a16z Podcast - a16z Podcast: All About Stablecoins

Episode Date: December 21, 2018

with Andy Milenius (@realzandy), Jesse Walden (@jessewldn), and Sonal Chokshi (@smc90) The history, evolution, and use of money revolves around the important concept of debt: It’s what allows us to “time travel” and build toward the future — growing livelihoods, businesses, and the overall economy as a result. When it comes to crypto, however, this concept plays a key role as a way to potentially stabilize the volatility of cryptocurrencies, and more importantly, provide a more stable medium of exchange so key applications can be built on top of blockchains. That’s where stablecoins (cryptocurrencies pegged to a more stable asset, such as fiat dollars) come in. Because they’re deployed on top of blockchains, they retain the advantages of cryptocurrencies — digital, global, easily transferable, decentralized. And because open source networks are more transparent and auditable, these systems are far less opaque than, say, the huge house of cards that collapsed in the case of the 2008 financial crisis. But beyond bringing more people into a better financial system, why do stablecoins like Dai — and Maker, one of the oldest decentralized autonomous organizations (DAOs) on the Ethereum blockchain — matter to the crypto developer community? To banks? To anyone who thinks about the future of innovation… or even the future of the firm, and the future of work? How do (and don’t) DAOs and these kinds of smart contracts change everything we know about management and software development? This episode of the a16z Podcast explores the answers to these questions and more, with Maker CTO Andy Milenius in conversation with Sonal Chokshi and a16z crypto partner Jesse Walden. Here are just two quotes from our jam session: Blockchains are an "open-access, permissionless, choose-your-own adventure story"; and smart contracts are an mp3-like "compression format" for scaling trust. Let the music begin! Please note that the a16z crypto fund is a separate legal entity managed by CNK Capital Management, L.L.C. (“CNK”), a registered investor advisor with the Securities and Exchange Commission. a16z crypto is legally independent and operationally separate from the Andreessen Horowitz family of fund and AH Capital Management, L.L.C. (“AHCM”). In any case, the content provided here is for informational purposes only, and does NOT constitute an offer or solicitation to purchase any investment solution or a recommendation to buy or sell a security; nor it is to be taken as legal, business, investment, or tax advice. In fact, none of the information in this or other content on a16zcrypto.com should be relied on in any manner as advice. You should consult your own advisers as to legal, business, tax and other related matters concerning any investment. Furthermore, the content is not directed to any investor or potential investor, and may not be used or relied upon in evaluating the merits of any investment and must not be taken as a basis for any investment decision. No investment in any fund advised by CNK or AHCM may be made prior to receipt of definitive offering documentation and due diligence materials. Finally, views expressed are those of the individual a16z crypto personnel quoted therein and are not the views of CNK, AHCM, or their respective affiliates.

Hi, everyone. Welcome to the A6NZ podcast. I'm Sonal. Today's episode is all about stable coins. What are they? Why do they matter? So our special guest is Andy Millennius, CTO of Maker, which is one of the oldest and longest standing projects on the Ethereum blockchain. They are the makers of the stable coin die, which is a cryptocurrency that tries to remain stable in terms of volatility. Joining me to interview Andy, we also have Jesse Walden, who is the former CEO and co-founder of Media Chain, and a partner on A6 and Z Crypto. Speaking of, please note that A6 and Z Crypto is an independent fund, managed by C&K Capital Management, a registered investment advisor with the SEC. It is separate from the Andresen-Horowitz family of funds. The content here is for information only and should not be taken as legal, business, tax, or investment advice. It does not constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. And in fact, the content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. For more details, please see A6 and Z Crypto.com slash disclosures. So, back to the overview.

Our discussion covers the trend of stable coins in general, as well as how it fits into the broader landscape and evolution of crypto. We also discuss the super interesting challenges in designing this kind of, quote, hard software. And finally, we discuss how to build and run a distributed organization because Maker is one of the first decentralized autonomous organizations or DAOs, which has all sorts of interesting implications for the future of the firm, innovation, leadership, and more. But first, we begin with a brief history of money, and more specifically, the big picture and concept of debt. Gold itself is only part of the story of what money is, right? In terms of the day-to-day lived experience of people's lives working with money over the last, you know,

5,000 years, a lot of it actually hasn't been with gold currency in it. It's actually been with debt money. Debt, without getting too much into historically how. get to use. Debt is very useful because it is a virtual and can be transferred very easily because it's just records in a ledger. Sounds familiar, right? Does sound like blockchain. And so like historically, the way that people have used money in the past is that if I have assets and I can issue like IOUs against them, those IOUs can be monetized and effectively debts against my assets. And then anybody can, as long as they trust that the assets are there, they can trade those and monetize those IOUs and start using them as money. I actually think you should get into history because

The big picture of why debt matters is as a way you can actually grow a pie. Sure. I guess what I would say is that debt money is very interesting because it allows you to sort of see into the future, right? If you have a good expectation of what's going to happen in the future and you want to access that value right now, you can issue debt against it. So I think of debt as a really, really interesting sort of like time machine that humans have access to. They're able to basically travel into the future, access that value and bring it back to today.

and then use it. It's such an interesting sort of like shared reality that we create. And that shared reality is necessarily virtual because it's shared amongst all of our collective understanding. And so by creating this virtual space where we all understand what will happen in the future, we can sort of leverage that today, create money, and then basically all benefit from the increased liquidity

to purchase provision goods and services and stuff like that. My grandmother grew up in India in the generation where gold was literal money. You have as much gold as you have. have, she put it in a box, a mattress, whatever. The concept of taking on debt was so foreign for her. She's like, you can't have credit cards. That's like a really bad idea.

