#880 The $10 Billion Stablecoin Bet on The Bitcoin Standard w/ Do Kwon

Do Kwon is the Co-Founder of Terra. He is one of the great brains behind Luna and UST Stablecoin. In this conversation, we discuss Terra's brand new $10 Billion Bitcoin Bet to move UST Stablecoin onto the Bitcoin Standard. ======================= Since 2018 Copper has been at the forefront of institutional digital asset development. From award winning custody solutions, to creating the first truly off-exchange settlement function, Copper pioneers technology, products, and services, in lock-step with a rapidly changing world. No other infrastructure provider covers as many assets, across as many exchanges, with the speed and security that Copper can offer. To learn how Copper helps the world’s largest institutional investors secure their digital assets, head over to copper.co Copper - the unfair advantage. ======================= Compass Mining is the world's first online marketplace for bitcoin mining hardware and hosting. Compass was founded with the goal of making it easy for everyone to mine bitcoin. Visit http://compassmining.io to start mining bitcoin today! ======================= Bullish is a powerful new digital asset exchange built for institutions that delivers the innovations of DeFi in a regulated environment. The Bullish Hybrid Order Book pairs the high-performance of a traditional Central Limit Order Book with automated market making. Powered by deep Bullish Liquidity Pools, backed by the multi-billion dollar Bullish Treasury. So, you can trade with certainty and at scale across variable market conditions. Learn more at Bullish.com or follow @Bullish on Twitter. Because the future belongs to the bullish. *Not investment advice. Digital assets and cryptocurrencies are high risk products. Consult your professional advisor before dealing in them. Bullish’s services are available in select locations only and not to U. S persons. Visit https://bullish.com/legal for important information and risk warnings =======================

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Today's episode is with Do Kwan, one of the great brains behind the Terra ecosystem, including Luna, the UST stablecoin, and their brand-new $10 billion Bitcoin bet to move that UST stablecoin onto the Bitcoin standard. I really enjoyed this conversation with Do Kwan, and I hope that you enjoy it as well. Before we get into this episode, though, I want to quickly talk about our sponsors. Today's episode is brought to you by Copper. Since 2018, Copper has been at the forefront of institutional digital asset development. From award-winning custody solutions

• 0:44Anthony Pompliano?

  to creating the first truly off-exchange settlement function, Copper pioneers technology, products, and services in lockstep with a rapidly changing world. No other infrastructure provider covers as many assets across as many exchanges with the speed and security that Copper can offer. To learn how Copper helps the world's largest institutional investors secure their digital assets, head over to copper.co. Again, Copper, the unfair advantage. Check them out at copper.co today. Next up is Compass Mining. Compass Mining is the world's largest marketplace for mining hardware and hosting. With Compass, everyone can mine Bitcoin. Their team makes it easy to start mining wherever you want, at home or in one of their 23 hosting facilities around

• 1:27Anthony Pompliano?

  the world. Through the Compass marketplace, retail miners can access mining hardware with similar prices and purchase plans as the world's largest mining companies. Compass miners own their machines, they choose whatever mining pool they want, and they mine directly to their own wallets. Miners who don't want to host their machines can order ASICs directly to their doorstep. Simple and low-cost hosting agreements, coupled with best-in-class customer service, are the reasons why Compass is the simplest and most popular way to mine Bitcoin. Start mining your own Bitcoin today by visiting compassmining.io. Again, compassmining.io. Go check them out and let me know what you think. This episode is brought to you by Bullish.

• 2:10Anthony Pompliano?

  Bullish is a powerful new digital asset exchange built for institutions that delivers the innovations of DeFi in a regulated environment. The bullish hybrid order book pairs the high performance of a traditional central limit order book with the automated market making powered by deep bullish liquidity pools backed by the multi-billion dollar bullish treasury. So you can trade with certainty and at scale across variable market conditions. You can learn more at bullish.com or follow bullish on Twitter because the future belongs to the bullish. Now, this is not investment advice. Digital assets and cryptocurrencies are high risk products. Consult your professional advisor before dealing in them. Bullish's services are available in select locations only and not to US persons. Visit bullish.com/ legal for important information and risk warnings.

