00:00hi everyone welcome to day 6 and Z
00:03podcast I'm sonal today we have another
00:05one of our podcast on the road episodes
00:07with guests from New York City on the
00:09topic of crypto but more broadly on
00:12crypto networks as emerging economies
00:14this conversation goes into the super
00:17interesting nuances of structuring these
00:18networks to avoid some of the failings
00:21we've seen in the monetary and fiscal
00:22policies of traditional economies
00:24including debating how to empower users
00:27when it comes to risk but also how to
00:30better distribute access in terms of who
00:32captures value from networks we then
00:35also discovered different mindsets for
00:37the governance of these networks which
00:39are really crypto economic systems
00:40especially as they evolve and grow more
00:43mainstream over time joining us to have
00:45this conversation we have two guests our
00:47friends at placeholder VC Chris Byrne
00:49iski who formerly led arc and best
00:51crypto efforts has written a lot about
00:53financially modeling influence
00:54frameworks for analyzing crypto and
00:56co-wrote a book on crypto assets and
00:58Joel Monet grow who before starting
01:00placeholder with Chris was an analyst at
01:02USV where he helped develop their early
01:04blockchain theses prior to that he
01:06managed the Dominican Republic's
01:08government office in charge of
01:10developing the country's national and
01:11digital economy technology agenda I
01:13share all that as key context for the
01:15conversation that follows and last but
01:17not least we have two of our partners
01:19from Asics and Z crypto Jessie Walden
01:21and Denis nazarov formerly cofounders of
01:23media chain which was acquired by
01:24Spotify Jessie and Denis interview our
01:27guests and also add their perspectives
01:29in the discussion and debate on that
01:31note the content here is for
01:33informational purposes only and should
01:35not be taken as legal business tax or
01:38investment advice or be used to evaluate
01:41any investment or security it is not
01:44directed at any investors or potential
01:46investors in any fund for more details
01:49please also see a 6nz crypto comm slash
01:51disclosures before the discussion goes
01:54into what it takes to design such crypto
01:56economic systems at scale from value
01:58captured to risk to governance they
02:00first quickly begin with the fundamental
02:02concept of layers in a stack of
02:04protocols and decentralized applications
02:07the first voice you'll hear is Joel's
02:09followed by Chris's and then Jesse and
02:12Denis joins in later
02:13you can think about it from an
02:15engineering point of view and how
02:16different kinds of software are layered
02:18on top of each other you can think about
02:20it also from a more social point of view
02:23layer one is more machine work and layer
02:26two is more human work and as you
02:28transition from layer 1 to layer 2 then
02:31you end up with lighter weight models
02:33because you don't have the capital cost
02:35of the machines to actually do the work
02:36to store the files to mind the
02:38transactions what we see at layer 2 are
02:40more abstract units of work that
02:42required human judgement and there the
02:45cost is harder to model because it's
02:47harder to quantify what is the value of
02:48that goes into performing some unit of
02:51work and and that unit of work can be
02:53anything from curating content to making
02:56a governance decision all of those
02:57things are very difficult to put in a
03:00spreadsheet model but we have the aid of
03:02the invisible hand in a way and that's
03:04helping us figure out what human work is
03:06worth I think the infatuation with layer
03:081 comes from it being much easier to
03:10understand the cost and value
03:12relationship between providing a service
03:15and consuming a service it gets harder
03:17as you move up the layers once you get
03:19into the realm of human work is when you
03:21start to really imagine the different
03:23ways in which crypto can't really change
03:25the way we do things I think you know as
03:27we go up higher in these these layers
03:28we're gonna see different
03:30incentivization and therefore about you
03:32capture mechanisms layer one the
03:34priority of security right because
03:36that's basically our clearing and
03:38settlement layer and so we've really
03:40seen Bitcoin prioritize security or
03:42aetherium and because if we build all
03:45these layers on top of an insecure layer
03:47one then we're screwed right and then as
03:50we move up the stack it's less about
03:52that machine security say and more about
03:56how do you incentivize the economic
03:59actors to perform the service that
04:01you've promised to provide and the only
04:04way that that ends up being a service
04:06that the end user uses is either if it's
04:08cheaper than existing services that you
04:10can get from the centralized model but
04:12on par in terms of user experience or
04:14it's a fundamentally new experience or
04:17service and this is the only place I can
04:19get it there's the access tokens where
04:21basically there's demand of what I find
04:24interesting about an access token is
04:27we've thought of tokens as needing to
04:28connect the supply side and demand side
04:30an access token really just focuses on
04:32the supply side and it can have a fixed
04:35supply and there can be scarcity because
04:37basically if the supply side needs that
04:39token to perform the service and
04:40performing the services of profitable
04:42activity for them then there will be a
04:44clamoring to get a hold of that token
04:46and that drives its own scarcity and
04:48that's slightly easier to model you can
04:51actually use the discounted cash flow
04:53model to approximate the value of that
04:54token and you know the demand side can
04:57pay in fear if they want and I think
05:00will increasingly see this where the
05:02demand side is gonna just pain whatever
05:04asset they want they don't need to
05:05interface with crypto assets from a
05:07day-to-day perspective but you can still
05:09have value in a work token that
05:11organizes the supply side and induces a
05:14competition around being able to provide
05:15that service so in the model you
05:18described Chris we call the taxi
05:19medallion model what's interesting about
05:21it is there's one token that is the
05:24right to do the work and the other token
05:27which is the payment token and so as you
05:29said it's you can do sort of a cash flow
05:31analysis on what the work token is going
05:33to earn and this differs from the base
05:35layer where you know today most layer
05:37one box chains use one token for both
05:40rewarding the supply side and for the
05:43demand side to consume the service and
