Bankless - 130 - How to Fix DeFi Tokens | Hasu

Episode Date: August 1, 2022

✨ DEBRIEF ✨ | Ryan & David's Unfiltered Thoughts on the Episode: https://shows.banklesshq.com/p/debrief-how-to-fix-defi-tokens  This is Hasu’s 5th appearance on Bankless and this might be his best one yet. If you’re unfamiliar, Hasu is a crypto-economic researcher at Paradigm, strategist at Flashbots solving MEV, host of Uncommon Core, and more recently, a Governor delegate for MakerDAO and overall DAO governance thinker. In this episode, we’re going to reorg your brain about what it means to be a DAO. Hear what’s broken about DAOs, the potential solutions, what regulation could do to help, and so much more. ------ 📣 Forta | Help Make Web3 a Safer Place https://bankless.cc/Forta  ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  ------ BANKLESS SPONSOR TOOLS: 🚀 ROCKET POOL | ETH STAKING https://bankless.cc/RocketPool  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  ❎ ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across  🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave  🌴 MAKER DAO | DECENTRALIZED LENDING https://bankless.cc/MakerDAO  🔐 LEDGER | SECURE STAKING https://bankless.cc/Ledger  ------ Topics Covered: 0:00 Intro 6:10 DeFi Token Brokenness 12:36 Treasury Management 15:29 Uniswap Token & Fees 27:09 Uniswap’s Strategy 29:58 DAO Governance & Business 33:06 DAOs vs. Digital Organizations 41:55 Regulation vs. DAO Governance 44:53 Founder & Protocol Alignment 50:09 Regulatory Clarity 1:00:16 Regulation’s Bull Case 1:03:58 Game Theory & Gov. Adoption 1:08:05 DAO Constitutions 1:13:13 The Value Prop of DeFi 1:21:03 SubDAOs & Voting 1:28:00 DAO Costs 1:31:04 Summary & Action Items 1:34:09 Why Be Optimistic of DeFi 1:40:53 Closing & Disclaimers ------ Resources: Hasu https://twitter.com/hasufl  Fake Dao vs Real Daos by Gabriel Shapiro https://lexnode.substack.com/p/defining-real-and-fake-daos  The Market for Promises by Anthony Lee Zhang https://anthonyleezhang.substack.com/p/the-market-for-promises  A Stupid Simple Governance Framework by Andrew Beal https://30000feet.substack.com/p/issue-72-a-stupid-simple-governance  Hasu’s Recent Maker Governance Post https://vote.makerdao.com/address/0xafaff1a605c373b43727136c995d21a7fcd08989#delegate-credentials  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. 

Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Guys, great episode, great topic, great guest for you. This is how to fix defy tokens. We have Hasu, who is a prominent research, and I think one of the best people on Earth positioned to talk about this with us. We talk about why defy tokens are broken and how to fix them. really the hard work we have to do during the bear market. Look out for these takeaways. Number one,

we discuss what's broken about defy tokens today. Number two, we discuss why all roads seem to lead back to regulatory, question mark. We talk about number three, why the West might actually be the last to embrace crypto. Number four, we talk about why fixing governance is the key to fixing defy tokens. We have to do that first and Haseu dropped some tips for Dow's as well. And number five, we talk about why we have to fix defy tokens if we want to end the bear market. This is key as well, making defy tokens an investable asset class, shoring up our investor protections there. David, this was a really fascinating discussion with Hasey. What did you think? I have so many things to say. Some of them I'll definitely have to say for the debrief.

For the listeners that listened to my very quick interview with Kane Warwick out of ECC, he talked about this meta of in 2017, the scoreboard was, how much can your ICO raise? In 2020, the scoreboard was, how much can your yield farm get up in TVL? And then he predicted the next bull market, the next scoreboard will be how much fees can your protocol generate. And that third scoreboard is intimately tied to this conversation that we just had with Hazu, because how much fees can your protocol generate is going to be a function of the quality of the protocol, not necessarily the thing that's broken, but the quality of how well that Dow can organize around those fees and capture those fees and direct value back to token holders. This is the thing that is broken today,

is that we have stellar protocols and fundamentally broken DAOs. We have fundamentally broken Dow structures. And we need to fix that Dow side of things to bridge the fee flows that these protocols are just printing. They're money printers, but we don't have the pipe between the money printer and the Dow to fund operations to pay for contributors. and we go through all the variables, all the aspects of DAOs that need to be fixed in order to build this bridge between the fees that some DAOs are absolutely printing right now and then the actual organization that governs over these things. This is the conversation. I have so much more to say, Ryan, so we'll have to talk about it in the debrief. No, we will talk about that in the debrief. Debrief, of course, is our episode after the episode where you get David and I's raw thoughts. If you're a premium subscriber, you get that and we'll include a link for you to become a premium subscriber. It's really a fantastic episode. And I think if you're a defy investor, you want to pay close attention to this episode because

we talk about what's going to be required to make this a much more investable asset class as well. One of the big themes that we've said on bankless is we're speed running the history of money and finance. Then that quickly turned over into Dow's, we are also speed running the history of human coordination systems. And that theme is part of what we're talking about today, where this is actually a science that humanity has already perfected. It's corporate governance, it's human organization. We already know the answers to this things. We just need to learn how to apply them in a new Dow context. And so one of the big themes for this episode is how do we apply the lessons that we've already learned as a species onto this new form factor, which is DAOs. And so the listener

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wallets and defy apps. So whether you're new to crypto or you're a season pro, it's time to ditch those risky extensions and it's time to switch to the Brave wallet. Download Brave at Brave.com slash Bankless and click the wallet icon to get started. Hey, Bankless Nation. We're super excited to introduce you yet again to Hasu. Hasu has been on the podcast before. He's a crypto economic researcher, pseudo-anonymous. He's helping to build a frontier in many different directions. He's a researcher at Paradigm. He works strategy at FlashBots, solving, helping to solve the MEV problem. He's also a podcaster as well, a governor, a delegate. in many defy protocols such as Maker Dow.

And overall, he's definitely a defy governance big thinker. So wanted to bring Hasu on. And I guess the original topic for today was how we can fix DFI tokens. But I think in talking to Hasu pre-show, David and Hasu and I concluded that there might not be a clean answer on how to fix DFI tokens. So I think the orientation of this podcast is really the question. can defy tokens be fixed. Hasu, welcome on bankless.

We're excited to have this discussion with you. Yeah, hey, Ryan. Hey, David. Thanks for having me back on. Okay, I'm going to tee this up and just set this up. I feel like defy tokens, and I think maybe many people in crypto, feel like defy tokens are somewhat broken right now, at least from a value accrual perspective.

So the idea is many of our defy protocols actually are working really well. like Maker is working pretty darn well, uniswap, historic volumes, it's driving more transaction revenue than Ethereum at this point in time. AVE has proven itself in ways that the C-Fi lenders could not during this cycle. And yet, the value accrual for D5 tokens has been somewhat disappointing leads to the conclusion that maybe they're a bit broken right now. First, Hasu, what do you think about that statement. Do you agree that defy tokens are kind of broken in their current form? And what about them is broken? First of all, I guess, so you're saying that defy protocols do a really good job, but the value crew of the token is a bit disappointing, right? Yes. I wouldn't really

overindex on how the defy protocols have done in sort of this credit contraction that we've seen over the last month, I mean, the Defi protocols, fortunately, they haven't gotten into the business of unsecured lending yet, which is what really drive all of these lenders into bankruptcy. And so you have a pretty easy explanation for why they came out of this better than the SIFRenders, which is that they only offered repo lending. They're just all over collateralized is what you're saying. Yeah, exactly, exactly. So, yeah, Mechadau has like a small amount of sort of uncollateralized lending,

but that was sort of, is completely orthogonal to the crypto space. But also there's examples in DeFi of like Uniswap and Synthetics, for example, unrelated to lending, unrelated to collateral, that are also driving a ton of fees. So, yes, I take the argument that just like the over collateralized nature of defy lenders makes them meaningfully different than CFI lenders. But I think the real conversation is a lot of these DeFi apps are done. directing cash flows or directing fees, and yet none of those fees are falling into the hands of value capture into the token. Basically, we're not seeing token price go up. We're kind of

just seeing a leaky ship. No matter what defy protocol you're looking at, you're not really seeing any of these protocols capturing and maintaining value as a function of the fees that they are collecting in the space. Would you agree with that? Partially. I mean, I think UNISOP, for example, is still worth $7 billion fully diluted. I think off the top of Matt Lido are they somewhere between $1 and $2 billion, a maker around $1 billion. So we have defy unicorns, right? I don't think that the valuation is extremely unfair or anything.