• 2:54Anthony Pompliano?

  Go check them out at bullish.com or follow at bullish on Twitter. All right, let's get in this episode. I hope you guys enjoy this one.

• 3:00Speaker 01

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 3:23Anthony Pompliano?

  All right, everyone, I've got Doe here with me. Let's start first with Terra as just a general idea. Obviously, this has grown to become one of the largest platforms, tons of users. What exactly was the general idea when you first started and what has that morphed into today?

• 3:38Speaker 02

  So when we first started Terra, the idea was that we wanted to build a decentralized currency that is easier to use and more attractive to hold than other alternatives. So, you know, this was the case in 2017 when Terra was founded and it still is the case today, but all the stable coins are, you know, is a very valuable product on the market. About 80% of all spot trading for all of crypto happens through stablecoin pairs and denominates most of the liquidity pools use cases for DeFi. But the issue is that they're either centralized backed by P L dollars for every unit of stablecoin that's issued, or they're based on leverage. So it doesn't scale as user demand.

• 4:20Speaker 02

  For stablecoins increase. So Terra is sort of, you know, a new way of creating these stablecoins that are algorithmic, which is that instead of having a dollar that were some unit of leverage that is backing a unit of stablecoin, use a set of arbitrage incentives to stabilize the peg around the dollar.

• 4:38Anthony Pompliano?

  Got it. And so when you start to think about this, there's algorithmic stablecoins that have been attempted multiple times. And I always talk about it in terms of there's an intellectual fascination that people from technology, finance, and many other disciplines have with this. Your idea was to essentially use that arbitrage incentive to drive the value back to $1. Explain where the Luna token comes in and how you think about absorbing volatility and that actual arbitrage incentive to keep it at a stable value of $1.

• 5:07Speaker 02

  So an easy way of understanding this is that, you know, user, so price volatility for the Terra stablecoin is absorbed by the supply of the Luna staking asset. So at any given time, a user can mint one Terra USD by burning a dollar's worth of Luna. And vice versa, any user can redeem one Terra USD for a dollar's worth of Luna, whatever that market rate might be. So, so in essence, like Luna contracts and expands in supply in order to be able to facilitate mints and redemptions of the Terra stablecoin. And that's how the stablecoin maintains its stake.

• 5:42Anthony Pompliano?

  Got it. And so when you start to think about this, how exactly are most people getting the Luna token? Are they just going to an exchange and taking Bitcoin, ETH, a different stablecoin and buying it? Or how is that getting into their hands so that they can actually participate here?

• 5:56Speaker 02

  I would say most people, you know, for newcomers, they purchase it from an existing exchange, be it a centralized exchange or DEX, so Luna trades in multiple different DEXs across numerous different blockchains. Or for existing holders, they could use some of their staking rewards to get Luna.

• 6:16Anthony Pompliano?

  Okay. And when you start to think about the algorithmic stablecoin structure, what are the pros and cons of this, right? It's obvious that you're trying to keep it at that stable value. But how do you think about this being superior to other forms of stablecoins? And then what are the risks or challenges that you guys identified?

• 6:34Speaker 02

  Sure. So I would say the three things that you need to keep in mind when thinking about a stablecoin is number one decentralization, number two stability, and number three scalability. So algorithmic stablecoins are very strong in decentralization and the scalability elements. Well, it's decentralized because there's no centralized collateral that is sitting that can be censored by regulators or by custodians. It is scalable in the sense that, you know, insofar as there is a non-zero amount of some paired asset that can be burned, stablecoin supply can increase to meet user demand.

