Bankless - 62 - Governance and Capital | Joel Monegro

Starting point is 00:00:01 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 bankless. David, fantastic episode. Who did we have on and what did we discuss? We had on Joel Monegro of Placeholder VC. Joel is very close with Chris Berniske, who we've also had on the podcast. And I personally really enjoy this duo of really big thinkers. And these guys really take the very nuanced details of, you know, token governance, you know, crypto network management, and really extrapolate it from the micro all the way to the macro. And this is a bankless podcast that I think is really pushing the frontier of crypto knowledge. Because again, we are not designing these systems, we are exploring these systems. And Joel, I think, is doing a really good job exploring the frontier of crypto network governance and what that means. And he has, I think, done a

Starting point is 00:01:22 very fantastic job, really defining and articulating what is actually going on when we talk about governance and linking it to capital. And his association of governance and capital is actually two sides of the same coin I thought was extremely profound and perhaps actually the entire through line of this entire episode. Yeah, what's crazy here is I feel like a lot of people who, whether they're bankless listeners or just, you know, the population in general, have this like feeling that something big is happening. Like something has changed. Like we are entering into almost a new era where our previous institutions no longer work and we've got to discover these new institutions. Like change very much.

Starting point is 00:02:03 Maybe it's the 2020s thing, but it feels like change is in the air, David. And people are uncertain how this is all going to shake out. And what I love about this episode with Joel is he thinks big picture about how these technologies, specifically these coordination technologies, capital coordination technologies, governance technologies will shape humanity's trajectory, will shape us into the future. It's just a very big brain, a very big picture, high-level, long-term type of podcast that blends like what we love to talk about so often on bank lists, this kind of philosophy, side, you know, this anthropology side of things, the societal impact side of things with the

Starting point is 00:02:45 technology. This is right in our sweet spot. This is the podcast that we love to do because out of Joel, we get definitions for things that we hadn't previously really defined or thought about, like, what is the definition of capital, David? Hmm, let's ponder that for a bit. What is the definition of governance? We talk about these terms so often on bank lists, but Joel actually brought some definition to these terms. And that's what I loved about this episode. And I don't think there's any other realm of knowledge outside of the crypto space that is really tackling questions like this, tackling questions that Joel is really going after. And the inspiration for this podcast came out of a desire to really articulate why governance

Starting point is 00:03:27 has value in the first place. Because ever since DeFi summer, we've been hearing that, like, oh, these DeFi tokens, they control the passing of money. you know, uny governance tokens control the LP fees. They control how money is sent around in the system. And therefore, the governance tokens will just vote in fees to the tokens. And then that's how there's money. That's how there's value collected in these governance tokens. That's why governance tokens has value. And it's been this very handwavy explanation as like, oh, the governors of a system will just vote in fees for the governors. And so I really wanted to get Joel on the podcast to ask him, is it really that simple? Is it really that, you know, if this, then that. And that's why

Starting point is 00:04:05 governor's tokens has value. And to some degree, Joel said yes, but also he said no. And we dove into how actually capital is a form of power over the world. And as a capital owner, you can direct power and route power as you see fit. And whether or not fees actually do make it from the hands of the protocol into the hands of the token owners, the value of these governance tokens have value no matter what because of their ability to dictate power around the world. And just like you said, we can talk about that in the very micro aspect of, you know, crypto network governance, but we can go all the way back into the history of human governance at large and talk about governance is power, power is capital, capital is governance.

Starting point is 00:04:50 And all of these same things are becoming distilled inside the same asset on Ethereum and tokens and crypto networks at large. If you love previous bankless episodes like Slaying Moloch or our episode on the Crypto Nation State with Bellagie or where we talk to the Chris Dick. in about how the nation state would be unbundled, how there's this new capital coordination technology. This is the episode for you. And of course, if you are a paid subscriber to bankless, stay tuned for the debrief that comes out on the bankless premium feed where David and I do. And after the podcast digest of our thoughts, definitely one to catch up this time. David,

Starting point is 00:05:27 one more thing. We'll get to sponsors. Then we'll get to the interview is Dharma is hot these days. Folks that are listening to the bankless podcast over the last few episodes know we've been talking about Dharma, which is a smart contract wallet, enables you to go directly from your bank account into a crypto protocol, start earning yield in something like WIRNs, particularly if you're in the U.S. David, tell me something good about Dharma because we're really excited about them these days. Yeah, my current thesis, and I'm pretty sure, Ryan, you agree with me, is that retail season is right around the corner. How could it not be when Doge is at 40 cents. Retail is coming. And retail is expecting a centralized platform level of performance,

Starting point is 00:06:08 but we are trying to get people onboarded to the values and merits of decentralization. And Dharma, I think is how we do this, right? Dharma is how we make sure that people get into actual real capital assets, like the ones we were about to discuss with Joel, and they do it in a very easy and quick way. And without having to worry about things like Doge or Lightcoin, because the capital assets on Uniswap are legitimate assets. and you can access those legitimate capital assets directly from your bank account with Dharma. If your friends are asking for a way to get into Defi, send them to Dharma at Dharma.com. Speaking of fantastic defy tools, we want to tell you about the sponsors that made this episode possible.