But I'm thinking of the example that Yuval Harari sites and Sapiens and how we all have these collective mitts and fictions. It's actually a driver for economic growth and innovation in the big picture. And he gives the example of a woman who's a great baker, like my grandmother's a great cook. You want to open a restaurant, but you don't have enough actual money now. You can't just take one-to-one what you have. If you have debt and people can invest in you, you can invest in you, you can actually create future values. I'm just thinking a more concrete example of what you're

sharing. You can sort of time travel to the future where you have the restaurant built already. Exactly. And take some of that money back with you. Yeah. Where are we now, by the way? Money has this big historical tradition of being at times issued as gold and then at times issued as debt against assets. And there's a huge historical tradition, but that brings us up to today, right? The era of digital money is upon us. I mean, you know, Bitcoin was so cool when it came out and it captures people's imagination. And it was originally sold to us as like this peer-to-peer electronic cash system. I think that's actually the literal subtitle of the nine-page white paper. Yeah, exactly. And that captured people's imagination. But Bitcoin kind of only tells part of the

story about what cash is, right? Because Bitcoin, as we've seen, how it's behaved in the wild, it behaves a lot like digital gold. And it's definitely an improvement on physical gold. But if we're going to sort of do things in an intuitive way, basically do things, a proven way that humans instinctively coordinate, then we sort of arrive at this attempt to use the Ethereum blockchain to create money, to create a stable coin. Isn't that what everybody's doing, though, when you think

about a cryptocurrency? Currency and money are actually different. It's a subtle distinction, right? Currency are units. These are the things that we can or can't use those money as we want to, but money is much more like a symbol. It's a collective understanding. So I can make currency units. The question is, do people accept them and use them as money?

That's on them. And so maker is sort of attempt to actually create money. And so we issue all these currency units as debt against assets, just like there's this huge historical tradition of doing. And that currency that we issue is called die, D-A-I. So as we come up to today, if we have this tradition of money creation as debt, and then we get into the future, and we want the blockchain to actually work. Because this is an important thing, right? The blockchain space has sort of, it's preceded in fits and starts. It's captured a lot of people's imagination, but there's been sort of a lack of traction where the

actually meets the road, right? And that's, you know, customers, entrepreneurship, these sorts of things. It's actually funny because there was a joke that for a while it was like blockchain inside, like everything plus blockchain or does this really need to be on the blockchain? And then you think of ML inside. I mean, it's the same thing that happens with every new technology. People adopt it somewhat superficially before they truly build actual value around that. I always think of that one company's blockchain video where it's like a tomato on the blockchain. And it's like a famous company. But anyway, yeah. I'm curious, how does that really thoughtful explanation of money relate to what you're doing at Maker?

So stable coins are interesting in so many different ways and digital money in general. If you really think about it, a stable coin is just a rebranding of money because it just works the same way as money. And money is a very interesting feature in the sense that when you use it, you don't really think about the fact that it's stable. The whole point is that you just use it automatically without thinking about it. But I think what's really telling about why stable coins are important is actually how a lot of people got involved in the Maker project.

And I can say, from my own personal experiences, when I first discovered Ethereum, I immediately recognized that there was value in a decentralized network that maintained, like, this global state, this global, like, objective state that we could all agree on. It's very interesting, you know. There's so much sort of, like, underlying value

that we could build up and access here. It was like this wild space. Yeah. It was like wild, untamed space that had tons and tons of potential, but had not been cultivated in any way. And so when I first got into Ethereum, it was actually so early on that there was like one website you could go to and see all of the Ethereum projects.

It's like that time when people would actually like catalog the internet in the early days, right. And so I was going through all the projects. And when I saw a maker, I immediately recognized that this was actually like an upstream problem that needed to be solved before I could really work on anything else. And I said, oh, we need to make sure that this works so that way I can sell services on the blockchain. If I want to make whatever I want to make like a server company that's going to accept cryptocurrency, it needs to be able to accept a stable medium of exchange to be able to work. Because really, that's what makes blockchains so cool.

All this open network, it allows for a lot of synergy. And each project benefits from each other's success, right? And so a lot of actually developers that are some of our strongest, most ardent contributors to this day, had a similar sort of story of getting into Ethereum, thinking about what are the underlying foundational problems here, recognizing that a stable medium exchange was necessary, encountering Maker because we've been around

for so long. And I think it's really interesting that your motivation was looking at the developer ecosystem and thinking about all the things you could build on Ethereum and then thinking about solving the medium of exchange problem. So it was a very developer-focused lens as opposed to just used as like speculative trading

instruments on exchanges. And not only that, but I think that there is this temptation and this is something that never gets acknowledged but the cryptocurrency industry is very young, right? So for a lot of people this is their first job ever. And so there's is temptation to have dessert before dinner. Oh, that's such a great analogy.

And so people really, really, really want something that just like clicks with consumers when that's not how any new technology ever comes out. It's always developer focus first. And it's always in the garage. Then the design and polished balls. And then it slowly gets polished over time. Right, right. So I get the developer focus and the draw that you had.

And I agree with you that that is the arc and trajectory of most technology. But I want to know, quite honestly, why I or someone else who's not, a developer should care because it sounds a little bit like nerds for nerds. And I'm not saying that's a derogatory thing. I love nerds. Tell me why I should care, why other people should care about why stable coins matter. I think that the reason that stable coins matter is actually very related to the reason that blockchains matter, which is that because it has so many implications for other applications, I think it will be a really interesting like skip level technology, similar

to how cell phones allowed people in the developing world to sort of skip home internet connections. The phrase that we use a lot in media is like leapfrog. In China, we Connie and I wrote about WeChat, but the big story is that they were able to leapfrog the internet phase because they went straight to mobile and that enabled all these things without the legacy infrastructure. I think it'll be the same thing for online payments and for just online e-commerce in general, right? Because e-commerce is this thing that's really, really slowly sort of penetrating the entire world. It feels like everybody is online right now, but it's just a question of what are they doing online, right? Like a lot of times they're gossiping and talking to their friends and stuff like that, but are they really doing impactful things? Are they building businesses?