05:45I'm curious what do you guys think the
05:47implications of moving to work token
05:50model are is is there any sort of
05:53implications for users and suppliers not
05:57being aligned around the same token well
05:59the thing that's really scary about this
06:02trend to create dual token systems where
06:04one token gives you access to the supply
06:07side or a right to participate in the
06:09supply side and another one and so being
06:10the payment token whether it's another
06:12token that it's created by the crypto
06:14network or something like e or any other
06:16one is that you were doing the same
06:19thing that we did with the world economy
06:22which is that we separated currency and
06:24capital the moment that we moved into a
06:26fiat currency model in modern capitalism
06:28we have two major kind of asset types we
06:32have capital and and we have that and
06:34currencies are really a form of that at
06:36the end of the day and backtracking a
06:38little bit the reason we separated
06:40from capital is because the transaction
06:42velocity of capital is very low the
06:44transaction velocity of you know a
06:46dollar is very high and so as the
06:48economy grows exchanging gold or land or
06:51just a barter system is not going to
06:53work and so we need at currencies to
06:55accelerate economic growth so so far so
06:58good the problem is that capital and
07:01currencies respond very differently to
07:03economic growth capital appreciates
07:05together with economic growth and
07:06currencies actually depreciate as an
07:09economy grows inflation is commonly
07:12thought of as the printing of new money
07:14but really a more traditional definition
07:17of inflation is increases in prices over
07:19time as a result of economic growth and
07:22capital as an as an asset type
07:24appreciates as the economy grows because
07:27it is more scarce than currency currency
07:28we print more of it to keep up with
07:30inflation to keep prices stable and
07:32that's how they end up devaluing over
07:33time because we're creating more and
07:34more and more what happens over time
07:37then is that actually capital becomes
07:39more and more concentrated because it's
07:41transaction velocity is so low and the
07:43problem with that is that we end up with
07:44a lot of people living their lives in in
07:47currency and very few people living
07:49their lives in capital what part of the
07:51promise of crypto networks at least to
07:53me is that we are able to combine
07:55currency and capital into a single asset
07:57so that then we don't get this same kind
08:00of income inequality or wealth
08:02inequality being created as any
08:04individual crypto network grows and the
08:06risk of separating the access token or
08:10the work token from the currency token
08:11is that the people who accumulated the
08:13access tokens early on that that group
08:16becomes increasingly concentrated over
08:17time as the economy grows or as the
08:20crypto Network grows the value of
08:22combining the two if you have a single
08:24token that is both a supply-side token
08:26and a payment token in order for the
08:29supply side to provide its service it
08:31has to take payment in that token so the
08:33token has to be in the users hands in
08:34order for them to actually consume the
08:35service and so that creates a pressure
08:37to sell the work token or sell de
08:40capital token as the network grows
08:42because otherwise you're not going to
08:43get any customers everyone in a crypto
08:45network can participate from the value
08:46created as opposed to just one segment I
08:48definitely agree there's a risk to
08:51backtracking a little bit with the ethos
08:54operating the work or the the capital
08:56and currency I think one thing even if
08:58we end up in a work tokin world or taxi
09:01medallion world where we've separated
09:03capital and currency again at least
09:05within those networks the one one
09:07reassuring thing is that you can't be a
09:10passive accumulator of capital you you
09:13have to be more active like you you
09:16stake the work token and then you have
09:17to continue to provide work for the
09:19network to continue to collect cash
09:21flows so I would I would argue that
09:23that's not entirely true and that's
09:24because in these proof of stake systems
09:26you have the often have the ability to
09:28delegate stake and so what happens there
09:31is a marketplace emerges where there are
09:33people sitting on Capitol and they just
09:35point that capital at a worker so it's
09:38very much like taxi medallions work in
09:39New York City they're mostly bought up
09:41by hedge funds and the like and then
09:42they hire drivers to go and drive the
09:44cars and earn you know earn passive
09:46income on those medallions and so I I
09:48think that does speak to two jewels
09:50point that the separation of these two
09:51things does result in concentration of
09:54capital but I would argue that you know
09:56the flipside is that the users of the
09:59service don't have to take any risk so
10:01you know when I get into a taxi cab I
10:03don't have to think about whether uber
10:05or lyft are gonna have a real but impact
10:07on the value of my medallion and you
10:09know the future utility I'll get out of
10:11it so you know humans tend to think in
10:13one unit of account because it's just
10:15easier to reason about and you know you
10:17don't want to be taking risk necessarily
10:19when you're buying a coffee and or pizza
10:21and that ends up you know going on to be
10:23worth millions of dollars and so there
10:25is this sort of simplicity in in the
10:28taxing now in versus currency model that
10:31I think you know is it's hard to get
10:34away from just because of human nature I
10:36argue that risk is good because you
10:39can't create value without creating risk
10:40and again it's it's that same kind of
10:43thinking that led to the world where we
10:45are today it's much simpler to have
10:47everyone use dollars because no one has
10:48to think about how the markets are
10:51moving and how your value is changing
10:52over time rather you you trust a
10:54government you trust that they're going
10:55to maintain a certain monetary policy
10:58such that you're you you hope that your
11:00$100,000 today is going to maintain a
11:03certain degree of purchasing power the
11:05problem with that is that by not
11:07allowing people to take risks in a way
11:09then we've cheated them away from
11:11capturing some of the upside of the
11:13value and I think it's time to rethink
11:16how we think about risk for people more
11:18broadly if we prevent people or the sign
11:21systems that make it harder for people
11:23to take those risks and participate into
11:25value then we're gonna end up in the