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Starting point is 00:09:15 All right, everyone, we are super excited to have Joel Monegro on the podcast. Joel is a partner at Placeholder Ventures. Placeholder is a venture capital firm which invests in decentralized networks and companies. We call these crypto-native organizations. He started the firm in 2017 with his friend Chris Berninski, who is a bankless podcast alum. Go check out Chris's episode as well. And one of his mentors, Brad Burnham, after three years at Union Square Ventures, which is a relatively famous VC fund, he developed the firm's early blockchain thesis and portfolio there, including such memes and articles as the Fat Protocol thesis. He is now a big believer and has been for quite some time that crypto will change the structure of all markets, maybe even how humans organize societies into the future.

Starting point is 00:10:09 Guys, prepare yourselves. This is big brain stuff today. We are going deep. We are super excited about this episode. Welcome to bankless, Joel. Thanks, Ryan and David. I'm super excited to be here and looking forward to the conversation. You know, we got to start at the highest level macro.

Starting point is 00:10:28 place we can to get introduced to this. And this is like the structure of societies, the structure of humanity. One of my favorite books I know is David's as well is a book from Yvall Harari called Sapiens. And there's a lot of great insights in that book, but one of the insights is the thing that separates humans from all the other animals and all of their species is our ability to coordinate socially. That is humanity's superpower. And you can even think about our trajectory, our technology trajectory through the ages. We've come from kind of a cave society to agrarian society to this digital society as just increasing progress on coordination technologies. I want to start with this question around, with that grounding

Starting point is 00:11:17 around coordination technologies in a term that we use so often in crypto, which is the term governance. Now, I think of governance as the ability to really determine how decisions are made, but governance is almost a coordination technology in and of itself. How do you think about governance at the highest levels, Joel? What is governance? Yeah. So governance is a tricky term because it's so broad, right? And I think that's what makes it sometimes difficult to think about and analyze, but I'm with you that governance is ultimately about how decisions get made and the structures that drive decision-making between groups of people or among groups of people. It can also be within an individual, though there, I guess you would call that autocratic governance

Starting point is 00:12:17 or use a similar term. But yes, at a high level governance is how decisions are made, And they're usually tied to some kind of system, whether it's a social system or economic system. And you could say that those are the same. But governance exists between a group of friends, for example. If you're going out to eat, there is a governance process by which humans find consensus about which restaurant to visit. All the way to defy protocols, there is a governance process. in a system that gets created for deciding where a network goes. And also, like Ryan said, Sapiens mentions how the reason why humans are different from other

Starting point is 00:13:06 species is that we can actually scale governance. And he talks about how humans use stories initially to scale governance, shared stories and shared myths. But also, as Ryan said, governance is also a technology. And it's really a humans are trying to find governance. governance mechanisms, governance technologies that allow us to scale into larger and larger groups, and that allows us to scale beyond just like tribes of 50 to 150 things below Dunbar's number into nations of millions and hundreds of millions. And so, Joel, when we talk about governance,

Starting point is 00:13:45 what is it that we are actually governing over that allows us to scale from just, you know, hunter-gatherer societies of, you know, 50 to 152 nations of hundreds of millions. Yeah. I think ultimately, what we're governing is pools of economic resources. And so that can be anything from a household. You know, if you live in a house with people, there is a kind of understood or maybe not so well understood, but there is a governance process internal to the household that is about how to make decisions for that little system. And in economic history, there have been periods where we have set, for example, the family as the core economic unit. Other schools of thought think of the individual as the core

Starting point is 00:14:36 economic unit. But this idea that it's a little economic system, we're deciding how resources are distributed and how responsibilities are distributed within that system, you can have have governance over another kind of economic system like a company. And there you're making decisions about how voting power is distributed. Same kind of exercise. How do you distribute the economic resources within that system? Who is responsible for certain aspects of that system? You can have governance over countries, as you mentioned.

Starting point is 00:15:08 And it's the same dynamic. It's who makes the decisions about how resources within that country are distributed. And now the principles are the same, whether it's, you know, a family or a company or a country or the world. If you think of the United Nations as a way to create a governance system that can coordinate across countries. And the technologies change, right? In a household, you know, you may not need a rulebook, though I know that some households have household rules that are written down. and other systems have, you know, for example, a company have shareholder agreements and all kinds of contracts that define the governance system for that kind of organization. And different companies or different countries will have different systems.