Are they really accessing all of the wealth? Because that's a big thing that I almost never see you get acknowledged when we talk about these spaces. There's so much wealth in the world that is in the informal economy, and it's not being properly registered and recognized by the global financial system. And so a blockchain,

which is like this open access, permissionless, choose your own adventure story, is such a compelling technology that I could see allowing a lot of this existing wealth and existing assets to be online and be recognized by creating these shared realities and these shared understandings where people can sort of acknowledge each other's property

and each other's existing lives when it comes to economics and commercial activity. And a stable coin will be incredibly useful in allowing people to have open access to stability, because that's something that sort of everybody is entitled to, I think. Yeah, give me a concrete example, though, because a lot of crypto people generally, which is great, I think this is one of the promises talk about banking the unbanked.

I think I can give you a concrete example. So one of the ones that is really compelling and is actually already we're building momentum in is this idea of trade finance, right? So if we look at the supply chain, the supply chain is a huge hulking, almost like impossible to comprehend Leviathan of economic activity. I can't remember it. It's like it makes up some incredibly large fraction of actual global commercial activity, right? It feels almost like a vascular system in the sense that it's got these huge players in the middle. And these huge players in the middle are very plugged into global finance. Yeah, exactly, you know, these trunk arteries.

But then when you get out to the periphery, you know, like the coffee grower in Guatemala or the shrimp fishermen in Thailand or something like that, it's clear that they're part of the same system, but they're very disconnected and they're very not included. But because they're, you know, business people and they have the same sorts of financial needs as these bigger central players, a lot of times their market needs aren't being met. And so having a stable coin and specifically the option of debt, taking out debt, through the blockchain is such a compelling opportunity for them because if you are the coffee grower in Guatemala and you're having cash flow problems, but you have that opportunity to jump

into the future when you've received the money that you've been promised by the global supply chain, you can access that money today as debt and then solve that cash flow problem in a way that maybe before you would have to go to like a loan shark or some really, really unsavory extractive technology. And so what we're really trying to do is, with this whole open, permissionless system is give people in all parts of the world access to the same sort of high-quality financial tools, especially when it comes to borrowing

that these big players have in the center. I think that's really interesting because that sounds a lot like the original Bitcoin vision. It's the vision of all cryptocurrencies. They're permissionless. They move across borders, like emails, but that's not been the vision that's been realized to date.

And so what is it about stable coins in general that you think is the fundamental breakthrough here? There were a lot of people who were interested by blockchains and found them a bit inaccessible and found the community a bit difficult to interface with and found it was really, really unclear how they were to do business on top of this platform.

And so for us, one of the big partnerships that we announced over the summer was a partnership with TradeShift, which is a very big, really dynamic supply chain data platform out of Denmark, right? And so having an opportunity to see a traditional startup that has done so much

towards digitizing supply chain logistics, partner with a Dow. A decentralized autonomous organization. Yeah, like this collective group of people who have come together to create Maker and see this stable medium of exchange that you could take for granted but is so novel in this context.

I think that it creates connections from the legacy world, whether it's the supply chain or finance or whatever, connect back into the blockchain. One of the analogies that I've heard that I found really just stuck with me is that it's a bit like a chairlift. you know, where you start here

and then there's this rough terrain that you go over on the chairlift and then you wind up at the top of the mountain, right? The top of blockchain mountain. And I'm hoping that Dai is this sort of funnel that brings people onto the network, makes them comfortable, like gets the wheels greased turning

and gets them comfortable with beginning to transact over this network. And that's already happening right now and it is happening with engineers first. We're seeing other projects starting to integrate Dai simply because it makes their user experience 10 times better instead of having to transact with, you know, whatever service, whether it's

like a digital goods marketplace or a prediction market in some volatile currency, you can make a loan, for example, in dye and not have to worry about the volatility risk of the underlying currency. And that's a really exciting early application. What do you think the breakthrough is? In order for decentralized applications, which are deployed on top of blockchains, to reach millions and millions of users, the experience needs to rival that of, you know, a traditional a web 2 startup. And in most parts of the world, we have credit cards and its payments are fairly seamless experience on the web for a lot of people. The stability of stable coins just

brings that experience to these applications. And that's a fundamental unlock that's required for this to scale up. So basically it's sort of like this port between kind of the early adopters and the late adopters to help mainstream it, maybe not a port, maybe even a wormhole, however you want to think about it. We're getting, doing all kinds of analogies on this episode. Speaking of, I loved the chairlift analogy. I think that's a wonderful. visual of describing it. But it's interesting because we've talked about the history of tech and how these things adopt. And in many cases, I think Chris Dixon actually shared this with me a couple of years ago, the strong form of a technology will always, quote, beat the weak form

of a technology. You know, the companies that go cloud native first are going to beat the ones that are trying to do hybrid cloud first. But I think this is an exception because here in cryptocurrencies, blockchain, you know, crypto in general, we have a case where it's a little bit of a moving target. These apps are developing, as the infrastructure is developing, as the users are developing, they're all kind of happening simultaneously for the first time, I think, in the history of computing versus in the past where there was a bit more of a stepwise flow. So I think that's very interesting. But on that note, when we think about this quote transition phase, it's not ephemeral. It's transitional in the sense of it's creating that port or wormhole.

