Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Dan Shin: Terra – The Stable Currency Tackling the Ecommerce Payments Market

Episode Date: August 20, 2019

This week we're joined by Daniel Shin. He is the Co-Founder of Terra Money and previous CEO and Co-Founder of TMON, one of Korea's largest players e-commerce platforms. Today he talks about his success in that area and how that drove him to enter the cryptocurrency and blockchain space with this new project. Daniel was lead to blockchain when looking for a solution to reduce transaction fees paid by online merchants. Not satisfied with just using an existing stable coin, he set about to make his own, which is how Terra was born. Topics covered in this episode: Daniel's background with TMON and his need to explore new transaction cost-cutting ideas How Daniel discovered that cryptocurrencies may help reduce intermediaries in the payment space Terra's impressive partnerships with some of Korea's largest e-commerce players The stability mechanism and the role of the Luna token The role of miners in Terra and the currency's seigniorage model Comparisons to other stablecoins like Maker DAI and Libra The contingency plans in the event of a catastrophic plummet in demand How Cosmos formed the basis on which Terra was built Terra's business model and product roadmap Episode links: Terra on GitHub Terra white paper Introducing the new Terra Protocol Use Cases for Decentralized Money (Stablecoin) Scaling Seigniorage Terra Research Forum Terra Twitter TMON Sponsors: Cosmos: Join the most interoperable ecosystem of connected blockchains - http://cosmos.network/epicenter This episode is hosted by Sebastien Couture & Friederike Ernst. Show notes and listening options: epicenter.tv/301

This week is Berlin Blockchain Week, and we're so excited to be here. Actually, as I'm recording this, I just landed in Berlin and heading over to the Web3 Summit. We'll also be at DAPCon from Wednesday to Friday at the Technical University of Berlin. It's organized by Nosis and will feature prominent members of the Ethereum and decentralized web community. Last year's event was terrific, and I really am looking forward to the second edition. Tickets are still available. Episenter listeners can get 20% off the regular ticket price with the code DAPCon Epicenter 2019, and that's at DAPCon.io.

Where can you find us this week? Well, we're doing a live recording of Epicenter on Thursday the 22nd at 10 a.m. in the main room. Sunny, Frederica, and I will discuss the state of the DAP ecosystem and take questions from the audience, so be sure to attend.

We're also doing a meetup on Thursday from 6.30 p.m. to 9 p.m. Come hang out with us, have a drink. You can register for the meetup at epicenter.orgs slash Berlin meetup to get the address. All of us are also speaking or moderating panels or on panels throughout the week. So be sure to check out the schedule to find out when you're speaking.

And come say hi. We'll be happy to see you. Looking forward to seeing all of you at DAPCon and during the Berlin Blockchain Week. This is Epicenter, episode 301 with guest, Daniel Shin. This episode of Epicenter is brought you by Cosmos. Cosmos is building the internet of blockchains, an ecosystem where thousands of blockchain, can interoperate, creating the foundation for a new token economy. If you have an idea for ADAP, visit cosmos.network slash epicenter to learn more and to get in touch

with the Cosmos team. Hi, welcome to Epicenter. My name is Sebastian Guizu. And my name is Friedricha Ernst. And so today we're speaking with Daniel Shin, who's the CEO of Terra. You may have heard of Terra recently. It is a stable coin that is coming out of Korea. and one of the things that's interesting about Tara is just the CEO's background.

So Daniel is an established e-commerce entrepreneur in Korea. He founded T-MON, which is one of the top three e-commerce platforms in Korea, so like an Amazon equivalent in Korea. And from that experience, he saw some of the issues that e-commerce merchants face in one of those issues, and this is something that's been brought up a lot in a crypto space. is the cost of payment. So the cost of doing business with regards to credit card

transaction fees, etc. And so Terra addresses this issue by creating a stable coin that removes a lot of the intermediaries that exist in the payment space. So banks, intermediate banks, payment service providers, Kevin Gateway's Stripe,

you know, and also the visa fee. So it was an interesting discussion to say the least. Yeah. So there's some interesting ideas here with regards to the peg that the stable coin, the mechanism for the peg. And we went, we got a little heated there for some time. Yeah. So I think it was a little bit controversial and we had some argument about whether it's good enough to have the stable coin be backed by the

company in effect, namely the lunar token holders. Yeah. So Daniel gave some answers as well. And I would invite all of you to hear what he has to say and make up your own minds. Yeah. So I think this is interesting because when I first heard about Tara, the thing that struck me the most is I thought, wow, like this is one of the first times or maybe even the first time that I see a cryptocurrency project that has an actual go-to-market strategy and like a plan on creating demand for this currency. And that plan is that they've got this network of e-commerce merchants in Korea, so food delivery apps, movie ticket apps, etc., that are accepting this payment system. And at the moment, they're doing about a half a million dollars

in transactions per day. They've got 300,000 users on their payment app. So it's massively successful. And they only launched 50 days ago. So, yeah, I mean, they've been really good at actually getting this on the ground and getting people to use it. Right. So one of your points of contention was that you think that this doesn't work, that like the peg doesn't work. Yeah, exactly. So basically my point of contention was that I made the point that I think this works as long

as there's an expectation of growth, but that the system inherently can't cope with shrinkage and basically being convinced that it can't hold up in the event of a black's Black Swan event, that will damage the system and its credibility and that it may cause it to fall apart, even if no Black Swan event actually happens. I think like if we were to compare this to something like Maker, like Maker is collateralized by Ether, it's overcollateralized by Ether. And so there's something backing it there. Now, one could argue that Ether by which Maker is backed is also backed by some expectation of future profit or like future value. Whereas with Terra, there's no underlying collateral. The only thing that keeps the peg is the expectation of future growth

through this seniorage model that they have and also the transaction fees that they pay to their validators. And so you had, you had issue with that, particularly because you think that, you know, if there is some catastrophic event where there's loss of confidence in Terra, for whatever reason, it would be the spiral of death for them. Yeah. So I was very much the bad cop on this episode. My view is that I think that, so the person we interviewed was obviously Daniel, the CEO. There was also another co-founder. He wrote the white paper or co-author of the white paper. His name is Doe Kwan. He's the more sort of technical person. The reason why I'm somewhat bullish on this project is because of sort of like Daniel's background in e-commerce and as sort of like more on the business side, being able to like create something that's valuable for like a lot of people.

