Bankless - 34 - The Internet Cooperative | Jesse Walden

Starting point is 00:00:00 Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and 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 bangless. David, how are you doing this episode? Really, really optimistic about the future of Ethereum, specifically from what Jesse talked about in this podcast. And I think this is going to be another one of the bankless podcast where you can take it to your friends and family and show them exactly what it is we are doing here. Because in addition to the defy, DGen yield farming that we're doing, we're also doing something much grander, much more meaningful. And that's the thesis that Jesse brought in this bankless podcast today.

Starting point is 00:01:01 So this is a great episode just to illustrate why we are all here. I felt like this was an entirely new lens than what we usually talk about on bank lists, which is a bit more like finance and economy economic, right? Like more money related, I suppose. But this one, I think you're right, did feel like it has something for people who aren't finance geeks. I don't really care about yield and return and all of these financial terms. They'd rather have their CPA handle that for them. and like this is talking about the the real economy, the ownership economy on top of this banking

Starting point is 00:01:41 layer and this property management system that crypto has essentially built. So I think it's super exciting and also a lens that we don't often see on bankless. I'm going to be thinking about this episode for a while. What were your takeaways, David? Yeah, my big takeaways. And this is just a fantastic continuation from our previous episode. with Amin and Kevin about Molok because the Molok conversation is so relevant here as well. What Jesse is doing with his fund variant, he's trying to solve coordination.

Starting point is 00:02:14 And he thinks that what we can do with Defi, what we can do with tokens specifically is coordinate among a wider set of participants. And this is where the legacy financial system and the legacy startups of Silicon Valley and the gargantrons of Silicon Valley have really broken down is that they haven't been able to coordinate a larger and larger group of people. And so what I got specifically out of this episode is that what we are doing when we are yield farming and what we are doing when we are issuing and trading tokens is we are figuring out ways to get and coordinate energy and labor across a wider pool of participants to focus in on something that could be something that would replace Facebook.

Starting point is 00:02:58 That could be something that would replace Twitter. Or that could be something that could also replace your bank, some financial institution. And it seems to be that we have the tools to move forward with actually trying and achieving some of these goals. Yeah, this paired with our NFT episode, a couple episodes ago, feels like it's making a case for how Ethereum, how Bitcoin can go mainstream through real world usage, right? It's always the question that we ask is like, what's going to be the catalyst that makes crypto go mainstream. That makes bankless go mainstream. Is it stable coins? Is it the

Starting point is 00:03:35 institution's coming? Is it just this bankless economy saturates the world in areas of the world that don't have banks? And the answer to that question is yes, but there's also an ownership economy answer to that question as well. And Jesse provides the thesis for that. It almost feels a a little bit like, you know, our episode with Vance from Framework. You know, if we had talked to Vance from framework in 2018 and kind of developed his thesis before it was, you know, proven out. This episode felt a little bit like that. It's like this thesis of the ownership economy just a little bit ahead of it being totally proven out. So there might be some alpha there that listeners can realize from this episode. Absolutely. A while ago on the bankless newsletter, I wrote a very

Starting point is 00:04:25 quick Market Monday piece talking about how Uniswap moved the Overton window of capital, right? And what we were, what I was discussing was how Uniswap as an application really just purchased the loyalty of anyone that's ever used to ever, right? A retroactive air drop of $1,200 that distributed ownership and governance over the protocol to the people that are incentivized to be good stewards of the protocol. What Jesse's really talking about in this podcast is copying that same model and using it on a grander scale and really kind of getting ownership into the hands of the people that actually produce the value of these systems and including them in financial upside, right? So if there's ever going to be a face, a new Facebook that's 10x better or a new Twitter that's 10x better, Jesse thinks

Starting point is 00:05:17 that it's going to have some sort of compensation model for the people that are actually contributing the value that make those platforms valuable. All right, guys, so you're going to love this episode. You know, David, before we get into it, you've got some interesting news to announce, right? You've got a speaking event coming up. Yeah, CoinDusk is getting hot on Ethereum. And so they are throwing an Ethereum Invest Economy conference, virtual conference on October 14th. There are going to be a ton of Defi All-Stars there.

Starting point is 00:05:46 Like, Vitalik has a keynote there, Rune Christensen from Maker Dow, DeFi Dad, Hugh Karp, from Nexus Mutual, Stani from Ave, Fernando from Balancer, Haseeb from Dragonfly. There's going to be a fantastic lineup with a fantastic set of spots. And I am also speaking at this event, I'm talking about why Ether is such a compelling and unique asset that has not found anywhere else in the world. You know, Dave, those names you mentioned, all of those, almost all of those have been on the bankless podcast previously. It feels like a bankless conference almost. Yeah, it's going to be a bankless reunion. And I guess all the ones that we haven't gotten on the podcast, I think probably will be on the podcast in the future. If you guys want to tune in to all these different people talk about

Starting point is 00:06:31 DFI, talk about Ethereum, go to the link in the show notes and register with the code bank list to get $25 off of your coin desk invest conference ticket. So I will see you guys there. All right. Before we get started with Jesse Walden on the ownership economy and episode you absolutely cannot miss. We want to tell you about some of these unique bankless tools from our sponsors. Bankless nation. Do you want to go fully bankless, but in the real world, monolith is the defy account that you need. It wraps your eth address in a bankless visa card, and it does so much more. It closes the loop from fiat to defy. So you can onboard fiat to die on monolith with zero fees. Then you can convert that dye to a die, which is an interest bearing saving, save.

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Starting point is 00:10:14 Doing well. Thanks for having me. All right. Hey, are today's big tech companies taking advantage of people's free labor? Is that what's going on? Yeah. Well, it's a loaded question, but I mean, my short answer would be yes. I think if you look at, you know, internet platforms today, I think it's fair to say that much of the value is, of course, created by their users, whether that's content or products in marketplaces. and those users, of course, get tons of value from the platform in the cases where they're able to reach an audience or sell their products or services. But I think we're sort of starting to hit an inflection point where the value that these

Starting point is 00:11:02 platforms are able to extract is a little bit disproportionate to what the users are able to get out of it. And the ownership economy and what I'm... I see happening in cryptos or presents an alternate model that I think is going to become the dominant model in the near future because better economic alignment with users is likely the way to win market dominance in my view. So we can get into that, but the short answer is I think that users should be able to capture more of the value that they create on internet platforms. Yeah, so really want to talk about your thesis around what you call the ownership,

Starting point is 00:11:42 economy. And as we dig into that, maybe jumping off of what you just said to sort of tee this up. So David and I, we're content producers, right? So on behalf of the bankless nation, thanks for everyone listening in, reading our stuff. But we use platforms like YouTube and Twitter and Facebook for the distribution. And it feels like a lot of times as content producers, we don't necessarily, A, have very much power in the interaction. So we're creating all of this all of this value, right? All of these resources, but we actually can't stop YouTube from, say, blocking us or Twitter from, like, putting us in Twitter jail for a while. And we also, we've realized like some of the upside, I suppose, but it very much feels like Facebook and

Starting point is 00:12:32 YouTube are, you know, setting the terms here. Is that kind of what you're talking about when you're contrasting like the future ownership economy to the world that we live in? largely in social media and web two? Yeah, I think that's it's sort of a good, a good place to start the discussion. So I think most of these platforms, social media platforms, marketplaces, they follow a very predictable lifecycle. And my former partner at Andreessen and Christensen, wrote about this in his post why decentralization matters. The life cycle they follow is sort of an S curve of growth, where at the beginning of the S curve,

Starting point is 00:13:08 you know, they're very cooperative with their users. invite, you know, content producers, you know, media, media publications in the case of, you know, Facebook and YouTube to join the platform. They do everything in their power to help them out and reach a large audience. Once that audience is there and growing really quickly, you know, the S-curve starts to go up into the right, but eventually it plateaus. Eventually, you can't grow any more organically. And so that's where the final turn in the S-curve comes at that plateau. And at that point, many of these platforms start to become more extractive of their users. And they're able to do that because they've sort of locked in network effects. Now they've got,

Starting point is 00:13:51 you know, the creators and they've got the audience there. And it's very difficult for each of those parties to move because, you know, classic network effects, there's more value in staying than in leaving and being in a room by yourself. And that empowers the platforms to go and start extracting as much value as they can from their users and returning that value to shareholders. And so I think when you say, you know, YouTube sets the terms or Facebook sets the terms on how you sort of interact and monetize their audience, I think that's very much true. And you're very much subject to the whims of this S-curbs. So if YouTube decides, you know, they need to extract more value from for shareholders, they can very well do that. And you're kind of powerless to fight them

Starting point is 00:14:35 as an independent creator, right? So the ownership economy sort of posits an alternate model where these platforms no longer have to follow that same S curve. And that's because I think platforms of the future will be owned and operated by their users. And what that enables is a much more cooperative economic model where the platform remains aligned with users over time. And in turn, that allows for unabated growth and continued innovation as the platform continues to serve the interests of users rather than the interests of shareholders. So I remember as a kid growing up, Facebook came out when I was something like, you know, 12, 13, 14, right when I was starting to become like a social individual, right?