• 7:15Speaker 02

  Where algorithmic stablecoins have sort of a different stability model is that, you know, for something like Keta or USDC, hypothetically, it could absorb like 100% of the demand fall of that stablecoin. So without presupposing any sort of changes in user demand, like because there's a dollar in collateral for every stablecoin that's issued, all of that demand volatility can be absorbed. So algorithmic stablecoins are more brittle when it comes to changes and user demand because if you have too many of the people that are sort of divesting out of that stablecoin all at once, then you could lead to a situation where, you know, too much of the paired asset gets printed and therefore there's a debt spiral in the overall economy.

• 7:58Anthony Pompliano?

  Got it. And so when you start to think about those challenges, how have you previously been addressing it? And then we'll get into this idea of Bitcoin backing. But what were you previously doing to prevent that scenario?

• 8:10Speaker 02

  So if you look at sort of the long list of algorithmic stablecoins that have failed, like Basis Cash, ESD, you know, TSD, Tomb Finance, they all fail for one reason. And that's because there's no inherent driver of demand for these stablecoins other than if you hold this stablecoin, we're going to give you 100x the amount of stablecoin within the next year. So it's sort of a game of musical chairs whereby, you know, everybody's sort of watching when all the other capital is going to exit. So the most famous case of this failure is something called Iron Finance, which I think Mark Cuban invested in. And the idea is that they were offering a 12,000% APR on holding these stablecoins.

• 8:55Speaker 02

  And at one point, if a sufficient amount of capital left the system, the entire thing collapses. So for Terra, we approached it in a slightly different way. So in the beginning, Terraform Labs, which is a company that I founded, has been the most prolific builder on top of the Terra blockchain. So we tried to focus on use cases that are, that exhibit low volatility and reaches a lot of real world users. So we've created a number of payment companies across Korea and Mongolia and expanded to Vietnam and Thailand. So these are companies like Chai and Aimpore, whereby you could take Terra stablecoins and spend it across, you know, pretty much every large merchant in the country.

• 9:37Speaker 02

  So we sort of closed the retail loop on payments on things that you could do with Terra stablecoins. So from that perspective, like demands, user demand for, you know, payments is a lot less volatile than what you would find in something like DeFi, right? It's just generally like a pretty smooth up to the right type of curve. There's very little churn, so which, which makes it perfect to use for a sort of like an adoption gateway for an algorithmic stablecoin. Other things that we've launched, like for example, Pylon and Anchor and Mirror are quite similar. Right? They share the common characteristic that users don't use it as sort of like an endogenous recursive vehicle to part stablecoins. And then it's something that, that draws a lot of people and exhibits lots of stickiness.

• 10:21Anthony Pompliano?

  Got it. And so when you start to think about the fact that you've addressed this to some degree, you're aware of how other stablecoins actually failed. Why is there an interest in or the potential move to do the Bitcoin backing? What's the thought process there of moving some or all of the reserves into Bitcoin rather than just sticking with the current kind of failure mitigation strategy?

• 10:44Speaker 02

  Yeah, so there's a couple of reasons. And the first reason is economic, right? So whereas in the beginning, when Terra was a much smaller ecosystem, we were building a lot of use cases and we could sort of control the types of use cases that were built on Terra. That is no longer true. So Terra is currently the second largest smart contract platform after Ethereum in terms of PDL and number two or number three in terms of usership. So the types of applications that are being built on the Terra blockchain, they're not.

• 11:13Speaker 02

  Not all of them are necessarily, you know, exhibit low volatility. So for example, we have options protocols and interest rate swaps and FX perps and, you know, dog coins like Doge Quan named after yours truly. So if you sort of think about like an open permissionless platform where people are just launching anything. So in that case, like it's harder to reason about the volatility profile of that stablecoin. And correspondingly, we needed to, you know, design this stability mechanism in such a way that is more robust than what we initially found that.

• 11:46Anthony Pompliano?

  Got it. And so right now, there's about $3 billion or so in the Luna Foundation that I'll call as the Luna reserves. When you think about those reserves, what are that $3 billion sitting in? Is it all in U S T, the stablecoin? Is it in various other assets? Where are those reserves being held?