and understanding the real business opportunities and problems that companies face. And I think the design of this thing probably isn't perfect. There's some parts that definitely, I think, could be improved, like the Oracle mechanism, which we go into during the interview. Also, it appears that right now the validators are mining at a loss. But so these things that probably aren't optimal at the moment, I think can be adjusted and fixed over time. but as long as they have this vision of building this payment network and addressing this issue that, you know, like hundreds of thousands of companies over the world are faced with,

as long as that exists, I think that they can be successful. And so that's why I'm kind of bullish on it. More on the like business go-to-market side than so much on the technology. But I think the technology is kind of cool too. It kind of looks like, I don't know, it resembles Libra in some sense on the strategy side. No, not on the economics. So I think I very much come from the technology mechanism design school of thinking. And I can totally see that they've done a tremendous job in getting traction for this in such a short amount of time.

And obviously Daniel has a formidable background, but it's very much a mindset that is fueled by the expectation of growth. And basically, I agree that it'll, it's a good model as long as there is growth. But I think that it's a good model as long as there is growth. can't withhold a Black Swan event. Okay, well, I guess we'll see. So we hope you'll enjoy this interview with Daniel. So actually this is interesting because we're actually sitting across from each other

in the studio at Full Node. We've never done an episode where both of us are sitting here in the studio. So it was kind of like interesting dynamic to be able to, yeah, not be on a Skype call. So yeah, I hope we'll get to do this more often. I really like it. Also, the intro is very much different now

that like we could actually talk to each other from face to face. All right. So with that, here's our interview with Daniel Shin. We are here with Daniel Shin. Daniel is the CEO of Tara. And previously he was the CEO and co-founder of T-Mond. And T-Mond is one of the largest e-commerce platforms in Korea. They're regularly in the top three.

And so today we're going to talk about Tara and also his experience in the e-commerce space as a social. successful e-commerce entrepreneur in Korea and how that drove him to enter the cryptocurrency in blockchain space with this new project. Daniel, thanks for joining us today. Hey, thanks for having me. So starting off, yeah, let's spend a little bit of time on your background because if we look at our history of guests on the show, I'd say it's quite unusual to have someone with such successful background as like an e-commerce entrepreneur building one of the largest platforms in the country and it just totally switched and transition to the crypto space.

Yeah, tell us a bit about your background and how that led you to where you are today, building Terra. So I grew up in the States for most of my life in the East Coast. And in 2010, I came back to Korea where I was born. and that was right about the time where Groupon was one of the fastest growing companies in the world, one of the hottest companies in the world, and we decided to replicate that model in Korea. After about a year of running the Groupon model,

we realized that pivoting the business towards mobile commerce provided a larger opportunity. Because while Amazon had such a foothold in U.S., there was no such equivalent in other parts of the world like Korea. And we saw mobile as an opportunity to really drive growth behind e-commerce and mobile commerce. So I ran the company for about eight years as a CEO. We grew from five people to 1,300. The final year, we were doing about $3.5 billion in transactions. and had roughly 20% of the country use our platform at least once a year, which was pretty cool. But you may also know that e-commerce runs on razor-thin margins.

So after cost of goods and logistics and fulfillment and promotions and marketing, there's not much left to the company. And we thought one of the line items that we wanted to make go away, was the payment cost. So we were paying upwards of 2. something percent on every transaction that we did. And that was kind of the rule of the game for the past couple of decades.

But with the advent of blockchain, we thought, you know, I thought that was an opportunity to change that for our business at Timon, as well as e-commerce businesses across the world. This definitely resonates with me. I mean, I started my career in e-commerce. Not the same skill as you did, but I worked a lot with e-commerce clients. And payments has always been a pain, like for so many reasons, but also for its costs.

And, you know, in the beginning of like when I started getting into Bitcoin and everything, that was kind of one of the promises of crypto is that like cryptocurrencies allow for these period of pay payments and the transaction costs are much lower than anything else that's available out there, like Visa, MasterCard, like most of these payment platforms. You know, from that context, what is it that led you to want to build Terra and where did you find that cryptocurrencies in general, as they exist, weren't fulfilling, you know, that goal of having low transaction costs for payment transactions? I think innately, I'm an entrepreneur that really enjoys the early part of a startup.