How should traditional finance players, like banks think about this? Well, there was no sense, at least in our community, that banks are gone or that their purpose for existence is not there, right? What I'm hoping is that they become actually a lot better at what they're supposed to do and then have a lot of things become automated and a lot of things become just streamlined that they maybe had to spend a lot of resources handling before, right? And every bank is different from Maker because every single bank exists inside of some sort of nation state, right? And so you've got a collective of people that all have like a shared agenda. And I think that banks are really important in the

whole process of providing for the strength of the nation. I think that banks will continue to do that, and Maker basically has no dog in that fight because we don't exist in any single country. And so what I'm hoping is actually that Maker will end up being this really, really low-level sort of warehouse for banks to build on top of and then do what they do best inside of the countries where they operate.

You know what I mean? This non-jurisdictional international space that we've kind of stumbled across with blockchains is really, really compelling when you're looking at transnational business. The idea of any one player coming in and setting up this transnational, non-jurisdictional space, it seems a bit far-fetched and it seems a bit difficult to imagine. But seeing it as this emergent, accessible space,

I think is really, really compelling for not only banks, but tons of different finance companies and different enterprises in general to suddenly become these transnational actors that they weren't before or that they didn't have access to because they didn't have the resources to build out that capability. Does that make sense? It makes perfect sense because it actually goes to the very heart of open soul. in fact, because if you think about the history of open source, and we've talked about this a lot in the podcast,

it's been star for resources. And in the classic model of open source, you had these big corporate players. They needed open source because no one company could be open source. Because they would never be trusted. And so you have this interesting ecosystem of all these big open source funders from big companies like Cisco and Google and et cetera. And then you had like these open source consortiums and projects.

And the really interesting evolution we're talking about in crypto is that we don't actually now have to rely only on those. your point about banks is quite interesting because you're putting that same framework at the international global people transacting with each other level and creating this sort of substrate for everyone to build on to create that interconnection without having to worry about, well, that bank has a dog in the fight. So we can't trust them if they try doing the same thing, kind of thing. So let's actually now talk about how it works and what concretely we're talking about here because so far we've defined the category of stable coins. I understand the value in

the larger system of, you know, with cryptocurrencies, a lot of volatility. So this is sort of a way to stabilize that, hence a stable coin. I also understand the point about it being this, you know, transitional and more importantly like a port between these worlds. But concretely, what is it? Like, what is dye, DAI? I mean, it's so many different things. It's a bit like all the blind men looking at the elephant. Yeah, I love that analogy. There's tons of different ways you could describe the same thing. But I think the one that is the most, I guess, immovable is the fact that it is smart contracts. At the end of the day, Maker is a system of smart contracts that compel or that incentivize people to come together and lock up their assets, their crypto

assets into escrow in these smart contracts, and then they have the opportunity to issue die against them. Yeah, and maybe worth clarifying, what is the smart contract? If I can offer a definition on what it is, I would describe it as an autonomous program. So it's a piece of computer software that is deployed on a blockchain. It's run on computers all over the world. And what's autonomous about it is that no one party controls it. It's completely trustless. It's running a trustless environment, and that's really important for the functionality of the system. Self-executing can be a bit confusing, but it's definitely a rules-based system that is fundamentally open such that anybody can see the rules, and nobody specifically administers the

running of the code. And so anybody in the world can take their crypto assets, lock them up into escrow, and then issue dye against them. And then that die, which is effectively functions like they borrowed, they can take it, do whatever they want, they can start a business, refinance their house and then later when they want to get their asset out of escrow, they return the die that they borrowed plus a fee based on how long it was outstanding. It should sound really familiar because it works in a very familiar, traditional sort of storied way. Can we lock up real world assets into this? The promise was always was that many different types of assets would be able to be locked up. Real estate. Anything, really. You know, you're talking before about

like, you know, blockchain rate? Or tomatoes. Anything you can get onto the block. blockchain can theoretically be locked up as collateral in our system, right? That's like the whole promise. And the idea there is that, you know, one of the compelling sort of details of dye is that for every die issued, there are assets locked up in escrow. And so every die is effectively backed by these assets. And so one of the really, really important details about die is this idea that there's a lot of different types of assets. So you can imagine supply chain invoices. You can imagine like commodities like gold. You can imagine pure cryptocurrencies like Ether or Auger's rep, all existing in the same system of credit so that

if any single one of them has trouble, the other ones may still be performing and it sort of protects the strength of the entire pot. You see what I mean? That's really cool because there's this flywheel where Dive has already sort of improved the user experience of today's early applications on the blockchain. And, you know, that in turn fosters adoption of those applications. And increased adoption, in turn, leads to the tokenization of more things. And as more things get tokenized and become collateral, they sure out stability. And so stability begets more stability and more adoption. I love that because we talk a lot about network effects on this podcast. I think any software business cares about network effects. Software has that sort of

unprecedented scale. Just for the reminder of the definition of network effects is when a system becomes more valuable, the more people that use it. And hence the flywheel effect. But for the naysayers, It can also sound like a crazy house of cards. This thing, reinforcing that thing, reinforcing that thing, that sounds like a crazy spiral. Tell me, how would you disillusion those folks? A lot of people who have nightmare visions of, like, 2008. The problem with 2008 was that in 2008 they were doing something

that was, again, like a very storied tradition, which is debt issued against assets. They did not invent that in 2008. Right. It was just very bad debt issued. What it was very opaque, and it was very difficult to see what was going on. It was very difficult to get a sense of the problem.