If anything, they probably went up too high, I think. I mean, as is kind of expected in the cycle of crypto that we see, like kind of speculative mania. But I mean, nonetheless, it's really impressive to create, like in the real world, we would say it's extremely impressive to create a unicorn company. And so I think these companies are doing quite well, but maybe not as well as they could do if investors have more faith that these, I mean, that sort of certain overhangs would be eliminated. right and we can sort of get into what these are i mean um one is basically just to go like very

briefly through them i mean um so they don't they tend to not have sort of uh you know effective management um why because um these protocols need to be decentralized um they don't they tend not to do any marketing at all um because then you get into securities regulation um they tend to you know have really broad token issuance they tend to not drive any revenue to their token and so on so and furthermore we are in a market that is extremely cyclical so investors don't really like very cyclical markets and in many ways i mean sort of um i guess the staying power of defy defy has only been around for two years at this point um so i mean as an investor it feels warranted to put a large discount on on defyte tokens before you see some of these regulatory

overhangs and eliminated. Just to really drive this point home, you put out an article that was more or less, I think, close to the top of the bull market, talking about the actual fleeting nature of all these defy treasuries. We looked at the uniswap treasury and we saw $4 billion. And then we actually took a peek under the hood and it was all unitokens. which you were arguing doesn't really count as a treasury when it's denominated in an asset

that the protocol can just freely mint if they so desire. And so like if I wanted to, I could go mint a token, put it on Unswap and then mint 10 trillion of them in the back end and I could claim that I have like a trillion dollar treasury. It doesn't really work like that. Your treasury should really only be denominated in external assets and perhaps just mainly money's ether, Bitcoin, and stable coins.

And so you made this argument that the size of these treasuries we're actually extremely at risk from a bear market, which we tend to always know comes in crypto and it tends to always be, you know, 90% drawdowns. And that's kind of what we've seen in a lot of defy treasuries. And so this conversation of our defy tokens broken, is there a missing link between protocol revenues and defy Dow treasuries, I think is really, really salient. Yes. And when I say the words like, we have a leaky ship is that we have these Dow's, we have these orgs that govern over defy protocols on chain and those protocols direct cash flows, direct fees, but the fees that they are directing are not going into the treasuries of DAOs,

meaning that we cannot pay for labor, we cannot pay for capital expenses, we can't really grow these organizations in a meaningful way that has been tried and true throughout time. Would you agree with all these statements? Yeah, and I think the reason why it makes sense to bring up the treasury debate from last year is that this proves to me that most defy protocols are not run like businesses. Because if you were, like, if you were actually running your protocol like a business, then you would make sure that, you know, it has sufficient liquidity to pay wages and invest throughout the bear market.

But we are seeing the opposite. We are seeing that many protocols did very poor treasury management. and now find themselves in a position where, you know, they have to reduce the headcount. They have to stop incentive programs. They have to raise money near sort of at peak low prices. And this is all things that, I mean, if you had someone in charge of treasury management who had worked at a traditional company before, I mean, these are very basic things, basically. And I think if projects thought of themselves more as businesses, then you would not.

see some of these easy mistakes. Yeah, what's interesting to me is it feels like the simple question to me, and maybe sort of an archetype for the protocol works incredibly well, but the token feels like it's a little bit broken is probably the uny token, right? And the criticisms of the uny token right now are, oh, it's just a governance token. And by the way, governance doesn't work very well. Go look at the kind of the uniswap governance forms, and you can kind of see. and it doesn't even have value accrual attached to it right now.

And so Uniswap, incredible protocol working very well, showing what DeFi is capable of, but that is not translating into a token that is delivering value back to investors. What's interesting to me is like there's different answers to this. Like some people would actually say, uniswap should not have a token at all. Why are you even introducing a token in the first place?

It should just be a protocol that kind of works and there's no need for a token. So why don't we just eliminate the token? That's one potential answer to this problem. Another is, from I guess the uni investor perspective, why don't we just turn on fees? Let's start there. Let's start getting some revenue, I suppose, into the protocol so we can have some fees to govern. Of course, there's lots of governance issues to work through on the other side of that we could step

into. But why don't we just turn on fees? I want to ask you about maybe these first two things. So first, why does Uniswap even need a token? Maybe some of the critics are right that some of these protocols should be tokenless. And then secondly, if there is an argument for Uniswap to have a token, why haven't we just turned on fees yet? Why haven't the governor's done that yet? Okay.

So I think to get into the first question, depends what you mean by a token. Whether it's like, whether you mean that Uniswap should could in theory be owned by like one person, one company, one family, without putting any sort of shares on the secondary market, which is one valid interpretation, or whether UNISOP should benefit no one and be sort of a completely free open source project that doesn't ever charge a fee. And I do mean that more of the public good model.

Yeah. I mean, the answer is basically that you can do that, but there's not going to be another UNISOP after that. So I think you need the ability for, you know, people to get rid of. in order to have, you know, a funding market for these things. So if you need the token can never, you know, pay back the investment that the, the investors made in it, then basically the primary funding market also is going to dry up.

And then we just have a lot less innovation in DFI projects. So I think that the founders and investors need to be able to get rich from this or you will just see, no further projects. And so I think it follows to say that this is kind of the core argument as to why everything has a token. Because if you don't have a token, somebody will just copy you and then make a token. And then now that's kind of the new shelling point. It's an arms race, right? It's a little bit of an arms race, yeah.

That's why Uniswap did this in the first place, you might argue, as a response to a competitor, sushi swap. And so I think, Haseu, you'd agree with me is that many DAOs, many defyedfye apps have an undefined vision for themselves. You know, what are we? What is Uniswap? Is it a public good? Is it a for-profit exchange? And I think the argument that we're making is like everything kind of boils down

into a for-profit value capture governance token that governs over a D-Fi protocol. Would you agree with that conclusion? I think that if the answer to that is yes, then that's the brightest possible future for defy. Because if there's no value accrual, then I think the space of possible innovation in the future is going to be a lot lower. whereas if investors learn that you can make a lot of money from defyte tokens, then you will attract a lot of great founders, great teams,

you will unlock a lot of financial innovation, and you'll have a very deep and liquid market for funding these projects in the first place. Okay, so we're now operating under a paradigm that everything is going to have a token, the best token governance, the best Dow governance that leverages the powers that their token enables to them to best govern over their protocol and make the best protocol possible, which captures the best fees possible, will be the protocol that wins.

Honestly, this feels like very basic business 101, and we just kind of forget this. We are not escaping just like 101 rational economic truths by being in the crypto space. We still follow the laws of economics. We still follow the laws of incentives. And so, may the best protocol win.

And the protocol that wins is the one that drives a bunch of revenue to the Dow, grows the organization, and ultimately rewards token holders. Yeah, we on the same page? Yeah, I mean, I would think so, yeah. I mean, so that begs the question then in kind of the second point or the second criticism or the second question people have about something like the Uni token, why not turn on fees? Why don't they just do that? Why hasn't this been done? And we are seeing proposals that have come out over time. And I think some action has maybe been heating up in the last week or two around series proposals to turn on the uniswap fee switch.

