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

Starting point is 00:00:00 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 Kwon, 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 Kwon, and I hope that you enjoy it as well. Before we get into this episode, though, I want to quickly talk about our sponsors.

Starting point is 00:00:35 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 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

Starting point is 00:00:55 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 the world. Through the Compass Marketplace, retail miners can access mining hardware with similar prices

Starting point is 00:01:33 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.

Starting point is 00:02:09 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

Starting point is 00:02:47 locations only and not to u.s persons visit bullish.com slash legal for important information and risk warnings. 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 enjoyed this one. 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.

Starting point is 00:03:23 All right, everyone. I've got Do 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? 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.

Starting point is 00:03:54 But all the stablecoins are, you know, is a very valuable product in the market. About 80% of all spot trading for all of crypto happens through stablecoin pairs and denominates most of the liquidity pools and use cases for DeFi. But the issue is that they're either centralized, backed by fiat dollars for every unit of stablecoin that's issued, or they're based on leverage. So it doesn't scale as user demand for stable coins increase. So Terra is sort of a new way of creating these stable coins that are algorithmic, which is that instead of having a dollar that were some unit of leverage that is backing a unit of stable coin, use a set of arbitrage incentives to stabilize the peg around the dollar. Got it.

Starting point is 00:04:38 And so when you start to think about this, there's algorithmic stable coins 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. So an easy way of understanding this is that price volatility for the Terra stablecoin is absorbed by the supply of the Luna staking asset.

Starting point is 00:05:20 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 in essence, like Luna contracts and expands in supply in order to be able to facilitate mints and redemptions of the pair of stable coin. And that's how the stable coin maintains its spike. 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 stable coin and

Starting point is 00:05:52 buying it? Or how is that getting into their hands so that they can actually participate here? I would say most people, 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. 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 stable coins? And then what are the risks or challenges that you guys identified?

Starting point is 00:06:34 Sure. So I would say the three things that you need to keep in mind when thinking about a stable coin is number one, decentralization, number two, stability, and number three, scalability. So algorithmic stable coins are very strong in the 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 insofar as there is a non-zero amount of some paired asset that can be burned,

Starting point is 00:07:12 stablecoin supply can increase to meet user demand. Where algorithmic stablecoins have a different stability model is that for something like Tether or USDC, hypothetically, it could absorb 100% of the demand fall of that stable point. Without presupposing any changes in user demand, because there's a dollar in collateral for every stable point that's issued, all of that demand volatility can be absorbed. Algorithmic stable points are more brittle when it comes to changes in 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 too much of the paired asset gets printed, and therefore there's a death spiral in the overall economy.

Starting point is 00:07:58 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? So if you look at sort of the long list of algorithmic stable coins that have failed, like Basis Cash, ESD, DSD, Toom Finance, they all fail for one reason. And that's because there's no inherent driver of demand for these stable coins. Other than if you hold this stable coin, we're going to give you 100x the amount of stable coin within the next year. So it's sort of a game of musical chairs whereby 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

Starting point is 00:08:46 Iron Finance, which I think Mark Cuban invested in. And the idea is that they were offering a 12,000% APR on holding these stable coins. 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 ways. 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 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 Einport, whereby you could take Terra stable coins and

Starting point is 00:09:32 spend it across pretty much every large merchant in the country. So we sort of closed the retail loop on payments on things that you could do with Terra's stable points. So from that perspective, user demand for 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, which makes it perfect to use as sort of like an adoption gateway for an algorithmic stablecoin. Other things that we've launched, like for example,

Starting point is 00:10:05 Pylon and Anchor and Mirror are quite similar. They share the common characteristic that users don't use it as sort of like an endogenous recursive vehicle to park stablecoins. And then it's something that draws a lot of people and exhibits lots of stickiness. 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 stable coins 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? Yeah. So there's a couple of reasons. And the first reason is economic,

Starting point is 00:10:47 right? So whereas in the beginning, when Para 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 Para. That is no longer true. So Terra is currently the second largest smart contract platform after Ethereum in terms of TDL 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, 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 Dogecoin named after yours truly. So if you sort of think about like an open permission platform where people are just launching anything. So in that case, like it's harder to reason about the volatility profile of that stable

Starting point is 00:11:37 point. And correspondingly, we needed to, you know, design the stability mechanism in such a way that is more robust than what we initially found out. 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 UST, the stable coin? Is it in various other assets? Where are those reserves being held? So the reserves are being held by a multi-sig of seven directors of the Luna

Starting point is 00:12:13 Foundation Guard. So these are 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 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 USDT and USDC quite easily. 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

Starting point is 00:13:06 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 in the number that everyone's talking about, but only 3 billion in the reserves. Explain that. Yeah. 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 UST scenery to keep building up the Bitcoin reserves. So the idea is that every time that a new UST is minted, some portion of that will still subscribe to the old stability mechanism. So it's still going to burn Luna.