Starting point is 00:15:25 And Facebook was really viewed by me and everyone around me as this sort of like public good on the internet. It was this platform for keeping in touch with your friends, or being able to share experiences and really to be able to live a social life on the internet. And I think that's kind of where a lot of optimism about the future sci-fi world that's coming came from because these Silicon Valley startups kept on producing these awesome, awesome public goods that would produce value for us. Twitter is the same thing.

Starting point is 00:15:56 It's a common square for conversation. YouTube is the same thing. It's this place to get out free content and to capture attention and to have conversations. And that was really exciting back when I was a kid in the early OOs, right? But what you're saying is that as time grows on, like Facebook and just the value that it provided to everyone as a social, as a public good platform to share social experiences, kind of grew and grew in it and it continued to grow. And then it grew into such a wide part of the world that as a publicly traded company on a on the U.S. stock market, the only way where it could get the share price to grow. grow was to start, you know, becoming more and more extractive, right? And so it hit the limits of growth in terms of adoption of its platform. And so it started to, in order to grow what the ultimate

Starting point is 00:16:47 goal is, is the share price on the stock market. It needed to become extractive. And that's where we kind of see the disillusionment we know we see in Facebook today where people are all, all but aware that, you know, that Facebook is creating, you know, more and more polarization from various different parties left and right. And I think, Jesse, trying to not put words in your mouth, but you might ascribe that polarization created by Facebook as a result of the business model of the Silicon Valley startups. Is that right? Well, yeah, certainly in the case of Facebook and other social media platforms, I think, yeah, the business model may be to blame for, you know, the nature of the algorithms that drive polarization. But then I think the root question here is why is the business

Starting point is 00:17:33 model that way, right? And to your point, I think it's to drive, you know, advertising dollars and which trickle into share price. Now, just thought experiment, imagine Facebook was actually owned by its users instead, right? Well, then users might optimize for something other than share price. They might optimize for utility that they get out of Facebook. And maybe part of that would mean reducing the number of ads that they see in their feed or reducing the amount of polarization that the algorithm suggests, right? You'd have a different mandate if the platform were owned by its users. Today, you know, since the 1970s really, since Milton Friedman proposed that the sole purpose of corporations is to maximize profits for shareholders, we sort of lived in a paradigm

Starting point is 00:18:22 where each, each internet platform has strived to do exactly that. But now there's sort of new tools in the toolkit to build internet platforms that don't just maximize profits for shareholders, but maximize benefits or utility to their actual users. And I think the first early examples of this are crypto networks, which I'm sure we can get into. But that's what sort of got me excited and down the path of thinking about the ownership economy and how it can enable a more equitable future that also results in better products for consumers. So for me, Jesse, this brings up two questions. I'm going to ask the first. So why doesn't everyone just switch? Right?

Starting point is 00:19:05 So David and I and a bunch of other content producers were sick and tired of a platform. Well, like, why don't we switch to another platform? Yeah, it's network effects. Again, it's hard to coordinate a large group of people that are at a party to go to another party somewhere else. right like there's going to be you know there there has to be a tipping point a critical mass of people willing to move uh to the next party uh for that to happen and and so there's a social cost there's a coordination cost of getting everyone to exit and move somewhere else um and that's that's the result of strong network effects that these platforms have and you know the this is the classic

Starting point is 00:19:53 problem in building any new network, any new marketplace, is solving this chicken and egg problem. How do you get people to fill up the room such that it becomes more valuable, more attractive for others to come and join in? And one of the key innovations that networks like Bitcoin, Ethereum and others have employed to solve that problem is giving users that participate a direct economic incentive to join the network and help see it grow. And so that's the new, you know, earlier when I mentioned there's new tools in the toolkit a new way to build platforms that are better aligned with users. That's exactly what I'm talking about.

Starting point is 00:20:34 You know, David, this sounds so much like our previous episode where we talked about Molok, the god of coordination failure, right? So, Jesse, what I think you're saying is that basically the reason we can't all just switch is because we can't coordinate very well. well with our other laborers, right? So the reason we don't as laborers go unionize and then try to negotiate with capital or switch platforms or exit, something like that, it really comes down to a coordination problem. And I think what you're getting at is that crypto helps solve that a little bit. But let's get to that in a minute. First, I want to ask my second question around this, which is just

Starting point is 00:21:12 like, all right, so let's say we go back to your example where you have Facebook. but instead of shareholders owning it only who are like just like maybe users, maybe not, it's owned primarily by its users, perhaps primarily by its heavy users or something else, or something like that. Doesn't kind of the equilibrium in this sort of thing just turn users into capitalists over the long term? So let's say you just distributed everyone Facebook shares and you said, look, we're getting rid of our cap table, And we're distributing all of Facebook capital to the users. Doesn't over time, what happens is kind of the users just sort of become the capital

Starting point is 00:22:01 or some users sort of decide to sell their capital, others acquire it. And they essentially become the capital in the market. So it sort of becomes like, you know, a new boss, same as the old boss over time. What are your thoughts on that? That's definitely a possibility. I would answer that with another question, which is what's wrong with that, right? So imagine a new platform gets off the ground and its early power users end up, you know, earning a large ownership stake in the network.

Starting point is 00:22:36 And that's, you know, it's very much the case of what happened with Bitcoin and the early Bitcoin miners and developers that were part of the community that got it off the ground. Same thing in Ethereum. I think the question is what's the problem with those early adopters being large owners? You could argue that they will try to extract rent from others that join later. And that may be the case. But maybe that's not the game theoretically optimal thing for them to do. Rather, maybe they can see beyond that and see that there's potential to grow the network even bigger,

Starting point is 00:23:13 even larger than Web 2 networks have grown by virtue. of giving additional users a slice of the pie. So to make this a little more concrete, I think there's a good analogy to be drawn in venture capital financing. So it's usually the case that early stage founders and investors in a startup get diluted as the company grows and takes on subsequent rounds of financing. In other words, as the company is growing and it needs to raise more money, the cap table expands, it inflates, and the original shareholders have less total percentage

Starting point is 00:23:54 than they did at the outset. Now, why would they agree to do that? They agreed to do it because they see the additional capital coming in and the additional growth that that enables as a way to grow the pie for everyone. And so while they may own less on a percentage basis, the percentage that they do own will be worth more. And so I think there's, you know, that same analogy can be used as a mental model in crypto networks where smart capital or smart users will see the benefit of continuing to grow the network in a way that is aligned with additional users joining. And so that's where you get into monetary policy.

Starting point is 00:24:38 And I think that the most successful networks in the crypto space and the ownership economy space will be adaptive. and they will have a monetary policy that encourages continued growth over time. And if that's the case, I think it's likely that users as capitalists is not a bad thing. In fact, it's the driving engine of growth. Jesse, I think your answer there was more along the lines of, you know, we've previously seen companies on the public stock market, companies like Facebook, companies like Twitter, where they will dilute shares to reward. you know, new employees, like new team members, because that's just a smart

Starting point is 00:25:19 incentivization model. And that has also worked out just well. That's been a great model. But I think your answer was that specifically with, you know, ERC 20 tokens on Ethereum or the token equity model that is issued by smart contracts, we can expand the inflation of the token of the governance asset, the share of the protocol, to a new cohort of people, which are the users rather than the employees. And so not only are we incentivizing, you know, early stage employees with equity,

Starting point is 00:25:50 but we are also now incentivizing early stage users. And as a different cohort of people receiving the governance rights over a system, that new cohort of people wasn't really included in the previous model, in the, you know, Web 2.0 or company equity model, but now that we are able to get equity or ownership into the hands of users, that a different sort of social contract can emerge as a result of the inclusionary environment that this new system, that this new substrate offers. And that new social contract might be able to expand these new products,

Starting point is 00:26:26 these new protocols to be far greater and far more inclusive than their Silicon Valley cohorts. Was that a different summary? Yeah, I think that's absolutely right. I just want to distill two points that I think are actually separate, but kind of interrelated. The first is that, you know, the model I'm describing where users own the network is very similar to, you know, traditional venture capital in the way I described where, you know, there's inflation of the cap table and that inflation is used to bring in new talent, new investors, and grow the pie for everyone. That's point number one. And so very similar to VC funding or stock option pools that grow over time. So the second point, which is a point that you made, David, is that we have this new tool in the toolkit, which are tokens and smart contracts.