But I'm curious, what's the history here? Why hasn't that been done previously, do you think? And does it feel like governance is broken? Because we can't do this simple thing. I don't think it means governance is broken. So why haven't we turned on the fees in uniswap? I think there are very good business reasons why we haven't done it. So traditional sort of Silicon Valley, you know, startup canon would be first,

you like in these kind of network based businesses business with network effect which definitely unisop kind of you know this applies to it as well because you have a two-sided market between you know traders and market makers really what you want to do is kind of you want to grow the network as much as possible and then only then when sort of yeah users have a switching cost to another network and gain more utility from being in your network than in another network, that's when you start to monetize and you can monetize up to their exit cost. So that would be kind of the traditional, you know, VC way of thinking about these networks. So, Hasi, this is like why Amazon ran with no profit for like decades

and why Facebook didn't even have a revenue model like, you know, four or five years into its business. To build that network effect, is that correct? Yeah, or Uber, I mean, Uber still loses money on every ride. Yeah, so, so yeah, I mean, these networks can require like 10 years of investment before they are so big. Or YouTube, for example, didn't run any ads for the first seven to eight years, right? And only when sort of the library of videos and the algorithm and everything was so strong that the users didn't really have an actual. alternative to YouTube, that's when they slowly started sort of to ramp up, you know, the adverts and started to roll out YouTube premium and all of this stuff, right? So that's why you can definitely

point to business logic and say, hey, that's why Unisop shouldn't turn on the fee switch today. But I think that there is still doubt in, you know, the general market's mind whether, unisop, even if it would make sense, we're in a position to turn on the fees. So I think that's definitely also a factor. So what about that second bucket? So let's say I totally understand the argument of not turning on the fees on something like the Uniswap protocol of we're building network effect. And, you know, we want to make this as low cost as possible to out-compete our competitors and build the biggest network. And yet on the other side, they're could be the business case to do this. Turning on fees, for instance, you got to think that that would

be a positive catalyst for the value of the uni token for one. And if the Dow has a lot of uni in its treasury, then that makes it more valuable, which is a good thing. It can be spent on other aspects of growing the UNISWAT protocol. Also, of course, this starts to create the first revenue stream, like a real way to bolster a Dow's treasury with actual revenue rather than just kind of their own token. And so this is a positive thing that could be poured back into investments in the business and could be used to kind of expand the Uniswap protocol. Buying a stadium, perhaps. Yeah. I could also see like the other side of the business argument, which is like we don't have to put up transaction fees to kind of maximum, but why don't

we start somewhere at some low fee just so we could start this process and being able to govern this cash flow? Just a signal to the market. Yeah, we're turning on a 0.0001% fee. Exactly. That would be enough. Yeah, that would be interesting. Or maybe just turn it on for some pools, right, just to prove that you can. But I want to give you sort of the counter the counter argument why you shouldn't do it. So right now, if you turn on the fees, like if you turn on fees for the entire protocol. I think what will happen is, I mean, Unisop, anyone can sort of fork Unisop.

And Unisop doesn't really have sort of a network effect that goes beyond like one pool, right? So even if it's just one pool, every single pool can be forked and sort of replicated in a cheaper way. But I think you get to, you can get to a point where that's not possible. And that's sort of, it seems to me from an outside view, sort of, sort of, of what UNISOP is doing, which is sort of vertical integration, right? Unisop want to control a lot more layers of the trading stack than they do today. What could that mean? And that could include like a wallet, a custody solution, an MEV solution, a margin solution.

And then once you have sort of all of these and they have all of these friction points together, by having them all from sort of one hand, Unisorp can become a lot harder to fork. And so it can make sense to grow the pie until all of these layers exist. And Unosop is sort of a more vertically integrated exchange slash wallet slash custody solution. And then Unisop, the protocol could still turn on the fees just sort of with a much stronger lock-in. So I think that would be the counterpoint. That's so interesting. And that's just also just so much more to build to your point.

And the question is like, where does that building happen and how does that get funded, right? Because it seems to be the case that Dow governance in its current state for something like Uniswap is not sophisticated, does not have the business processes, does not have the management processes. To pull something like that off, that feels like a complicated multi-products sort of investment strategy that almost requires like a centralized brain and entity, right? you know, not to pick on uniswap this entire time, but it is, as I say, kind of an archetype for all of these DAOs really. But like Uniswap has a labs function as well. Exactly. Which is somewhat interesting. That's what I was going to say. Uniswap has exactly what you described, right?

Okay, so that is the brain for this thing and that is an organized entity. And I guess Uniswap labs, I mean, most recently they acquired an NFT aggregation company, right? Genie, yeah. Genie, right. So is the idea that that becomes the brain? But then all of the other stuff that you just kind of, you talked about that Uniswap needs to build as part of its comprehensive strategy. The value of all of those things, where do they go? It's not clear that the value flows back to the Uni token. Maybe it goes to equity in Uniswap Labs. This is very confusing to me. And I think to everyone in the crypto space, trying to figure out what's the value of these DeFi protocols. Yeah, exactly. So for one, I think you have Unisop Labs,

which feels like it's pursuing like a strategy. like that, yeah. But that doesn't mean that, for example, Unisop Dao couldn't also pursue a similar strategy. And it wouldn't even necessarily need to, like, it's only lever is not the fee switch, right?

Unisop DAO can also be run just like Unisop Labs. Like maybe it can become second pronged to Unsob Labs, or maybe it can become something more like, like a headquarters, right? That where sort of you see

Unisop Labs, as one supplier to sort of the UNICEP ecosystem, but then there can be other suppliers. And for example, the UNICEFDAO could do like a token financing, right? They could sell tokens to the market and raise an actual treasury and then start to invest that in projects that they think will make the UNICEP protocol better. And maybe it is time for the UNICEFOB Unisop community to start taking over the Dow and slowly put in place of governance processes in order to manage such an expansion. If they were to do that, Haseo, I guess from the comment on

governance sophistication, it doesn't feel like defy token governance is there yet to be able to have the sophistication that you just mentioned, right? It feels like the most efficient way for capital to organize if you want kind of a central brain or decision maker is still, of course, entity that's a business that's registered somewhere. Are you optimistic that Dow governance can become a bit more business-like and capital efficient? And like, what's the gap in order to get there where we have a Uniswop Dow that is able to execute on a similar vision as an entity like Uniswap Labs? Yeah, great question. I think I'm definitely optimistic. I think the problems right now are being recognized in the space

and a lot of DAOs are suffering from the exact same problems and I think that all come to a similar conclusion. I mean, some might come to a different conclusion but I'm not too optimistic about those. And I mean, maybe it makes sense to describe

the status quo of, you know, most DAOs tend to have you know, just kind of one token, one vote. Voting schemes where anyone can make a proposal and then sometimes you have like like attempt checks via snapshot

so those are not civil resistant and then you tend to have sort of actual on-chain proposals where people can vote and then stuff goes on chain and I mean the reality is that there isn't really any

sort of management or kind of central brain that defines a vision for the project and a strategy to reach that vision and then operates the the data or the protocol like a business right sort of you know looks at you know it's balance sheet and sort of things what assets should we acquire what assets like should we build how should we invest our capital but also how should we finance ourselves right like when should we raise our next funding round, how do we make sure we manage our cash flows? And these are all kind of, this is like the actual sort of 101.

There's like the first chapter in every business book. But right now, sort of these sort of most basic functions are not filled in DAO's. And I think the reason is that everybody looks to everybody else to do it. So, and I think that gets us to what I think is like the first solution, which is just, let's identify the positions in our DAO's. definitely need to be filled and then let's make sure that we fill them with a dedicated person or a group of people that we then hold accountable. I said in the beginning of the show, it's not like crypto or Dethy or Dau's have broken through any sort of just like barrier of

the law of economics. We are following the laws of economics and we have as species refined what it means to run a business and, like, you capture a value. This is a known science. I think what's really missing from the Dow space is, like, paying attention to that model. One of the reasons, like a very small but significant thing that happened is that the meme, the name Dow took over, decentralized autonomous organization, which if you take at that at face value, those three words decentralized autonomous organization really actually describe the organizations that are governing over defy apps. And I would absolutely argue that no, it's just like this accidental meme that got caught on and now it's what we call these things. I've been a big proponent of dues instead of

Dow's digital organizations rather than decentralized autonomous organizations because decentralized autonomous organizations were supposed to illustrate something like where there's code at the center and humans at the periphery, which I would actually really argue is just what Bitcoin and Ethereum are, those are the actual DOWs, these like very robotic, no governance, humans at the output, sending in like value to the center, a bunch of algorithms, do a bunch of things, and then send it back out to the humans. When there's humans at the center, it turns it into something completely different. It turns it into a digital organization, which is basically a company, an LLC, but not. It's just on chain. It's just the new Web3, like crypto-enabled

versions of these organizations. And like this name decentralized has worked its way into the culture of so many DAOs, which are actually dues. And now it's like, oh, we can't have processes or order or organization. We can't have centralized leadership. We can't have a centralized brain because it's a meme in this space that centralization is bad. But it's the wrong form factor applied to the wrong organization. It's really dues and dues need to have and follow the same laws of business and economics that we've refined as a species over the last thousand years. And that's really the only way to, in order to mimic that tried and true business strategy of growing an organization and capturing revenue and paying out employees and labors and

contributors is the thing that we need to optimize for. It's really just a difference of who are these contributors. How do they engage with the due? And how does value flow more liquid and more easily throughout the do that is really the new paradigm that we need to optimize for? for. Hauser, do you agree with all these stuff? It depends whether it's a description of the status quo or whether you think that every organization should be run like a corporation or not. Well, that goes back to what we were saying, where all orgs have to have a token, and that token has to capture more value than any competitor token, and that is the moat. And so, yes, I would conclude that all DAOs must generally be run like a corporation.