an industry or a topic that is currently unsolved and we're not sure if we can solve it, but if we do, it's a big win for myself and the rest of the country. So I thought for e-commerce as a broader industry, blockchain coming in and solving the taxation that payment companies levy on each transaction as a mission worth going after. Having said that, I looked at the hundreds of projects that were getting funded, and it was a bit shocking to me how little of a plan they had to connect with the real world economy and get adopted and mass distributed across the regular people, the non-crypto traders. I thought there was a role that I could play in bridging e-commerce as a broader industry with blockchain and crypto. You know, we've seen fintech companies do this in the past, right? So, and financial, one of the largest fintech companies in the world,

they piggybacked as a payment feature on Alibaba and transformed itself by adding other financial features to become one of the largest digital banks in the world. In a similar fashion, we thought blockchain and crypto could really benefit from having a alliance of e-commerce companies as a distribution channel. So there are already a couple of stable coin solutions out there, right? So I can totally see why you would want to build an e-commerce platform on a stable token because basically having this in a volatile asset doesn't make much sense. But why did you choose to build a new system rather than building upon one of the

stable coins that's already out there or one of the stable coin designs that is already out there? Yeah, so we reviewed most of the white papers that were published at the time. And big issue that payments companies need to solve is a two-pronged problem. So you have to become cheaper and more efficient for e-commerce merchants. And on the other hand, you need to provide a tangible benefit as to why customers use it. So the former allows you to integrate with more and more e-commerce partners and impacts fungibility, whereas the latter really improves upon your share of checkout and getting consumers to adopt it.

So I feel like other stable coins could have addressed the stability issue as well as cheaper payment costs to merchant issue, but I thought from a consumer perspective, there's absolutely no reason to switch off of a credit card option or a digital wallet option to a stable coin option because why is there, right? So can you briefly explain what kind of a stable coin Terra is? I think we'll go into more detail later, but just to give an overview. Yeah. So Terra keeps itself stable using a elastic money supply.

So if demand for Terra goes up by integrating with more e-commerce companies, then to prevent the prices from going up, the algorithm issues more Terra to keep itself against the peg. If demand for Terra comes down, then we buy up supply in the open market and burn supply in order to bring the price back up to the peg. The interesting component exists on both sides of the scenario. So if we're constantly adding new e-commerce companies and driving more demand to Terra, and that allows us to increase the circulating supply of Terra, then in economics terms, that's called seniorage, and we're able to take that resource and reinvest that in discounts to consumers. So we talked briefly about why other stable coins don't work.

It's because there's no reason to switch from legacy platforms. The reason why people are using Terra today is because we're able to give 5, 10% discounts on every transaction that you do on e-commerce, whether it's buying fashion apparel or diapers or travel or whatever it may be. On the downside case where we need to buy up Terra, we collateralize the network with a second token called Luna. So Luna is our depost mining token that receives transaction fee rewards from Terra's payment network. And Luna, in short, derives value because Luna will be valued at some multiple of the transaction fee cash flow. that come into Luna holders and we take that value and in the times of terror recessions, we use it to collateralize Terra's network. Okay. There's a lot to unpack here. We're going to get into all the details of this over

the episode. You said something here that you wanted to create demand for this currency. How do you plan to create demand for the currency? Because I believe that is the real thing that's holding the peg together is the expectation of future demand. Yeah, so demand is created by two things. So constantly integrating with more and more partners, which are e-commerce partners, fashion e-commerce partners, movie ticket apps, food delivery apps, whatever it may be. And second, increasing our share of checkout within those platforms.

So how are we able to integrate with more and more partners? the answer is because we're able to reduce transaction fees for these platforms. But how are we able to constantly increase share of checkout is because we're able to use the senior's profits to offer ongoing discounts for consumers. So if you're buying the same good or the same service, if there's multiple checkout options, consumers are likely to choose the one that provides the best deal. So we feel like more and more people will learn about Terra and will select Terra as their payment option,

increasing our share of checkout. This kicks in the virtuous cycle of increasing the demand for Terra, which allows us to print more supply of Terra and further take that seniorish profits to give more discounts back to the community. There's a natural limit to this though, right? Because basically the entire e-commerce space has a CERSys And after a certain point, you will not be able to offer these seniorage profits to people who used to pay in Terra anymore, right? Naturally, growth will slow as we become much larger.

But e-commerce as an industry is, you know, trillions of dollars across the world. And e-commerce is just the gateway for us to get into other industries, right? So, you know, there's no reason Terra can't be used in purchasing. cars fueling your car in buying insurance and buying your home. I think the ceiling does exist at some point, but it's very, very high and won't come for decades. Okay. So you think that there's a lot of headway for demand for Terra and essentially e-commerce

is sort of like the gateway and you can then expand into other industries and even at some point you even, I don't know, B2B payments. Does that also make sense? Yeah, absolutely. But even in the baseline scenario where we're connected with a subset of e-commerce companies and our share of checkout does not increase, e-commerce as an industry across Asia is growing at 20, 30% year over year. So even if we are not able to onboard more partners, even if you're not able to increase share of checkout, we're still going to grow 30% year over year. But that is not the case. We're going to add more partners, we're going to add more industries and more use cases for terror down the road. So what's going to happen once you can't grow hundreds or tens of percent year on year?

So what happens if demand for Terra as a stable coin is constant? Well, our worst case scenario is looking just like the best fintech companies across the world. So basically we'll be an Alipay or a PayPal or a Venmo if we're not able to use seniorage to pay for discounts. However, the way that we think about it is we have a economy that we can piggyback to really grow our business with virtually no cost of acquisition cost, cost of customer acquisition. And once we have hundreds of millions of customers on our platform, there's so many more ways to increase senior age.

For example, we can reduce the velocity of money. So get people to pre-charge their apps so that the velocity goes down, which increases a supply of money. We can introduce lending and investments on the app, which also multiplies the amount of money that goes through Terra and Chi. So I think the opportunities are limit this. But if we take for a second that we can do $100 billion. in transactions over the next five years, and 10% of that is used to give discounts to consumers, and in turn is used as a way to acquire customers,

then $10 billion is funneled into our ecosystem without using venture capital money to grow our business to wherever we can take it. So what happens once demand for whatever reason? So say there's a global recession or, climate crisis hits or confidence in the product plummets. So what happens if the demand for terror goes down? So how is it collateralized or is it collateralized?