Starting point is 00:16:00 And by a large, the technology, the dominant governance technology is writing. Writing is what you use to define a lot of the processes. and a lot of the responsibilities, and it's ultimately about what mechanism do we use to find consensus among a group of people? And it starts kind of giving us a window into why blockchains are so intertwined with this idea of governance

Starting point is 00:16:31 because we primarily know them as consensus protocols. And it's very different from, say, the protocols of the Internet, which are communications protocols. And so this idea, that we now have this new technology that allows us to create consensus protocols of various different kinds from the Bitcoin blockchain to a Dow really helps us understand that we are dealing with not only a financial technology, but also a governance technology. It's a new tool, kind of parallel to writing, which has been used for thousands of years.

Starting point is 00:17:02 So, Joel, you said the thing that we govern over most often is economic resources, various economic resources. I've often heard, crypto and systems like Ethereum being described as sort of a capital coordination tool or a capital governance tool, if you will. You just use the word consensus. Maybe we're kind of swirling around some synonyms here. Maybe these terms have different meanings. How would you relate the concept of capital to governance? Are we essentially in these crypto economic systems, are we governing over capital? Is that the thing? Or are capital and governance more closely related? in your mind? I think they're more closely related than we might think. And to zoom out a little bit,

Starting point is 00:17:50 a lot of my time over the past couple of years, I've spent it trying to understand capital a little bit more. And it was this funny thing because I found myself kind of thinking about the traditional definitions of capital, which are taught in economic schools and so on. And I think the most common definition goes back to Adam Smith, who describes it as the part of your stock that affords your revenue. And capital is this interesting thing because I found out that everyone is aware of capital, kind of the same way that everyone is aware of energy. It exists in every social system. people usually understand what you mean when you say capital, though most people don't seem to be

Starting point is 00:18:42 able to describe it precisely. And so it's something that we experience, that we know what it is through experience, but don't necessarily know how to precisely define it. And I found that the classic definitions in the textbooks don't cover the full spectrum of capital that we have observed in society over the past couple hundred years. That 300-year-old definition of, you know, those possessions that you have that afford your revenue were created at a time when there were, there was a limited number of observed forms of capital. And so we're used to thinking about capital as money, for example. We're used to thinking about capital as, you know, the equity of a company. But capital takes so many different forms. We now know to speak of political capital.

Starting point is 00:19:38 We now know to look out for social capital as well. And I find that those new forms of capital don't adequately fit within that framework of this thing that affords your revenue per se. And so as I started thinking more about it, I came to the conclusion that at the end of the day, what all the different forms of capital have in common is that they all represent some kind of power or control over economic resources, which is a form of governance. And so, for example, if you think of political capital, if you have a lot of it, you're a congressperson, for example, and you have through your career accumulated a lot. lot of political capital. There's no object, right, that that embodies your political capital. It's kind of a power that you have. And the more you have of it, the more influence you have over how laws are created and which laws get or which proposals become law. And so your political capital in that scenario is governance, as control over the rules of an entire country. And that's

Starting point is 00:20:53 incredibly valuable thing, even if it's not a revenue-producing asset like a share of stock in a company. If you have 10 million followers in social media, you have a lot of social capital. You don't have, again, this object or this instrument that necessarily gives you direct value like the dividend on the stock, but you have the power to influence the public opinion of your followers or the opinion of your followers. And that's an incredibly valuable thing. And so what's interesting about that exploration is that once we understand capital as control, and once we understand governance as control, then we start to see this very intimate relationship between capital and governance.

Starting point is 00:21:37 And we might even say that governance is capital. And this idea that governance equals capital is, I think, a foundational principle for understanding how to think about governance in decentralized systems. because once we understand that the governance of a protocol is really the capital of that protocol, it helps us understand then what to expect from a governance system or what to expect from, say, a governance token. Joel, there's so much to unpack there, like, just the idea of governance equals capital. Like, I mean, I think that could be, quite honestly, the rest of this podcast.

Starting point is 00:22:14 It's so deep. Yeah. But, like, I want to get back into just some of the concept you were talking about. So what you're saying is basically there are all of these other forms of capital that aren't very visible to modern society that Adam Smith didn't see and we might not see, might not be quite obvious now. We might not recognize them as forms of capital. And it's probably partially because there aren't assets around these forms of capital and there aren't markets around these forms of capital. So if I wanted to measure the level of political influence of a senator, say like Senator Bernie Sanders, for instance, over time, there's no. I can purchase. Like I can't purchase burn token, you know, and chart that over time. Not yet. That's

Starting point is 00:22:58 interesting. Same with social capital. Exactly. I can't, you know, David is a really popular crypto social media figure, as we all know. I can't chart the value of that over time because the asset is not visible. So one thing I think you're saying, among the many things, is that there are all of these forms of capital in human societies that are like forms of influence as well, forms of governance as well, that are basically invisible to us because we don't have financial markets set up for them, at least that's part of the reason why. Is that what you're saying? For the most part, yeah, I think you're right. The way I like to think about it is, or the terms that I use are there's capital.