it's just like the best ones are going to find and change the things like well there's like top down extremely hierarchical or like organizations in the web two tradfai world and they don't need to be so hierarchical they don't need to be so vertical and have such a like a strong chain of command it can be more flat and that is a goal to aspire to but there still needs to be a path towards we must collect revenue, there needs to be a central vision, a central goal, which leadership directs the rest of the organization towards. And then everyone else needs to be just like worker bees that achieve those, that means to the end. Yeah. So I think it sort of inspires the question, you know, why are the DAOs that we see so flat? And I mean, maybe a small part of the answer

is that especially some of the early crypto believers, they, you know, just see centralization is something bad that they want to avoid. So they really believe in the power of flat organizations. But I would argue that for, you know, the bigger part of the DFI founders is more that, you know, they are really worried about regulation. And really we're talking like different kinds of regulation here. So securities regulation.

So if you drive value to your token, you know, it might be a security. If you run like a hierarchical organization, it might be, you know, reliance on the managerial efforts of others might be a security. If you market it to like the general public or even perform like a public sale might be security. And then you get into like, okay, so money laundering, you know, tax evasion and the case of like Mecca, Dow, Avey, et cetera. You also get into like banking regulation. And so that's where kind of the A and DAO also comes from, which is, so Lex, Lex Note wrote an article about this a couple months ago and he called it how, I think the article is called something like how you can discern like fake DAO's from real DAO's. And he gave a good, I thought a good definition of what, you know, the three letters in the DAO stand for.

And the A for him, so that autonomous for him was another word for sovereign, meaning that it's an organization that doesn't, you know, have to, that isn't basically subject to any of these rules. It plays by its own rules. It's a sovereign player on the global stage. And, yeah, it's, in order to do that, you probably need a different kind of organization, one that actually has very few levers to pull,

or that is, you know, credibly decentralized, whatever that means. So I think the challenge that we see, I mean, either over the next years, we are going to see more regulatory clarity. And I don't just mean

sort of regularity saying that, you know, the doles don't apply to defyed tokens, which if that happened, that would be good, but probably unlikely. So what's more likely is that there even is a path to get regulated

it if you want to. But it's in like in the financial realm, it's extremely hard to, you know, acquire, you know, the necessary licenses to do any business to begin with. So I think what's more likely is that sort of we see a path between sort of regulatory like leniency, but also sort of making it easier to get, you know, the, the necessary licenses. And up to that point, I think the alternative is really to build organizations that are more decentralized than a cooperation, but that still capture some of the same benefits of sort of a more traditional organizational design. Yeah, and what that, what, what, which you know, those might be, we think we already touched on some, right? I think you need, I mean, you definitely need sort of, sort of

some degree of hierarchy. I think maybe it doesn't, maybe hierarchy is kind of the wrong word, but you have these different roles that need to be filled. And I think what you can't do is you can't rely on just random people from your DAO

to do it. You have to say, this is the exact role or the test that needs to be done. And, you know, anyone can sort of make a bid for that. But then sort of of once you get the job and you do get paid,

like we want to see an output from you and we're holding you accountable to that output. So yeah, something around these lines, I think. I don't know if this word resonates with you, Hasu, but structure comes to my heart. Not hierarchy, but structure. We just need some structure in these organizations. That's much better, yeah, I agree.

And I definitely want to put a pin on governance minimization as a competitive design structure, especially when it comes to regulation. and also talk about a little bit more Dow design structure. I want to put a pin on these things, but there's a rabbit hole I want to quickly go down, small rabbit hole, that is about the interaction between regulation and Dow governance.

And this has to do with the conversation of yield farming and how a lot of DAO's, a lot of leaders, before there was a token, the leaders behind a project, they come to make a protocol, then they release their token, and then they aggressively yield farm it out into the space because of regulation.

Hasu, can you walk us through the incentives as to why this was done so much in the last year? And what are the perils of this? What's the negative outcome of this? Yeah. So I think if you approach this from, you know, the mindset of the traditional investor or company builder, then usually, so what they do is kind of, it's called equity financing where you just issue tokens. And usually you do it to raise money in order to, you know, finance your operation and expansion and growth. But sort of the way, and it can mean also like raising money from investors and then using that money to pay, you know, large scale incentive programs like the ones we touched on earlier where you sort of subsidize your entire business like Uber subsidizing sort of every right that's taking place. It's basically sort of yield farming with an extra step, right?

So however, the way that it's done in defy, you know, it just sort of. It looks extremely, you know, broad and, you know, really large scale and really unfocused and sort of unstructured. And as a traditional investor, you kind of scratch your head about, you know, why it's done in this way. Especially when you compare it to a traditional company where, so usually, let's say, sort of a private company says 10%, you know, if it's kept at every round. and then raise money for it and puts that into sort of growth and incentives. Whereas here we have projects that give away 80, 90% of their cap table in a sense to investors. They're not investors, but sort of they don't even get any money for it. All they get is sort of usage of the protocol.

And yeah, I think we touched on one reason why they are doing this. they don't do it because they think it maximizes for growth. They do it because they think it maximizes for decentralization. They just want to, you know, get rid of the token and the control of the project as soon as possible in order to say that this project is now decentralized. Don't look at us, dear regulator, because we are not in charge. I mean, look, we only control 10% of the voting power. Like, this is, this is, we are not pulling the stream.

here, not making the decisions. And also more insidiously, it pays for liquidity, which towards the end of this bull market, it allowed the founders to go, let's yield farm, get rid of our own control, and also give us an exit because we only want to be around for six months, because that's like how much this bull market has left in it. And now we're out and like, we've made this protocol. And now like all these yield farmers govern over it, not us. And they got to exit. And so like no one in the traditional startup space, has like a six months like exit plan. Companies don't last for six months. Like you don't want to have a six months roadmap for the founders. The founders need to be locked in for a long,

long time. They need to be tied to the protocol for years. How would you ask for this dynamic to be fixed when it comes to like founder alignment with the protocol? Yeah, I mean, optimally, you do have sort of long vesting schedules for founders in defy as well, but there are definitely some counter examples that you're probably thinking of where sort of this may not always be the case. But I think you're sort of pointing towards a bigger problem, which is that, you know, just companies in crypto, not companies, but that protocols in crypto, they just, if we sort of stretch the analogy here more to the traditional company, then they just tend to go public extremely early. And like a traditional company might stay private for many years and only sell shares to accredited investors.

But then you have sort of a crypto company that, you know, it's extremely early. And they already issued tokens to the public and maybe do a public sale. And this definitely creates adverse incentives. I mean, for one, it's sort of subject the protocol to sort of the short term whims of the market. unlike sort of a private company where so the founders can just, you know, build and peace and sort of raise from investors. We have a long time horizon. But sort of more importantly, it gives these founders exit liquidity.

And it creates this, I mean, especially in a market where, you know, tokens are in such high demand. And really like what we're selling here is kind of stories that, you know, a particular project might, you know, make it big in the future. then yeah it does indeed create this incentive for you know protocols to emerge it really put sort of that have the the token as the actual product and are sort of all built around that and I think especially sort of in last year in what we what we saw labeled as like defy 2.0 I think that entire class of projects I think fits fits the example of sort of sort of The token being the actual product, very short vesting schedules, etc. So I think these primarily existed, yeah, unfortunately to enrich their founders and the earliest investors. There is a brand new staking feature in the Ledger Live app today. We all like staking the assets that were bullish on. And now you can stake seven different coins inside the Ledger Live app.

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You can find me hanging out there sometimes in the chat. So I'll see you there. What's interesting about this conversation is I feel like all roads lead to the same destination, which is defy has a regulatory issue here. We don't have the regulatory clarity. it's like why are D5 tokens broken? Because we can't do so many of the things we want to do because we don't have regulatory clarity.