Yeah. So first line of defense is our Luna token. And recall that Luna token is our mining token. And if you help validate transactions, you receive transaction fee rewards from Terra's payment network. So let's take for instance that we do a $5 billion annually in transactions and we take 50 basis points in transaction fees.

Then that's $25 million being paid to Luna holders over the year. So the way that you value Luna should be some multiple of that $25 million. So, for example, Visa trades at, I believe, 50 to 60x their profits, Stripe and PayPal probably trades above that. So, you know, we can take fintech comparables and apply a multiple, and that's what Luna should be trading at. The second layer of defense is we take the transaction fees that are levied to e-commerce and we temporarily increase. that if there's downward pressure in Luna's price to the point where the collateral cannot fully collateralize Terra. So recall that e-commerce pays, say, 3% of their transaction volume per year.

Terra charges, like I said, anywhere from 30 to 50 basis points. So there's a 5-6-x ability to up our transaction fees without the e-commerce companies turning off of our payment network. So in the times of Luna downward pressure, we're able to 2x, 3x or transaction fees so that it counters the downward pressure in Luna price. The final measure that I'll talk about is something that we want to wean off of down the road is we will have a very, very healthy cash reserve as well. And we recognize that in the very, very beginning, we don't have a.

enough e-commerce partners across enough geographies to say that, okay, we will not drop by 50% in a given year. But just as governments weaned off to fractional reserves over time so that we're fully reliant on Luna when we have thousands of partners across many, many countries and doing tens of billions in transactions. Let's walk through a user flow here. So let's say I'm in Korea and I want to use Terra to benefit from these decreased transaction fees on like my favorite e-commerce site. Like let's say I want to buy movie tickets or something. What does that look like for the user from the moment he's heard about Tara to the transaction and maybe explain what's going on in the background while this is happening? Basically, the user flow is identical to what you would do before.

So you would turn on your movie ticket app. You would select the movie that you want to buy. And when you go to the checkout page, you will see multiple pay options, including the payment option that Terra provides called Chai. So you would click on Chai. If you're a first-time user of Chai, then you would have to integrate your... bank account to it and sign up for the app. Right. So I think that's what I'm most interested in.

So onboarding this payment system, what does that look like for the user in terms of acquiring Terra? And what's happening in the background for that for that Terra to be minted and how it relates to like Luna, for example? So essentially, you sign up for the app the first time. you do KYC and you link up your bank account. Banks offer an API integration where we're able to essentially command the bank to pull from the account when the user is purchasing something. And so once you've signed up for that app, as you go through the e-commerce flow, if you click the product, you click Chai and with a six-digit code or a a face ID, you're able to pay for the product in, you know, a couple seamless steps. What's happening in the background is the money is pulled from your bank account and it's

converted to chai points. And chai points are linked to terra. So essentially for, you know, $100 of chai that you charge up your app, $100 of terra is. A hundred dollars of terra is. is held in the background. And what that allows us to do is impact demand in Terra with the growth of transaction volume on the Chai site. If transaction volume grows, then Chai would have to basically buy up more Terra in order to match that demand.

And that puts upward pressure in the price of Terra, which allows the arbitrage mechanism to print more terra and increase the supply to counter the upswing in price. Okay, so let me just interject here. So as a user, I connect to my bank account and I use my existing Fiat reserves to buy some Terra. Where is that tariff coming from? And so is the bank somehow connected to the system and enabling that tarot to be minted? How does that minting process works? So your purchase does not mint the terra. Essentially, when you transact, the Fiat on-ramp happens through your bank account. And indirectly, the Fiat that you've on-ramped is used

essentially to buy up Terra that's already been minted. So as you can imagine, if there's a set supply of Terra, but if more people are demanding the Terra, then the price should swing upwards. And we have arbitrage mechanisms in a place where if Terra's price goes up, then people are encouraged to deposit money and receive Terra so that they could sell it in the open market and create more supply of Terra if that makes sense. So basically, if people then deposit more money in order to mint more Terra, whether does that Terra come from? I think that's still where I'm stuck. Let's just say it comes from exchanges. But where do the exchanges get it from? Exchanges already had a set supply of

tar, right? I think what we're missing here is really the mechanism by which Terra is minted when there's an increased demand for Terra and there's not enough Terra in the market. Yeah. The mechanics that you need to understand is the demand for Terra, and the minting of Terra is actually two separate sequences. So if through our payment network, more people are depositing Fiat and converting it for Terra because it's a better way to pay for things, then let's just assume that Terra is bought from Exchange A. And because we don't want people to go to the exchange themselves and sign up for exchanges and hold their private keys and whatnot, let's say we have a custody service where we do that on their behalf. If transaction volume increases, then we buy up more terra, which obviously with the same number of supply, puts upward pressure on the price of terra.