And by the time regulators realized, it was literally way too late because the entire House of Cards was falling down. And I think that one of my favorite things about blockchain networks is the fact that they're fundamentally transparent and auditable. And I think that that sort of feature is so important when you're talking about these sorts of things, like a large credit system, right? And so I think that the transparency, the auditability, and the open source ethos is what is going to be its most regulating

or stable sort of influence over the long term. term, because if there's any funny business, you can't get away with it, right? There's so many times in Maker that when one person acting of their own accord in their house, God knows where, takes an action, everybody else sees it, and then suddenly reacts and starts commenting on the chat, starts following their own incentives and self-regulating in many ways. The real-world example, I think, is what happened with the Wells Fargo executives who were stealing money from people who died bank accounts, or even those that were issuing really bad

loans and just trying to like, there's this whole scandal they were just like pumping up all these customers just in order to meet their numbers, but they were making very bad decisions. And the executives were clueless or maybe they were turning a blind eye, but at an organization at that huge of a size, like that's a huge problem. So anyway, that's a great

counter example. So given that the system is backed by these collateral assets, there needs to be a decision made about which assets should go in the basket behind die. So how does that work? Who decides? You know, this is probably the most important aspect of stability, right, is who is making the decisions about

these collateral assets. And that brings us into the second crypto asset that exists in the system, the yang to Dai's Yin. Another great analogy. And so there's actually two assets that exist in the maker system and make up the whole ecosystem, right? One of them is Dai, which is very much the product, but the other one is Maker. And that's MKR. MKR is the administrative and governance token that exists to make exactly these types of decisions using stakeholder democracy. So one MKR equals one vote, and the MKR holders are responsible for making these decisions about what types of assets can be used, what types of fees will be associated with borrowing against them, and in what ratio, die can be issued against these assets.

These are all really, really important questions, and they do this in a completely open and transparent way. And in return for their service, because it's very much a service that they're working to provide to the entire system, in return for their service, that fee that the die issuer pays, like I said, when they issue die, if they want to get their collateral back, they return the die plus a fee. That fee is used to buy up and destroy MKR on the open marketplace. So it represents this kind of constant buying pressure that exists, hopefully, to the benefit of MKR holders. If the MKR holders are doing a good job, then DAI will be issued and then fees will be sent into this buy-in burn, we call it. This is very interesting, right? Because, you know, it will feel

very familiar to anybody who's sort of seen the story of buybacks in the financial markets. So the analogy is that MCR holders are like the miners of the maker network in the sense that they're doing the work to make sure that dye stays stable, to make sure that die is growing and being used properly, just like the miners in Bitcoin are keeping the network secure. Yes. They're like a decentralized central bank. They are the service providers that make die work. The analogy that I like to use is actually, if you imagine walking on a balance beam,

this is not something that just happens automatically. You can't just make an automaton that walks on a balance beam. It requires a lot of finesse and it requires a lot of... A lot of core exercises. A lot of decision-making as new information is being presented, right? And that is really the core of what the MKR holders do. They're making decisions as new information is being revealed in the marketplace. And in the happy case, the fees that are collected are used to buy and burn MKR.

But there is a flip side. And this is really important, and it's a really important sort of skin in the game, as has been famously said many times. Including most lately by Nassim Taleb in his latest book. Right. Yes. Ironic phrase there. And so the skin in the game that the MKR holders have is really interesting because in the case where one of the collaterals that they accept to be issued against, if they ever make a mistake and that collateral loses all of its value overnight, then, And all of the dye that was issued against it needs value to be backing it.

And so what happens is MKR is minted and sold off in the marketplace to cover that debt. And so we actually have like opposing forces here, which is why this fascinating. Yin and Yang sort of analogy I think makes a lot of sense also because you've got MKR on one side, the happy case, MKR is being bought and burned. And then on the sort of sad case, the mistake case, MQR is being minted and sold. If the MKR holders do a good job, then we can expect. MKR to become more scarce

over time? One way I think about the whole system zooming out is it's really a two-sided marketplace. On one side of the market, you've got MKR holders. And again, they're doing the work of the system. And what they're doing is setting a bunch of parameters such that people who want to get leverage or liquidity against their assets

can do that. And they know how it works. The system's fully transparent. So one side of the marketplace exists to serve liquidity. The other side of the marketplaces are people who just want to benefit from the stability of die. They don't have to know or care about MKR. They don't have to know or care about the credit system and the smart contracts where the collateral is held. All they need to do is transact using

this stable currency. Right. It's like people like me who want to spend a dollar without knowing how the financial system works. Exactly. And so what's really powerful about the system is that the incentives on both sides of the market are aligned through the functionality encoded into the MKR token. Exactly. So the incentives of the MKR token holders are aligned with the incentives of dye holders, because as die grows, if they keep the system stable, they stand to benefit. And if they don't do that, they also stand to be punished. Right. It just goes right to the whole, again, even more broadly speaking, to the whole definition of crypto networks. That's community-owned and coin-operated digital services. And this is actually

the perfect blend. The community-owned, that's the DAO. It's operated, the services, is M-K-R, which is part of Maker, M-A-K-E-R, which is the entity, and then you have die, which is the coin, or the debt currency, in this whole system. So I think we kind of have a sense of it, and I love what you said about the Union Yang, because these two equally opposite and opposing forces, it's the checks and balances, the fail-safe, that sort of avoids this case of the mortgage crisis of 2008, because you have this opposing force. One thing that's really interesting

about this whole system is, like, it's completely coordinated by token holders all over the world. There's potentially going to be lots of money in these smart contracts and lots of commerce happening as a result of the system. And so the need to have high security standards is real. Those who've been following crypto would have heard of the DAO, which was a hack in the early days of Ethereum on a smart contract. Maker is not the DAO. To the contrary, it's a DAO that's been live and been secure to date. And so I'm wondering, as the CTO, what are the best practices and how is engineering smart contracts different from traditional software.