As you were talking, Hussu and as you guys were talking, you know, I cooked up this meme. It's like I really feel like it's the case. Like the world if we had regulatory clarity in D5 would be so much better. And what I'm showing is like a picture of, you know, the classic meme template of a future world and everything's amazing and everything's futuristic.

It feels like there's so much more we could do in crypto and in Defi, if we had this bridge to regulatory. You know, so often I think in crypto, we talk about scalability sort of one-dimensionally, you know, transactions per second, for instance, or even if you broaden it, you might say the market cap of crypto assets is a dimension of scalability, or you might say user experience is scalability. But I also think that regulatory bridges are an element of scalability that we need. and we are kind of like growing in defy in this strange way because of like let's be honest

there's some regulatory arbitrage here right we've had to sort of grow in this way and the only thing that regulators will really allow or have clarified that they will allow it seems is the a in for autonomous in decentralized autonomous organizations so we've kind of constrained the design path for these defy protocols so that we're maximizing decentralization, but the truth is some protocols and some projects need much more structure than complete decentralization will provide. And so I guess this is a scalability limiter on defy and on our industry. I don't think it's insurmountable by any stretch of imagination. I think as the uniswops of the world and the defy protocols of the world prove their

value, we will earn more regulatory legitimacy. But it feels like that is the mismatch here. Are you seeing this as kind of the common theme across all your research for, you know, why some of these things are broken, why some of the governance could be improved? Like, we know what we need to do with DOWs. Like, there is a recipe book for creating a structure for companies. And we could pay for the best managers and like people in the world who are fantastic at this, but we're not allowed to create the structure because of regulatory concerns. Are you seeing this? You know, I actually kind of have two pieces here that are, that go back to sort of what you said about this regulation.

And I think one is one, one is kind of a thesis. I think that regulation is not going to improve any time soon. And it goes back to, it goes back to this article that I wrote already many years ago, which is called independent property rights. And sort of how Bitcoin back in the day is this new property layer. And I think you can really think this, further for defy like blockchains in general are kind of um you know proper sort of property or like

systems to enforce uh sort of property or promises between people right and and the financial system and there's like a really cool article that we can link for your listeners it's called the market for promises by Anthony Lee zang and sort of he makes the case that sort of financial assets are really just, you know, promises between people, like whether that means that, you know, equity, I get a share in your business in the future and like a claim on your dividends or, you know, debt, I get sort of claim on, you know, repayment of the principal plus, you know, interest or whether it means sort of more complicated structures, like derivatives on sort of, you know, stock market indices or, you know, futures options, all of these kind of delivery products. And

there is a big reason why sort of financial markets are so strong in the West and so weak everywhere else, which is that, you know, markets for promises depend on the, like, lower layers sort of that can enforce actually these promises, especially under very adverse conditions. Court systems. Settlement. Yes, exactly. And this goes back to like sort of strong property rights and the strong independent. legal system. And so, yeah, markets for promises have have been traditionally sort of been one of the core

things that, you know, nation states and governments in the West are providing. And this sort of locks a lot of, you know, both people, but also companies, especially companies, you know, into their respective domains. And so I think this, like, I think there is a case here for why the Western nations will fight very hard for domain over these market for promises. Hussu, let me make sure I understand that case. So this is the bad case. I'm hopeful you also have a good case, right?

So we'll get to that in a second. But like... It's not, if you read the article for Anthony, it's actually a bull case for him, because what he's saying is that the West will shut down, you know, shut itself out of this innovation. But especially everywhere else in the world, where sort of you have very weak property rights and legal systems,

that's where there's much stronger demand for an independent market for promises that especially companies can tap into. And that's like a real case of how Defi can bridge to the real world maybe much faster than currently anyone is expecting. And he's saying he could imagine sort of a wild west for financial innovation, and emerging in sort of Southeast Asia and Africa and all of these sort of and South America and all of these places that sort of are sort of not really served right now by the capital markets of the West.

And so it's actually sort of a mix between like a bear and a bull case. But I really love this as an explanation of sort of why def, like why do we defy? right um and it's kind of that um you can't have markets for for promises without a strong enforcement system for these promises and um without without effective markets for promises our economy would be uh you know one percent the size i'm like really convinced of that because like our economy is so financialized and financialization and like empowers the economy so much that like If you have this, you can really like supercharge your economy. So I think that's definitely sort of one case.

I just want to comment on that case. So first of all, I think David and I, the bankless thesis, 100% believes that these are systems that are about property rights at the core. That's a base layer. We don't call it the bankless nation for nothing. You know, like money is just another form of property, of course, right? Yeah. And that's what these ledgers are.

They're ledgers for digital property rights. But just to kind of echo in, make sure I understand what you're saying. So it's a bear case for if you live in the West, maybe, or if you are a Western government, the bear case is the West won't accept it. And I think it's because you were saying they believe they already have a system. And this upstart competitor is kind of infringing on their territory. And so they're not going to embrace it. You know, best case scenario, you get sort of like a shrugging the shoulders, ignoring it.

And like maybe it eaks itself into a few niches here. or there, and that's maybe the West reaction or the countries with sophisticated financial markets and property rights system. But the bulkcase on the flip side of that is in emerging markets where there really is not a sophisticated property rights system in place.

They will be very quick to embrace these technologies. And that's great news for emerging markets because they will be able to leapfrog like the West. You know, it's kind of similar. We've seen this play out in technology in the past where everyone kind of skipped in the emerging markets, you kind of skipped

the PC and the laptop and you went straight to smartphones. They're the kind of computers and they built out telecom networks to support that. So that's sort of the argument. Yeah, exactly. And like mobile payment penetration is like much higher in Africa and India than like in

Central Europe and the US for example. Yeah, so is it the tone that countries with sophisticated property rights system, they'll feel threatened by this technology So they'll never really want to embrace it. They'll be dragged into it kicking and screaming. Is that the case that you were making? I think it's possible, yeah.

Okay, what's the second case then? The second scenario. So the second case would be that regulation can actually be a bull case for defy. And this is kind of one that I have been giving for years also with regards to sort of Bitcoin in the past. Because regulation can also serve, you know, defy projects to protect them from, incumbents. If there's actually something that DFI projects can offer, you know, in spite of regulation, that incumbents can, then that's a big competitive benefit.

For example, they can offer banking services without a banking license. They can, you know, not pay taxes. Bankless services, if you will. Yeah, exactly. So, yeah. And so I think you see this. I'm not sure if the banking sector is sort of a good example for this,

but in general, sort of the history of regulation is very often you have sort of incumbents pushing the government to add more regulation in order to create barriers for new, that make it harder for new entrants

to come into the market and compete with them. So they kind of do this to protect that turf. But then when someone comes into the market anyway, for example, as was the case with Uber and Lyft versus the time, taxi medallions, then all of a sudden you see that the regulation actually works against the incumbent and it makes it harder for them to compete against sort of the new entrant. And then all of a sudden you'll see the incumbent asking the government to please deregulate so they can,

you know, compete again. And yeah, so I think something like that is also possible where if we actually manage to find or create, you know, working defy protocol, that can scale and that are supported by, you know, actually decentralized but nonetheless effective organizations, then it means that you probably, like these projects probably have a lot of advantages that their regulated counterparts do not have. I love this example. I think we're actually seeing this play out. And it strikes me that both kind of your vision one and your vision two could both be at play

at the same time. It could be like some combination of these two visions. but I want to ask you about the point of like one incumbent reaction you mentioned is the incumbents go to regulators and they say, we're too regulated, please deregulate us. The other reaction incumbents might have and, you know, we might be seeing some of this already, is the incumbents might point to the defy protocols and they might say, this isn't fair. You better go regulate them, right? Like we have Sarbanes, we have like 10K report, we have all of these things. They don't. So you better go. get them out of here or regulate them in the same way that we are regulated. Do you think that's a possible incumbent reaction? Oh yeah. Oh yeah. 100%. I think that's probably already happening. Yeah. I mean, for example, I think definitely like stable coin issuers are effectively shadow banks, right? They are sort of issuing their own euro dollars. And what, what you, I think what you will,