So if Terra used to be a dollar and if transaction volume goes up by 10%, then Terra's prices go up to, you know, $1.10. We have a separate smart contract in place where if you deposit a dollar's worth of Luna, then you'll get a Terra in return. So think for a second when people would make that trade. People would make that trade if Terra is trading above a dollar, right? So you deposit a dollars worth of Luna by buying it up on an exchange into the smart contract and you get one terra, which is currently trading at $1.10. Then these people would take it and sell it into the exchange and capture the 10 cent arbitrage profit until that 10 cents goes away. So the first component impacts the second component, but they're actually two completely separate sequences where e-commerce volume impacts. the demand and price of Terra,

and then there's a smart contract that creates an arbitrage opportunity for traders, which impacts the elastic supply of Terra. Okay, so basically the Luna holders are the people who profit from the increase in Terra. So this is where the profits flow to, right? Well, you don't necessarily have to be a Luna holder because you can buy a dollars' worth of Luna at any given time

and trade it for Terra at that. instant if Terra is trading above a dollar. Okay, but basically, so you have to have Luna in order to benefit from this, right? I mean, you can buy it. You didn't actually have to buy it in the token sale, but you can just buy it on an exchange, but you have to buy Luna. So basically the profit does go to Luna holders. Correct.

So how are you able to pass this profit on to people who actually pay for things on the e-commerce platform? Because you said that you can give like 5, 10% discount. to the users of your payment service. How is the money that is distributed to Luna holders? How does this actually end up with the customers? Recall that the smart contract trades a new Terra that gets minted for a Luna that gets deposited into the smart contract.

So basically the Terra that we minted is new supply, whereas the Luna that we received is from a previous fixed supply, right? Yes. So we as a protocol take those Luna proceeds because it's been deposited, and there's a voting mechanism in place to a funnel that proceeds, which we can call seniorage. to e-commerce discounts or any other use cases that we think will drive the growth of terra's economy. Basically, the Luna that was deposited is the proceed. So basically, does the proceed come from the fact that you as a company hold a large portion of the Luna? No, that's incorrect. So basically, we were able to create more demand for Terra through our e-commerce transaction

volume going up. And that created an arbitrage opportunity where we're able to mint more in Terra and sell that to people who wants to buy it. And so those people who buy it, they deposit a Luna and receive a Terra in return, right? So the Luna that just got deposited into the smart contract becomes proceeds

for us to distribute back into the ecosystem. But the person who's actually minted, that Terra got the seniorage, right? I mean, they got the Sanridge proceeds. So how do you pass on these benefits to the people who use Terra to pay for things? So the Terra isn't minted by a person, right? It's minted by the protocol automatically when someone deposits a Luna, right? So basically, the protocol in the case that Terra demand is increasing will end up with, you know,

a certain amount of Luna, let's call it, I don't know, like $20 million is deposit into the smart contract in order to whittle away at the arbitrage opportunity created in Terra prices. Then we have a separate voting mechanism by Luna holders to take that $20 million and deposit that into projects that help grow Terra's economy. So right now, the largest project that we're running is basically the payment network. So we would essentially earmark the $20 million to the payment network to be able to spend that as promotional dollars against purchases of goods and services.

Okay, so I think I understand. So basically the lunar holders in their entirety or by some voting mechanism decide that the profits that they have made by the growth of the Terra ecosystem is distributed not to them, but to the users of Terra. Is that correct? Correct. Yes, that's correct. This episode of Epicenter is brought you by Cosmos, the internet of blockchains.

Cosmos is live and we couldn't be more excited to see so many projects already building on it. Blockchain technologies are evolving fast, and development shouldn't be one-size-fits-all. As a DAP developer, you need the tools that will allow your DAP to scale, grow, and evolve over time. The Cosmos SDK is a user-friendly, modular framework which allows you to customize your DAP to best suit your needs.

It's powered by Tenerment Core, an advanced implementation of the BFT proof-of-state protocol. Cosmos takes care of networking and consensus and allows you to focus on building your application in your language of choice. Ethereum smart contracts will be supported soon, and the SDK makes it simple for you to connect to other blockchains in the Cosmos network.

If you have an idea for ADAP, and we'd like to learn more about the cosmos SDK, or if you'd like to connect your existing dot to cosmos, visit cosmos.network slash epicenter. For Epicenter listeners, the Cosmos team will reach out to answer your questions and help you get started. We'd like to thank Cosmos for those supportive Epicenter. So switching gears a little bit here,

let's talk about the validators in the Terra network. In the white paper, you refer to them as miners. And you talk about the role of these validators and how they're remunerated for their work in validating transactions? Yeah, so it's a depost system very similar to the Cosmos network. And right now we have about 66 validators or miners, if you will. And we've currently capped it at 100. So later, the validators would be ranked by the Luna that's staked to them.

And the main role that they play is first and foremost to validate the transactions themselves. Another role that they play is to receive price feeds for Terra and Luna. And lastly, the Luna holders play voting role or a governance. its role in distributing the seniorish profits that we just talked about. Okay. Can you talk about the Oracle? What's the role of the Oracle in the sort of Terra design? Yeah.

So basically we need feeds for the local currencies that we pegged to. So it could be the Korean one, the Singapore dollar, the Thai bot. We need feeds for Terra's prices. and Luna's prices. So we obviously need feeds for the local currencies because Terra needs the peg to it and it falling off of the local currency would create a arbitrage opportunity. We need the Terra and Luna prices because, again, we as a smart contract make a promise to swap dollars' worth of Luna for Terra at any given time.

So those are essentially the price feed that we need. Okay. And so I believe you're also issuing a Terra SDR. And so like SDR is this special drawing right issued by the IMF, which is a basket of currencies that creates this stable currency. And it's used to like for countries like to pay their debt or something like that. Why did you choose to also create an SDR peg? It's kind of unusual and unique.