11:28same world where we are today where the
11:29values concentrated amongst those who
11:30took the greatest risks now obviously it
11:33can go really badly if you have a whole
11:35bunch of risk right a whole a whole
11:36bunch of people and then everything
11:37comes crashing down then you have a real
11:39problem so it's not that there isn't
11:40value in stability and value and
11:43currencies that make it easier for
11:44consumers to go about their daily lives
11:46but I also don't think we're heading to
11:49a world where you buy your coffee with
11:51Bitcoin I also think that the overall
11:53argument of well we need to create these
11:55systems because otherwise it's too risky
11:57and then people are not going to use it
11:58I think it's a little not patronizing
12:00but it underestimates people's ability
12:03to make those decisions for themselves I
12:05remember asking you about I don't know
12:08three four years ago whether it's
12:10actually a good idea to make your users
12:12investors because there's a cognitive
12:14overhead yeah that is associated with
12:16that you know you're asking your users
12:18to be sophisticated about the under the
12:21the underlying infrastructure you know
12:23powering their daily experience and I
12:26think increasingly in encrypted we're
12:28seeing that you know at least when you
12:31have some skin in the game participants
12:33in these networks are willing to go in a
12:35little bit deeper and the types of
12:37communities that a merger on these
12:38projects are just fundamentally
12:41different like people have a different
12:42relationship with the network aetherium
12:44participants own the token and therefore
12:46you know have an emotional connection to
12:47you know the values of the
12:49infrastructure and what you know its
12:51goals and what you sometimes yeah to a
12:53fault sometimes and I think the question
12:55is how scalable is this can we scale
12:58this model to you know the entire world
13:00or you know is is it limited to a subset
13:04of users who are you know sophisticated
13:06enough and want to take on that risk and
13:08so just to push back a little bit on on
13:10the idea that will we will be able to
13:12scale this model so it's sort of all the
13:14way up I think the idea of having this
13:16work token currency model it doesn't
13:18preclude power users from purchase
13:20dating in the network and through
13:22delegation the owner of that token does
13:24not need to necessarily provide the work
13:26so a power user can invest in the
13:28success of the network that they're
13:29using but it's a choice and so I think
13:32there's there's flexibility both ways on
13:35one side the assumption is that we
13:37should give risk to everyone and that's
13:39that optimist in the other side is we
13:40should let people choose you can argue
13:42both sides of the table and so what that
13:44tells me is you know let the people make
13:46the choice but then that becomes a
13:48question of what's the default so you
13:50know we've all gone through a signup
13:51form where the checkboxes are are
13:53checked by a default or not that opt you
13:55into certain things and we've learned
13:57that people tend to stick with the
13:58default and so I would rather see a
14:01world where the default is we're all
14:02participating in the value yeah any any
14:04citizen can go and open a brokerage
14:06account and buy stocks and participate
14:08in the market but most people don't
14:09because that's not the default so I
14:12think one thing that we can do here is
14:13actually create a model and train
14:15another generation of users to think as
14:18as users who are staked in their network
14:20in a way that we really couldn't before
14:21and the generational aspect I think is
14:24very important because the the the other
14:26thing that's going on here is that the
14:28way these assets accrue value is very
14:30different to the way that other previous
14:32kinds of assets accrue value previously
14:35in in a more traditional world when we
14:37have companies go public it was a lot of
14:39the same philosophy of you your customer
14:43of Walmart Walmart goes public you can
14:45buy stock in Walmart and then every time
14:46that you go to Walmart and you're paying
14:48with your dollars you know there is some
14:50value accruing back to you as a
14:52shareholder of the company but in order
14:55to properly underlies an equity you have
14:56to go to business school and learn how
14:57to do this kind of cash flows and how to
14:59figure out you know how to analyze
15:01whether management is doing things
15:02correctly and so on what's different
15:04here is that we're dealing with these
15:06decentralized networks where if they're
15:08properly constructed the value doesn't
15:10really necessarily depend on the actions
15:12of a management team but rather on the
15:14overall network yeah you know we were
15:16talking about the the consumer
15:18perspective and then them being a
15:19shareholder and that's one side of the
15:22argument the other is from the from the
15:23developer and people who are actually
15:25building these protocols so I want to
15:27take a step back because we've been
15:29saying user network participant the
15:32kinds of things and I think that it
15:34really depends on which network
15:38participant we're referring to so early
15:41on in a network where it's mostly the
15:43supply side right because the supply
15:45side has to come on board to actually
15:46provision the the asset and presumably
15:49the supply side is going to be a much
15:52more sophisticated person at least in
15:55their understanding of the network than
15:57the demand side at least as we scale out
15:59over the long term I think that's that's
16:01an assumption we can make and so that
16:03supply side can tolerate that earlier
16:04risk because presumably they're more
16:06sophisticated and so that all makes
16:08sense where I think we start to
16:10encounter more problems especially if
16:13crypto goes mainstream we will have you
16:15know hundreds of millions billions of
16:17end users on the demand side and I think
16:20it's a stretch to ask the demand side to
16:23be an expert in the network the supply
16:25side this is different from our current
16:27equity environment if you set aside
16:29stock based compensation you stock stock
16:37based complicating fiat currency which
16:42goes back to Joel's point of you know
16:44they don't get to participate in the
16:45capital appreciation as much as the
16:47management and the concentrated owners
16:49of capital so for me that's a big
16:52improvement early on demand siders there
16:55will be early adopters but I think as
16:56this base grows we will abstract
17:00a lot of complexity away from them and