what you will. So if like tether and circle, et cetera, like keep growing. like that, then you would probably see, you know, incumbent banks that actually have banking licenses and so on, they will, you know, push for, you know, these competitors to be regulated because, of course, it's bad for the banks if someone can offer banking services without banking licenses. So I just want to, you know, zoom out because this worry from critics or people in the space about crypto has been present with crypto and Bitcoin since the early beginnings, which is basically the worry of the government is going to not allow this. They are going to regulate this

thing that you're trying to do out of existence. They said that in the early days with Bitcoin. Like you can't create a decentralized money. What are you talking about? Like governments around the world have thrown people in jail when they've tried to create monies in the past. And yet, Bitcoin is still legal here in, you know, 2022. And it is like more saturated and more part of mainstream than ever. So at some level, this problem has been with us forever, and yet crypto has survived and crypto has kind of infiltrated in all of these various ways. I'm wondering if you think that the basic argument of game theory is kind of at play here, in that if you are a crypto-regulatory-friendly

jurisdiction, you're going to attract more productive citizens, more jobs, more economic benefits from a friendlier posture to crypto than an anti-crypto posture. And so as a country, as a regulatory apparatus, you will be slowly forced to embrace crypto for game theory reasons, because you can't let Europe, if you're the U.S. have the advantage, or if you're China, you can't have the U.S. have an advantage. You can't let emerging markets leapfrog you. This has always been sort of my hopeful response when people say, no, the government's going to this stuff you're trying to do out of existence, the response has always been,

no, the game theory won't let them because this technology is so productive, so useful, that they'll be forced to adopt it in the same way that countries were forced to adopt the internet. What do you think of this argument? Yeah, I think this argument has been in play for a long time. I think there's definitely some merit to it. I think it applies more to smaller countries

that have sort of more to gain than to lose. And I think it's not really like unexpected that we see sort of these smaller countries making moves on, you know, crypto regulation and also, you know, buying crypto, et cetera. So far, I can really point to, you know, an example where it really sort of worked out for them in a major way. But it's like, of course, it's really early, right? So I think definitely one place where we shouldn't expect it is maybe in sort of, I think in Europe, it's much harder. in the U.S. is much harder.

Why? Because, I mean, these have much more to lose. So they have sort of the incumbent currency, he's China as well. So in like the context of sort of layer one crypto, I think for them, you know, it just makes much more sense to ban it than to support it. But if you don't have sort of a reserve currency, then I think it's much more, you know, for you, it may not really.

matter like if it's like the dollar or the euro or the yen or you know some cryptocurrency so i think you're much more open to you know whatever option and you're you're more interested in you know attracting capital attracting young people etc so i would say this argument um of like yeah it's kind of a in a sense it's like a tragedy of the commons right from the perspective of sort of the the protectors of the existing system where like there's always the incentive for some nations to effect and, you know, track these resources. And sort of that's, I think, what we've seen. And that's what I would, you know, continue, expect, you know, us to continue to see. So we've talked a lot about regulation and what we want to see out of the regulatory world that would enable Daos to

be their best Tao, be their best version of themselves. I think if we flip things around and we put ourselves in the shoes of a regulator, we would also ask for Daos for the same thing, which would be clarity. That's one thing that DAOs don't really have to offer right now. Daos are so chaotic, they're so undefined, they need more clarity. Regulators would love to be able to appear inside of a DAO and see what's going on in there, and maybe that's where we can meet in the middle. And what I mean by this is that we've talked about the need of structure and organization inside of DAO's. But Hauser, you've been a big proponent of DAO constitutions, as in setting a vision for a Dow and having this like central North Star piece of literature that allows for a Tao to organize

around itself. And I think this can start to solve both internal problems to the Tao, where Daos don't have their own internal vision for what they are. They don't have their own internal identity. But also it's this thing, this constitution, this document that we can take externally and show the world, like not only do we know who we are, but we can tell you the world who we are too. Can you talk about the role and importance of having like a constitution for a Dow? Yeah. But before I do that, I want to actually pick up on something that you said like right before, which I think is really interesting, which is that I'm not even, I'm not sure about you.

But for me, I'm not like, do you feel that sort of token holders in a Dow right now are more protected than, you know, equity holders in a company in the West? No, no, because of what the hell is a Dow? It's the same thing. Like, I don't know what it is. Exactly. So, like, personally, I feel like it's like it doesn't even feel good to say, you know, DAO shouldn't be regulated or like people should buy Dow tokens.

It does, doesn't feel good to me because when I look at, when I look at corporate governance, you know, every, so the way it works basically is every country has sort of a list of rules for corporate governance. These are sort of, you know, best practices that all companies that are listed in the public markets have to follow. And there's a lot of good stuff in there. One is that the company should be run, you know, to the benefit of the shareholder. And then there's one that sort of all stakeholders of the company that's like suppliers,

employees, customers, et cetera. They should all be, you know, considered in the decision making. One is about the protection of minority shareholders. And one is about accountability of the management to the hook to the owners of the company. and sort of that the owners get to elect the board and then the board gets to elect a CEO and fire them. So you have like really clearly defined sort of structures of accountability and so on.

And also sort of a big one is about disclosure, right? So what who is supposed to have what information like the managers and board members? Like do they need to, what do they need to disclose? For example, as a manager, you're not allowed to trade. you know, the stock of your own company, stuff like that, right? And if I look at DAOs, it just don't see any of the same protections. And that just makes me feel really bad about investing in DAOs.

And I think if we create, I think, so the biggest thing that we need to do is like, first of all, we need to get like level with, you know, the shareholder protections that exist in the traditional financial system. Because in theory, we have all the tools to do it, right? I mean, in theory, we are operating. In theory, like, decentralized organizations should serve to protect minorities shareheads better, but in practice, they do it worse.

In theory, they should be, like, more resistant to entrenchment and insider dealing, but in practice, they are not at all. In theory, there should be sort of harder to change and, you know, trust this, but in practice they are not. And so, yeah, I see all of these problems right now. And I think we need to like really start to, you know,

look at, you know, corporate governance best practices, not because we want to turn DAO's into corporations, but because sort of corporate governance is fundamentally about solving principal agent problems, sort of between minority and majority shareholders, between owners and managers, between, like, it's like there's so much good research on this. Right. It's a science that they have perfected. And we would be the hubris of DAO's to think that that is just like invalid and not relevant to them is off the charts.

That's exactly what I think. But do you know, as you guys are talking about this, what I find that I completely agree that the investor rights, investor protections of DAV tokens suck. they're inferior to holding U.S. stock. Like, they totally are. But you know what is better than U.S. stock is like the underlying crypto rails of an ERC20. Access. Like, that my Apple stock is stuck in an E-Trade account somewhere,

and I can't do jack with it, right? Whereas, like, in this programmable defy world, my goodness, you could do all sorts of things with an ERC20 token, unlock certain pages, like Discord access, vote in different ways, lock it as collateral and another protocol, trade it anywhere in the world, all you need is an internet connection, withdraw at any time. Like, that's the value proposition of the thing is the token that's on these new digital

rails that are open, permissionless, and program. It's almost like we've built a better banking system, but we haven't built a better investor rights asset yet. 100%. So we can point to all of these things that are sort of worse for shareholders right now. But we can also point to a lot of things that are better than traditional markets, right? I mean, so crypto defy projects, they get access to if they want to raise from like public markets, like public markets, they get to tap into, you know, very liquid sort of funding markets.

They get to attract customers from all over the world without like having to acquire all of these regulations and so on. on, you know, they can be non-custodial. They can be extremely cheap to build. I think that's sort of one of the biggest. Like the go-to-market in DFI and sort of the speed with which you can iterate on your product is just insanely fast. I was talking to a DFI founder the other day. And he said, Hasu, like, we build this. Like they have a main net protocol out that they build on less than a million dollars in funding.

and it now has over like 100 million TVL and making revenue already. And I mean, so they built this in like one year on less than a million dollars, which is insane. And so in theory, sort of all of the promises of Defi they are holding, right? It's like not the entire stack is broken. Like some parts of the stack are extremely promising. It's just that sort of the organizational part, and sort of the, you know, the alignment between the shareholder and sort of the operators and sort of the shareholder protections.