Starting point is 00:27:24 And the way I see tokens effectively are packets for value. So we can now move value on the internet and the way we move information instantly to anyone anywhere in the world. And the result is that we can sort of expand the pool of talent that's able to participate in value creation and value distribution. So instead of being a W2 employee of a company and earning stock options when they inflate the talent pool, you can be a user of a platform and contribute to the platform's marketing or contribute to its development. And in return, earn a digital token that gives you some of the value that you, you've contributed. And so the fact that this is now digital and native to the internet is, I think, a really important shift because it expands the talent pool to literally everyone with an internet connection. And that's why it's now possible, I think, to build platforms that

Starting point is 00:28:21 are built, operated, and owned by their users. This is so interesting, this idea of a permissionless and global talent pool. You know, David and I often joke, but it's not really a joke that we work for protocols. We don't work for people, right? So there's no boss at Bitcoin or Ethereum of these crypto networks that we talk about and formed kind of like media properties around. But we do it because we're passionate about these systems

Starting point is 00:28:49 and also because there's an economic incentive, right? So we believe that by talking about these crypto systems, that more people will be onboarded, that it's better for our world. It makes our world more bankless. gives us a new financial system that's open and accessible to everyone. And also because these tokens go up in value. And that's a good thing for everybody.

Starting point is 00:29:13 So I think that's what you're talking about, right? Like so, you know, I quit what I was doing. It's really interesting kind of the startup space and doing things in healthcare because I was just sucked into this ecosystem. And now I work for a protocol. Is that what you're talking about? Exactly. Yeah.

Starting point is 00:29:27 And what I would add is that, you know, I think that networks like Bitcoin, Ethereum, and others in the DFI space are the very first examples of what I'm describing, right? These are networks that were built, operated, and owned by technologists, developers, and enthusiasts who were sort of naturally the first to recognize the value of these digital tokens, right? Like, it's no wonder developers were sort of the first to grok it. And technologists like yourselves. And so we are seeing this in real time where you guys, self-describe work for a protocol, right? You work for the growth of the network. I think we're just in the very early innings of this becoming sort of a very mainstream

Starting point is 00:30:12 phenomenon where in the near future, I think, with one or a few breakout successes that are more consumer-facing, this will become the dominant model for building new internet platforms because it's just the most market-driven strongest way to drive network effects and growth. So we're going to talk a bit more about this new crypto toolkit and building out the ownership economy in a minute. But before we do, Jesse, can we talk about some of the old tools that we have? Because I think there's probably some folks that are listening who are just like, yeah, but, you know, do we really need blockchain for this a little bit? Right. So a couple of things. One is we have this idea of the passion economy that's kind of been kickstarted in Web 2.

Starting point is 00:31:03 So platforms like Kickstarter, like Patreon, like Substack, which we use for bank lists, where instead of it being sort of an attention-driven type economy that is the base business model for YouTube, Twitter, and Facebook, we sell ads for your eyeballs, for your attention, like patrons, effectively, can start to support content producers. So that's one. but we also have other elements. I mean, you mentioned employee stock options, but we also, and I know you talked about this before,

Starting point is 00:31:32 we also have co-ops like REI that are kind of like companies, but instead of owned by shareholders, they're actually owned by like members who are users and purchasers of like REI products, say. Can you comment on some of the old tools before we get to the new tools here? Definitely, yeah. So first on Passion Economy platforms, I see passion economy platforms is very adjacent to ownership economy platforms.

Starting point is 00:32:00 I would say the ownership economy is a very linear extension of the progression of the internet as a whole. And so to answer this question, I'm actually going to rewind the tape a ways back before the passion economy. And first just note that one of the most surprising things to happen in software, generally speaking in the last 20 years, is the success of open source software. You know, if you, 20, 25 years ago, if you told the average computer geek that the most, you know, valuable companies in the world were going to have been built on top of open source software, they probably would have laughed at you. That would have seen like a crazy idea. But having grown up having grown up in the 90s with Windows dominance, I totally agree with what you're saying. That's totally the case.

Starting point is 00:32:46 Right. And so the remarkable thing about where we are today is that open source does power trillions of dollars of economic value. And open source software is software that's built by a community of developers all over the world. It's crowdsourced. And then with that open source software, we've gone and built, you know, these valuable companies, many of which crowdsource their value, again, from their users. So, you know, content products, we talked about that. And just now we're getting into a phase where people are starting to recognize the value of those contributions.

Starting point is 00:33:19 And that's what the passion economy is about, right? So the passion economy is enabling people on the internet to pay for, for, you know, the work of creators that they want to see more of. And that's great. That's like, I think, the very logical next step. Now, what comes after that is sort of what I'm interested in. And I think where this is where this goes is back to sort of where we started the conversation, which is the creators of value on platforms like Kickstarter, Patreon, substack.

Starting point is 00:33:52 are the users, the people driving subscriptions, right? Now, why shouldn't it be the case that those creators are able to earn all of the value that they contribute to the platform? So in addition to just the value that they're getting from their subscribers, can they get involved in a deeper level in building and operating the platform tailored to their needs? And if so, how should they be rewarded for that? Now, Substack kind of did this in an ad hoc way and that they gave some of the, some of the creators, stock options in the company.

Starting point is 00:34:28 And I think that's sort of a good first attempt. But what I think that points to is doing that same thing at scale. And that's where you start to run into problems. I think if you want to start giving stock options or equity to your users at scale, at the scale of these large Internet platforms, you start to run into headaches pretty quickly. stock options are, you know, big legal contracts and, you know, there's tons of paperwork, and you have to be in a certain geography. And so it's not digitally native or internet native, I should say, to scale that up to the size of the most valuable internet platforms today. Tokens, on the other hand, and smart contracts enable an internet native sort of movement of value

Starting point is 00:35:18 that can scale. And that's why I think they're the right tool for the job. That said, you know, it may be some time before we see that happening in mainstream consumer platforms. Today you see it happening in crypto networks. My view is that it's very quickly going to cross the chasm to consumer facing marketplaces as well. But it may be a few years out. But that's I think that's why I think that the ownership economy is sort of a natural extension or natural progression from the passion economy. Now, how about REI? And maybe for folks that aren't even familiar, Jesse, with, like, what a co-op is,

Starting point is 00:35:58 maybe you could, like, talk about what co-ops are and be, like, something like REI and, like, that current tool set. Yep, absolutely. So, yeah, so a few years ago, I don't, I, the question dawned on me, you know, here I am thinking about networks owned and operated by their users. And I started to ask, well, what are other examples of organizations that aren't owned by shareholders but are actually owned by users or customers or suppliers? And that's what got me on to a train where I researched cooperatives, mutuals, credit unions. Turns out there's actually a lot of organizational structures that are owned by members or users rather than shareholders.

Starting point is 00:36:45 And so I think there's a good analogy between crypto networks or ownership economy platforms and cooperatives, for example. And REI is one of many multi-billion dollar cooperatives. There's others like Land of Lakes Butter is a $24 billion cooperative. It's a dairy cooperative. I had no idea. Not just butter. But it's a massive organization. and it's comprised of dairy farmers who actually own the means of production.

Starting point is 00:37:20 And the goal of a cooperative is to maximize the benefit of members. So I'll talk about land of lakes first and then we'll go to REI. But with land of lakes, you know, a bunch of dairy cooperatives, dairy farmers, rather, at some point realized it would be more cost effective for them to pool resources together. and buy some equipment that they could all share in order to scale up production, rather than each of them having to buy that equipment on their own. They pooled the resources, and that was a way to increase each of their bottom lines respectively. And so that was sort of the inception of the cooperative.

Starting point is 00:38:00 Similarly, REI started as a group of outdoor enthusiasts who wanted very specialized climbing gear that nobody was making. They were the only ones who wanted it, the only ones who knew how to make it. And so they pulled resources in order to go produce it for themselves. And then as they did that, turns out there was a bigger market there

Starting point is 00:38:23 than just them. And so they were able to scale that up. But if you are an REI member, you know that when you shop there, there's sort of member benefits. Namely, whatever profits are left in the cooperative at the end of the year from all the stuff that they sell, you get a distribution or a dividend of those profits.

Starting point is 00:38:46 So by being a member of REI, you get a dividend which effectively amounts to a discount on your purchases there over the year. And so, again, there's sort of a benefit to pulling resources and sort of acting collectively to maximize benefits to the people who actually use the goods or services of, you of these cooperatives. And so I think there's a good analogy there for crypto networks and ownership economy platforms in that, you know, the optimal economic model for these platforms should be to maximize the benefit of using the product or service for the users rather than for the shareholders.

