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 we discussed 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
- Cosmos: Join the most interoperable ecosystem of connected blockchains. Learn more at cosmos.network/epicenter.
(09:15) Daniel’s background and how he built Terra.
(11:49) How Daniel discovered that cryptocurrencies may help reduce intermediaries in the payment space.
(14:16) Why Daniel chose to build a new system rather than building upon one of the established stable coins.
(15:51) An overview of Terra as a stable coin.
(18:04) How Daniel plans to create demand for the currency.
(20:29) Terra’s plans in expanding into other industries other than eCommerce.
(21:16) What will happen if Terra can’t grow hundreds or tens of percent year-on-year.
(23:05) What plan is in place for collaterization if there’s a global recession or climate crisis and confidence in the product plummets.
(25:59) A walkthrough of the user flow of Terra. What it looks like for the user from the moment he turned on Terra to the transaction, and what’s going on in the background while this is happening.
(27:00) What it looks like for the user in terms of acquiring Terra and what’s happening in the background for that Terra to be minted. How this relates to Luna.
(28:57) The minting process between a user’s bank account and Terra.
(30:08) Where the Terra come from when people deposit more money in order to mint more Terra.
(32:43) Where the profits flow to and the role that Luna plays.
(38:09) The roles of the validators in the Terra network and how are they remunerated for their work in validating transactions.
(39:26) The role of the Oracle in the Terra design.
(40:16) Terra’s inclusions of an SDR.
(44:21) How to become a validator on the Terra network and the current mining position.
(47:08) Terra and Cosmos.
(49:22) The economics of Terra as a stable token and it’s backing by Luna.
(51:21) Terra’s plans for a catastrophic failure.
(53:48) Why the decision was made to build this as a blockchain product and not a Visa or Mastercard competitor that just charges lower fees.
(57:08) Where to learn more about Terra and how to start using it to pay for things.
Sebastien Couture: We’re here with Daniel Shin. Daniel is the CEO of Terra and previously he was the CEO and Co-Founder of TMON. TMON is one of the largest eCommerce platforms in Korea, they’re regularly in the top three and so today we’re going to talk about about Terra and also his experience in the eCommerce space as a successful eCommerce entrepreneur in Korea and how that drove him to enter the cryptocurrency and blockchain space with this new project. Daniel thanks for joining us today.
Daniel Shin: Hey, thanks for having me.
Sebastien: So starting off. Yeah, let’s let’s spend a little bit of time on your background because you know, 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 an eCommerce entrepreneur building one of the largest platforms in the country and it just totally switched and transitioned to the crypto space. Yeah. Tell us a bit about your background and how that led to where you are today building Terra?
Daniel: So I grew up in the states for most of my life on 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 the US 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 eCommerce and mobile commerce, so I ran the company for about eight years of the CEO we grew from five people to 1300 the final year we were doing about three and a half billion dollars in transactions and had roughly 20 percent of the country use our platform at least once a year, which was pretty cool. But you may also know that eCommerce 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 point something percent on every transaction that we did and you know that was kind of the rule of the game for the past couple decades, but with the advent of blockchain, we thought you know, I thought that was an opportunity to change that for our business at TMON as well as eCommerce businesses across the world.
Sebastien: This definitely resonates with me and I started my career in eCommerce. Not the same skills as you did but you know, I worked a lot with eCommerce 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 when I start getting into Bitcoin everything that was kind of one of the promises of crypto is that like cryptocurrencies allow for these peer-to-peer payments and the transaction costs are much lower than anything else that’s available out there like Visa and MasterCard, like most of the 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 that goal of having low transaction costs for payment transactions.
Daniel: I think, 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 eCommerce 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 it adopted and mass distributed across, you know, the regular people the non crypto traders. I thought there was a role that I could play and bridging E-commerce as a broader industry with blockchain and crypto, you know, you’ve we’ve seen fintech companies do this in the past, right? So Ant 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 crypto could really benefit from having an alliance of eCommerce companies as a distribution channel.
Friederike Ernst: So there are a couple of stable coin solutions out there, right so I can totally see why you would want to build an eCommerce 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?
Daniel: Yeah, so we’ve reviewed most of the white papers that were published at the time and a big issue that payments companies need to solve is a two-pronged problem. So you have to become cheaper and more efficient for eCommerce merchants and on the other hand, you need to provide a tangible benefit as to why customers use it, right? So the former allows you to integrate with more and more eCommerce partners and impacts fungibility. Whereas the latter really improves upon your share of check out 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 merchants 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.
Friederike: 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.
Daniel: Yeah, so Terra keeps itself stable using an elastic money supply. So if demand for Terra goes up by integrating with more eCommerce companies than 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 eCommerce 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 seigniorage 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 five, ten percent discounts on every transaction that you do on eCommerce, whether it’s you know, 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 D post-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 flows that come into Luna holders and we take that value and in the times of Terra recessions we use it to collateralize Terra’s network.