I think that is something that we need to focus on next and really look how we can address it. And I think that's what brings us back around to, you know, what you were originally asking about with the constitution. Yeah, tell us about that then. Yeah. So I think the governance design space, I think, I mean, there are some, they are like a lot ways you can approach this, right? So you can have, I mean, of course, it's best if you have a protocol that sort of you put it out there and it's set in stone. It's like almost like an NFT, right? Almost like

Bitcoin. It's funny how like the Bitcoin protocol is also almost like an NFT in the sense that it has barely been improved after the original launch. And so you can really not say that there's any expectation, you know, that the value of Bitcoin sort of depends on, you know, the managerial effort or of anyone, right? Clearly not a security, Gary Gensler, okay? Yeah, exactly. But unfortunately, like, if you can have that, I mean, that's great, but it's also extremely hard.

And I think most, you know, defy-procats are not going to fall into this category. We are seeing some experiments that are maybe like worth pointing out. So I think Rye is kind of very, you know, governance minimized and then liquidity is, somewhere sort of in the middle. And so it's not like there are projects kind of experimenting with how they can minimize the need to govern. But then there are also others where, you know, just decisions need to be made in order for, you know,

this thing to work. For example, looking at Avey or compound, they need to, you know, tune interest rate curves. They need to decide what collateral to add and, you know, all kinds of parameters. They need to decide how to, you know, expand, especially now that the defy world is getting more and more fragmented, they need to like

decide how they want to expand across, you know, to other defy chains and how they want to like set the debt limits, how they communicate across chains. There's like so many technological and organizational problems that they need to address also like how to set incentives. Really like it's like a lot of, a lot of things that if you want these to be successful then it's just like it's a big complicated problem that you have to solve and so the question is then if you don't have the luxury of having you know a protocol that doesn't need any governance

how can you do it in a way that is not strictly hierarchical that is not centralized basically you don't just put a traditional cooperation in place to manage and run this protocol um And so I think it goes back to like this one keyword that we had, which is structure, right? If you need, if you need a group of people to organize or to sort of, you know, make decisions, then, you know, at the very least you know, you want it to be like less chaotic than it is right now. I think that's where this idea of sort of a constitution comes from. So we said, okay, let's put as much sort of in code. as possible and make it like immutable. But what if we,

what about things where, you know, we can't do that because it's not code because it's, let's say, it's like the vision for protocol. And it changes like once every year or once every other year or whatever. Or what if it's about sort of the relationships or like the rights and responsibilities of different actors in the system?

I think this is stuff that you would, that you can put into a constitution. And then the constitution says, okay, this is all the stuff that we can't put in code. Here's the vision for what this protocol is supposed to do. Defines here these five groups of shareholders, and they have these rights and responsibilities. And yeah, these possible should never change.

And if you do change them, then at least you know, you can't just change them on like a higher layer. Then you need to actually go back and sort of deal with the constitution itself and say, hey, I'm making a proposal to change the constitution. you know, this and that should change or be amended. And you can, and this can, for example, require like a lot higher buy-in. And like the decision for that needs to be sort of a lot more, and it needs to have a lot more consensus than, for example,

it's something that happens like on a layer like way higher on the stack. So this is like an organizational operating system, basically. Social code. Yeah, great point. And this is something I've actually spent a lot of time thinking about. And I don't really think. think that this actually stops at a highest-level constitution. Dow's blockchains themselves operate, kind of, I think they will operate like a court system where, and we also still need to talk about

in this episode, token voting and the broken nature of token voting. But I think the token vote, the global Dow token vote really only needs to come to vote collectively as a Dow when it comes to change the constitution, as some part of the Dow is going to propose that we're going to change the constitution of the Dow in this particular way, that triggers off a global token vote. But as there are sub-constitutions, because there's going to be sub-DAOs, we've already seen AVE, synthetics, bankless DAO, break off into sub-Dows because of, you know, modularity is just a strong design structure and is efficient when it comes to DAO organization. And so, like, say you have, like, the meta-Dal, the Maker-Dow, right? And, like, Maker-Dow's got the core units,

but then you have like the growth core unit of MakerDAO and they can have their own constitution for the growth core unit about what the growth core unit does and that's a constitution that only the growth core unit votes on not the rest of the DAO only that growth core unit and like maybe the growth core unit fractures off into three more sub-dows that are just you know teams just like work streams and they have their own micro sub-constitution and that's just like what's they are deciding to do as a micro sub-dow in Q3, 2020. And so what this turns into is like a tree structure, which is basically like a GitHub repository. It's like this fractal tree structure that grows into and creates a modular DAO that has every part of it being defined by a piece of

literature, a vision, a roadmap that allows this organization to be highly scalable. And this, not just like the meta-constitution for the DAO as a whole, but also the sub-dial. and the micro sub-dows, each also get to concretely show the world this is what we do. And it works like GitHub. It's like we merge this into our local constitution, which gets merged up into the greater's constitution, which emulates the goddamn United States of America. Again, a tried and true science that we already know about to this day. So I guess, David, also what you just described to me, this is corporate governance, man.

Right. So replace sub-dows for like business unit or department area. and replace kind of like the subteams you were talking about to like different areas of responsibility and incorporation. Replace token vote with a shareholder proxy vote of some sort with delegates. I mean, we're kind of like back to like run these things like a business. I'm sorry, Ryan. Have we said the line we are speed running the history of human coordination enough on this

podcast before? I just think some organizational structuring experience is going to come to this podcast and be like, yeah, guys. That's how you do it. What do you think? He took you 12 years to figure this out. What do you think of this, Hossu? Yeah, he should have Professor Andy Hall on the podcast, I think.

He think he would be a tremendous guest to riff on the subject with, yeah. Is he kind of an org structure specialist? Exactly, yeah. He's been making some contributions, some articles to make a Dow and recently published something for A16C. Yeah, he's like of the opinion that we need, that sort of, um, that sort of, um, of we need to get to like the representative democracy stage. So there's something we haven't touched on yet, right, which is kind of owners making decisions versus sort of their elected agents

making decisions on their behalf. And then you want probably, I think what this basically does is if you look at ours today, then you just see sort of huge voter apathy. So you see like 5%. 5% of like the voters, the votes participating in every vote. And what this means is, of course, sort of the most motivated, like, if there's one motivated way, they can push through almost any proposal in Daos. And this is like part of what creates this, you know, big problem for minority shareholders

in Daos, which is that if you're aware, then you can do whatever you want. And oftentimes, sort of, they have different incentives than, you know, a shareholder that's like a smaller size. right um and so what we really need to do is we need to you know get uh if participation up in these votes and i think it's much easier to do if you sort of reduce the mental overhead and the decision for uh governance participants to uh okay let me vote like let me sort of elect a person who i think like really represents what i think this tao should do versus let me vote on you know all of these all of these 10 proposals that go live every week.

So the mental overhead for, you know, the law is extremely high, whereas the mental overhead for the former is very low. And so, and then sort of your delegates, they can be, you know, this can be sort of full-time, you know, salary droids. I think we are, this is something that we are now seeing in Daos, which is, it's a step in the right direction because it allows specialization in decision making. And it allows like consistency also among who the decision makers actually are.

But yeah, I think this is only the starting point for I think a lot of the innovation that has to happen in Dow governance. Certainly. And I believe a proposal for Maker Dow, which has kind of outlined the structure that you think MakerDAO needs to go in. And this is where this like constitution idea came into my head. And you said like Maker Dow doesn't have. have a aligned vision. They're competing visions for what MakerDAO is. Some people think it's a public good. Some people think it's a decentralized bank. Some people want it to do real world assets. Some people want it to be ether only. And this lack of vision means that like different parts

of the Dow are having this tug of war against each other trying to pull Maker Dow in this different direction. And just from a raw energy perspective, when there's a internal tug of war pulling one thing in two different directions, you're going nowhere because you're you're tugging against each other. But if you can get everyone to point in the same direction and then tug, that goes from a tug of war to progress. When we talk about why we need how to fix defy tokens, when we turn our energy, which is tugging one rope against our own teammates, and that rope's not going anywhere, and we reorient it to we tug the organization going in the correct direction. Like, the current state of Dow governance is a big hole that we need to plug. I don't know if you've

ever crunched any numbers or done any nap and math hazoo as to like how costly Dow governance is. But I would imagine that it's one of the biggest expenditures that DAOs have agis and an organization is that we need like global token votes on like who's going to have what for breakfast on that morning. And that's costly. That's expensive. And that ends up as sell pressure in the secondary markets. Have you done any sort of like analysis or have any thoughts on this? I mean, that's sort of the actual cost, the tangible cost. So, Mecca Dow spends like, I don't know, it has like, it spends, it pays two million dollars, I think, right now a year on, you know, paying delegates.