Starting point is 00:23:46 which is a natural social phenomenon. And it's, if we think of capital's control or influence or power, all of those things are related. Capital kind of emerges naturally out of any social system. If you have a group of friends, there are some friends who are more influential than others in terms of how a group decisions are made. And same with a company. There's a more established hierarchy, same with the government. And so as we scale the systems, they tend to have more structure around them.

Starting point is 00:24:19 But there's capital, and then there's capital instruments. And the instruments are what defined the behavior of that capital. And the instrument layer, if we want to think about it that way, is where technology comes in. And so for the most part, because we have used writing as the governance technology for thousands of years, instruments have been defined with language. And so, for example, reusing that friend circle example, there's no friendship agreement that you might use with your friends. And so the capital exists, but there's no instrument around it.

Starting point is 00:24:59 And the instrument is the object, the abstraction of capital that makes it observable, measurable, measurable, and tradable. And once you can do those three things, then you can create markets around it. and that's where the financial market aspect of it comes in. But there's a really important concept here to impact this idea that capital exists, whether or not it has an instrument. And then the instrument is the mechanism that we use to build consensus among a group of people about how that capital is distributed.

Starting point is 00:25:31 And so, for instance, in a company, you use the full stack of contracts from the incorporation documents to the membership, agreements or the shareholder agreements to the employment contracts to the lease agreements when you're renting an office, all of those things are instruments attached to different forms of capital that define the behavior of the assets within that system. For instance, if you are the CEO of a company, you have a different set of rules and responsibilities than if you're an employee and your capital within that company is represented by shares of stock that you own. And those give you certain governance powers over the organization and certain control over

Starting point is 00:26:22 the organization. If you have, if you're an employee, you have some capital in the organization and that is defined by your employment agreement. And it tells you what things you have power and control over and what things you don't. If you're an investor in the same company, you also have shares of stock, usually with different rights and different terms than, say, the share is owned by the CEO. And that's another instance where we use writing to define how this form of capital behaves differently from this other form of capital.

Starting point is 00:26:55 But the instrument there is the share of stock. And so the stock that is distributed to employees versus the stock that is distributed to the founders or leadership versus the stock that's distributed to investors may have different terms and different rules. And so it defines how the different kinds of capital within that system behave, and it ultimately defines what they are worth. So, for example, investor shares tend to have certain economic properties and protections, and we usually call them preferred shares, and those have a different economic arrangement than, say, common shares. Now, the instrument remains the share of stock. For other forms of capital, like intellectual capital, for instance,

Starting point is 00:27:39 we may have other kinds of instruments. So a patent is an instrument for an idea that you had. And it's the instrument that we use, and it's in writing, it's a legal contract as well, that gives you certain rights and certain control over that idea that you had. And that ends up in this instrument called a patent or a copyright. We may have also, for example, property titles are yet another paper contract written in language that gives you ownership and control over a piece of physical land. And that's an instrument for a different kind of capital. Some people call it real capital or land is a form of capital. And so the instrument there is a property title.

Starting point is 00:28:29 And so we have these different kinds of capital. And then we have associated instruments that allow us to do those things, observe it, measure it, and trade it. You know, I can I can sell you my patent, right? And it's how I am able to trade something that's not tangible like an idea using this instrument that's been created around it. But what's interesting about that is that we have all of these other forms of capital that don't have any instruments yet. So going back to political capital or social capital, you know, political capital, as you describe, it's hard to measure. We don't really have anything to measure it. And if we can't measure it, we can't value it or price it.

Starting point is 00:29:11 And we also can't trade it formally. And so it kind of stays in this gray market governed by lobbying and other forms of capturing value from that political capital. And so that, I would argue, is inefficient. then I'm sure we'll go into that in a second. But then using the example of social capital, we have a way to measure it, right, like followers and social media. So we have that.

Starting point is 00:29:35 But we don't have an instrument that allows us to trade it. Because we don't have those instruments, then we can't create markets around it. And so we can't accurately price and value what that capital is worth. And so I think one of the big opportunities we have here with blockchain says at the end of the day, we have a technology that collapses the cost of instrumentation. It makes it so much cheaper and easier for you to create instruments for all kinds of capital. And I would argue that most kinds of capital that exist in the world don't have instruments attached to them and therefore don't have markets attached to them. And so there's a lot of wealth out there in the global system that is

Starting point is 00:30:15 yet to be captured because we haven't created instruments for those forms of capital. Joel, this is insanely cool. And I want to back up and just kind of recap the conversation. so far. And so when people typically talk about capital, they typically talk about perhaps their net worth and their net worth is always something that is a collection of all of their defined assets. Right. But what you're saying is that capital, we can actually look at capital more expansively. And perhaps a way to define capital is trying to measure some individuals or some individuals capital their ability to influence the world. And perhaps we don't know how much capital that person has until after they try to expend it.

