What’s new in the Terra Ecosystem with Do Kwon, CEO of Terraform Labs

I interviewed Do Kwon on Twitter Spaces to discuss the latest Terra projects, NFTs, proposals & more. Below are a few of the highlights.

I recently had the opportunity to chat live with of the most influential founders in crypto: Do Kwon, Co-founder and CEO of Terraform Labs. Before Do and I entered the world of crypto, we went to college together. And in 2018, we fortuitously got reintroduced when Do and his co-founder Daniel Shin started Chai, a payment app in Korea that utilized Terra stablecoins. Do later spun out Terraform Labs to focus on building out the Terra protocol, and Lightspeed was fortunate to invest.

This year, Terra has seen explosive growth in its ecosystem and is now the 4th largest smart contract platform (source: DeFi Llama) with almost $8 billion in TVL as of writing. Terra is a blockchain protocol for “programmable money” that supports stable programmable payments and open financial infrastructure development.

At its core, Terra is a platform for developers. Developers can build applications on top of the Terra blockchain for countless use cases in crypto, including instant payments using stablecoins, trading synthetic assets, generating savings yields from deposits, recurring payments, and NFTs.

Terra has become a global blockchain platform at the intersection of crypto and fintech, and Lightspeed is proud to be an investor. At Lightspeed, we’ve invested in category creating fintech and crypto companies including Affirm, Blockchain.com, Finix, FTX, Offchain Labs, and Wintermute.

Interview Highlights

Q: Do, thanks for going live with us today to discuss the latest updates on Terra. Can you start with a quick intro of the mission behind Terra, and an overview on LUNA and UST?

A: At a high-level, the goal for TFL has been creating the most decentralized and scalable stablecoin, which acts as a conduit for onboarding mainstream users to crypto. Terra’s primary product is UST, which is Terra’s USD stablecoin. UST is balanced by LUNA, the underlying token used for staking and governance for the Terra protocol.

Stablecoins encompass more than $125 billion of value within DeFi, making them a critical component of the decentralized applications. Without a liquid and scalable decentralized stablecoin, the DeFi stack will be held hostage to the issuers of custodial stablecoins.

In addition to the applications incubated by TFL, there are now dozens of projects in the ecosystem that utilize UST, which drive the demand-side for Terra stablecoins. The rest of the decentralized stablecoins have failed because previous iterations of decentralized stablecoins failed to grasp the importance of the demand for the stablecoin. On the supply-side, robust mechanics are important, but without diverse and consistent sources of demand for a stablecoin, contractionary cycles can spiral out of control.

Q: This year has been incredible for the Terra ecosystem with projects launching and the expansion of UST across multiple blockchains. What were some pivotal moments this year for Terra that led to this impressive run?

A: Terra’s meteoric growth this year is a function of several developments. Namely, the enabling of smart contract functionality in 2020 and the release of Mirror and Anchor as accelerants of the adoption of UST.

Beginning with Mirror Protocol, TFL incubated several projects that utilized UST to bootstrap its growth. After the launch of Anchor protocol in March 2021, everything began accelerating at an incredible clip. Soon enough, dozens of third-party projects were building on Terra and using UST in a meaningful way. The UST market cap surpassed $2 billion and quickly solidified itself as a top 5 stablecoin and the leading algorithmic stablecoin in the market.

Since May, over a hundred projects have announced plans to launch on the network. A few weeks ago, our new mainnet Columbus-5 went live. More recently, the NFT scene has been growing rapidly on Terra.

Q: UST recently launched on several exchanges including Coinbase Pro, Curv, and Uniswap for more avenues of crypto/fiat onramp. Will there be more avenues to purchase UST and LUNA in the future?

Transak recently launched and allows you to buy UST with credit card. They are a payment gateway for crypto. In addition, the Terra Station wallet will soon incorporate a way to buy UST using one of the projects is working with Prime Trust to exchange fiat for Terra. Stay tuned for that if you’ve downloaded the Terra Station wallet.

Q: Several Terra NFT projects have been garnering community interest such as GalacticPunks, which were sold out before public minting on RandomEarth. Since this is relatively new, can you give us the scoop on the recent Terra NFT projects?

Dozens of NFT projects on Terra have been announced in the last several weeks and we have more in the pipeline. Previously, NFTs were almost non-existent on the network but the NFT narrative has arisen rapidly, covering everything from marketplaces to JPEGs (Galactic Punks, LUNA Bulls), tooling (Random Earth), property ownership, gamified NFT studios (UNOPND) animated story NFTs (Hero), and utility NFTs connected to the real world.