17:03the demand side will just pain whatever
17:04they want to pay be they in Kenya be
17:06they in the u.s. be they in Korea you
17:09pay for the service with whatever
17:11currency you want that ends up getting
17:12converted and the the supply side will
17:15get paid in the native asset at the
17:16network through whatever it may be but
17:19the key is that the supply side gets
17:21access to that risk and that capital
17:22appreciation for me for me so I think an
17:25interesting sort of Avenue to go down
17:27here is to again come back to this idea
17:29of the different layers in the stack and
17:31and how it may be different at each of
17:32them so at the base layer it makes a lot
17:35of sense for there to be sort of one
17:37currency or you know because because you
17:40do really want to align the incentives
17:41of the supply side and the users because
17:45substrate upon which you know like all
17:48all kinds of more complex applications
17:50can be built but this because it's very
17:51general you want there to be this sort
17:54of network effect that everyone is
17:55everyone converges on the values and the
17:59goal of this general substrate as you
18:02get further up the stack and you build
18:04more complex applications something like
18:05a stable coin for example requires sort
18:09of more specialization in terms of the
18:11type of work that's being done and this
18:13is to Joel's point earlier that it's
18:15more human work and more specialization
18:18generally means more expertise and so
18:21once you get into those types of
18:23applications I think it becomes a little
18:26bit harder for everyday users to be
18:28sophisticated about the work that's
18:29going on behind the scenes people
18:31probably don't need to understand how a
18:33theorem computers you know determine
18:35consensus but I think I think the
18:37difference is that in order for a stable
18:39point to work it's a much more you know
18:41complicated system and it has parameters
18:43that need to be tuned and they probably
18:45need to be tuned by experts
18:46whereas computation is deterministic
18:49it's sort of a binary outcome right or
18:51wrong and it can be verified by
18:52computers and so I would argue that the
18:55the base layer of the system being more
18:57general lends itself to this sort of
18:59single token model a little bit better
19:00but as you move further up the stack I
19:02think you do want this separation
19:04between sort of the management and the
19:06users because it requires expertise and
19:09that brings us to governance right maybe
19:11an analogy is the bass player is sort of
19:14like a country it's like you're a
19:16citizen of America you you get to vote
19:19and participate in you know elections
19:21and to decide kind of policy taxation
19:23policy is the substrate for all economic
19:25activity built on top of America and
19:28then there's more specific you know
19:29corporations inside of America and they
19:32have their own governance practices they
19:34have their own equity and then
19:35participating in them is much more
19:37specialized but you have this broad
19:39substrate that everyone else builds on
19:41top of with different governs parameters
19:44so I like to think of or we like to
19:46think of crypto networks as emerging
19:48economies and what's interesting about
19:50that is that if you if you compare a
19:54 network to a country you start to
19:56see a number of similarities there
19:57our currency that's exchanged between
19:59buyers and sellers there's if you think
20:02of the executive team or the executive
20:04branch as the core development team and
20:06you think of the blockchain as the court
20:08or the legislative system where you know
20:10you all the rules go there and then you
20:12have the supply side which are the
20:14miners or the producers and you have the
20:15demand side recharge the users who are
20:17consuming the service it starts to look
20:19a lot like a small economy and then
20:21what's cool about that is that you can
20:23use this model to think through whether
20:26a crypto network is properly constructed
20:28or not so for example things that we've
20:31learned over time that we like to see in
20:33physical economies like low degrees of
20:35corruption and sound monetary policies
20:38and fiscal policies and a rich supply
20:40side and an active demand side and ends
20:43up getting us into the topic of
20:44governance because one of the things
20:46that can determine the success of a
20:48national economy or not is how that
20:50economy is governed there's a broader
20:51conversation about where is the value of
20:54governance in crypto networks and
20:56governance is a difficult topic because
20:58it is so broad but I'll bring it even
21:00further back to the history of
21:03information technology in the 50s and
21:0560s that Aaron was based around the
21:07hardware how quickly you could iterate
21:08on hardware and how quickly could you
21:10get computers in the market and IBM won
21:12that war because they were able to
21:14design custom computers for custom use
21:16cases faster than than anybody else that
21:18business started breaking down in the
21:2170s and 80s following the introduction
21:22of the microprocessor which consolidated
21:25a whole bunch of those circuits into a
21:26single part that was widely available
21:28and that created two things it first
21:31didn't bundled the hardware industry and
21:33we went from you know effectively one
21:35computer manufacturer to dozens of PC
21:38manufacturers and so on but then what
21:41happened is that value moved one layer
21:42up to the software layer so we have
21:44Microsoft and and the PC software boom
21:46of the 70s and 80s we saw that get built
21:48on top of the microprocessor standard or
21:50a platform fast forward to the end of
21:54the 80s and and into the 90s and we went
21:56from having dozens of independent
21:58software vendors to have a you know
22:00Microsoft consolidating consolidating
22:02that entire ecosystem and building its
22:04business on the basis of proprietary
22:06software and proprietary distribution of
22:09what happened in the 90s as we got to
22:12things we got the internet and we've got
22:14Linux which was free software and free
22:17distribution and so that directly
22:18challenged Microsoft and so we got into
22:21the web era where the value moved again
22:23one layer up to data which is where we
22:26live today we have the the big tech
22:28company so today Google Apple Facebook
22:30Amazon and so on their main asset their
22:33main capital asset is all the data that
22:35they've been able to accrue over time as
22:37people have used their service so we've
22:39been in this stage for about 20 years
22:41now and right on schedule we get the