• 12:07Speaker 02

  So the reserves are being held by a multi SIG of seven directors of the Luna Foundation Guard. So these are, you know, builders of various different protocols on top of the Terra ecosystem. So right now, we hold, so we've been steadily buying Bitcoin. So some portion of it sits in Bitcoin. I think it's still a little less than a billion dollars. And then about 1.6 billion dollars sit in Tether. And then I think close to a billion dollars or so sits in in Terra stablecoins. So of which we, you know, could liquidate to Curve, which is quite imbalanced in favor of U S D T and U S D C quite easily.

• 12:53Anthony Pompliano?

  Got it. And so when you start to think about this idea of moving to some Bitcoin backing in the reserves, what I find fascinating is you only have $3 billion in the current reserves. My understanding is that the plan is to move all $3 billion of that into Bitcoin over time. How do you get from $3 billion to 10 billion, though? There's $7 billion kind of difference there, the number that everyone's talking about, but only $3 billion in the reserves. So explain that.

• 13:18Speaker 02

  Yeah, so. So what we're doing with that 3 billion is that we're just using it to bootstrap the initial reserve. But essentially where we're trying to get to is where we use a part of the U S T senior age to keep building up the U S, to keep building up the Bitcoin reserves. So the idea is that every time that a new U S T is minted, some portion of that will still subscribe to the old stability mechanism, so it's still going to burn Luna. But some percentage of that, let's say, you know, like 40% or 50% gets used to buy Bitcoin and then to place it in the Bitcoin reserve. So as U S T grows, you can imagine a scenario where more and more Bitcoin gets locked up

• 13:59Speaker 02

  in this reserve system and is sort of, you know, and which can kick in during times where U S T demand needs to be absorbed.

• 14:07Anthony Pompliano?

  Got it. And so when you start to think about the new issuance, right now, my understanding is about 100 million to 200 million new demand per day for U S T. At what point do you decide what percentage of that will be diverted to go purchase Bitcoin versus just burning the Luna that's being given in for issuance?

• 14:28Speaker 02

  So it's going to be an on-chain parameter that can be determined through governance. But the idea is that, you know, there's going to be, so this already exists, by the way. So there is a parameter on the Terra blockchain that determines what percentage of senior age should be routed to some common public good purpose. Right? So there is a wallet that is controlled by the set of people that have staked Luna on the Terra blockchain. And then these people can vote on what to set their parameter to and how it changes. So it's not a discretionary decision point for the foundation. So the idea is that, you know, you have this on-chain parameter. So anytime that users start to swap in Luna to mint U S T, some portion of that, as dictated

• 15:10Speaker 02

  by this parameter, is going to be reserved by the system and then used to purchase Bitcoin against, let's say, an on-chain M M or a special, you know, virtual exchanges that were in the process of shaping up and submitting for a community review shortly.

• 15:26Anthony Pompliano?

  Got it. And so when you do this, right now, let's say that the average amount of Bitcoin that's coming into the circulating supply via the block reward is, you know, plus or minus $40 million per day. If you have $200 million worth of demand coming in for UST and you're diverting, you know, even a smaller percentage, even a majority of it to actually purchasing Bitcoin, you could be purchasing over 100% of the daily incoming supply of Bitcoin on a relative basis. How do you think about that in terms of impacting Bitcoin's price? And do you think that that's a positive, negative, or just completely indifferent to what the impact is?

• 16:06Speaker 02

  So I guess this could be like an interesting way of, you know, what the Ethereum have been saying about EIP 1559. But I think for a very long time, UST supply is going to keep growing. I think there's massive demand for decentralized stablecoins. So I think, you know, on a lot of days, we will see more Bitcoin being locked up in this on-chain reserve than the miners are putting out in the market.

• 16:32Anthony Pompliano?

  Yeah.

