Cryptocurrency has long been associated with volatility, and its critics have used that as a stick to beat it with. Money is meant to retain its value, act as a measure of prices, and be useful as a means of buying things. By those criteria, the more speculative, meme-ified coins floating around might struggle to be classed as money.
Enter stablecoins – cryptocurrencies pegged to the price of other, more traditional assets. Stablecoins offer some of the benefits of crypto – faster settlement times, lower fees, greater anonymity – with reduced volatility. Those qualities make stablecoins a crucial part of the crypto economy (and, perhaps, the wider economy).
On this week’s podcast, I spoke to Do Kwon, the co-founder and CEO of Terraform Labs, the company behind the Terra blockchain. Terra hosts stablecoins pegged to a number of currencies, and enables an entire financial ecosystem to operate around those stablecoins, from ultra high-yield savings accounts to synthetic asset trading. Do’s aims are pretty ambitious: he wants Terra to be the money of the future.
Terra is a very, very clever system, and I really enjoyed speaking to Do about how he’s putting the “currency” back in “cryptocurrency.”
The Big Idea
“The founding war cry of Terraform Labs,” Do explains, “was that a decentralised economy needs decentralised money.” Terra isn’t backed by real-world collateral; instead, Terra is pegged to the value of the dollar by other means.
A reserve token with a fixed supply, LUNA, acts as USD Terra’s (UST) partner – the moon to Terra’s earth. The currencies are exchangeable one-for-one. When demand for UST rises (and pushes the price of UST higher), LUNA holders are incentivised to exchange their LUNA for UST, then sell it, bringing Terra’s price back in line with its peg.
So that’s how Terra works. But what makes it an exciting project is what it can be used for. UST forms the basis of a nascent financial ecosystem, offering everything from real-world payments (through a protocol called Chai), to eye-popping savings rates (Anchor) and synthetic stock trading (Mirror). Interestingly, the largest user base for Mirror is in Thailand because of strong capital regulations that make it hard for Thai citizens to invest in foreign markets. The innovation arm of Thailand’s oldest bank, Siam Commercial Bank, is an investor in Anchor and has set up a validator node on the Terra blockchain.
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