22:43arrival of a new open technology which
22:45are block chains that directly
22:47challenged the proprietary data business
22:50model just as the internet and Linux
22:51challenged the proprietary software and
22:53distribution business model it gets into
22:55a question of okay if we see this
22:57pattern of value moving one layer up one
22:59layer up one layer up and we've gone
23:00from hardware to software and from
23:02software to data and now data's free
23:04what what's above data what's the layer
23:06that exists at a higher level and to us
23:09that's governance because it becomes a
23:11question of how do we manage how do we
23:13control how do we manipulate the data
23:14and how do we agree on a single source
23:17of truth which is the whole thinking
23:19behind arrive designing these consensus
23:21systems the crypto networks at the end
23:23of the day our systems that we designed
23:25to arrive at a shared understanding of
23:27what is the right data to observe in a
23:29world where all the data is open and
23:31ultimately that is a governance system
23:33with that model do you think the base
23:35layer the computational substrate you
23:38know if does that become a commodity how
23:40do you think about the value of the base
23:42layer and how governance of the base
23:44layer relates to the governance of the
23:46applications on top of it
23:47I think we need to be careful of
23:49thinking of it statically because just
23:52as Joel just went through there's this
23:55evolution of value capture that we saw
23:56with information technology and I think
23:58we will see an evolution of value
24:00capture within crypto where value will
24:03start to move up the protocol stack
24:05right now we're focused a lot on
24:07developer protocols because we believe
24:10it's the developer era of crypto and
24:13that's those are the most valuable
24:15people and developer attention is the
24:17most valuable resource I would argue
24:19within crypto right now and we may have
24:21this period of valley value accrual
24:23and developer facing networks which then
24:26may become commoditized and shift up to
24:28more consumer facing protocols but it's
24:30more that there's this evolution so how
24:32do you have justify that more more
24:35concretely like for example two
24:37transactions can use the same amount of
24:39gas they could use the same amount of
24:41the computational resource of aetherium
24:43but their economic value can be
24:45drastically different mm-hmm that brings
24:47a question of there's sort of this you
24:50know tragedy of the Commons problem that
24:51one user of the protocol derives way
24:54more value from this underlying
24:56substrate than another we can compare
24:58the foundational layer of a box chain
25:00smart contract platform and decanters
25:01applications being built on top of it to
25:03general cloud computing infrastructure
25:05you know such as Azur or Google Cloud or
25:08Amazon AWS and all the applications all
25:11the super valuable kind of Union who are
25:12applications built on top of it they all
25:14utilize this commodity layer and kind of
25:16pay for computation at the level of the
25:19resource but the value they derive from
25:22the cloud platform is immensely higher
25:24hence their market caps combined they're
25:26much higher than the cloud platforms
25:28underneath them so I don't think every
25:29layer one protocol will capture a ton
25:32about you I think most of them will get
25:33commoditized and the ones that don't
25:35will be the ones that become these
25:36stores of value for these really
25:39important settlement protocols within
25:41the space but I think that you know as
25:44we move up past that we could see these
25:46middleware protocols actually have more
25:48scale than the underlying smart contract
25:50protocols start now with the developer
25:52in the future with the consumer but
25:54still largely in the protocol there and
25:56I mean we're talking about a
25:57multi-decade 11 here but an evolution
26:00nonetheless I have a different way of
26:01thinking about value which is through
26:04the lens of cost and this goes back to
26:06you econ 101 one of the first things
26:08they teach you is marginal benefit
26:09equals marginal cost at equilibrium and
26:12bringing that into the discussion of
26:14where does value accrue then you can
26:17then extend that an okay value will
26:19accrue to where there is the highest
26:20cost and it doesn't really matter where
26:23in the layer that is it matters more
26:25what is the kind of service that's being
26:27provided and what is the cost of that
26:29and then the other dimension is scale I
26:32think people sometimes confuse commodity
26:34with value less you can
26:36something that is a complete commodity
26:38like milk and still hit enormous amounts
26:41of scale that permit value to accrue at
26:44that layer regardless as you move up the
26:47different layers or you start thinking
26:49about where does value accrue in
26:50different places just bringing back the
26:52whole governance umbrella making a
26:55decision you know what's the value of a
26:57decision well it might be in precisely
27:00where they're implementing it in the
27:01governance over the standard and over
27:02the protocol over time where perhaps
27:04over time as the protocol becomes more
27:06important than the standard becomes more
27:08widespread than the value or the cost of
27:12making a protocol decision increases
27:14over time because it affects a greater
27:15number of people and so that's that's
27:18one way in which you can kind of use the
27:20lens of cost to kind of chase down where
27:22value might accrue in different services
27:24or across an ecosystem I think one
27:27helpful analogy with the the governance
27:30space and value accrual from the
27:33perspective of cost if you look at for
27:36example United States right the United
27:38States has a fixed supply of one
27:40president but the cost of being that
27:44president has grown over time as the
27:47network of the United States has also
27:49grown over time and this is actually
27:51where I think fixed supply works in a
27:53governance token setting if you have a
27:54fixed supply that asset but the cost and
27:57value of governing that network is going
27:59up then so too should the cost per token
28:01of that asset and so that's that's a
28:04useful analogy for thinking through it
28:05and just thinking about America being a
28:08substrate for businesses built on top of
28:10it the incentives there is that
28:12corporations that exist within America
28:14are taxed to fund that substrate better
28:17infrastructure you know all kinds of
28:19services and but you know to my earlier
28:21point that there is no kind of economic
28:23relationship in the same way that there