• 16:32Speaker 02

  It's obviously positive.

• 16:34Anthony Pompliano?

  Yeah, very positive if you're holding Bitcoin. One of the things that people I don't think quite understand about the move of Bitcoin from, you know, $8, $10,000 to the first time it crossed over 60,000 was the grayscale GBTC arbitrage trade was a huge piece of that. At one point, they were buying up, you know, 150, 200% of the daily incoming supply of Bitcoin. But there's no redemption functionality to that fund. So that people would basically give them the money in the private placement. They would take the cash, go buy Bitcoin. Once it went into the GBTC structure, it couldn't come out. And today, they hold approximately 3% or so of the circulating supply in that fund. And it's somewhat of a black hole, right? Can't come back out. Talk

• 17:16Anthony Pompliano?

  us through, once you all have purchased Bitcoin via the various things, either converting the existing reserves or using some of the the scenery, is it possible for people to essentially redeem or withdraw the Bitcoin out of the UST reserves? Or once it goes in, it's pretty much in there? And it won't be coming out?

• 17:37Speaker 02

  Yeah, so as I said, the structure is very similar to an AMM, so you would be able to trade USD against it. So the idea is that how it works is that at any given time, it's sort of a special AMM that subscribes to an oracle price of Bitcoin. And then the price update would be something like 30 seconds. And the idea is that at any given time, you could trade in a dollar's worth of Bitcoin and then mint one Terra USD. And then vice versa, on the redemption cycle, you could trade in one Terra USD and then get, let's say, 99 cents worth of Bitcoin. So this sort of spread between the mint and the redemption guarantees that this reserve is only used when USD is starting to de-deck. But if you wanted to use it as a redemption mechanism, you could do that minus some small spread.

• 18:22Anthony Pompliano?

  Got it. That makes sense. What's your thought process as you go to do this? Obviously, the Bitcoin community, they look over and they say, hey, what the hell is Terra? You know, who's dough? What's going on here? Somebody's gonna buy $10 billion worth of Bitcoin. They'd be one of the largest Bitcoin holders in the world if they successfully do it. Have you seen a positive, a negative reaction? Does that help Terra in terms of the awareness with other communities? Or how are you thinking about maybe like the non-economic aspect between the communities?

• 18:53Speaker 02

  Yeah, so let me answer this in two different ways. So the first is, I would say the sort of the response of various different communities has been mixed. Right? So I think overall supportive. There are some very interesting takes that have gotten on DMs or on Twitter. But overall, I think using Bitcoin is a way to sort of build alliances with the Bitcoin community, which is very valuable. But at the same time, one of the strengths of using Bitcoin as a backing asset is that it builds credibility with the other communities as well. Because you can say whatever you want about Bitcoin, but at the end of the day, it is the soundest and the most credibly neutral asset

• 19:37Speaker 02

  in the digital asset space, right? There's no equal, right? So as Terra is starting to expand into different cross-chain ecosystems, right? To facilitate Lots more use cases. If we only work with Luna, then in that case, the sort of the approachable market of people that can we can work with is going to be limited. But by working with Bitcoin, that potential space gets much larger. And the size of our ambition isn't to be the largest stablecoin of the Terra blockchain. It's to be the largest stablecoin, period. In order to do that, it just makes sense to work with Bitcoin 100%. Second response is that one of the great things about Bitcoin is that it actually doesn't matter what the community says about Bitcoin.

• 20:20Speaker 02

  Right? That's actually, it's fundamentally great property. Right? In the sense that Bitcoin is going to have value as a backing asset. Irrespective of whether people approve or disapprove of this move. Right? So from that perspective, I think it's, you know, the fact that there's, you know, an outpour of lots of different types of opinions is actually incredibly bullish. Because in despite of that, I think this is going to be great for crypto. It's going to be great for Bitcoin. And I think it's going to be great for Terra.

• 20:47Anthony Pompliano?