Starting point is 00:39:32 And that's exactly what cooperatives like REI and Land of Lakes have done. Now, just one last point on, why do we need a blockchain for this? I'll again sort of note that cooperatives are, you know, traditional organizations that have tons of legal overhead. There's a lot of a lot of paperwork. In fact, even more paperwork than a traditional Delaware corporation because you have to sort of specify, you know, the benefits that member owners get from the co-op in the bylaws of the organization. And so there's a lot more sort of customization that needs to go on versus a plain vanilla Delaware C-Corp. And traditionally, that overhead, I think, has been, you know, difficult for startups in particular to manage. Now we have new tools in the toolkit that enable you to express all of those rules and sort of values that the owners want in code.

Starting point is 00:40:32 And so the cost to building organizations of this type, I think, has gone down by orders of magnitude overnight with smart contracts. And so I expect we'll see a lot more digitally native cooperatives. And you guys mentioned Malak, who you had on recently. They're an example of exactly what I'm describing. Yeah. And so like the other thing going back to your previous is that imagine being a startup trying to do this with all this documentation, but then like trying to do that globally.

Starting point is 00:41:02 like extra net, like across all of these various nation states and their regulatory structures, that sounds like impossible. I don't even know if an REI, Orlando Lakes can kind of achieve that outside of like their, you know, nation states. Right. That's right. So I think, I think in the case of those two, they have managed to do it. But again, it's, it's a nightmare. It's setting up these like subentities and making it all work. Expressing all this as code is orders of magnitude. improvement in terms of cost efficiency, transparency, accessibility. And so I think we're going to see way, way more experimentation in this direction because of that.

Starting point is 00:41:43 One of the tools I've started to use recently is Zapper. For those of you that were part of the 2017 bull market, it was characterized by just opening up Blockfolio and refreshing it over and over and over again. And also, anytime you ever made a trade, you would have to go into Blockfolio and manually input that trade information to make sure that your portfolio that you think that you have matches what you actually have. With Zapper, you don't have to do any of that anymore because all you have to do is Zapper is input your Ethereum addresses, and then Zapper will give you a really elegant report as to where all your money is.

Starting point is 00:42:16 So there will never, ever be any disconnect between the money that you think that you have and the money that Zapper reports to you. Zapper looks directly on-chain and gives you a nice portfolio summary of all your assets and how many assets and all of your debt and all of your lending positions, all of your positions all at once. So there's no more editing your portfolio because Zapper just does it for you. One thing that I thought was really useful about Zappers was when I plugged my wallets in, I found that I had submitted liquidity to Uniswap forever ago, and without Zapper, I would have probably lost that forever, because Zapper knows where your money is better than you do.

Starting point is 00:42:52 It's also the gateway to investing your money into this ever-expanding list of available DFI platforms, like curve, balancer, uniswap, yearn. In the bankless nation, there is this growing number of money Legos, and keeping track of them all is just super overwhelming, which is why you could just go to Zapper, and Zapper will solve the problem of there just being too many money logos to choose from. So check them out at zapper.5. Enter your Ethereum addresses,

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Starting point is 00:44:26 Jesse, the way that you described the Land of Lakes, you know, butter co-op and then the REI co-op as well, it seems to be that they are thwarting Moloch, right? And I'm really happy that this episode is coming right after our Moloch episode with Amin and Kevin, because what Moloch is is human coordination failure, right? But humanity is a story of finding different ways and finding good people that you want to include in your in-group. to coordinate with to produce better outcomes, right? And so it sounds like, you know, the Land of Lakes butter co-op, which was a group of dairy farmers that all figured out that if they coordinated together, they could have net positive outcomes for everyone at large. And then the REI model seemed to increase that, right? You know, like just to double down on that idea. And what I'm hearing you and Ryan discuss is that, you know,

Starting point is 00:45:24 if we wanted to have something like a global co-op, there's no platform to enable that. There's no global co-op like mechanism until crypto, right, until the smart contract, where there needs to be a legal system of enforcement that is internet native and globally accessible in order to produce some sort of global co-op that is fit to kind of take over what we are seeing with, you know, the traditional legacy financial model of Silicon Valley startups. Yeah, I think, I would sort of restate it that, you know, simply the, you know, traditional organizations, you know, whether Delaware C-Corps or cooperatives, have relied on,

Starting point is 00:46:10 you know, the jurisdictions in which they form for their documents and enforcement. And now we have new tools in the toolkit, and those tools are based in code. And the jurisdiction is the internet. And so Bitcoin, you could argue, is the first example of an internet native co-op. It's a platform where there is no company. It's a network that's owned and operated by its users. And then Ethereum is the same thing, but it extends the functionality beyond sort of, you know, store of gold or digital value. And with smart contracts, you enable any developer to build their own organization on top. And that's what we're starting to see happen in D5. And I believe that's what we're going to start to see happening across more consumer-facing verticals as well.

Starting point is 00:47:03 And that's what unlocks the ownership economy. Okay, I want to connect some dots for some crypto folks here, right? Who haven't quite viewed crypto in this lens before. But you wrote a great ownership economy article, which will include in the show notes, which everyone listening to this, who's into this should go and read. And you called Bitcoin the first user-owned an operated network at scale. And I think you called it that because basically the users were the laborers.

Starting point is 00:47:37 It was one and the same. And they also owned the capital. And then you talked about Ethereum sort of in all of the sub-games that came out from that. So like the, I guess, sub-ownership economies that came out from that, Maybe we could talk about some of these examples. Like you can even talk about Bitcoin or like what we've seen with SNX, the synthetics token,

Starting point is 00:48:00 or what we've seen more recently with Uni tokens. Can you give us some examples as to how we're seeing this play out in crypto through the lens of the ownership economy? For sure. So, yeah, with Bitcoin, I imagine most of your listeners know. But, you know, the way the network works is you have a bunch of miners who operate these, you know, big, intensive computing rigs to secure the network. And it wasn't always the case that you needed these kind of highfalutin rigs with tons of electricity.

Starting point is 00:48:33 And back in the early days, you could do this on your laptop. And so the people who participate in securing the network, securing the digital gold that Bitcoin wants to be, are rewarded for their efforts with new Bitcoin. And so what that means is they're rewarded with a stake. in the platform's native asset, in the platform's sort of equity value. And so that, I think, was the very first example of this new organizational model

Starting point is 00:49:03 where the people who are, you know, contributing the most value to the network are earning the most value. Now, I think Bitcoin, because it was the first, you know, had to invent a lot of things. And one of them was this monetary policy that the miners earn these rewards. And that monetary policy,

Starting point is 00:49:22 is sort of fixed in the code of the network. Ethereum iterated on this a bit. So they had a similar model. The miners of Ethereum earn new ether, a direct stake in the network itself. However, Ethereum also did a crowd sale. And so people who were interested in the vision of Ethereum sort of described in the Ethereum white paper really

Starting point is 00:49:45 were able to fund its development. And those people who did so were able to earn or receive an ownership stake in the network. They got Ether in the Genesis block. And so too did the developers. So the initial monetary policy of Ether already sort of expanded the adjacent possible of who you can incentivize, which stakeholders you could incentivize to build a successful user-owned and operated network.

Starting point is 00:50:14 And I think Ethereum has done, you know, did that very, very well. And that net today they have a really robust developer, community because lots of the developers own ether. You guys produce this podcast because you guys own ether, right? You want to see the network succeed. And now we're starting to see the same sort of tinkering with ownership distribution design manifest in other verticals. So you mentioned uniswap. Uniswap is an exchange for crypto tokens. It's similar to Coinbase or Binance, but it's different in a few important ways. And one, and one, One is that it's a decentralized exchange, meaning the operations of the exchange happen on top of Ethereum.

Starting point is 00:51:00 And the value of the exchange doesn't go to shareholders as it does with Coinbase and finance. Instead, the value of the exchange goes directly to the liquidity providers, the people who trade on the exchange and make it valuable in the first place. And so another way of saying this is that the business model for Uniswap is the same as the business model for Coinbase. They both take a fee on transactions in their marketplace. But what's different is what each of them does with the fee. Coinbase takes the fee and gives it to shareholders effectively. Uniswap takes the fee and gives it to the users trading on the exchange. And that's what they've been doing from Inception.