28:25is in America between aetherium for
28:27example in the applications built on top
28:29you could imagine that there's some way
28:32in protocol to say it's and I'm great to
28:34ERC 20 standard that you know 10% of the
28:37tokens every quarter get it's a tax that
28:41goes to fund the base chain and maybe
28:44this is a way to solve the you know the
28:46problem of how do we fund you know it
28:48innovation of the base chain right
28:50I'm curious what you think of it I think
28:52you know traditionally taxation is one
28:56of the mechanisms through which a
28:57currency can bootstrap value right and
29:00then this goes back to for example the
29:01Sharda listeria that the government has
29:03to spend the the currency first and get
29:05it in the circulation and then collect
29:07taxation and so that kick starts the the
29:09economic flywheel people are
29:11experimenting with different forms of
29:13Taxation in the space and really a
29:14transaction fee is a form of tax but we
29:17haven't seen direct taxation to fund
29:21core developers beyond the inflationary
29:24model right and that's really kind of
29:26taxation through senior age or dilution
29:29for example there's zi cash or D cred or
29:32some of these networks that are working
29:33with this idea of okay part of the mana
29:36monetary policy we're gonna mint out
29:38over time and decreed allocates 10% of
29:41each coin base reward to the the
29:43developer pool which will be allocated
29:45through governance and the communities
29:47actively a 10% tax in same would see
29:49cash it's a 20 30 percent tax and
29:52because it's of the income right if you
29:54think of every time a new block is
29:55produced that's income that's going to
29:57the miners but 10% of that is coming
29:59back to to development it's an implicit
30:00as opposed to an explicit tax that then
30:03funds the network you know if you start
30:05thinking about governance first through
30:07the lens of this idea of Taxation you
30:09can think of your kind of analogy of we
30:12have a fixed supply of one precedent
30:13that we can figure out how much it's
30:15cost to run for precedent over time and
30:17figure out you know what's the cost of
30:18that governance model but there's
30:20something that we can observe more
30:22concretely which is just a tax rate over
30:23time in world economies and we have seen
30:25tax rates as a proportion of GDP
30:28increase over time as GDP increases
30:31because the cost of governing the
30:32economy grows together with the growth
30:35of the economy and so how we can
30:37translate that into crypto networks is
30:39thinking through what is the cost of
30:41governing a crypto network and the cost
30:43of maintaining an economic system over
30:45time and how does that change as that
30:48network grows or contracts over time so
30:51again we keep coming back to this
30:52conversation around different layers in
30:54the stack and we did a whole podcast on
30:56this about how the emergence of base
30:58layer crypto networks are like cities in
31:01that there's a bunch of people that have
31:03a vested interest in in the
31:05infrastructure upon which they're
31:06building and they're pulling it in
31:07different directions but there's
31:09actually at the birth of water cities
31:11there's not this like formal process for
31:13coordinating that it's just you know
31:14consensus emerges to this very rough
31:16process a lot of these ideas around
31:18rough consensus and running code are
31:20from venkatesh trousers post on breaking
31:22smart which we've referenced a number of
31:24times on the podcast and we keep coming
31:25back to we also talked about sort of the
31:28emergence of internet standards and
31:30specifically the internet engineering
31:32task force was this group of academics
31:35and engineers that were working on base
31:37layer internet protocols and they have
31:39this very formal policy to not have
31:41voting but instead and sort of weekly
31:43coordinated consensus mechanism whereby
31:46people argued their points with strong
31:47opinions it was a sort of a robust and
31:49sort of scientific approach and the best
31:51ideas were converged upon so it's this
31:53idea that a rough consensus emerges from
31:56one strong opinions weekly held to
31:58running code and in order to form those
32:01opinions and that's very much the
32:03governance model of Bitcoin and
32:04aetherium today other projects are
32:07taking a different approach with formal
32:08on chain governance I think our view is
32:10that the more general the network in
32:13terms of the service that it's providing
32:15the more it lends itself to this process
32:18of rough consensus and if you go all the
32:20way down the stack down to you know IP
32:21protocol it says very general protocol
32:24it's completely unimpacted set it's
32:28moving from A to B and the rough
32:30consensus product process or worked
32:32there it's very it's very lightweight
32:34and easy to integrate I would make the
32:36argument that general computation
32:37platform would lend itself to that same
32:40process because you wanted to do this
32:42very general thing and the thing that is
32:45very deterministic it doesn't require
32:46human subjectivity to validate then as
32:49you go further up the stack there are
32:51applications built on top of this
32:53substrate and as Dennis made earlier
32:55it's like it's it's like the businesses
32:57built on top of America they each of
32:59them are providing different services
33:01they have they require different
33:02expertise in order to provide those
33:04services and I would make the argument
33:06that at that layer in the stack
33:07governance does become important the
33:09expertise requires specialization and
33:11these applications need to be more
33:13dynamic and responsive to their users
33:15versus general computation which
33:17over time you know should hopefully
33:20remain fairly consistent such that these
33:22applications can feel like they can
33:24build on top without the rules changing
33:25on them to add to that there's many many
33:27factors that go into kind of governance
33:30decision for processes that are informal
33:32so I think that I kind of like one
33:34factor is you know the original roadmap
33:35over the project like does this change
33:38fit within the original vision kind of
33:40outlined by both the founders and the
33:41community so I can you know I'm in
33:43Bitcoin there's a promise of 21 million
33:45bitcoins that is very important to it
33:47also there's figureheads you know
33:49vitalik for exam I was very strong
33:50opinions oh well people trust him he is
33:53he is one of many voices in the
33:55community and I think you know it's not
33:57dictatorial he proposes changes and