  I saw a number of the takes. Some were very pleasant, some were not so pleasant. And the thing that caught my eye, I saw two different tweets. One was the idea that, you know, when MicroStrategy is buying billions of dollars of Bitcoin, bullish. When El Salvador is buying a lot of Bitcoin, bullish. When Terra is buying a lot of Bitcoin, we don't like that. Right? And that seems kind of crazy. And then the second one was this idea that lots and lots of people have always thought that Bitcoin is kind of pristine collateral. Or it's the perfect asset. And so the central banks would eventually peg or back the fiat currencies with Bitcoin. And, you know, let's go talk about that. Let's encourage that. But oh, wait a second. Hold on. A dollar stablecoin that is not from a central bank, we don't want them to do it.

• 21:33Anthony Pompliano?

  And so my general take here is if you all are successful and kind of execute this correctly. Is it a fair statement to say that you're essentially creating the playbook for any currency? Whether it's a stablecoin, whether it's a fiat currency, or really anything else? On how to back that asset with the pristine collateral of Bitcoin?

• 21:52Speaker 02

  Yeah, for sure. And I think a lot of that is already happening. So today, the Ava Labs, which is sort of the core team behind the Avalanche blockchain, just used Woody Work Timer to announce a new bridge that bridges Bitcoin over to the Avalanche blockchain. And I think a lot of that use case is going to be centered around using Bitcoin as collateral in various different, you know, DeFi and cross-chain ecosystems. I think this playbook is going to get played out over and over again. I think, you know, stable coins that are backed by Bitcoin is going to be, you know, a very strong use case, but I can also see DAOs that are holding, you know, Bitcoin as a treasury management strategy or, you know, using it as a settlement asset

• 22:37Speaker 02

  and lots of different use cases can proliferate.

• 22:39Anthony Pompliano?

  Yeah, I tend to think that that is very positive, both for the communities that are going to do it and also for Bitcoin, the asset itself. If, if somebody listens to this, what's like the one thing you want them to walk away with, understanding or thinking about when it comes to UST Terra and this decision to go ahead and back it with Bitcoin?

• 22:59Speaker 02

  So ultimately, what we're trying to do with sort of, you know, getting UST on the Bitcoin standard is to get to a state where we can build a better currency for all of crypto, right? The decision to subscribe to the Bitcoin standard is because we believe it's the best asset that you can use as collateral to create a new type of money, right? So there's a number of technical challenges that remain for us to be able to do this as well as, you know, we haven't deployed the system on in production yet, so lots of economic challenges. So if you have anything to offer in terms of mechanism research or technical skills or, you know, relationships with bridges

• 23:40Speaker 02

  or other teams that can help us do this, you know, please send DMs my way. Would love and appreciate the help.

• 23:47Anthony Pompliano?

  Awesome. And where can we send people to find you on the internet or find out more about what you guys are doing with either Luna Foundation or UST itself?

• 23:55Speaker 02

  Got it. So in order to reach out to me, I'm @StableQuant on Twitter. My DMs are, I'm pretty responsive. In terms of where you can find out more about, you know, the progress of what's happening with this reserve system, our research forum, Agora that Terra that Money is going to contain lots of updates as we roll out requests for funding and as we make, you know, treasury changes to acquire more Bitcoin. So please stay tuned.

• 24:21Anthony Pompliano?

  Awesome. Well, listen, thank you so much for taking the time to do this. I think that this is an epic move that some people don't understand yet, but I wish you the best of luck. And it seems like if you execute this correctly, it'll be pretty powerful.

• 24:33Speaker 02

  Yeah, sounds great. Thanks so much for having me.

• 24:35Anthony Pompliano?

  Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you subscribe on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered. Head over to pompscryptocourse.com. We've developed a curriculum with the top teams across the industry. It's a three-week intensive training program with over 50 events packed into that three-week time period. Go to pompscryptocourse.com to learn more and I'll meet you guys for the next episode.