with our readers. The ecosystem is not small, to say the least — it includes Terra Money, Terraform Labs, LUNA, TerraUSD (UST), Terraswap, and Mirror Finance. Could you please introduce us to the different parts of the ecosystem, along with their functions?
Do Kwon: Terraform Labs (TFL) is the South Korean-based company that launched the Terra blockchain network and has developed many of the existing applications on top of the network so far.
Terra is a Tendermint-based PoS public blockchain built using the Cosmos SDK that deploys an elastic supply (algorithmic stablecoin), monetary model. The native governance and consensus staking token of Terra, LUNA, collateralize the suite of fiat-pegged stablecoins on the network that serves as an emerging forex market and high-throughput stablecoin layer for payment settlement. TerraUSD (UST) is one of Terra’s primary fiat-pegged stablecoins (to the US Dollar), and currently has a market cap above $800 million.
Terraswap is Terra’s AMM exchange, similar to Uniswap on Ethereum, that enables users to swap any Terra-based asset for another, such as UST/LUNA or KRW/UST.
Finally, Mirror Finance, or Mirror Protocol, is a synthetic assets protocol built on the Terra network that is designed to provide real-world exposure to all types of asset classes such as US tech equities, commodities, ETFs, crypto assets, and more.
Mirror is like a decentralized, censorship-resistant Robinhood that is globally accessible, and increases demand for UST since CDP positions to mint mAssets “mirrored assets” are collateralized with UST. All of the applications built on top of Terra increase demand for the network’s underlying stablecoins, which accrues value to LUNA stakers that share in payment + swap fees. Additionally, as demand for UST increases, more LUNA is burned, making LUNA more scarce than before.
Basically, more adoption of Terra equates to more value for LUNA stakers and holders.
Tokenist: Terra is often referred to as “programmable money for the internet” and sometimes, “money as a service”. What does that mean, and how does Terra facilitate such a mechanism?
Do Kwon: Stablecoins occupy this unique space within crypto. More than $54 billion in stablecoins have been issued in the last year with $380 billion in value settling on-chain. In fact, stablecoins have become the preferred means of settlement on Ethereum. They’re quickly proving their dynamic uses across DeFi, whether for yield farming, collateralized debt positions, payments, or use as collateral for cross-margining derivatives positions on exchanges.
At Terra, stablecoins (including a forex market) are baked into the layer one of the protocol, enabling a seamless flow of payments, swaps, and deployment of stablecoins within applications built on top of the network. Not only does this appeal to simplicity of development for developers and improved UX for users, it provides a foundation for value capture by the LUNA stakers that has eluded many crypto networks in the past.
A growing set of stablecoins on Terra, which can be added and configured by governance, extends to programmable money serving as the catalyst for applications on Terra. Anchor, Mirror, Chai, MemePay, and more all need to use stablecoins in one way or another — facilitating low-cost, high-throughput transactions in use cases ranging from payments to trading, investment, and saving.
Tokenist: As many know, LUNA is the cryptocurrency that miners receive when powering Terra’s blockchain. How does LUNA work to ensure the price stability of TerraUSD (UST)?
Do Kwon: LUNA collateralizes the suite of stablecoins on Terra. First, stablecoins remain in a tight band around their pegs on Terra by use of a decentralized price oracle system, where prices are submitted by LUNA stakers that are rewarded for submitting price oracles within 1 standard deviation of the media for that given epoch.
In the short-term, LUNA stakers absorb the short-term volatility of stablecoins on Terra. In the long-run, they are rewarded with increased mining rewards (e.g., oracle rewards/staking returns) from the adoption of the network’s stablecoins via apps built on top of the network.
In the case of UST, we can flow through an example that captures two sides of the price stability. For some context, the Terra protocol enables minting 1 UST by burning $1 worth of LUNA at any time via the on-chain liquidity swap mechanism, as well as burning 1 UST in return for $1 worth of LUNA.
So, if demand for UST is increasing, that will pull the price peg of UST above $1, which will trigger arbitrageurs to mint 1 UST by burning $1 worth of LUNA and selling that 1 UST on the open market for a riskless profit. The immediate result is downward pressure on the price of UST to return to its $1 peg and a reduced supply of LUNA. Therefore, more demand for UST equates to less circulating LUNA to maintain the price peg.
Conversely, if demand for UST is decreasing, the price peg will fall below $1, triggering arbitrageurs to burn 1 UST by minting $1 worth of LUNA and buy up UST on the open market at a discount. This pulls the price peg for UST back up to $1 and increases the LUNA supply. So, falling UST demand equates to increased circulating supply of LUNA.
Tokenist: Is Terra more of a settlement network, or a payments infrastructure? How so?
Do Kwon: It’s both. Terra’s stablecoins serve as the settlement layer for a broad spectrum of use cases ranging from investing/trading (Mirror), saving (Anchor), payments (Chai), and more. The idea is that with stablecoins baked into the protocol as the primary vehicle for value transfer (instead of a volatile native currency like ETH), more intuitive, user-friendly, and familiar applications can be built on top of the network.
Developers can configure stablecoins in a way that is conducive to their application’s needs.