33:59there's a debate in the conversation so
34:01at the base layer today in a platform
34:03like etherium aetherium is both the
34:05medium of exchange and the reward for
34:07the supply side of the network and
34:09importantly the governance process is
34:11this this process of rough consensus
34:13where there is no default setting for
34:15upgrading the network and and it's a
34:17this is sort of an important connection
34:19to draw because the users of the network
34:21have an active interest in how the
34:24network evolves and so they're
34:26incentivized to participate in this
34:27process of rough consensus whereas an
34:30application built on top of aetherium
34:32that layer in the stack the expertise
34:34required maintenance associate that the
34:36management of this organization whether
34:38it's a central company or you know
34:40loosely affiliated group of people all
34:42over the world that those stakeholders
34:44have that expertise in order to make
34:45those decisions and so I think this is a
34:47really critical difference the base
34:49layer is very general users wanted to do
34:51this one thing and do it well you know
34:53compute things in a deterministic way
34:55but as you get further up the second
34:57becomes a lot harder to reason about
34:58those mechanics I've started to use the
35:00term powered tokens instead of
35:02governance tokens to refer to tokens
35:05that represent the power to change the
35:07rules or change the the makeup of a
35:09crypto network or at least one vote to
35:11change the rules of the of the crypto
35:13network in one way that I like to
35:15describe it is that crypt economics are
35:17the rules of the game and governance is
35:19the power to change the rules of the
35:22game and my belief is that as the game
35:25becomes more valuable than the power to
35:27change the rules becomes more valuable
35:29as well and so that's the umbrella that
35:31like to use to think through what's the
35:33value of power was the value of changing
35:35the rules of the game if power tokens
35:37were the only means of making decisions
35:40it's sort of a very heavy-handed
35:42specific tool that if manipulated you
35:45know incorrectly it will lead to
35:47negative outcomes but this more you know
35:49in formal process you know through hard
35:51Forks you you you you also in addition
35:54having a kind of checks and balances
35:55we're usually mentioned early there the
35:57different classes of participants you
35:59know the miners the developers the users
36:01sort of a different bodies of the
36:02government that developers proposed the
36:05code it has to be agreed upon by the
36:07miners to implement it so it's a more
36:08multifaceted multi-stakeholder operation
36:11as opposed to who owns the tokens gets
36:13to and the other problem is it's a
36:15creates a default so if the network
36:17automatically upgrades into some you
36:20know specific version of the code the
36:22catastrophic scenarios are much worse
36:24because everyone opts into a default
36:26whereas in this more weak consensus
36:27model everyone has to agree and in kind
36:30of a broader way I haven't twist on
36:32rough consensus and running code which
36:34is cryptic anomic consensus and running
36:35code and my take on it is rough
36:38consensus works well when you're small
36:40and when the number of stakeholders is
36:42fairly small when the IETF was working
36:45through these protocol iterations you
36:47you didn't have to find consensus
36:49amongst a very large group of people in
36:51terms of who is really affected by these
36:53decisions today it's a completely
36:55different kind of dynamic where the
36:57underlying protocols have remained
36:58fairly stagnant and all of the
37:00innovation in terms of use cases has
37:01happened above where governance is is a
37:04lot more fluid in the sense that each
37:06individual application can construct its
37:08environment or its system in the way
37:09they prefer but bringing these ideas
37:12back to crypto there's another model
37:14that I like to think about which is on
37:17chain governance off chain diplomacy so
37:19by offering diplomacy I mean every time
37:21that a core developer team meets with
37:24each other to make a decision or a user
37:27or an application of that protocol wants
37:29to lobby for a change really the human
37:31process by which we arrive at proposals
37:34and ultimately decisions you still have
37:36meetings between people debating and
37:39arriving at decisions and and proposing
37:41different ideas all sorts of issues can
37:43emerge right you can have
37:44raishin in the power took and that
37:46enables a small group of people to
37:48really control the network but you can
37:50have the same kind of dynamic today with
37:52rough consensus you don't have a formal
37:54process that allows everyone that they
37:56can participate in that process you can
37:57end up with a clique that effectively
37:59governs the network through their own
38:01rough consensus and cuts out everyone
38:02else let's make sure everyone has a fund
38:05of everyone in the network has a
38:06fundamental right to participate in that
38:08governance process and let's have
38:09mechanisms for people to get together
38:11and and and have sophisticated
38:13discussions about how decisions were
38:15made but let's make them convince the
38:18community and convince the network that
38:19that is the right thing to do I think
38:21also if you don't have formal governance
38:24mechanisms and clarity around it you
38:26devolve into governance by defection and
38:29we saw that with Bitcoin we're not
38:31necessarily arguing for complicated
38:33governance we're arguing for rules and
38:36transparency such that the network
38:38participants all understand not only
38:41what the rules are but how the rules are
38:44changed yeah I guess where we might
38:46diverge a bit is that we are arguing
38:48that the more general the service of a
38:50crypto network the more it should be
38:52ossified so again coming back to the
38:55side the IP is ossified Bitcoin has
38:57ossified may be a general computation
38:59substrate is better ossified because it
39:01lends itself to the trust that the
39:04developers building on top need in order
39:07in order to feel comfortable building
39:08their however the those applications
39:10that developers build because they're
39:12complex and dynamic and interfacing with
39:14end-users need to be able to change and
39:17in order for them to do so a formal
39:20governance process is probably necessary
39:22the default is to take the whatever the
39:25coin holders vote upon and upgrade the
39:27system and so I think one of the
39:29assumptions is that the token holders
39:31participating in the vote and prior to
39:33that participating in the diplomacy are