And then there's, of course, all of this, the cost of on-chain voting. But then there's all of this time that's being put in by all of the participants playing these governance games, right? And I think, so the biggest problem that I see is that sort of people who are good politicians, they, you know, sort of are much better. at playing these games, right? I see people who have like a very good strategic mind to understand very good sort of what the business model

of MakerDAO should be, but maybe they are not the best communicators. Maybe they are not the most popular. And I think so one good way that, for example, representative democracies in the West have found what this is that there are elected parties and then they get sort of, if you vote for them, they go in power. But then you also have full-time employees that work for the government all the time. And they don't need to be elected, right?

They are actually put in place on merit and not on popularity. And so I think that Daos, they kind of meet both, right? I think there's right now, I mean, very clearly there's way too much voting. And so this covers the tangible cost, but also this huge field of opportunity cost. because we don't actually know where we're going, we don't have a coherent vision. Instead, we are voting on every kind of micromanagement decision. Although if we ever set down and put our strategy in place and our vision,

that a lot of these decisions would actually derive automatically from them. And so one big theme for me personally in governance and with all of the projects that I work with is sort of don't have governance over decisions, have governance over processes. And then sort of decisions should derive from processes. And the processes themselves, they can be updated much less regularly. So, Hasu, let's summarize this and turn this into some action items for all the Dow governors out there that are listening to this, who are now inspired. Like, I know what I need to do to make my Dow work.

What are the simplest, lowest hanging fruits that all DAOs need to consider and engage? in what they should tackle first and then after that like where should they go after that just what are the action items here let's see okay so a big one is um you know treat your dow like a business that doesn't mean treat it like a corporation but you know think of it as like think of your dow as having a balance sheet and you know needing to manage its liquidity and its cash flow and needing your doubt to make money right maybe not today but you should have a plan how you want to grow it and how you want to make money in the future because otherwise like raising money from people if you don't have a plan on making money for them in the future,

I think that's unethical and that's not, you know, actually good for crypto. And then number two would be, I think we need more structure in Daos. I think we need governance over processes and not over decisions. So I think a constitution would be great for every DAO. Like let's just eliminate discussion about 90% of things. and you know just focus on it's painful to do a constitution once and like agree on it but once you have it

then all of a sudden everything else becomes much more streamlined and much more productive because now you talk about okay how can we do thing X and not all of the time should we do X, Y or Z and at every sort of decision point sort of these fundamental debates pop up again and so yeah I think I think more structure is good. I think you want to have like small committees. I think if you want,

if you want thing X to be done, then what the DAO should do is should say, like, here's task X and like let's put like a committee of these five people in place. And they don't even need to be employees of the DAO necessarily, right? They can be like one executive of the DAO and like other external people, basically specialists and whatever that thing that needs to be done is. And then, you know, they get a clear scope and, you know, they get the thing done. And I don't, I don't think that this really, like, constitutes sort of centralization, right? It's really just, like, a decentralized group of people coming together and saying, we need to do this thing X, and here are like five experts who are going to pay,

and they are going to do it. And if they did the job, then we release the money. And I think that's kind of, this kind of, you know, Dau's making high level, like, debating about vision and strategy and, like, making high-level investment allocation decisions, I think that scales much more than what we see today where sort of a lot of small decisions are also kicked to two token holders. So Hasu, as we start to close this out, we've talked about so much, you know, so many things that need to be built, really. And this kind of reminds me of, you know, it's only in the

bear market. We start like peeling these layers back and talking about this deeply and thinking about it. I think your excellent post from earlier this year about Dow Treasuries somewhat fell on deaf years because people were like, hey, it's the bull market. Like, don't be gloomy, Hasu. Now people are paying more attention and it's clear we have so much work to do. Can you give me the case for why we should be optimistic about defy and tokens? And do you believe we actually should? What other reasons maybe for optimism and why are you spending your time here? Why are you spending your career here right now, Hasu? I'm extremely optimistic about, you know, defy and public blockchains over a longer timeframe because I think they offer, you know, assist like a trust machine or a system for

sort of the enforcement of contracts and promises that are outside of the traditional financial system, the traditional legal system and they are not dependent on any nation states. And I mean, much like the early internet, I think it's still, it's not super clear, like, what is going to be built on top of this and how, like, how it's going to change the world. But I just have this feeling that it's going to unlock a lot of innovation and I will unlock, like, markets that are more global than ever before and that have, that sort of everybody can access. And that are really sort of, you know, they will create much more. more equity and equality in the world and where everybody can participate. So that would be my hope. I think as for the Defi projects, I think that we need more innovation in the field of Dow

governance. I think we need to look at corporate governance, not because we want to copy, you know, all of it one-to-one and just, you know, basically. create a corporation and put a Dow label on top. I think that's not what we should do. But corporate governance is an extremely rich field that has done a lot of research on principal agent problems in human organization and how to get things done.

And so I think over the next year, I would really love to see sort of more experimentation with Tao governance structures and really by the end of then, 2023, I think, hopefully have a lot of positive examples to point to for DAOs that, you know, really do it better and that are both sort of great business, but also great investment cases. Yeah, so on defy tokens and Dow tokens as an investable asset class, what would flip you to being more bullish on those as assets, what things would need to happen?

Well, I think for one, if there's like more regulatory clarity, I think that's big. I mean, either because we know it's okay or we know that, you know, um, there's no enforcement sort of happening. But what would make me even more bullish is sort of if we just solve our own problems. So we find governance structures that are more streamlined and more efficient and that give just overall more power to shareholders. And not in the sense that we have them vote on more things because I think that's the exact opposite of what should be happening.

I think we need, I think more DAOs need to be run like businesses. And I think that should give, you know, investors the confidence that, you know, the thing that they buy, you know, there are other investors and, you know, and workers, etc. Who will try to, you know, maximize the value of that investment. Fantastic. Hossu. Thank you for guiding us through all. this. This has been a fascinating discussion. I think exactly what crypto needs right now. So I appreciate all your work in this area and for joining us on bank lists today. Thank you. Guys, some action items for you.

I'm just going to recap what Hasu said. If you are a Dow governor, a few things you can do. Number one, create a constitution. Think about that. Number two, treat your Dow like a business. Number three, focus more on structure. Govern over decision processes, not the decisions themselves. Number four, break up the projects into smaller units. There's some low-hanging, fruit areas that we can do. Of course, a lot more on the Dow structure, Dow governance side needs to be built out. A few other action items for you. They'll be in the show notes, but Hasu listed a number of resources, some articles today, one by Gabriel Shapiro, fake Dow versus real Tao's, another, the Anthony LeZang article, the market for promises will also include links to Hasu's recent

maker governance post, which gets you an idea of what the Dow Constitution might look like. And of course, If you are not a bankless premium member, David and I want to cordially invite you to become one, because you can join the debrief episode that David and I are recording right after this episode. Debrief is an opportunity for David and I to give our reflections on the episode. It's just kind of unscripted canon. We just hit the button we record, and we talk about stuff that we didn't get to chat about in the episode. So it's a lot of fun, number one. David, what else would you say about debriefs?

Well, it won't be happening in this particular episode, but sometimes that's where we get spicy about the guests. Hasu, nothing about you. This episode was fantastic. But sometimes we have to unpack what we disagreed with a guest on. But I don't think there was a single word that came out of Hasu's mouth that we disagreed on. David, you're supposed to hype it up, man. There's definitely going to be some disagreements with you, Hossu in the debrief. You have to become a premium member if you want to hear those. That's usually for when we host Alt Layer 1 panels and stuff like this. Hazu, this has been super exceptional. I think this episode is going to go down as the canonical episode that Dow's need to follow in order to build our way out of the bear market, because that's really

what this episode is for. This bear market isn't just going to immaculately end, just like the last bear market didn't immaculately end. We are going to build our way out of this bear market, just like last time. And I think you have helped us articulate a vision for how we actually do that. So thank you so much. This has been, I hope, a great service to this industry. Yeah, thank you. Thank you guys. Thank you guys. of course. As always, guys, none of this has been financial advice. Crypto is risky, so is defy. You could definitely lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.