Starting point is 00:30:56 And then we can look at how much of the world that they have changed. And then we can measure it's like, well, you had this much capital, and we can judge that by expending it. But before they expend it, before we understand all the forms of capital that they have, in their potentially infinite different forms, we actually don't know how much capital there is out there in the world because humans, through their unique ability of communication and language, can instrumentize capital, and that is something that we try to do and seemingly has,

Starting point is 00:31:28 we've always tried to do more and more and more of as we progress through history. And now we have these crypto networks, which, as you said, collapses the cost of instrumentation, which allows humans to express capital and define it in a precise, specific asset. So now that we have this cool new technology where more and more capital can be defined and instantiated in one single asset. My question to you is, what does that unlock? And why is that good? Why is the instrumentation of capital?

Starting point is 00:32:02 Why can we say that that is advancing of human society? What does that unlock for us? What ability does that give us? So the first thing it does is it unlocks wealth at the broadest sense. In part because you are a, once you instrumentize, capital, once you create an instrument around the form of capital, the most important thing that instrument does is allow you to exchange it. And once you understand capital as control, you know, something like a share of stock is a share of control over a system. And once we can trade

Starting point is 00:32:40 it, then we can create markets. And once we have markets, then we can put a dollar amount or a dollar value to that unit of power, if you want to think of it that way. And so I think there are lots of forms of capital out there that so far we have unable to create instruments around for various reasons. And to understand that a little bit further, it's worth noticing that every instrument of capital that exists today is a legal contract. everything from a property title to a patent to a share of stock. None of those are objects that exist. All of those are abstractions of that power over the underlying system. If you own a house, you can do whatever you want to it, right?

Starting point is 00:33:32 Or if you own a piece of land, you can do almost anything you want. And so you have total control, right? And so this idea that you have complete governance over that plot of land. if you own all the stock in a company or even the majority of the stock in a company, you have the control over that system and you have complete governance control and power over that system. We used to have kingdoms, right? And so all of the capital in a kingdom was invested in the monarchy.

Starting point is 00:34:02 There was no instrument for trading it other than violence and death. You had to go kill the king or queen in order to transfer that capital. Capital was transferred through war and control, and it wasn't until we started creating legal agreements, which are consensus mechanisms and consensus technologies, that we were able to transfer power between people. And so going back to the question about what this enables, it unlocks more wealth because we can create more markets around new forms of capital. I think there are so many interesting things that can happen once you make influence, tradable, for example. And I also think that capital is valuable in and of itself, whether or not it produces, say, profits in the traditional sense that we're used to thinking about capital assets.

Starting point is 00:34:56 And so this idea that we can use this technology to create new kinds of capital assets that have never existed before, it shouldn't be controversial to agree that capital is inherently valuable and whether or not you can measure it. And so being able to measure it means that we can distribute that power more efficiently. So if you think about the wealth concentration that happens in a monarchy, when all the power and all the value is concentrated in a family, versus how much more distributed wealth is in the modern world with democracy and open markets, we can take that a step further.

Starting point is 00:35:32 And it's almost like hyper-capitalism, but in a good way. Capitalism is actually responsible for discovering and distributing a lot of dormant values, in the world. And so being able to take that idea further is I think what's enabled by blockchains. So we are unlocking more capital. We are instrumentizing it, if that's even a word, as well. And this is going to unlock wealth. Hey, guys, I hope you're enjoying the conversation with Joel thus far. Next up in this podcast, we talk about the relationship between the creation of an asset and language and code and how the root settlement of an asset is the physical power of the nation state. And then we discussed what happens next when we use crypto networks to settle assets instead that doesn't rely on physical force.

Starting point is 00:36:25 Later in the show, we ask Joel how he thinks about governance token value capture. And we ask the question, is it really that simple that governance token holders can just vote in fees? Or does governance value capture have to be something more complex than that? And then we finish off this podcast with a conversation about how these governance systems can update throughout time and not only work for the users and operators of these systems now, but also work for the many generations to come down the line. Can these systems be inclusive to all further generations? Or are we destined to become the blockchain boomers and have future young people of the world become resentful that these governance systems forgot to include

Starting point is 00:37:05 them? I'm so happy that we're all going through this conversation together. I think it's one of the most important conversations in crypto. We have to talk for a moment about some of these fantastic sponsors that make this show possible. Guys, we've entered a bull market. Now is the time to start building your crypto empire, and you should do it on Gemini. Gemini is the world's most trusted cryptocurrency exchange. It's available in 50 countries, supports more than 30 crypto assets, including defy tokens, like Dai, Abe, Uni, and YFI.