39:36experts and have the best interests of
39:38their users in mind their their
39:40interests are hopefully aligned with
39:42their end-users and they pay for it if
39:44they mess up right dilution right that's
39:46right and so there's the the incentives
39:49are tightly coupled so that the experts
39:51make decisions for the benefit of their
39:52users and for the benefit of themselves
39:54and you end up with this very dynamic
39:55system where the end users don't
39:58need to think about the complexity of
39:59the underlying mechanic of the thing and
40:01importantly there's explicit
40:03enforceability over one canonical group
40:06of contracts that controlled the system
40:08and so the output of the governance
40:10process doesn't require for example end
40:13users or other participants in the
40:15network to download new software and run
40:18it the analogy of a blockchain is like
40:21we're traveling down a highway and then
40:23we decide that we want to like take take
40:25a turn one of two turns into two
40:28different futures you know and that
40:30would be upgrading miners upgrade their
40:32software to a new fork version what
40:34Forks are in protocols is different than
40:37Forks are on base layers like you can't
40:40fork in the case of a stable coin
40:42because it has all this collateral you
40:44can't fork the collateral because you
40:46your DAP doesn't control that you know
40:48you are using the existing platforms
40:50collateral so the upgrade process has to
40:52be different in the governance debate
40:54there's nuance in like what it means to
40:55upgrade adapt that's running on top Roco
40:57and the protocol itself you brought up
40:59the example of a computation network
41:01it's a very well-defined
41:03kind of service you know a computer runs
41:05the code the code has an output if you
41:07focus on something more controversial
41:08like how value is distributed then all
41:10of a sudden you find that the governance
41:11is really important but also argue that
41:13powered token voting excludes the needs
41:17of miners and the needs of users that
41:21depends on how you design it you think
41:22of power as the source of value then you
41:24want to make sure that that power is
41:25evenly distributed amongst the
41:27participants of the network otherwise
41:28you end up again where we are in the
41:30modern economy today with very few
41:32people with a lot of power and and most
41:34people with not that much power so just
41:36one thing I wanted to add is that one of
41:38the problems with thinking about on
41:40chain governance as a sort of way for
41:42users to actively participate in the
41:44evolution of a network is that in
41:45practice if we look at the real world
41:47and how governance systems work there's
41:49there's actually very low participation
41:51and this is because you know as an
41:53individual user an individual voter my
41:56one-vote my my little Sayed doesn't have
41:59all that much influence on its own and
42:01so there's this apathy about
42:03participation and so any assumption is
42:05that when we talk about users affecting
42:08or risking together and
42:10debating and governance is that they
42:12have some sort of emotional stake in the
42:14outcome of governance processes and that
42:17may be the case in very niche
42:19applications where users you know feel a
42:21strong affinity to the application
42:23they're using if I don't have a strong
42:25connection to participating in voting
42:27maybe I'd be more likely to sell my vote
42:29to someone who does and the result of
42:31that is is the same risk that you'll
42:33described earlier where the capital and
42:36the currency become disaggregated and
42:38this could undermine launch and
42:40governance processes it's important to
42:42note that on chain governance is really
42:44hard for a number of reasons in the
42:45context of box chains it's very
42:47difficult to know who the participants
42:48are you can you know you can be hundreds
42:51of people just by generating multiple
42:53keys and so when you have this system
42:56that is synonymous it's difficult to
42:58enforce behavior patterns that lead to
43:00good governance say in like shareholder
43:03governance where shareholders are bound
43:04by fiduciary law there's a great post by
43:07a researcher at Cornell we recently had
43:09the Hat on the podcast named Phil Diane
43:10and and he went deep down the rabbit
43:13hole in two different attacks that you
43:15docpath yeah the post dodged in deep and
43:18our podcast does as well on different
43:21sort of attacks that you can launch to
43:22bribe participants in on chain
43:24governance schemes food I think a lot of
43:27arguments against on chain governance
43:30are kind of primitive in their thinking
43:32around how is that governance applied
43:34one common element of a lot of the
43:35counter arguments is the assumption that
43:38governors power is linear and one token
43:40equals one vote whereas in crypto
43:43networks we have the opportunity to
43:44design much more intricate systems with
43:46much more intricate rules and so yes you
43:48can replicate yourself across a thousand
43:50different addresses well you can make it
43:52such that your governance powers
43:54amplified if you have all your tokens
43:57and in one wallet and so you can make it
43:59actually more powerful to basically
44:01voluntarily disclose still within this
44:03pseudonymous system how much of the
44:05token you have because you get more
44:06power by aggregating your assets
44:08together and you can kind of change how
44:10how that occurred that the shape of that
44:12curve depending on the context you can
44:14also do things like look at the age of
44:17an address one thing that we learned
44:19actually from a non crypto company that
44:22community of use space is that the
44:23length an account has been open as the
44:26crate as determinant of whether it's a
44:27troll or not and so you can use things
44:29like a lifespan of an account or of a
44:31wallet or the tokens that have received
44:33and you can even make distinctions
44:34around whether the tokens in that wallet
44:37were purchased from an exchange or were
44:38received directly through mining and you
44:40can factor all of those things into how
44:42you design let's call it your governance
44:44curve right maybe those are all examples
44:45of on chain reputation that's sort of
44:48needed right of the system exactly so
44:50yeah thank you guys very much for coming
44:52on it's been awesome sort of recapping
44:54the space and how its evolved over the
44:55last few years and super excited to see
44:57how our theses play out over the years
45:01going forward well thanks for having
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