Yeah. So our fundamental thinking was that businesses in non-US parts of the world don't want to be settled in the US dollar. So everybody wants to be settled in their local currency because very few businesses are wanting to take on the foreign exchange risk. So we've created the KRT, which pegs to the Korean one here. and we're looking to create HKT and SGT, which pecks to the Hong Kong dollar and the Singapore dollar. But because we only have one Luna, one collateral, we needed to pick a currency that is the least volatile

over a long period of time to peg the value of Luna too. So essentially we selected SDR as that, you know, Mother Terra, if you will, you can imagine a scenario where, you know, several decades down the road, Luna converges more to the portfolio mix of the local currencies in Terra's network rather than to a basket that's issued by the IMF. But we thought IMF SDR is, at least in the beginning, the best representation of the global network that we aspire to capture. So you said that the Luna is pegged to the SDR and then all of the other exchange rates to whether that's the Korean Juan, Singapore dollar, US dollar, etc.

Get their exchange rate relative to SDR. Is that correct? Correct, yes. Okay. Interesting. It kind of occurred to me that there are a lot of similarities between the underlying economics behind the SDR and something like Libra. because Libra is also a basket of currencies. It's pecto basket of currencies. Did you see any interesting dynamics here? Like, for example, should the IMF issue an SDR cryptocurrency,

would that make like the Libra and perhaps even the Terra and like a lot of cryptocurrencies, I think, obsolete? Have you given any thought to that? So I think the purpose of using SDR or a basket of currencies for, you know, Libra and SDR in the case of Terra is we envision having a global portfolio of businesses and because we don't know what those proportions are yet, we need to peck to something that's already a basket of global currencies, which is SDR. So I think we use it more as a convenient index to start off with rather than SDR is the

end-all and be-all of currencies. So ultimately, like I said, the terrar. that gets most often used in practice is going to be the Korean Wan Terra or the Singapore dollar Terra or the Thai bot Terra. But because we are one network that operates in multiple local currencies, we do need some sort of mother exchange, which SDR plays the proxy to at the moment. So I don't think IMF issuing a currency is going to, you know, end all crypto stable coin businesses, I think it's very far from the truth. Maybe just as a reaction to Libra, you know, Christine Lagarde could be like, we're

going to launch our own cryptocurrency to counteract the Libra. I don't know. It would be funny. Yeah, yeah. So tell me about the validators again. So say I'm interested in becoming a validator. How do I become a validator on your network? And how are the validators as they are today?

So the 66 people or the 66 companies you talked about. earlier, how are they distributed and what qualifies them to be a validator? So as all early networks do, I think we tried to either pick validators that have a track record of success in a similar operations. And because we took lots of the components from the Cosmos atom and Cosmos SDK, lots of our validators, overlap with those of the Cosmos Adam. And we also invited our investor base because in theory our investors are biggest fans and those who support our broader vision.

So, you know, guys like, you know, polychain or hashed are investors in Terra's network who also run validators for us. So in the beginning, I guess you could say most of the validators, received kind of hand-picked invites based on the two criteria that I talked about, having a track record on Cosmos or supportive investors to Terra, down the road, the validator list will be capped at 100, and it'll be ranked by the Luna stake. So obviously, the stake that people will stake with them will be dependent on, you know,

the fees that they charge, but more importantly, how secure their network is and the downtime and the track record that they build on our network. So, you know, I guess in a way you could think of it as a vote of confidence based on how well they perform. So if I understand correctly, the validators are currently still mining at a loss despite the fact that the transaction volume is like half a million a day. Would you confirm that? I'm not entirely sure the economics of each validator. However, as I've shared early in this call, the transaction volume is going up 20, 30, 40 percent each week.

And secondly, we've started off with a very, very low transaction fee to e-commerce just as a entry point into the market. But we've been received with good feedback so far. So we're looking to increase those fees as well. So I think if any validator is operating at a loss, those losses will be very, very short-lived. Okay. So you mentioned that we haven't really talked about, but so Tara is built on the Cosmos SDK. Why did you choose to build on Cosmos? And what went into your, into that choice? And then, you know, what are your plans for like the future of Terra as, you know, a zone on the Cosmos Hub, presumably? I think to be fair, we didn't build on top of Cosmos.

We took lots of the components from Cosmos SDK because we looked at how they work and thought they were fitting for what we want to accomplish. Number one component is transaction speeds. So for Terra, because we're working with existing businesses that do thousands of transactions per day, the ability to get TPS up beyond, say, you know, 2,000, is extremely important. So Cosmos, their blockchain has been tested for transaction speeds, and our test net as well, taking the best parts of tendermint,

have done TPS up to 7,000, 8,000 per second. The second component is we have a vision of not only connecting to e-commerce as payments, but serving as essentially a stability component for lots of the D-Apps across other main net ecosystems. So, you know, our belief is that just about any application on the blockchain will require a stable coin because if you, you know, contribute code

or if you contribute content or if you contribute, you know, just about anything, nobody wants to be paid in the volatile, token. So we needed the ability to essentially hub across to other main net. So we've already signed partnerships with guys like Tomo chain in Southeast Asia, Clayton here in Korea, and several other mainnet. And Cosmos, obviously, with their hub, offers an opportunity for us to offer stability as a service. So I'd very much like to get back to the economics of Terra as a stable token. So as I understand it currently, Terra is valuable because of its expectation of future demand. And in the case that it should go south for whatever reason, it's primarily backed by the lunar

token holders. And in essence, that is what in the legacy word would be the company, right? So basically it's, in effect, it's backed by the company or the network. So because it's backed by the, by the lunar token. To me it seems that the value of all lunar tokens together should be a fraction of the total volume that's being exchanged in terror tokens over the network. Would you disagree with this? No, I think it's for the most part correct. Okay. So what happens, I mean, in legacy terms, that would correspond to a very severe undercollateralization of the terror that's being issued, right? And I mean, I know that in the cryptocurrency space, people are always going on about how the dollar is not backed by anything because the Fed can just create it. But for the largest part, that's not actually true because most dollars are actually backed by things.