Starting point is 00:51:44 Just recently, they launched a UniTOP. which is a governance token that could eventually claim some of those fees. And they gave those tokens directly to users that not only provided liquidity, but for example, bought some of their merch. So they are, Uniswap is an experiment in, you know, different stakeholders that participate in networks and how to incentivize them appropriately. And I think the big work, the big challenge, a big opportunity in the ownership economy space is to iterate on towards a very sort of fair and meritocratic distribution of value for all the stakeholders in the network. And I think the platforms that succeed in the ownership economy will be the ones that figure out

Starting point is 00:52:33 the best ways to do that. I think the most obvious lesson we can learn from the fact that Uniswap is directing its fees to its users versus Coinbase that it's directing its fees to its shareholders. is that if you are a system that directs fees and rewards and value to the people that produce the value, you are simply a more scalable system. You have a bigger tent. There are more people that can contribute more total value to your system because they are being compensated for that. And so as a social organization, as a organization of people, the Uniswap organization is far more likely to scale

Starting point is 00:53:13 and because of their ability to coordinate more people and coordinate more value in ways that incentivize more alignment. And once again, this goes right back to what we were talking with Amin and Kevin on the Moloch episode where we were saying, whichever institution, whichever system can coordinate better than its competition will become the new status quo. Yes, exactly right. And one thing I just want to highlight is, you know, Coinbase is a company with, you know, a thousand employees, I don't know exactly how many, but somewhere around 5,000 employees.

Starting point is 00:53:47 It's been around since 2012. I think at their last fundraising round, they were valued around $8 billion. And Uniswap, by contrast, was initially built by a team of six or seven people. It's two years old, founded in 2017 or, sorry, early 2018. And over the last two months, it's outdone Coinbase. in terms of the volume traded on the exchange. Crazy. And I just want to add in something that's not financial advice,

Starting point is 00:54:20 but Coinbase is theoretically valued at somewhere between like $20 to $30 billion, where Uniswap is currently valued at $2 to $3 billion. So there's perhaps some discrepancy there. Right. And what I would say, the point I'm trying to land here is that networks that give a direct ownership stake or, you know, make better economic, alignment with their users, a feature of the product can grow way faster with a much smaller team because you end up getting production capital or real meaningful contribution directly

Starting point is 00:54:58 from your users. So rather than raising a bunch of venture capital, scaling the team inside the company, why not give ownership directly to your users and scale the marketplace with the help of those users rather than employees? And that's, I think Uniswap is an early example of that proving to be a very, very effective model. And there are other examples I can go into in other verticals. You know, I think Bitcoin, Ethereum, Uniswap, they're all more or less, you know, financial use cases. And Bitcoin is, you know, digital gold.

Starting point is 00:55:31 Ethereum is Internet money. And then Uniswap is an exchange for crypto tokens. But you're starting to see the same model play out in other verticals that are less technical, less financial in nature, and we can talk about that too. And before we do, Jesse, so like, we're talking about uniswap providing possibly a better coordination mechanism and, you know, beating its centralized exchange counterparts who don't have this ownership economy. I want to go back to something you said earlier because I think it's super insightful.

Starting point is 00:56:01 I don't want us to lose this. You talked about the biggest problem for protocols or even just in general networks, fighting against other networks is adoption, right? It's a network effect problem. So we can see this in the web world. The reason, you know, people can't just switch to another Facebook is because, you know, there's no, there's no users on the Facebook alternative, right? And so network effect is like, you add a user to something on Facebook and the value increases in a power law fashion. So, like a Facebook with no friends has no value, like an Uber with no drivers, has no value. That's what we're talking when we're talking network effect.

Starting point is 00:56:48 One thing that you taught me, I think that's an important lens. Maybe this is a little bit of a side quest, but let's go on the side quest for a minute. An important lens for defy value accrual is that some defy protocols can produce like code libraries, is basically open source code that can be forked, right? And you talk about that not being very defensible versus other defy protocols and just networks in general that are able to create entire networks that have state. They are able to capture value. They capture like users and that sort of thing.

Starting point is 00:57:24 I remember early on you gave a talk. I can't remember what it was, but you sort of compared the difference between like a zero X, right? As kind of a code library back in 2008, 18. versus a maker, which was actually capturing state, was capturing value inside of it. Can you talk a little bit about that, like network effects and protocol value accrual and what you actually need to capture in order to get a good network effect as a protocol? You know, to be honest, I think since we first talked about that framework of sort of libraries,

Starting point is 00:57:58 code libraries versus stateful networks, you know, my thinking has evolved quite a bit. And I think that's true for a lot of people in the space. So just to summarize that framework, you know, when you look at open source software, and I'm not just talking about crypto, I'm talking about any kind of any open source software. The value of that open source software is not in the code itself. It's in the deployments of that code. And here's what I mean by that. So let's take MongoDB as an example.

Starting point is 00:58:35 MongoDB is an open source database that anyone can download, right? When you download that code, it's free. It's like the definition of a commodity. Anyone can have it, right? And they can have it for free. It becomes valuable when someone takes that code and they deploy it and they start to fill up that database with data, you know, with users, with, you know, users' photos. And then they, you know, the state of that database is what's actually valuable because, you know, once you have user photos, you can put ads there, right?

Starting point is 00:59:10 So, so Facebook takes the commodity that is the MongoDB database, for example, and makes it valuable by filling it up with state, right? Now, switching back into the crypto context, right? There are a number of protocols that are just code libraries, meaning they've come up with a template for smart contracts. And then each new user takes that template and redeploys it for their own purposes. For example, a lending contract between you and I, we could instantiate that as a a smart contract, that's sort of a one-off agreement between you and I, and then anyone else could copy and paste that smart contract and use it between two other parties, right? So that would be an example of a library, a library getting, you know, copy-pasted two times, a million times,

Starting point is 01:00:14 and there's no sort of network effect there. Each copy is its own instance of the code library. The flip side is our networks that are stateful, right? So they're more like the Facebook database that's filled with user data. And examples of that are, you know, Maker-Dow compound. Sticking with the lending example, we could talk about compound. What compound does is it pulls value into a single smart contract that allows any borrower to show up and ask for a quote. And as the pool grows in liquidity or the state of that smart contract grows in liquidity,

Starting point is 01:00:59 the rate at which borrowers can take a loan gets better. So there are real network effects there. As there's more liquidity, there's better, you know, there's better pricing for borrowers. And so more borrowers will show up and that'll draw more lenders. Now, that was the thinking of the libraries versus networks framework. What we've seen, though, that I think is pretty unique to crypto, is that liquidity is a very fungible form of state. You know, the fact is, like, you can very easily move liquidity from one protocol to another. In fact, you know, there are tools that make it one click to do this.

Starting point is 01:01:43 And so what we've, I think what we've learned since we first discuss us, Ryan, is that liquidity is that liquidity is, is not a very defensible form of state. That's an interesting refinement. And so why did you make that refinement? Is it kind of examples that we've seen in the real world, say, like vampire mining is what it's called, where a clone of uniswap, a fork of uniswap called sushi was created and started to draw some liquidity out?

Starting point is 01:02:08 Yeah, I think that's a good example. I think also, you know, compound has competition from Avey and other lending protocol. And we've seen, you know, liquidity move back and forth, between the two of those pretty fluidly. So I think, yeah, there's just been a number of examples where the state of these networks has been less defensible than, you know, I once thought it might be. And so it begs the question, you know, where are the defensible network effects in crypto? And I think that's, you know, my answer would be, I'm not totally sure, but here are some ideas.

Starting point is 01:02:46 I think there's still defensibility in developer integrations, right? So there's a cost to a developer pointing, you know, their front end at your back end. And again, they are, the developer making that decision is doing so on the basis of the state of your back end, right? Does this back end have data in it that's useful to my front end? And so it's non-zero cost for that developer to add additional integrations. It may not be a high cost, but it's non-zero. And so I do think that protocols that are stateful need to prioritize a rich developer ecosystem. And part of that may be rewarding those developers with an ownership stake in the underlying

Starting point is 01:03:40 protocol for the value that they're driving to it. And so I think protocols that do that may end up seeing a lot more defensibility versus protocols that don't reward the developers that are integrating them. And another thing that I think maybe is a little bit softer, a little more fuzzy, is sort of brand and security. So those are two separate things, but they kind of go hand in hand. Obviously, you know, if you're integrating with a protocol that sits beneath you in your stack, you want to be sure it's secure. And one of the ways that you can build confidence is, of course, the track record and the brand of that protocol over time. Does this protocol have a history of, you know, being very security minded? And is that part of the brand of the protocol?

Starting point is 01:04:33 And so that may be another sort of asset or, you know, dimension of defensibility for protocols. And then finally, I think the other piece of this is when you're a developer integrating a protocol that sits beneath you, you want to make sure that the rug is not going to get pulled from underneath. And developers understand that very well because developers built on top of platforms like Facebook or Twitter only to see. those platforms shut off the API or yanked the rug from underneath them. And so how can developers be sure the rug's not going to get yanked from underneath? Well, they can be sure if they in fact own the underlying network. So again, that's another reason why you may want to reward developers who are building on top with an ownership stake because they're the ones driving value.