I think that one of the most interesting ways that smart contracts are different from traditional software engineering is that they actually have the characteristics of virtual hardware. Essentially, they behave like hardware because if you think about hardware, let's say I make a phone

or some other microchip or a toy or something like that. I have to design it and then manufacture it and then ship it out. And if I make a mistake, there's nothing I can do because I cannot take the hardware back and fix it. You don't have a fast enough feedback loop. And it's immutable. Like when I print the chip, that's the ship.

It's not going to change, you know, with some exceptions. And so this virtual hardware sort of story means that when you design smart contracts, you actually have to be thinking with a hardware designer's point of view, which is fascinating. Completely different from a software designer's point of view. In software, especially Web 2.0, there was this idea of ship your code as quickly as possible and sort of fix it as you, what do they say? Rapid prototype it.

Move fast and break things is also like the minimal, viable product. There's so many different ways of thinking about this set of ideas. So this move fast and break things sort of philosophy has literally never existed in hardware design because that doesn't make any sense. Like moving fast and breaking things in hardware means like a multi-million dollar recall of your product. I'm just thinking of semiconductor ships. You would design them. You ship them to be manufactured in China. You make a mistake in the design. You have a huge loss and you have to redo the entire thing. And it means that the bulk of the work is actually upfront before you write a single line of code. So there's tons of prototyping, tons of

specification, tons of really thinking deeply about what you want to do before you ever write any smart contracts. So a lot of it is in preparation, similar to like painting a house. A lot of the work is before you get the paint out. Leslie Lamport once wrote an op-ed for me when I was at Wired arguing why we should do specifications and do code like building houses. But a lot of people fought back on that because they felt that he was very outdated in terms of thinking about this nature of fast-moving, you know, object-oriented programming and all these other ways of thinking. Well, you will be proven right in the long term, especially as it relates to smart contract, because we've got this virtual hardware environment, you know, where we create a piece of virtual hardware,

we launch it onto the blockchain, and then that's it. It's out there now. And so a lot of the work is in prep. Like, you have no idea how many times we've implemented Maker and then thrown it out. And you have to be okay doing that. You have to be able to spend an entire day looking at a single line of code and saying, is this necessary? Does this belong here? It's like so meditative. I love this.

It's really, really intense. I'll tell you, man. And so part of it is all of this work up front, but then part of it is actually a tool that will be very familiar to hardware designers, which is formal verification. A rigorous, mathematically specified way of ensuring that the specification,

the behavioral specification that you've created, in fact, does match the code that you've written. It's sort of like simulation. If you're designing hardware, is that kind of the idea behind it? It's like simulation, but having the ability to mathematically simulate all possible reality.

You can say something like, die always must be issued against a collateral asset, right? That's a bold sort of propositional statement that I make there. And so that sort of behavior, we specify it. We say, die must always be issued against a collateral asset, and write that in a formal way. Then what I can do is I can take an implementation of the die credit system, and I can say, is it true that in all possible realities, in all possible cases, it is the case that die can only be issued against a collateral asset. And you can use essentially formal verification software tools to say, yes, we've checked, and it is the case that die can only

be issued against these collateral assets, right? And so when you know that, you can remove an entire class of errors or bugs. Actually, something is interesting, when hardware designers talk about mistakes, they always say errors. They don't say bugs. The bug is a bit, like, trivializing, kind of infantilizes the mistake you make, but an error is like, you screwed up. An error with all caps. So it removes an entire class of error. that you could have when you have this sort of guarantee that the code indeed does match the specification. And so we're very proud to be on the cutting edge of this

for smart contracts because the entire formal verification industry is not geared towards smart contracts. This is new technology. They're used to working with like semiconductors and airplanes and rocket ships. So the whole formal verification industry was very kind of caught off guard by smart contracts. And so we are very proud to be the first application

to be launched on the Ethereum blockchain that is formally verified. There have been experiments with this up to this point. This is the first non-trivial application that will be launched that will have these guarantees that you can rest easy and know entire classes of errors have been mathematically ruled out as possible. I love when hardware and software blend like this kind of thinking. This is fascinating.

We had Andy McAfee and Eric Banyl some MIT economists on the podcast talking about the problem they argued with smart contracts is that you cannot have completeness because you don't know if the car, like let's say you have a hard car that's being passed when you owner, you cannot up front specify that, well, this owner cannot change the color

or if they do, you don't really know what's happening. So it's really interesting in this analogy when you describe formal verification to be able to do all this upfront simulation of all possible scenarios is kind of a way to play out that reality. It gets into a very interesting question because, you know, formal verification

is really bandied about as a buzzword in blockchains as almost like a Holy Grail or like a panacea that will solve all problems, you know, and you see a lot of token investors saying, oh, formal verification, they wave their hands around, they say, then all our problems will be gone. That's not the case, because formal verification, you can only verify against a well-specified behavior, right? And so it gets into sort of the limits of formal verification, which is very much about how well did you specify.

You know, you can say something very trivial and sort of tautological about Maker and then verify that, indeed, the code matches the specification, but how far does that get? get you, you know, not very far. Right. So, like, not for emerging behaviors or things that you can't predict. Yeah. And so you can get guarantees about really, really low-level properties. To give you an example, and this is something that you really, really take for granted.

But when you're operating in a blockchain environment, the math is not guaranteed to be working exactly the way that you expect all the time, because you might have things like rounding errors, for instance, right? And so one thing that we can definitively say about Maker is that there are no rounding errors that will cause you problems down the line, right? And that's just a nice thing to know. And there's many sort of like really, really low level foundational guarantees that you can make that then allow you to sort of build confidence on a higher level that verification cannot target.