Sebastien: Okay, there’s a lot to unpack here and 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.
Daniel: Yeah, so demand is created by two things. So constantly integrating with more and more partners which are eCommerce partners, fashion eCommerce partners, you know 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 partners, the answer is because we’re able to reduce transaction fees for these platforms. But how are we able to constantly increase your share of checkout is because we’re able to use the seniors 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 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 seniors profits to give more discounts back to the community.
Friederike: There’s a natural limit with this though, right? Because basically the entire eCommerce space has a ceiling and after a certain point you will not be able to offer these seigniorage profits to people who used to pay in Terra anymore, right?
Daniel: Naturally growth will slow as we become much larger but eCommerce as an industry is, you know, trillions of dollars across the world and eCommerce 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, buying insurance and buying your home. You know, I think the ceiling does exist at some point, but it’s very very high and won’t come for decades.
Sebastien: Okay, so do you think that there’s a lot of headway for demand for Terra and essentially eCommerce is sort of like the gateway and you can then expand into other Industries and even at some point maybe even under will be B-payments does that also makes sense?
Daniel: Yeah, absolutely. But even in the baseline scenario where we’re connected with a subset of eCommerce companies and our share of check out does not increase eCommerce as an industry across Asia is growing at 20, 30% year-over-year. So even if we are not able to unboard on board more partners, even if you’re not able to increase the share of check out, 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 Terra down the road.
Friederike: 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 stable coin is constant.
Daniel: Well, our worst-case scenario is looking just like the best fintech companies across the world. So basically will be an Alipay or a PayPal or a Venmo if we’re not able to use the nourish to pay for discounts. However, the way that we think about it is we have an economy that we can piggyback to really grow our business with virtually no cost of customer acquisition. And once we have you know hundreds of millions of customers on our platform, there’s so many more ways to increase senioriage. 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 the supply of money. We can introduce lending and Investments on the app, which also multiplies the amount of money that goes through Terra and Chai. So I think the opportunities are limitless, but if we take for a second that you know, we can do a hundred 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 ten billion dollars is funneled into our ecosystem without using Venture Capital money to grow our business to wherever we can take it.
Friederike: So what happens once demand for whatever reasons, let’s say there’s a global recession or climate crisis hits, our confidence in the product plummets. And so what happens if the demand for Terra goes down, so, how is it how is it collateralized? Is it collateralized?
Daniel: 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 five billion dollars annually in transactions and we take 50 basis points in transaction fees. Then that’s 25 million dollars being paid to Luna holders over the year. So the way that you value Luna should be some multiple of that twenty five billion dollars. So for example Visa trades at I believe 50 to 60 x their profits, Stripe and PayPal probably trades above that. So, you know, we can take fintech comparables and apply 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 eCommerce and we temporarily increase that if there’s downward pressure in Lunas price to the point where the collateral cannot fully collateralize Terra. So recall that eCommerce space say 3% of their transaction volume per year, Terra charges like I said, you know anywhere from 30 to 50 basis points, so there’s a five six x ability to up our transaction fees without the eCommerce companies turning off of our payment Network. So in the times of Luna downward pressure we’re able to 2x 3x on 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 that we will have a very very healthy cash reserve as well and we recognize that in the very beginning we don’t have enough eCommerce partners across enough geographies to say that okay, we will not drop by 50% in a given year, but just as government’s weaned off to fractional reserves over time so that we’re fully reliant on Luna when we have thousands of partners across many countries and doing you know tens of billions and transactions.
Sebastien: 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 eCommerce site like this, I want to buy movie tickets or something. What does that look like for the user from the moment he turned on Terra to the transaction and maybe you know explain what’s going on in the background while this is happening.
Daniel: 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.
Sebastien: So I think that’s that’s what I’m most interested in and 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?
Daniel: 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 eCommerce flow, if you click the product you click Chai with a six digit code or 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, a hundred dollars of Chail that you charge up your app, a hundred dollars of Terra is held in the background and what that allows us to do is impact demand and Terra with the growth of transaction volume on the Chai side. 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 on the price of Terra which allows the arbitrage mechanism to print more Terra and increase the supply to counter the upswing in price.
Sebastien: Okay. So let me just interject a second. As a user, I connect to my bank account and I use my existing Fiat reserves to to buy some Terra, where’s that are coming from and he says is the bank somehow connected to the system and enabling that Terra to be minted. How does that minting process work?
Daniel: 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 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 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.
Friederike: So basically if people then deposit more money in order to mint more Terra, where does that Terra come from? I think that’s still where I’m stuck.
Daniel: Let’s just say it comes from exchanges.
Friederike: But where do the exchanges get it from?