So basically, if I take out a mortgage on my house, yes, the bank can create those dollars, but they have my house as collateral. If I finance my car, they have my car as collateral. Even if I take out credit card debt, they have me as collateral. my future earnings and my expectations as someone who has valuable skills. Because, I mean, you can see that in the fact that they don't give credit card credit to anyone or if they do, this system fails. As I see it, the terror system is backed very much by the expectation of growth. And what happens if that is no longer there?

What happens if for any reason the demand falls beyond what can be absorbed by the lunar holders? Do you have some form of plan for like a catastrophic failure or like a confidence spiral where the confidence in the system and the expectation of future returns would like fall apart? So I don't think there is a single answer that provides the most benefits for users and allows you to scale and grow while at the same time fully minimizes all the risks. So I think basically if you have a risk reward chart, you kind of have to pick a optimal point that allows you to scale and grow while at the same time is very well hedged against risk. Basically, we looked at fully fiat collateralized stable coins and our theory is that outside of crypto exchanges, it's never going to be used. Because, again, the world is already digital in many parts of the developed countries. your credit card is digital in nature, your bank wires are digital, and it's very expensive and hard for you to get people to switch off of a legacy system and use something new

when you're not providing tangible benefits for them to do so. On the other side is a maker doubt where the collateral is essentially Ethereum, and Ethereum value is completely based on the demand for Ethereum. And there's no fundamental cash flow or driver that determines the value of the Ethereum. So I think what we said was, hey, we can't be fully fiaturized because ultimately we'll never grow beyond our crypto niche. We can't be collateralized with, you know, Ethereum or other crypto assets that don't

have a fundamental cash flow. So let's take for example that we've collateralized ourselves with the equity of visa, right? And if you take a look at equity of visa, essentially payment network for the past decade, and you can take equity of visa, you can take equity of Amex, and you'll see that the revenue and equity of visa is actually fairly linear and upwards. And I think that's a testament to the stickiness of payment networks. So once platforms are onboarded to payment networks, the likelihood of them churning off of it, i.e. the likelihood of them not offering you the ability to pay with a certain method to do business is very, very, very low.

So we picked a category that's fundamentally sticky, but there's two things that we needed to admit, the first is that in the beginning we're not visa, right? Our payment network is a lot smaller. Our merchant base is a lot smaller and a lot more concentrated in a single country. So we need to be fully backed by Fiat. But as we grow our merchant base, we can we can wean off of the Fiat Reserve and start to depend on the equity of visa, which for us is Luna. The second component is we not only need to have a sticky base. like Visa, but we need to be a lot more stable than that.

And that's why we have the ability to calibrate our transaction fees from e-commerce up to, you know, six to eight times of what we normally charge because we're taking payment gateway fees down from, you know, 3% to below 0.5%. So if there's downward pressure in the price of Luna, i.e., let's say we lose half of merchant base in a single day, we're able to up our transaction fees by 2x in order to counter that so that the fees that the Luna holders are receiving remain steady and constant. Let's say for an example that we were trading at 50x our transaction fee cash flow and the 50x multiple comes out to 25.

The same thing can occur. We can up our transaction fees to e-commerce by 2x and the reward per Luna will still stay the same. So I think the fundamental thesis that we have is in a design that's fundamentally sticky, let's add in a factor of calibration so that we can minimize a significant amount of risk. So I agree that this will work in a setting where there's growth, but I think the legacy money system, to a large extent, is backed by the fact that there is actually real value that collateralizes it. And in the case of MakerDAO, there's ether that collateralizes it. And in the future, there will be other things that will be able to collateralize and die much, much like

in the legacy system where I can collateralize a dollar loan that I take out with my house. And that's not the case here. So basically, I mean that despite the fact that you don't think that, for instance, in the maker system, the global settlement is actually going to take place, it's a credible threat that it could take place. And everything would be settled. And everyone one would be fed from the underlying collateral. And in the terror system, this is not the case. In the terror system, if the bottom falls out, there's nothing to break the fall. Well, I would argue that that's not true, right?

So what's the fundamental value driver of Ethereum? The fundamental value driver of Ethereum is the usage of the network. So basically the gas transaction fees that are paid for being allowed. to use the network, and that's what fuels the value of Ethereum. Okay, and what multiple of the gas that is received is Ethereum traded at today? It's much more than it should be, so I don't know from the top of my head, but basically from current usage levels, it should probably be below what it currently trades at. So you're making it a good point that there's also speculation going on, that it's going to

become utilized more in the future and there's an expectation of future profit from holding ether now. But there is a fundamental utility of the ether token in paying for the network fees. I don't know the exact number either, but the multiples are so astronomically high that I don't even think it really matters how much gas is received to the network. It's almost pure 90s. 99% speculation where ether prices are on a given day. That's my theory. For Luna, the fundamental value is the e-commerce network that sits below it. So right now it's 25 e-commerce unicorns across Asia, and the Alliance of Terra will grow as people

understand the value proposition that we provide to their business and their customers. So if you believe that the alliance members turning off the platform is actually fairly difficult because we're offering them something that's relatively hard to replicate, and if you believe that once we get to several thousand e-commerce companies across Asia, losing a couple dozen is not going to harm the network in a significant way, then I think you can buy into the fact that a speculative security like Ethereum is a lot more risky than using Luna, which is basically a replication of X percent of the share of checkout on e-commerce. I totally get that point. And I think that losing a couple of merchants or even like 5 percent is not going to break the system.