Starting point is 01:05:26 And if they, you know, that through that ownership stake, they gain control and control gives them confidence building on top. So it's a sort of a two-way street that's symbiotic between, you know, developer integrations and underlying protocols. And I think that's something to strive for to create defensibility. You know, another moat that Dave and I have talked about so much, bank listeners will be familiar with this, is this idea of credible neutrality and what we call kind of the protocol sync thesis, which it kind of goes off of what you were talking about with like, you know, the first thing about, you know, developers wanting to connect to it and that being a network effect advantage and also the last with, you don't want a rugpole, right, if you're a

Starting point is 01:06:08 developer. Well, you know, the analogy here is, it's kind of like the internet, like TCPIP protocols, right? So how useful would TCPIP be if AOL owned it or if the United States of America governed it, right? It would be less credibly neutral for other companies, other nation states to build on top of it. But because of its credible neutrality, you might call this in your lens, Jesse, like it's decentralization. Then you can be assured that you're not going to have a rug pool type event. What's your take on that as a potential moat? We're describing the same thing, right? It's a credible neutrality, I think, derives, one way to derive. One way to derive, credible neutrality is through user ownership. In other words, if users own and operate the platforms

Starting point is 01:07:00 on which they build or on which, you know, or that they use, they can develop trust and exercise their will to ensure that those platforms remain aligned with them. And that's how you avoid a rug pull. So I think we're describing the exact same thing that you guys call credible neutrality. And that, that I think is a very powerful moat for protocols. If developers feel that the platform is credibly neutral, they will be much more confident building on top of it. And that's how you, you know, you lock in network effects. Because again, there is a cost for that developer to switch thereafter. Okay, that's great. SideQuest concluded. Thanks, Jesse. Like, we understand about network effects now and your take on it. You also mentioned earlier that for now, we've seen a lot of financial type of use cases,

Starting point is 01:07:51 but that this ownership economy concept is much broader than just banking, store value, finance, that sort of thing. I guess a few examples that I know the bankless community has some exposure to. One is a Web 2 platform, a social platform, Reddit, of course, rolling out community tokens. So it almost appears like Reddit is taking the ownership economy notion from crypto and glomming that onto an existing business model. Another example, of course, is like social tokens, and David just had a Grammy Award winning artist RAC on

Starting point is 01:08:28 the bankless YouTube channel to talk about one of his kind of fan tokens or a social token. It might be another example of that. But you do think that ownership economy is broader than just finance, right? How is it going to bleed into these other areas? Yeah. So I think the examples you just mentioned are good sort of early experiments. I think the Reddit experiment is really interesting. That said, you know, it's usually not the case that sort of incumbent platforms are the ones to break through with a new technology innovation.

Starting point is 01:08:59 It's generally, I think, an opportunity for startups. And so, you know, what RAC is doing, what with Zora, I think is really interesting, what foundation has been doing with helping other creators tokenize their work is sort of another example. And zooming out, the way I would describe all of those experiments, are consumer marketplaces that are enabling suppliers in the marketplace to make ownership a keystone of their product offering. So they're enabling creators to connect with their fans who otherwise would be patrons in Passion Economy marketplaces, patrons that pay a subscription like subscribers to bankers. And they're allowing these creators to experiment with the intersection of patronage and

Starting point is 01:09:50 profit. So not only are you, you know, someone who's excited about the work that this creator is doing and paying them monthly, you're able to actually invest in their success and get a token that gives you access, say, to premium features like, you know, bankless users have. And that aligns the incentives of the creators and their audience. And I think will eventually lead to a different mode of creation where it's not the creator creating in single player mode. It's the community around the creator contributing to creation, just like platforms, you know, internet platforms, crowdsource their value from their users, right? So it's the same idea just applied to a different sort of community that's creating a different kind of value in sort of consumer or cultural goods. And I think this

Starting point is 01:10:40 can also eventually happen at the platform level itself. So beyond, you know, RAC or bankless creating a token for each of your respective communities, I think we'll start to see the tools that these creators use also start to employ a similar model where the creators on the platform are able to earn some of the platform value directly. And that's exactly what Reddit is doing. I think you're starting to see it in other consumer-facing verticals. For example, Rowley is a platform for for video game studios and streamers that allows each of them to respectively earn ownership in the network itself. And so you're starting to see more and more experiments in increasingly consumer-facing

Starting point is 01:11:29 verticals where ownership is a keystone of the product offering. You're showing up day zero when no one else is there because you're able to contribute to this platform and earn your share for doing it. you're literally able to make money in a new way that other platforms don't offer you. And my view is once there's a breakout success here, it's going to be a zero to one moment where platforms that aren't offering their users this kind of compensation for their contribution are not going to be competing on the same terms as those that are. And that's how the ownership economy wins.

Starting point is 01:12:04 It's one of these things where everyone who's sort of not, on board with the idea today is saying, well, look, that's not how platforms have been built for the last 20 years. Why would it be any different going forward? But once there's one breakout success that, you know, hits a home run in the consumer world, I think it's going to become part for the course and everyone will be rushing in to do it. So, Jesse, I've been hearing different derivatives and different ways of people articulating very similar things to what you've been articulating here on this podcast today and what you've also articulated in your writing. There's a lot of resemblance to kind of the by the user for the user ethos that we came out in 2017. And a lot of a lot of the

Starting point is 01:12:51 ethos has been kind of being tossed around since 2018, 2019. And now it seems to be like as a community, we've really been able to focus on what we've really been talking about. And I think you are the person who has really been able to articulate this thesis the most clearly. And Which is why we're bringing you on the podcast. But what have you seen in the last years or so that has really allowed you to formulate this thesis? Like what has happened? What are the experiments that have caught your eye that have really allowed you to formulate this thesis in such an articulate way? Yeah.

Starting point is 01:13:27 So I think first off, I got into this space as an entrepreneur before I got into investing. And that was back in 2014. I co-founded a company called Media Chain Labs. And our goal was actually non-financial in nature. We wanted to build what we called a universal media library that would enable creators on the internet to capture more of the value that they create across platforms. And so, you know, in short, the idea was, you know, Bitcoin is really good at tracking this digital asset, this financial asset. What if you took a system with similar properties and used it for a different kind of digital asset instead of a financial asset? How about a digital media asset, an image, a video, or song?

Starting point is 01:14:15 If images, videos, or songs on the internet could be attributed to their creator in the same way Bitcoin is attributed to its owner, then you could enable those creators to capture more of the value from platforms that distribute their work. That was the goal. And so I've been in the space for a while with the same goal in mind. I think the thing that's changed for me is how I define creators. So rather than limiting it to media creators, I've expanded it to include all kinds of creators, developers, right, that are building these platforms, you know, people who are marketing these platforms. Everyone's creating some kind of value in the products and services they use every day online. And so I would say that the thesis has been, you know, sort of a cornerstone of my involvement. in the space from the get-go.

Starting point is 01:15:02 But what I've seen recently that I think is encouraging, you know, back in 2017, we saw, you know, the rise of like ICO tokens that sort of, you know, pie in the sky had the same idea, many of which didn't deliver, a lot of bad actors. And so that was honestly a bit of a distraction. But what did happen in 2017 that was pretty profound is a ton of developers rushed into the space, right? Like a ton of developers took an interest in platforms like Ethereum, frankly. And a lot of those developers stuck around.

Starting point is 01:15:36 And why did they stick around? Well, because they own ether. Or they own some token. And they're working to build the value of that, the platform token. Right. So I think that was encouraging is seeing how effective, you know, this model, in the case of the Ethereum community, has been at attracting developers to be. build out this ecosystem. That was 2017. I think today, 2020, we're seeing experiments largely in DeFi that have been very, very effective at driving growth and adoption. I think this has come

Starting point is 01:16:11 to be known as liquidity mining and yield farming, which you guys have covered extensively. So I won't, I won't explain it in detail. But in short, by distributing platform tokens directly to users, these new financial marketplaces on top of Ethereum have been able to, to grow their numbers really, really quickly. Now, I think there's a lot of problems with the distributions that some of these projects have deployed and that they've sort of optimized for short-term flash in the pan growth rather than sustainable and defensible growth.