That's great. I think this gets to one of the key things that's just generally interesting about smart contracts and crypto in general is that if you have these security guarantees, if you are able to formally verify smart contracts in this way, what you're effectively doing is you're transferring trust that you would otherwise place in an institution into trust in code. and when you do that what's fascinating it's sort of like a compression algorithm you're like compressing human trust and you're putting in this little snippet of code which is as minimal as possible

the reason I like the word compression is like when I think about audio we've had humans making sound for a long time but when we got the MP3 suddenly that sound could travel across the internet at light speed and so what's great about smart contracts and especially formally verified ones

is when we can trust the code we can really increase the distribution of trust worldwide and that's really important when you think about money. Yeah, absolutely. I think that with these lower level primitive elements that we really, really feel rock-solid about, then we can just start to sort of

think about like a global society in a way that actually feels possible. Okay, so where are we now status-wise in the world of stable coins? Because a lot of this stuff sometimes sounds like research or a project. People often say a maker project, but you actually have an actual product in the marketplace. It's very funny for me, right?

Because I've been thinking about stable coins for so long at this point, like literally a year. we're seeing a lot, not necessarily appear on the blockchain, but definitely appear as proposals and white papers and stuff. So they're not actually in production yet, some of these other ones? There's been a few. What I should have said is none on Ethereum. But when you talk about the wider world,

there's actually even stable coins that predate die when you talk about not on Ethereum. Dye is not naturally antagonistic towards these other stable coins like it can feasibly be used as collateral in our system as well, right? And dye can be issued against them. This is the idea of multi-collateral. Multi-collateral die. introduce other collateral types, you could take these IOU-backed stable coins,

which are just backed by dollars in a bank account, and use them as collateral in the maker system to the extent that you trust the institution that's custodying those fiat dollars. Exactly, yeah. It's actually another way of hedging and spreading the basket of different types of collateral. Jurisdictional arrest. Yeah, and it speaks to how maker is sort of a wrapper for all these other asset types. So fiat-backed stable coins are one type of asset,

but there will be others, gold, and real estate, etc. And even some that have never been tried, in the history of humanity, which we call senior-ed shares, stablecoins, which are completely different algorithmic properties that allow them to be a lot more autonomous. What do you mean by that? Yeah, so I guess we've already talked about two of the three types of stablecoins that we see commonly. One is sort of fiat-backed IOUs.

And then there's Maker, which is crypto-collateralized. So instead of being collateralized by fiat, it's collateralized by digital assets and tokens. And there's a third type, which is sort of novel, and that is algorithmic. stable coins. And those are often referred to as senior-ed shares models. There's a lot of sort of different approaches to it. It's difficult to describe in as recognizable ways as I was able to describe Maker, because Maker is this really, really old idea of issuing debt against assets. But effectively, what you do with senior-rich shares is you take the future expected value of the network, and then you use that as sort of collateral when you issue new stablecoins.

So you're issuing stable coin against the future expected confidence in the network. Does that make sense? Yeah, I mean, the way that I think about it, and this is probably simplistic, is just that the supply of an algorithmic stable coin changes in response to demand, and the way that the supply expands and contracts is based on the price. So there's this algorithm, also specified in the smart contract that's adjusting, inflating the supply when the price is too high so that it comes down. What's critical here is, like, there's no collateral backing this.

There's nothing behind it. it's just people's belief that it will stabilize itself based on the suggesting supply and demand. I was just thinking in my head just now while you guys are talking about that, that this is going to really fuck with black shoals and like the classic derivatives models that finance has had for many ages.

Anyway, just sort of interesting implications immediately end in the future for the future of finance as well. Definitely, that's true. Yeah. So it's interesting. What I love about these three types of stable coins that you described is that there's a lot of experiments

and we're running a bunch of experiments and we're at that phase in this. But you guys are clearly beyond experiments. you have something that's not just a project, it's in the market. Help me quantify what volume of things we're talking about here. Well, I mean, there's many different ways to look at this, right? One of the most typical ways to look at this is actually the number of dye in circulation. Something like about a million new dye come into circulation every week as people lock up ether and issue against it, which is so cool.

We want to see billions and billions of die in circulation so that it can sort of take its rightful place as digital money. But on the more qualitative side, we also... have to look at all of the different activities that surround the ecosystem because it's such a complex multi-stakeholder ecosystem, right? And there's so many different indicators of momentum that we've seen in just the last three months, right? Like one of the first ones that really touched off the summer for us was this trade shift partnership that I spoke about a little bit earlier. The sort of digitized supply chains around the world, global supply chains, and be able to then marry that with Maker. Yeah, or with really, really high quality international finance, you know. Not only that, but we've announced, new bridges to exchange fiat currency for dye in a very seamless way. So that way people who expect to be paid in fiat currencies can still sort of be plugged into the die ecosystem because there can be this seamless back and forth

between the legacy financial system and this blockchain financial system. Not only that, but one of the really most exciting things that we've seen happen in the last three months was the actual implementation of a MKR governance vote, which is super For the first time ever. For the first time ever, yeah, which is super exciting because, like I said, MKR operates on this idea of stakeholder democracy. And so seeing it in the wild and seeing a proposal put to the community and they deliberated it for quite a long time and then came to a decision to essentially what they ratified

was their own core values as a decentralized autonomous organization. So the decentralized autonomous organization voted using the NPR tokens. I'm curious, you know, what is it like to be inside of the belly of the beast that's building the thing? How is building a decentralized autonomous organization different from a traditional startup, or is it? I think that there's so many different ways, right? Because a big part of it is this community, you know, and in general when you're trying to create money, the community and the widespread confidence is so important. When you're operating a startup, especially when it's small and early on,

you run the risk of getting stuck in a pattern of like navel-gazing or trying to guess what the market wants, and really having a tough time reaching your customers, especially when you're trying to make something that you hope will work in the market. This is the whole product market fit thing. Having the community involved from day one has been so useful towards seeing what is necessary, what is fluff, what is really connecting with people and making them excited. And not only that, but having the community so-so involved from day one and so tightly connected with the project actually creates this.

this enthusiasm that allows Dye to sell itself. And then the actual effort of getting the work done, this gets more into remote engineering, which is something that startups and DOWs both have to contend with. But I think that we've sort of learned to put a lot of trust in people when we might not know them very well. And that's scary. But I think that it sort of speaks to people's general reasonableness, you know.