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Starting point is 00:38:28 uniswap is an autonomous piece of software on Ethereum, which is what Ryan and I call a money robot. No human counterparties or centralized intermediaries, just autonomous code on Ethereum. Input the token you want to sell and receive the token you want to buy. Something brand new in the Uniswap ecosystem is the Uniswap Grants program is now accepting applications for grants. We have been saying this for a while and we'll say it again. Dow's have money and they are in need of labor.

Starting point is 00:38:56 If you think that you have something to contribute to the Uniswap Dow, apply for a grant to Uniswap. Just look at the size of the Uniswap treasury. It's almost $3 billion. This mountain of capital is looking for labor. Do you have something of value to contribute to the Uniswap Dow? No matter how big or small your idea is, you can apply for a unigrant at unigrantz.org and help steer Uniswap in the direction that you think it should go. That's exactly what we did to get Uniswap to be a sponsor for Bankless, and you can do the same for your project. Thank you, Uniswap, for sponsoring bankless.

Starting point is 00:39:30 I want to camp on a particular subtlety, I think, that I don't want listeners to miss here because this is super interesting. when you were describing it, Joel, you kept using the terms. And the way we create an instrument out of capital is we use words, we use language, essentially. And I think what you meant were things like it could be a verbal agreement, a verbal contract. But more commonly, it could be a legal contract that we create. These are the words. This is the code, essentially. Of course, in the crypto world, in the blockchain world, that can literally become digital code.

Starting point is 00:40:06 Those words can be code. we can embed some of these ideas and if-then statements into actual code. But another change that I think is worth talking about is the settlement layer is somewhat different, right? So the words that we write, the settlement layer is ultimately the legal system of our nation state. So if we have a dispute on some contract, then Joel, you might take me to court. And ultimately, that's going to be settled by the nation state. And of course, at the root of the nation state, the nation state uses force, you know, violence, the ability to throw someone in jail, potentially, the ability to find them, you know, against their will.

Starting point is 00:40:49 That's how these word-based contracts are enforced. But crypto and blockchain offers an alternative settlement layer as well. And I wonder if you could reflect on this, because it seems to me if we have digital contracts that are, are settled on a crypto consensus layer and outside of meat space court systems and nation state court systems, we actually are able to remove that need for force and violence as the base settlement layer. Is that the right framing of things and the right thinking of things? Or how would you respond to that? Yes, it is. And it starts opening or pulling yet another threat, which is how does this play into the future?

Starting point is 00:41:35 How does this evolve over time? And it starts a trend towards the unbundling of governments because the more commercial activity that we move over to blockchains that are able to enforce contracts between people and enforce agreements without the very expensive use of force, then there's everything we've talked about so far, in terms of it expands the, you reduce the cost, you do a couple of things once you expand the amount of that activity.

Starting point is 00:42:10 And so, for example, and I think this is what we're seeing with crypto, the activation energy to launch a token is much lower than the activation energy to launch a company, for example. And that's in part because you don't have to do all of these time-consuming processes to make sure that those agreements settle in physical court. but then as we need courts less and less and less and less, and we need the state less and less and less to enforce contracts, it's cheaper for everyone involved. It's more efficient.

Starting point is 00:42:44 It's faster. It's all the things that you would expect. But it also reduces the role and the importance of the state, which opens all kinds of weird side effects. But the most important one is, I think, it helps scale capitalism globally in a way that was impossible before this consensus technology, before blockchains. Because one interesting thing about what I'll call industrial capitalism is that, and then the instruments of capital that we have today,

Starting point is 00:43:19 is that most of the instruments we have today were created under this industrial paradigm of capitalism. Shares of stock are just to, a couple hundred years old, but capital has existed forever, right? Patents are relatively new. Properly, titles are also relatively new in the context of humanity. But shares of stock in a company, that is a concept created under this idea that or under the paradigm of the economy where it's based heavily on production or heavily on kind of land-based capital, these kind of physical forms of capital.

Starting point is 00:43:58 And they're also designed to operate within the framework or the paradigm of a nation state because they have to be enforced by some court, right? And so when you remove the need for a court, you could think about all the things that that does to the state, which is one rabbit hole. But you could also think about some of the things that it opens. And one of the things that it does is it makes it much easier to conduct commerce on a global scale. because one of the ways in which we have found the limits of industrial capitalism is with globalization. And globalization has created a lot of weird side effects that we're still struggling with today, going from wealth inequality that has been created, all the way to just the cost of creating and distributing capital around the world. And what I mean by that is, you know, if you want to start a company, you have to choose what jurisdiction you want it to exist in.