Tokenist: In the summer of 2019, Terra announced a partnership with mobile payments app Chai. What exactly is Chai, and how does it differ from popular mobile payment apps in the US, such as PayPal or Venmo?
Do Kwon: Chai is one of South Korea’s most popular payments apps that recently raised a $60 million Series B. Through an API called I’mport, Chai enables merchants to accept payments via 20 different options (e.g., debit, credit, PayPal, etc) with low fees and fast settlement. On the back-end, Chai uses Terra’s blockchain (stablecoins) to settle transactions faster and cheaper than legacy counterparts. Notably, users of Chai are never actually exposed to interfacing with Terra directly. The user interface is smooth and conducive to mass adoption.
Tokenist: How much traction is Chai seeing? Which markets are experiencing the most use with Chai?
Do Kwon: Last year, Chai processed more than $2.0 billion in transaction volume with more than 2.5 million users — making it one of the most successful and widely adopted applications that uses blockchain technology and is not purely speculative in nature.
Chai’s bulk of users hail from South Korea, but is slowly expanding to other demographics in SE Asia.
Tokenist: In December of 2020, Terraform Labs launched Mirror Finance. As a decentralized platform, Mirror Finance allows for the creation and trading of synthetic assets—or Mirrored Assets—referred to as mAssets. These mAssets allow for users around the globe to trade on the price action of real-world assets, such as Amazon (AMZN) stock. What are the steps a user must take to trade mAMZN via Mirror Finance?
Do Kwon: Mirror is like MakerDAO in reverse paired with Uniswap/Sushiswap-enabled trading of mAssets on multiple chains. For minters of mAssets, they enter a collateralized debt position (CDP), where they collateralize the minted mAsset at a specific collateral ratio as determined by the governance (derived from the volatility of the asset). Minting mAssets is currently only available on Terra’s version of Mirror.
However, mAssets can be trivially traded on multiple chains including Terra, Ethereum, Binance Chain, and soon — more. To trade mAssets, you can simply swap UST or other Terra assets on the Terra Mirror “Trade” page. Additionally, you can buy mAssets directly from Terra Station using Terraswap.
On Ethereum, you simply go to the Ethereum Mirror page and select “Buy Token” for the UST/mAsset pairs, which will take you to Uniswap.
On Binance Chain, mAssets are available on Pancake Swap, an AMM similar to Ethereum. A UST-BUSD pair is also available on Pancake.
mAssets can actually be ported between Terra, Ethereum, and Binance Chain trivially using the Shuttle bridge, which can help alleviate the burden of high fees on Ethereum and take advantage of APR differences between trading pairs on different networks.
Tokenist: How does the debt model work with mAssets? If I mint mAMZN for example, and the price of mAMZN triples, what happens if I burn my mAMZN?
Do Kwon: Mirror deploys a siloed CDP model where minted mAssets need to be collateralized by UST based on the collateral ratio determined by the community governance (derived from the asset’s price volatility and liquidity). As a result, Mirror is capital efficient compared to pooled collateral models where the native token is staked and LPs are basically taking the other side of the directional exposure of traders on the platform.
The caveat is that on Mirror, minters of mAssets are effectively taking a short position against that asset, which means that if mAMZN’s price increases, they will need to add collateral (UST) to their CDP to avoid liquidation. In Mirror V2, inverse tokens will alleviate this by allowing positive exposure to mAssets for minters.
Once a CDP position is closed, the corresponding mAssets are burned.
Tokenist: What makes Mirror Finance different from other synthetic asset platforms, such as Synthetix?
Do Kwon: Mirror deploys a siloed CDP model for minting mAssets which makes it more capital efficient. For example, Mirror’s collateral ratio (as a whole on the platform) is below 200 percent, whereas on Synthetix, if a minter’s collateral ratio falls below 500 percent, they cannot claim their rewards.
Additionally, mAssets from Mirror can currently be ported across chains and traded on multiple types of DeFi protocols, such as AMMs, used as collateral in money markets, and more.
Tokenist: To date, what is the largest impediment to Terra’s growth? How can this be overcome?
Do Kwon: It’s probably the same problem that many chains and DeFi projects are facing right now — a dearth of development talent. Most successful developers in this space are either already rich or well-off enough to pick and choose their projects as they see fit. Demand for talent is constantly outstripping supply, so different networks and communities are all figuring out ways to attract more talent to build applications on top of the network.
Eventually this problem should be alleviated as more professionals gravitate to the industry, but right now it’s basically an arms race.
Tokenist: If there’s anything we didn’t cover which you feel is relevant to share (perhaps related to upcoming launches, etc.) please let us know.
Do Kwon: Anchor is a high-yield, low-volatility savings protocol built on top of Terra that is launching soon. We call it the “Stripe for Savings” as it is an easily integrated savings app that is the first interchain DeFi app — pooling emissions from major PoS chains, stabilizing it, and passing it on as attractive interest to depositors. On the supply-side, Anchor only accepts liquid staking derivatives as collateral — unlocking the capital efficiency of staked positions within major chains via a decentralized money market.