And I think that, again, this is something that kind of goes underappreciated in blockchains. But at the end of the day, most people are reasonable. Most people want to do something great and they want to cooperate. They want to come together and coordinate. And they want to be a part of something that is exciting. And so whether it's the developers or whether it's like the community or whether it's anybody that's associated with the project, as long as the system is fundamentally transparent

and adheres to these ethics of open source and this whole like aesthetic of transparency, then everybody just knows exactly what to do. And it's amazing. It's like watching like a school of fish or like a herd of bison or something like that. Everybody just knows exactly what everybody else is going to do and they all respond in kind.

And it really is like a testament to the power of humans' abilities to coordinate on these like mass physical and like time scales and stuff. And I think a lot of that could potentially have to do with the fact that there's this token involved in aligning incentives. And the fact that anyone can just jump in and participate in this network and, you know, as a token holder, have a say and have an incentive to do the right thing. Incentives are huge, but almost as big.

What looms nearly as big in my mind is actually narrative. So having all the different people who really have come together to make sure that this happens right, it really flows from our ability to trust each other and to work with each other, and a narrative gets created there of like, we are all in this together and we're all trying to do this. I hope it feels really inclusive and accessible.

And so when somebody encounters the project, it lights up their antenna like, oh, this is a community. Oh, this is something that I can be a part of and I can contribute to. And a lot of that comes to narrative, founders' effects, the core values. I mean, the first thing that we voted on was our core values as a community meant so much towards creating a narrative of trying to improve the world that we live in. If everybody comes at this from like some kind of hyper-rational, self-centered, I'm only in it for myself mentality, then they'll just never coordinate.

They'll never cooperate, you know, and they'll never put aside their differences and do the hard work. of stabilizing die. And so that's what I consider my job is to really steward that narrative into a place where it's something that inspires everybody. But I don't ask a cynical question. When I look at the history of open source

and communities collaborating, there's always a point, a choke point at which the community implodes because there's a command and control. I mean, it's actually interesting. You brought up earlier the analogy of different types of collectives of animals like bison or ants,

or a hive mind where you have a bee and there's a queen bee. and my question for you is how do you think especially in engineering how does this sort of coordination work and where are the failure points and how do you sort of think about counteracting that because I just have a hard time as someone not in this fully believing that that's possible you know that you can't see someone face to face on a regular basis that you can have a remote distributed workforce we always hear horror stories about you know organizations falling apart these are at the end of the day not just crypto projects and communities and networks they are groups of people working together. What does this mean for human resources and like everything else? This actually gets back into the idea of trust, right? Because you're right that when a bunch of people come together to actually work on something, there's a lot of work that needs to be done. And something that we realized in Maker, which was, it's really tempting when you get into blockchains to say, oh, we have decentralized networks now. You know,

we have these permissionless open things. And let's throw away all hierarchy. Exactly. We're like this like radical, like post-hyrarchy. And then it's a lot of, all falls apart. Part of our experience of growing up has been to not be afraid of leadership. Leadership is so big with humans, whether they're coordinating on mass scales, on microscales, or anything in between. We've really learned that a good leader is worth everything. And people in our community have opportunities to be both leaders and to follow a leader themselves. So it's not something that's static and it's not something that's locked in. It really depends on the context, right?

And so I think that if you have good leadership, then you're in a position where if it's some aspect of the work that is very disconnected from you, like say I'm working on technology and somebody else is working on communications, knowing that there's good leadership there and knowing that that team respects that leader

and that that leader, when they speak for the group, they truly speak for the will of that group, makes it so much easier to trust a group that you might not be familiar with. It gets back at this compression of trust, you know, but I think that taking something that you don't understand and then compressing it down to somebody that you do know and trust that can sort of speak for the will of the

group will go a long way towards distributing a lot of these different tasks and keeping it so that it's human scale while at the same time mass scale. I love that because we have such a tendency to think of hierarchy as leadership and you don't realize that there can actually be leadership in a distributed decentralized way with leadership with a lowercase L or however you want to think about it. It's a new form. I actually think it's quite fascinating because when I think of the history of the firm, the classic, we talk about it a lot, the classic Coast paper in 1937, and all of management literature has flowed from this idea that firms are the most efficient way

to reduce transaction costs and do these things. And now is a move into a new wave of DAOs that is just the beginning. We're going to have a whole new body of management leadership. I mean, some of it will be fundamental human principles universal that probably never change. And some of it would just be, this is the very beginning. Like we might see the next Peter Drucker of DAOs. merge. It might be you, who knows? There might be a whole new way of thinking. I mean, even like lean startups came out of lean manufacturing and Toyota style management. I love thinking about

how these systems are going to change the future of all that. Well, Andy, CTO of Maker, Jesse, A6 and Z Crypto. Thank you for joining the A6 and Z podcast. Thanks. Thank you for having me.