Starting point is 00:45:03 And so let's say it's the United States. And so you have to make a big investment into making sure that all of the rules around that company are kind of compliant with the underlying framework of the United States. And that works fine as long as you're in the United States. Things get orders of magnitude more complicated the moment you're trying to do business globally. And that's how you end up with very weird structures, with companies and parent companies and children companies and all of the weird effects around, you know, how taxes are handled across jurisdictions, all of these things that are very expensive. And what ends up happening is that because most of the instruments that we have today are designed to work within a jurisdiction as opposed to work globally, it makes it very difficult and expensive to distribute capital around the world. And what does that mean? So you have, let's say Walmart, what started in the United States, operating in the United States,

Starting point is 00:45:59 as long as you're in the United States, it's easy. You can go public. The idea of a public company within a country makes sense within the confines of that country. And so for a business like Walmart, that's all good. There's no weird issues there. It's a bit of a crude example. But to illustrate the point, you have something like, Facebook, right, which is a very different company than Walmart.

Starting point is 00:46:26 It's very different because Facebook is global. Facebook has customers all over the world or users all over the world, whereas Walmart has most of its activity concentrated in the U.S. Now, Facebook's capital is concentrated in the U.S. as well, because Facebook is a U.S. company. And when Facebook went public, Facebook went public on American stock exchange. and later you can find those shares maybe in London, maybe in Tokyo. But by and large, the capital of Facebook is concentrated in the United States.

Starting point is 00:47:01 And if you are anywhere else in the world, your life is affected by Facebook, whether you are, using Facebook or not, but you are unable to access the capital created by Facebook unless Facebook shares, which is the instrument of capital for Facebook, is available in your country. and it's unavailable in the vast majority of countries in the world. So in the times of Walmart, that was okay, because if you are in, you know, pick a place in Latin America, you're not really directly affected or influenced by Walmart in the United States, because Walmart is kind of just putting up stores in the United States. But now you have companies that exist in the U.S. or in China or in Europe that can do business globally,

Starting point is 00:47:47 but their instruments of capital are still tied to individual jurisdictions. because you need a court to enforce all of those things. When you replace that with these global settlement layers, then you can now create more inclusive instruments of capital that are broadly available. And so the theme that I'm trying to, or the line that I'm trying to draw here is with, with this new technology, you do two things. You collapse the cost of instrumentation, which we can think of as the cost of creating capital. and then you also collapse the cost of distributing that capital over the world.

Starting point is 00:48:25 So, Joel, it seems to me also that what we're doing is we're collapsing the cost of essentially maintaining consensus on that capital because instead of tanks and armies and a court of law, we have the expense of a global settlement network, something like Ethereum or something like Bitcoin. Is that the case too, that we're collapsing costs on the consensus layer? That is the case too, and it goes even further than that, which is a result of basically everything that happens before you go to court, right? There's a lot of humans in between making sure that those agreements are followed to the letter. And that's where we get that phrase to the letter. But a lot of that gets automated with smart contracts.

Starting point is 00:49:14 And so it's not only that it's much cheaper to settle. But as you mentioned, it's much cheaper to operate because it requires less humans and less oversight. Because really, when you and I create a contract between each other, we're both trying to avoid going to court. And so I have to hire, if it's a business context, I have to hire accountants. I have to hire operations, people, and lawyers to make sure that the contracts are being followed. But a lot of that goes away with automated smart contracts. And with crypto networks, we really get a two-futable. for one punch with both the efficient settlement and efficient, more scalable distribution. And so

Starting point is 00:49:55 just returning to that violence conversation where, you know, Ethereum and Bitcoin, they've replaced tanks and fighter jets and armies with proof of work and proof of stake. And Bitcoin is frequently cited as this super inefficient network, right, where like one transaction consumes as much electricity as like 50 households for a year. And even though that's perhaps an inappropriate rate calculation, the connection still stands the same. But people forget to make the similar comparison where, like, Joel, if you and I make a contract together, well, that contract is actually settled by, you know, F-35 fighters, right? Regardless of whether we actually need them or not, the dispute will go all the way to the courts. And if it makes it pass the courts, then it

Starting point is 00:50:39 makes it to violence. And so one takeaway I've already had from this conversation is that crypto networks, proof of work, proof of stake, perhaps just make this world a less violent place because it makes the returns on investments into military and physical power less lucrative because we just don't need them anymore. If we don't need armies to settle our consensus agreements, then perhaps there will simply be less violence in the world as a result of that in the very, very distant future. And that's only one side of the equation. The other side of the equation is what you were talking about, where we have made it more efficient to distribute capital. And just with what we call tokens, both L1 tokens, Bitcoin and Ether, but also tokens on Ethereum. And I think we can