I think about NFTs in their current form today like the “Rolls Royce analogy” — they park in a garage, and you only take them out when you want to show them off. The vast majority of NFTs today are JPEGs used as profile pictures, and eventually that might fade. What’s more interesting if we can use NFTs for a variety of useful applications using NFTs for on-chain identity. For example, users who are engaged in the Terra ecosystem could be assigned loyalty scores which are attached to wallet addresses with tiered levels of engagement. There are many possibilities, but that’s one we’re working on right now.

Q: What are other ways that TFL is fueling the growth of Terra-native applications?

A: TFL has transitioned from an “app factory” incubating protocols like Anchor and Mirror in-house to an “ecosystem-enabler.” Our role has evolved to provide resources, connections, and other tools for third-party projects to be successful in their endeavors. With so many projects set for launch soon, we’re also exploring other routes for assisting ecosystem development such as bounty programs, educational programs, and new incentive models for community building. The $150 million Terra Ecosystem Fund and community grant proposals help fund new ecosystem projects.

Additionally, several protocols have launched which help other projects in the Terra Ecosystem. For example, Pylon Gateway allows other protocols to distribute locked tokens to the community and yield-based funding of project milestones controlled by the token holders providing liquidity. There’s also StarTerra (gamified launchpad) and Angel Protocol (programmable donations in perpetuity).

Q: Can you explain the seigniorage process and talk about how UST supply expansion and demand play a role in LUNA’s value capture?

A: The Terra protocol operates somewhat similar to an open-source, on-chain bank. Progressively larger demand for UST generates value capture for LUNA holders. The peg is maintained by open market operations from arbitrageurs and validators who receive mining rewards.

In addition to the Terra network, UST is also available on other networks including Solana, Ethereum, Harmony, and Binance Smart Chain via cross-chain bridges. As more apps utilize UST across these networks, the demand for UST accelerates and demand comes from more diverse sources — this further amplifies peg robustness during contractionary cycles.

In the Columbus-5 upgrade, 100% of the seigniorage will be burned. Similar to the Ethereum gas update, minting 1 UST on Terra will burn the $1 worth of LUNA. The fees from this swap will go directly to stakers, and we predict that staking yields will go up to double digits as a result.

We can describe the Terra protocol mechanics for value capture as follows:

When the supply of Terra stablecoins (i.e. UST) ↑, the LUNA supply ↓.
When the supply of Terra stablecoins ↓, the LUNA supply ↑.

Or put another way:

Seigniorage — Minting 1 UST requires burning $1 worth of LUNA — contracting the LUNA supply + expanding the UST supply.
Contraction — Redeeming $1 worth of LUNA requires burning 1 UST — contracting the UST supply + expanding the LUNA supply.

LUNA holders benefit from scarcity of LUNA as the demand for Terra stablecoins grows. Demand for LUNA is now a function of demand for UST.

Source: Murray Rudd. A micro-economics view of the UST/LUNA price dynamics and value capture.

Q: Which governance proposals do you think are going to have the biggest impact for Terra in the near term?

The IBC (Inter-Blockchain Communication) proposal for Terra will allow Terra to seamlessly port assets and messages to any Cosmos or future IBC-compatible network. For UST, this means opening the liquidity floodgates to the Cosmos ecosystem, where stablecoin demand is huge but missing from leading protocols like the Cosmos Gravity DEX and Osmosis. We expect UST to be the currency of choice for IBC-connected chains, so we’re thrilled for what the future holds as the inter-chain environment expands.

Q: As part of Columbus-5, Terra will be diverting funds in the Treasury to the Ozone protection protocol to ensure the stability of UST. Can you discuss how Ozone works?

A: The Ozone protection protocol will help protect the Terra ecosystem from smart contract and economic risks characteristic of DeFi via an algorithmic, claims-based protocol. Ozone will be bootstrapped with $1 billion from the Terra Community Pool, which will be injected into the ecosystem as capital for coverage liabilities on an application-specific and broader ecosystem basis (i.e., the UST peg). Ozone is currently undergoing an audit, and more granular plans for the protocol’s launch will be released in the coming weeks.

Currently, numerous coverage options for Terra protocols and the UST peg exist from various providers like Risk Harbor and Unslashed. I’m really excited about what Risk Harbor is doing; in fact, about half of their volume is actually coming from Anchor.

If you want to learn more about building on the Terra Blockchain or are interested in creating NFTs on Terra, drop me a note on Twitter (@natluu) or natalie@lsvp.com.

If you’re interested in reading more of my thoughts on DeFi, check out this post: DeFi-ing the rules of traditional finance.

Thank you to Brian Curran for reviewing drafts of this post.