Daniel: The Exchanges has already had a set supply of Terra.
Sebastien: 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.
Daniel: 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 that Terra is bought from exchange 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 percent then Terra’s prices go up to you know, a dollar ten. We have a separate smart contract in place where if you deposit a dollars worth of Luna, then you will 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 a dollar 10, then these people will take it and sell it into the exchange and capture the ten cent arbitrage profit until that ten cents goes away. So the first component impacts the second component, but they’re actually two completely separate sequences where eCommerce volume impacts the demand and price of Terra and then there is a smart contract that creates an arbitrage opportunity for traders which impacts the elastic supply of Terra.
Friederike: 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
Daniel: 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’s trading above a dollar.
Friederike: 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 in the tokens sale you can just buy it on an exchange but you have to buy Luna. So basically the profit does go to Luna holders.
Friederike: So, how are you able to pass this profit on to people who actually pay for things on the eCommerce platform because you said that you can give like five ten percent discounts 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?
Daniel: 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? 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 seigniorage to eCommerce 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.
Friederike: So basically does the proceeds come from the fact that you as a company who had a large portion of the Luna?
Daniel: No that’s that’s incorrect. So basically we were able to create more demand for Terra through our eCommerce transaction volume going up and that created an arbitrage opportunity where we’re able to mint more 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.
Friederike: But the person who’s actually minted that Terra got the seigniorage right? I mean they got the seigniorage proceed. So how do you pass on these to the people who use Terra to pay for things.
Daniel: So the Terra isn’t minted by a person right? It’s minted by the protocol automatically when someone deposits a Luna. So basically the protocol indicates that Terra demand is increasing will end up with, you know, certain amount of Luna. Let’s call it. I don’t know like 20 million dollars is deposited 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 dollars and deposit that into projects that help grow Terra’s economy. So right now the largest project that were running is basically the payment network so we would essentially earmark the 20 million dollars to the payment network to be able to spend that as promotional dollars against purchases of goods and services.
Friederike: Okay, so I think I understand. So basically the the Luna 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?
Daniel: That’s correct.
Sebastien: 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.
Daniel: Yeah, so it’s a deposit 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 a hundred so later the validators would be ranked by the Luna that 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 a voting role or a governance rule and distributing the seigniorage profits that we just talked about.
Sebastien: Okay, can you talk about the Oracle? What’s the role of the Oracle in the Terra design
Daniel: Yeah. So basically we need feeds for the local currencies that we peg to so it could be the Korean Won, the Singapore Dollar, the Thai Baht. We need feeds for Terra’s prices and Luna’s prices. So we obviously need feeds for the local currencies because Terra needs to peg to it and it falling off of the local currency would create an arbitrage opportunity we need the Terra and Luna prices because again, we as a smart contract make your promise to swap dollars worth of Luna for Terra at any given time. So those are essentially the price feet that we need.
Sebastien: 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 the stable currency and it’s used to like for countries like the pay their debt or something like that. Why did you choose to also create an SDR peg? It’s kind of unusual and unique.
Daniel: 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 text to the Korean Won here and we’re looking to create HKT and SGT which pegs 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 to 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.
Sebastien: 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 Won, Singapore Dollar, US Dollar etc, get their exchange rate relative to SDR. Is that correct?
Daniel: Correct. Yes.
Sebastien: Okay interesting. It occurred to me that there are a lot of similarities between the underlying economics behind the SDR and something like like Libra as Libra is also a basket of currencies. It’s packed a 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?
Daniel: 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 peg 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 you know end all and be all of currencies. So ultimately, like I said the Terra that gets most often used in practice is going to be the Korean Won Terra, or the Singapore Dollar Terra, or the Thai Baht 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 you know IMF issuing a currency is going to you know, end all crypto stable point businesses. I think I think it’s very far from the truth.
Sebastien: No but 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.
Friederike: 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 with the 66 companies you talked about earlier, how are they distributed and what qualifies them to be a validator?
Daniel: So as all early networks do I think we tried to either pick validators, you know 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 Atom and we also invited our investor base because in theory are investors our biggest fans and those who support our broader vision, so, you know guys, like, you know PolyChain or our 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 I talked about having a track record on Cosmos or supportive investors to Terra. Down the road the validator list will be capped at a hundred 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 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.
Friederike: 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?
Daniel: 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, you know, 20, 30, 40 percent each week. And secondly we started off with a very very low transaction fee to eCommerce just as an entry point into the market, but we’ve been received with you know, 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 short-lived.
Sebastien: Okay, so you mentioned that we have really talked about but so Terra is is built on the Cosmos SDK. Why did you choose to to build on Cosmos and what went into that choice? And then you know, what are your plans for the future of of Terra as you know a zone on the Cosmos hub presumably.