Starting point is 01:16:45 But each time a new financial protocol distributes ownership directly to their users, they're iterating on the model and they're improving. And I think we're very close to establishing some best practices that are going to lead to repeatable and defensible organic growth over time. And so that's what's gotten me really excited lately is I think we're finally starting to see the ownership economy thesis play out at the layer of applications that end users use

Starting point is 01:17:14 rather than the platform or the infrastructure layer that developers use. And I think that's going to continue all the way until we get to consumer marketplaces and consumer social. I want to address a question again for the listeners who are a little more bearish on this about kind of why a blockchain. I know we talked about it earlier, but here's something a bit more specific. So when someone asked me to describe a token from, it wasn't Binance like B&B, but it's similar to that. Crypto.com is an organization. They have a token called the MCO token. They had a token. And the way I described it as to this bank list user is like I think

Starting point is 01:17:53 of it as kind of like a loyalty token, right? So almost similar to airlines. miles, hotel points, Starbucks points that you earn for doing specific things. And, you know, crypto.com as an entity kind of awards you for doing things it wants to incent in its platform, like a loyalty point. It's like a hotel point. Now, one key difference is, of course, you know, the token itself, the crypto.com token is on crypto rails so it can be like exchanged in the entire defy economy. But I want to go back to the skeptics take. It's like, is what you're describing with like fan tokens with RAC and Reddit and this sort of thing. Don't we already have these in the analog world?

Starting point is 01:18:36 Aren't they just called airline miles, hotel points, Starbucks points, that sort of thing? What's the difference here? Yeah, there's definitely similarities. But I think they're pretty different and important ways. And the crypto.com example, one that's very similar to that is, you know, Binance has a token, BNB, right? And I think it's not fair to say that Binance is entirely community owned and operated. Like CZ owns that company along with its shareholders. However, the Binance token does confer the holders of it with a share of the platform value

Starting point is 01:19:10 because they take revenue from the platform and buy back and burn those tokens. At least last I checked in, that's how it worked. And so, you know, I think ownership, in the ownership economy is a pretty broad design space, right? I think in in networks that are sort of more crypto-native like Ethereum and, you know, and uniswap and compound, those tokens directly control smart contracts on the blockchain. There's no other way to do it, right? But with finance, you know, you could imagine that, you know, they have a, they don't use a

Starting point is 01:19:48 blockchain for their loyalty program or their revenue share program. they use legacy rails. So why are they doing it this way? I think it's because blockchains are the right tool for the job when it comes to distributing value at Internet scale. So there is a cost to using the legacy financial system, especially when you're trying to move value all over the world. There's a bunch of non-interoperable financial rails

Starting point is 01:20:16 that are expensive to use and are subject to you know, the whims of the operators that run those networks. Crypto is a credibly neutral platform on top of which any developer can build and distribute any kind of value. And so I think, you know, much like the internet was an open, permissionless, incredibly neutral layer for experimentation, we are going to see lots of experiments of what it means to make ownership a keystone of your product experience. And some of those will be on the crypto-native end of the spectrum where there's literally no other way to do it.

Starting point is 01:20:55 And others will be on the end of the spectrum where it's more of a hybrid model. And I think both are valid experiments to run. Like social tokens are not fully decentralized. They depend on the creator, right? But when you produce this token on a blockchain, it's way easier, way less costly to distribute that value to people all over the world than it is to say use Stripe. And Stripe probably wouldn't even let you do. right? So there's there's a lot more room for experimentation. There's a lot more design space by building on top of a blockchain. It does seem like we keep going back to this idea of iteration and experimentation and crypto facilitating that, whereas like the traditional world does not facilitate that, which is super interesting, kind of comparable maybe to the iteration and experimentation of the early internet.

Starting point is 01:21:37 But I want to tie this into defy a little bit. So for bankless listeners who've been on the journey with us, one of the big questions, questions we always come back to and ask our guess is, when is Defi going to go mainstream? Like, what's the catalyst going to be? You wrote a really interesting article, Jesse, where you sort of divided that question into three schools of thought. You know, you said, one, the people will come, basically bank the unbanked is one school of thought, one thesis for when defy and why Defi will go mainstream. You said, secondly, another school of thought is that the institutions will come. So Wall Street wants to be part of this global casino.

Starting point is 01:22:21 They start issuing stock and tokens. And, you know, JP Morgan issues their stable coin and they become all about it. So the people come, bank, the unbank, the institutions come Wall Street. You also said that there's a third path that people talk about, which is an entire economy will be built around this. And that includes real things that you can do that you can't do in other economies. So like non-financial types of applications. So similar to kind of the fan tokens, the NFT idea that you were talking about earlier.

Starting point is 01:22:51 And then he said something which is kind of interesting to me and maybe contrarian a little bit to what we often talk about in bankless, which is you're much more bullish on the third than you are on the first two. Can you talk a little bit about those kind of three schools of thought and like why you're bullish on one versus the other? First, let me just sort of qualify this by saying that I think, you know, the question or the title of that blog post is, how does Defi cross the chasm? So it's specifically trying to address the question of how it becomes sort of like a mainstream phenomenon. And so the first two schools of thought, you know, Banking Unbanked and sort of Wall Street or institutional casino, I think I'm less bullish on those simply because I'm not sure that's how you capture the hearts and minds. minds of your, you know, your average Western consumer, which is sort of who I'm talking about when asking that question, right? And that's okay because it, you know, it means that Defi still has a ton of

Starting point is 01:23:57 room to grow even without the, you know, the Western consumer user in mind, right? Like, there's a ton of room to grow. If it's, if it's a Wall Street casino, there's a ton of room to grow if we bank the unbanked. But the question is, how does Defi cross the chasm and sort of, you know, get mainstream Western consumers to care about it? And there, the reason I'm bullish on the third sort of school of thought that, you know, there has to be a real economy here is, is I think informed by, by the way, you know, finance works in the traditional world. Like finance as an industry doesn't exist in a vacuum. It exists, at least in theory, to service an economy of real goods and services, right? The financial industry is a service industry and it's in service of other real industries,

Starting point is 01:24:47 industries that produce GDP. And that's not to say finance doesn't produce GDP, but you get my point, right? It's a service business and it's in service, at least in theory, of these other industries. It's not in service of itself, or at least it shouldn't be or can't be entirely in service of itself for very long. And I think right now we're in this sort of interesting phase in defy where by and large, a lot of, you know, crypto tokens and defy protocols are still used for financial speculation. So that's that's kind of finance in service of finance itself. I think it gets really interesting once you start to see the ownership economy thesis play out and you do start to see platforms that produce products and services that are not financial in nature, but use these new financial rails to distribute. the value of their product or service, the value of their industry directly to their users.

Starting point is 01:25:42 And once that value is running on these rails, the financial services that have been built through D5 to support it get a lot more interesting. And I think, just to make that concrete, imagine, you know, you buy, you're a fan of RAC, you buy his token, right? And you use that token maybe to, I don't know, you know, get a one-on-one meet and greet with him, you know, a few months from now. What happens if you're able to take that token and then go use it as collateral to go get a loan, you know, so you can buy another creator token and support the next creator, right? Like, I think that's when DFI starts to get interesting is when

Starting point is 01:26:23 there's these other products and services that have nothing, you know, explicitly to do with finance that start to play in the DFI ecosystem. That's when I think consumers will start to realize, wow, this is way better than my bank where I can't do any of this. And that's where it clicks. Ryan, I'm seeing a lot of similarities to what Jesse, what Jesse just said to what Andrew Steinwald said on our podcast about NFTs, where Andrew claimed that the NFT ecosystem will be orders of magnitude larger than defy because NFTs are the property that, you know, financial assets, you know, are used to purchase.

Starting point is 01:27:00 It's the actual property that we value rather than, rather than the, the currency. And I think what Jesse's saying is like, you know, defy is great and defy is valuable in of itself, but there's no real point to a financial system if it's not supporting something else. And that something else could be orders of magnitude bigger than the defy ecosystem that underpins it. Jesse, does that resonate with you? Yes, that's exactly exactly right now on the head. It's so cool because, you know, I actually think I agree with your article, right, with kind of the addendum that it feels like these three things will grow together. So the economy becomes much more interesting. It becomes much more interesting for RAC to put his fan token on a network like Ethereum

Starting point is 01:27:48 that has an ecosystem of banking and financial protocols basically, right? Like it has uniswap and it has compound and it has maker and it has this robust ecosystem of like banking users too. And so it seems to me that all three of those things kind of grow together, like even the second institutions. Well, that just lends credibility to the platform itself, which again makes it more interesting to build a real economy on top of. Would you agree? That's kind of what you're saying here?