Starting point is 00:13:45 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 USD grows, you can imagine a scenario where more and more Bitcoin gets locked up in this reserve system and is sort of, you know, and which can kick in during times where USD demand needs to be absorbed. 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 UST. 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?

Starting point is 00:14:28 So it's going to be an on-chain parameter that can be determined through governance. But the idea is that 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

Starting point is 00:14:57 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 UST, some portion of that as dictated by this parameter is going to be reserved by the system and then used to purchase Bitcoin against, let's say, an on-chain AMM or a special virtual exchange that we're in the process of drafting up and submitting for a community review shortly. 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 plus or minus $40 million per day. If you have $200 million worth of demand coming in for UST and you're diverting even a smaller percentage, not 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?

Starting point is 00:16:06 So I guess this could be like an interesting way of, you know, what the Ethereans 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. Yeah. It's obviously positive.

Starting point is 00:16:33 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 $8,000, $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 150%, 200% of the daily incoming supply of Bitcoin, but there's no redemption functionality to that fund. So 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.

Starting point is 00:17:15 Talk us through, once you all have purchased Bitcoin via the various things, either converting the existing reserves or using some of the, uh, the scenery, uh, is it possible for people to essentially redeem or withdraw the Bitcoin out of, uh, the UST reserves or once it goes in, it's pretty much in there, uh, and, uh, and won't be coming out. Yeah. So, um, as I said, the structure is very similar to an AMM, so you would be able to trade UST against it.

Starting point is 00:17:44 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 tera USD. And then vice versa on the redemption cycle, you could trade in one tera 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 deep bank. But if you wanted to use it as a redemption mechanism, you could do that minus some small spread. Got it. That makes sense. What's your thought process as you go to do this?

Starting point is 00:18:27 Obviously, the Bitcoin community, they look over and they say, hey, what the hell is Terra? Who's Doe? What's going on here? Somebody's going to 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 uh does that help tara in terms of the the awareness with uh with other communities or how are you thinking about maybe like the non-economic uh aspect between the communities yeah so let me answer this in two different ways so the first is i i would say the sort of the response um of various different communities has been mixed right so i i think overall supportive. There are some very interesting takes that have gotten on DMs or on Twitter.

Starting point is 00:19:14 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 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 in the digital asset space, right? There's no equal, right? So as Tera is starting to expand into different cross-chain ecosystems, right? And 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 we can work with is going to be limited. But by working with Bitcoin, that potential space

Starting point is 00:19:59 gets much larger. And the size of our ambition isn't to be the largest stable coin of the Tera blockchain, it's to be the largest stable coin, 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, 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. 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 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. And that seems kind of crazy.

Starting point is 00:21:08 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 let's go talk about that. Let's encourage that. But oh, wait a second, hold on. A dollar stable coin that is not from a central bank, we don't want them to do it. 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 stable coin, whether it's a fiat currency or really anything else on how to back that asset with the pristine collateral of Bitcoin?

Starting point is 00:21:52 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 Wertheimer 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 DeFi and cross-chain ecosystems. I think this playbook is going to get played out over and over again. I think stable coins that are backed by Bitcoin is going to be a very strong use case. But I can also see DAOs that are holding Bitcoin as a treasury management strategy or using it as a settlement asset and lots of different use cases can proliferate. 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 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? 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?

Starting point is 00:23:11 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? Um, so there's a number of technical challenges that remain for us to be able to do this as well as, you know, um, we, we haven't deployed the system out in production yet. So lots of economic challenges. So if you have, um, anything to offer in terms of mechanism research or technical skills or, um, you know, relationships with, um, bridges or other teams that can help us do this, you know, uh, please send DMs my way, uh, would, would love and appreciate the help. Awesome.

Starting point is 00:23:47 And where can we send people to find you on the internet or, uh, find out more about what you guys are doing with either Luna Foundation or UST itself? Got it. So in order to reach out to me, I'm stablequan on Twitter. My DMs are, I'm pretty responsive. In terms of where you can find out more about the progress of what's happening with this reserve system, our research forum, Agora.ParaTheMoney, is going to contain lots of updates as we roll out requests for funding and as we make treasury changes to acquire more Bitcoin. So please stay tuned. 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

Starting point is 00:24:30 like if you execute this correctly, it'll be pretty powerful. Yeah, sounds great. Thanks so much for having me. Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you're subscribed 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 palmscryptocourse.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 palmscryptocourse.com to learn more, and I'll meet you guys for the next episode.

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

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.