Daniel: 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 you know 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, you know thousands of transactions per day the ability to get TPS up beyond say, you know to 3000 is extremely important, so Cosmos, their blockchain has been tested for transaction speeds and our tested that as well taking the best parts of Tendermints have done TPS up to seven eight thousand per second. The second is we have a vision of not only connecting to eCommerce as payments but serving as essentially a stability component for lots of the D apps across other mainnet 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 others on mainnet. So we’ve already signed partnerships with guys like, you know, TomoChain 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.
Friederike: 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 Luna token holders. And in essence that is what in the Legacy world 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 Luna token. To me it seems that the value of our Luna tokens together should be a fraction of the total volume that’s being exchanged in Terra tokens over the network. Would you disagree with this?
Daniel: No, I think it’s for the most part, correct
Friederike: Okay. So what happens I mean in that legacy terms that would correspond to a very severe under collateralization of the Terra that’s being issued. 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 financed 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 Terra 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 Luna holders?
Sebastien: Do you have it you have some form of plan for a catastrophic failure or like a confidence spiral where the confidence in the system and the expectation of future returns would like fall apart.
Daniel: So I don’t think there is a single answer that provides the most benefit 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 an 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 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 DAO 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 Ethereum. So I think what we said was hey, we can’t be fully few a collateralized because ultimately will 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 ourself with the equity of Visa, right? If you take a look at equity of Visa essentially payment network for the past decade and you can you know take equity a 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 on-boarded to payment networks the likelihood of them turning off of it, ie 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 merchants base is a lot smaller lot more concentrated in a single country. So we need to be fully backed by Fiat but as we grow our merchants based we can reconvene 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 eCommerce up to, you know, six to eight times of what we normally charge because we’re taking payment gateway fees down from 3% to below 0.5% So if there’s downward pressure in the price of Luna ie, let’s say we lose half of our merchants 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 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 eCommerce by 2X and the reward for 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 significant amount of risk.
Friederike: 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 has it and in the case of make it out as Ether that collateralize has it and in the future there’ll be other things that would be able to collateralize dai 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 would be fat from the underlying collateral and in the Terra system is not the case. In the Terra system if the bottom falls out there’s nothing to break the fall.
Daniel: Well, I would argue that that’s not true. Right. So what’s the fundamental value driver of Ethereum?
Friederike: The fundamental value drive 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.
Daniel: Okay, and what multiple of the gas that is received is Ethereum traded at today.
Friederike: It’s much more than it should be so I don’t know from the top of my head. But basically from from current usage levels it should probably be below what it currently trades at. So you’re making 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 for the network fees.
Daniel: 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 99% speculation where Ether prices are on a given day. That’s my theory. For Luna the fundamental value is the eCommerce network that sits below it. So right now it’s 25 eCommerce unicoins across Asia and the alliance of Terra will grow as people understand the value proposition of what it provides 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 eCommerce 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 eCommerce.
Friederike: I totally get that point and I think that losing a couple of margins or even like 5% 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.
Daniel: 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 eCommerce for the past decade actually more people switch away from more expensive gourmet options to buying on eCommerce in the cases of recessions. So I would say the cash flows that come from eCommerce 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 you know, a trading focused open on exchanges cannot cannot do.
Sebastien: Yeah, after this conversation I feel like the utility value in Terra is orders of magnitude higher than for instance, like the actual utility value of Ether as gas in the Ethereum network. But yeah, I’m still I guess unsure about like so this black swan event, like what would happen in that case and I guess only time will tell if the peg can maintain itself given 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 what’s the what’s the future roadmap here both on the technical side but also in building this payment network and this partner network in Asia.
Daniel: We’ve integrated to 2 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 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 and we essentially have a licensed eMoney and payment gateway app in each of those markets. We have liquidity and the local stable currency. So, you know, Korean Terra in Korea, 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 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 introduced a blockchain element to that. So if through eCommerce payments were 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, you know credit to eCommerce consumers. We’re able to provide loans to eCommerce 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.
Friederike: I think my very last question is a meta 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 you didn’t want to pay the 3% that Visa and MasterCard charge and they have enormous profit margins because in essence the market is divided up among 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 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.
Daniel: I think one component worth explaining here is that Visa and MasterCard actually only charge a very very small fraction of the payment price to the merchants. So if you know Stripe at the end of it all charges three and a half percent, 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 entire 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 seigniorage profits that 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 eCommerce unicorn network across Asia and we were able to form this alliance not only by the value proposition that we propose but you know, 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.
Sebastien: Okay. Now where could working people learn more about Terra and potentially even I guess like to our listeners in Korea start using it to pay for things.
Daniel: Chai is you know top ten ranked finance app in Korea today so you can go the App store and Google Play you can download and sign up and start using it on eCommerce, and for Terra we have a Discord room up and running so you can join in there.