Starting point is 01:28:21 Totally. Yeah. I do think, I think I even mentioned in the post, you know, I think all these things are going to happen sort of in parallel. I guess, you know, transparently, I'm rooting for the third because I think we need just more entrepreneurs experimenting and building the ownership economy because that's going to be, that's going to be the thing that allows defy to really hit escape philosophy. So I think all three of these things will happen in parallel. But I think this goes exponential when we start to see

Starting point is 01:28:46 tons of goods and services, you know, whose value is is tokenized and running on these defy rails. So on that, if I am, say, a founder and I am looking to build something with an ownership economy in mind, or I'm even like a speculator looking at what, you know, this token comes, comes out with and I'm putting it through this lens. What does a founder need to do to begin with this new model in mind? Like do they go to Sandhill Road and go raise from VCs like the traditional kind of Web2 startup does? Or is it a little bit different? Yeah. So I think that ownership economy platforms are going to follow a sort of different life cycle than traditional venture-backed startups do. What I mean by that is, you know, it is explicitly the goal of an ownership economy platform to distribute ownership of the platform directly to users as a tool for growth, right?

Starting point is 01:29:54 So whereas traditional startups go to Sandhill Road and they raise subsequent rounds of fundraising to fund, you know, additional growth of their platform, ownership economy platforms seek that growth from their users and reward their users directly for their contributions to growing the platform. What that means, I think, is these ownership economy platforms will exit to their community of users, exit the value of their platform, you know, which traditionally is an IPO or an acquisition. They will exit to the community of users fairly early on in the life cycle of the project, right? because that's the goal. That's how you grow it. I think the implication is that these types of projects will not raise as much venture capital as traditional startups. Instead, they'll raise financial capital and production capital directly from their community of users through a liquid token. And so what I think that means is that seed stage or pre-seed stage even investing

Starting point is 01:31:00 is some of the most important capital founders will take, right? Because it may be the only capital that they take, and it's the capital that helps them get to this important milestone of exiting to the community of users. And that's why, you know, Variant Fund is set up with a dedicated focus on pre-seed and seed investing. I think that's the big opportunity in the space. Now, there's other schools of thought that, you know,

Starting point is 01:31:27 project shouldn't raise any venture capital at all, right? that they should only, you know, distribute tokens directly to users and not at all to investors. But I do want to push back on that idea a little bit because I think the key thing that kills any kind of startup is a lack of focus. You know, you have to build a product that people actually want. And that requires, you know, focus. It requires leadership and sort of quick execution and iteration. And at the earliest stages of a startup, I think it can be a distraction or a cause of, you know, the catalyst for a loss of focus. If you have to make every decision about what your product's going to do, what it's going to look like by committee.

Starting point is 01:32:13 I think what you want to do in the very early days of a crypto project is build something that people want. And then very quickly, once you validate it that people are actually interested in using this thing, start to effectuate a distribution of ownership to those. users to encourage them to help you grow the platform or service. So all that to say, I think there's a role for very early stage financing in the ownership economy, but there's likely less of a role for, you know, big VC funds to exponentially scale these platforms through subsequent rounds of financing because all that growth is going to come from the users directly rather than the VCs. And I think we've seen a ton of evidence. for this, especially in the last, you know, few months of Ethereum and DeFi, right? Uniswap is this place where

Starting point is 01:33:05 assets can come to access liquidity and can really be a good distribution mechanism. And then we've also seen compound, you know, go through very few seed rounds before getting a token out into the ecosystem. And, you know, in stark contrast to, you know, legacy companies that go after seed round, after seed round, Series A, Series B, where there's all these investors who are front-running the public stock market, right? Like the IPO is where, like, all the rest of the world gets to have access to some capital, some equity. And every single seed round or series round before it gets to the public stock market are, you know, privileged parties getting in front of, you know, the rest of the people. And what we're seeing these D5 Rails operate as are quicker turnaround tools to getting ownership into their. the hands of the people. And it seems to be the faster that we can get ownership into the hands of the

Starting point is 01:33:59 people, the sooner we can get ownership into the hands of the right people and kind of have that emergent incentive, that correct incentive emerge organically out of who wants to get incentivized quickest. That's right. Yeah, exactly right. I think that's that's the key to growth and that's why these platforms follow a different life cycle. I guess I just, one thing I also wanted to just add on to what I was saying is, you know, what I just described, this process of, you know, first building a product, then very quickly as soon as you're ready, distributing a token directly to your users, that's an idea I've called progressive decentralization. And, you know, a number of other folks in the community have been talking about this idea of

Starting point is 01:34:47 fair launches. And a lot of folks have like put these two concepts at odds with one another, you can't progressively decentralize if you're fair launching because a fair launch sort of implies at least aspirationally you are day zero distributing ownership to your users and then building the product and I think that's not it's not the case that these two ideas are mutually exclusive I think you can you know a better definition of fair launch is a launch that meritocratically distributes value to those that create it And so again, if it's valuable for the team to be able to be heads down for a little while, you know, building a product that people actually want, then I think the team should be rewarded.

Starting point is 01:35:37 And separately, the investors that backed that team and enabled them to go and build the thing in the first place should also be rewarded. Right. So I think, you know, a better definition of fair launch is really about meritocratic distribution, not about, you know, pure decentralization. and it's actually quite complimentary with the idea I was describing, which I call progressive decentralization. So, Jesse, it's been fantastic to have you, and this has certainly been a journey into the ownership economy. I want to conclude with this last question of what is next for the ownership economy. It feels like we've got this primordial soup of experimentation and new tools, but what's next? And is there even a way to predict what's next when we're getting this level of experimentation? Yeah.

Starting point is 01:36:27 So I'd say what I'm excited about next, beyond, you know, infrastructure platforms like Ethereum, beyond defy, is consumer marketplaces. I think we're going to start to see platforms that, you know, historically would be called Passion Economy platforms, start to lean into the ownership economy model first. because many passion economy platforms are those that depend very heavily on their creators for their value. And again, one thing that's unique about passion economy platforms versus, say, you know, gig economy or, you know, Uber, for example, is passion economy platforms depend on the uniqueness of their users, whereas Uber tries to commoditize all drivers, make every car the same,

Starting point is 01:37:16 you know, every trip of the same quality. passion and economy platforms lean into your unique content on bankless, right? And so I think that's a ripe opportunity for sort of cunning founders to explore, which is, you know, how do we give our most unique, our most valuable users, more skin in the game in the success of this platform? And again, I think once there's one successful experiment there, it's going to unlock the floodgates and everyone's going to jump in on doing it. And right now, I think, the tools to experiment with this are in market today. Namely, there's, I think there's two important advances that will enable this.

Starting point is 01:37:56 One is we have stable coins, right? So you can now distribute the value of ownership in a medium of exchange that creators or mainstream users understand. And two, we have wallets that don't require you to write a 24 word, numonic phrase and stored under your bed. You can use tools like, you know, Magic Link or others that give you sort of a Web 2 authentication experience while allowing you to access Web 3 or custody Web 3 assets, including stablecoins. And so, you know, Web 2 par user experience plus stablecoins, I think, are a big unlock for

Starting point is 01:38:36 consumer marketplaces joining the ownership economy next. Jesse, this has been absolutely fantastic. It seems clear to me that all three of these things, will grow together, you know, defy, institutional adoption. But the real economy that everyone's been asking about, like, what, like, what's, what are people actually doing in crypto? This real economy might indeed be the ownership economy that you are talking about. So thank you so much for guiding us through your thesis and this lens on the world. It's been a pleasure to have you. Likewise, thanks for the great questions. It's been a lot of fun to talk about it. I'm yet glad to have been here.

Starting point is 01:39:14 Absolutely. All right. Bankless Nation actions. And resources. So if you really enjoyed what Jesse was talking about, want to deep dive more, there are four of his articles that you absolutely need to check out, starting with the ownership economy thesis. We will include those articles in the show notes. As always, also check out our recent Meet the Nation episode with RAC, where we talk about, David talks about his fan token. That'll give you a take on that. And also, if you missed our episode on NFTs with Andrew Steinwald, that David referred to earlier. We will include that in the show notes as well. Lastly, David, how are we doing on five-star reviews? We're doing pretty good, we're doing pretty good, but we can

Starting point is 01:39:56 always do better. As DeFi grows and as the economy that Jesse cited grows, we want bankless to promote that growth in the iTunes top charts. We are currently in the top 100 in the iTunes investing in finance category. And I think as the economy grows, we think we can get ourselves into the top 10. And the way that we do that is with your five-star reviews. Wherever you listen to podcast, please open up your podcast app and give Bankless those five-star reviews. Thanks in advance for giving us five-star reviews, helping us spread the word, sending this podcast to a friend. As always, guys, risks and disclaimers. What we talked about today is risky. ETH is risky. Bitcoin is risky. So are some of these experiments that we were talking about in the ownership

Starting point is 01:40:43 economy. All of it is risky. You could 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.

Bankless - 34 - The Internet Cooperative | Jesse Walden

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