I'm talking about resistance to Black Swan events, so basically like a financial crisis. I mean, even if the likelihood of that occurring are slim, the trust that a system can withstand a challenge like that is, in my view, absolutely crucial in gaining traction and actually having people use it. Yeah, absolutely. But even in the worst financial crisis, like if you ask, will Amazon go away, I would say no. Like having been in e-commerce for the past decade, actually more people switch away from more expensive gourmet options to buying on e-commerce in the cases of recessions. So I would say the cash flows that come from e-commerce will stay relatively constant. the second component is that Terra is now exchangeable for real goods and services in just about all parts of your life. And I think that exudes a level of trust that a trading focused token on exchanges cannot do.

Yeah, after this conversation, I feel like the utility value in Terra is orders of magnitude higher than for, for instance, like the actual utility value of ether as gas in the Ethereum network. But yeah, I'm still like, I guess unsure about like this Black Swan event, like what would happen in that case. And I guess like only time will tell if the peg can maintain itself. Like even Maker has had some issues like maintaining this peg recently. But yeah, so as we're moving towards the end of the show here, tell us a little bit about like what's the future roadmap here, both on so the technical side, but also. in building this payment network and this partner network in Asia? We've integrated to two of our 25 alliance members so far.

And in a matter of 50 days, we've gotten to 300,000 payment users and about half a million dollars a day in transaction volume. So our immediate roadmap is to roll out the payment network across all of our alliance members, which include, you know, the largest food delivery network in Korea, the, you know, largest movie theater network in Korea and so on and so forth. If we're able to do that in not only Korea, but other parts of Asia that we have alliance members in, we essentially have a licensed e-money and payment gateway app in each of those markets. We have liquidity in the local stable currency. So, you know, Korean Terra in Korea, you know, the Singapore Terra in Singapore. And we have compliance measures

in each of those countries. So it's very easy for us to offer global settlements, global payments, and global remittances. Because again, we have a locally pegged stable coin and liquidity in each of those markets. So I, I think expanding the network beyond just Korea is kind of our midterm goal. Beyond that, I think we'll follow a lot of the footsteps of AliPay, but introduce a blockchain element to that. So if through e-commerce payments, we're able to capture millions of customers and lots of data around what they're buying on a daily basis, then we're able to provide credit to e-commerce consumers. We're able to provide loans to e-commerce merchants.

We're able to introduce investment products. So I think there's other layers of a digital bank that we can very naturally expand to once payments is up and running and we have access to customer data. So I think, you know, I can go on and on about how we go from payments to, you know, a digital bank to beyond that, you know, the de facto global currency of the world. but I think that provides kind of a good, you know, five-year roadmap for us. I think my very last question is a matter question. So what informed the decision to actually build this as a blockchain product?

Why didn't you build like a Visa or MasterCard competitor that just charges lower fees? Because in essence, that was your pain point, right? So you didn't want to pay the 2, 3% that Visa and MasterCard charge. And they have enormous profit margin. because in essence, the market is divided up among these two companies. So why did you not decide to create a non-blockchain-based payment system that just charges lower fees and gains traction that way? Because from where I'm currently standing, it seems like the blockchain element, yes, this is

fantastic to actually accelerate this in the beginning because you're able to distribute the expectation of future profits to the users today, and that helps you gain traction. But that doesn't necessarily mean that it's a well-designed system or it's a system that can withstand, you know, for whenever growth stops. I think one component worth explaining here is that Visa and MasterCart actually only charge a very, very small fraction of the payment price to. the merchant. So if, you know, Stripe at the end of it all

charges, you know, 3 and 1⁄2% Visa and MasterCard only charges 20, 30 basis points of that. The reason why it's so expensive to the end user is there's lots of intermediaries in the process. So there's Visa MasterCard, there's the

issuing bank, there is the payment gateway that charges, there's, you know, value added networks that charges a fee. So I think there's, you know, six or seven steps that take a fee in the legacy process, which is absolutely ridiculous, but that's the lay of the land today. So we're taking our blockchain network and replacing the entirety of that stack

rather than just replacing Visa MasterCard. But in order to do that, we need to find a way to incentivize users to adopt. And I think our blockchain economy and the seniorage profits that result is a way to get people to adopt. The second is obviously the transparency that blockchain provides. So we started off with a 25 e-commerce unicorn network across Asia and we were able to form this alliance not only by the value proposition that we propose, but they're all participating in some shape or form as Luna holders and they've participated in the design of the blockchain itself. So I think the transparency allows us to really form trust with the initial partners that will allow us to grow to a network, you know, kind of like Starwood across hotels or, you know, airline points across airline industry.

Okay. Now, where can people learn more about Tara and potentially even, I guess, to our listeners in Korea, start using it? to pay for things. Chai is, you know, top 10 ranked finance app in Korea today. So on App Store and Google Play, you can download and sign up and start using it on e-commerce. And for Terra, we have a Discord room up and running so you can join and participate in the community and discussions. Thanks a lot for coming on the show.

Yeah, thank you for being on the show. Yeah, thanks a lot. Thank you for joining us on this week's episode. We release new episodes every week. You can find and subscribe to the show on iTunes, Spotify, YouTube, SoundCloud, or wherever you listen to podcasts. And if you have a Google Home or Alexa device, you can tell it to listen to the latest episode of the Epicenter podcast. Go to epicenter.tv slash subscribe for a full list of places where you can watch and listen. And while you're there, be sure to sign up for the newsletter, so you get new episodes in your inbox as they're released. If you want to interact with us, guests or other podcast listeners, you can follow a

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