Starting point is 00:51:33 definitely draw the comparison, the difference between Facebook with its capital locked up inside of the USA nation state versus Uniswap, which distributed 400 tokens to 100,000 individuals all over the globe without asking where in the world do they live because it doesn't matter where they live because it doesn't settle to the nation state. So we really get this massive two-for-one punch with crypto network and specifically crypto network governance. Do you have any thoughts on that? Yep. And I think you're exactly right and it's a perfect example and it goes for all crypto networks, right? And this idea that, like, you know, that's impossible to do with the

Starting point is 00:52:20 instruments of industrial capital. It's practically impossible for you to distribute capital that broadly because those instruments were created for the industrial age. And now in the information age with online communications networks, we are reaching the limits of how much we can scale the instruments of the past. And what makes it. makes this, and that's what makes blockchain so foundational. It's a technology for creating new capital instruments that are orders of magnitude cheaper to create, orders of magnitude cheaper to distribute, and orders of magnitude cheaper to defend.

Starting point is 00:53:02 And you're right that I think this is part of a longer trend towards less violence. It doesn't feel that way necessarily to us, but if we take a very high-level view to the history of humanity, we live in the least violent times in human history. And with every socioeconomic revolution that creates new capital, that distributes that capital more effectively among society, we require less and less violence because we have more and more consensus in a way. And so I think crypto is yet another one of those socio-economic revolutions driven by a new technology, just like the Industrial Revolution was driven by steam power and all that. That allows us to make a significant leap forward in terms of being able to agree with each other without the need of violence. And with governance throughout history, we've seen two different ways that humanity kind of progresses, which is both the improvements of making governance aligned with what humans want.

Starting point is 00:54:20 But there's also this other side, which we haven't yet talked about, which is what Ryan and I have called ungovernance, where Bitcoin and Bitcoin Proof of Work is actually trying to be an ungovernance mechanism. And so we have new ways of distributing power, distributing tokens, distributing the control over the system. And that is a, perhaps an order of magnitude improvement upon our previous systems, yet it is still the same pattern. But we've also unlocked a new frontier to expand upon, which is ungovernance, which is what can we do when we make systems that actually there's no governance about. And so, Joel, like when you wait, when you measure the future or project into the future, the future of crypto networks, do you look at new governance mechanisms as the main innovation that has been unlocked? or is it ungovernance or the removal of governance that is really the cool new innovation? So the only thing I struggle with in with that idea is I think that what you're describing as ungovernance is itself a form of governance.

Starting point is 00:55:25 And so Bitcoin requires less, and this will I'll use slightly different terms, less active participation, but it does not require less governance. There's a governance process every 10 minutes with every block. It just so happens that the rules for how to process that information have been pre-established. And we found, or the miners find consensus around those rules. And then what you have is hyper-efficient automated governance with every block. But we've already agreed on the rules, and that is governance. And so this is actually something that I've debated a lot with my partner Brad, where,

Starting point is 00:56:05 he believes, and I largely agree, that crypto should allow us to have the least amount of governance possible. And the least amount of governance possible is achieved through more and more automation. Now, there, I think, is where it's worth thinking about, okay, governance as a concept is one thing. The amount of required participation to maintain that governance system is another thing. And so, for example, if you have a crypto network and you compare it to a country, a country requires a lot of active participation in order to keep the system running because it does not have a lot of built-in automation. And so, yes, we can agree to the loss and we've agreed to them, but we have to maintain an entire apparatus employing hundreds of thousands or millions of people to maintain that system. whereas with a crypto network, you define the loss and then the machines maintain the system. So, Joel, is this a new form of governance then that humanity has unlocked?

Starting point is 00:57:21 David just called it ungovernance. I think you added that. It is actually governance, but it's governance embedded in code. I often think of the comparison of like sort of, you know, we had economies and states ruled by king. And then the U.S. went out on this endeavor and created something called the Constitution, which is essentially a governance protocol, right? Yeah. And allowed them to scale a different form of society.

Starting point is 00:57:50 That was like a technology unlock. Have we unlocked something new here with these systems? Let's talk about these base layer systems like Ethereum and Bitcoin and kind of the ungovernance that they have, which is like there's this ability to fork if you don't like a decision. It's very much opt-in. The rules are all defined in code. Is this a entirely new governance unlock for humanity, or does it mirror something that we've always had in the old world and just translate it into code?

Starting point is 00:58:27 That's a good question, and I think the answer is both. and I would say on the first half that we are in the process of unlocking new governance systems. And this is where we have to differentiate between the tools and the systems. We have a new governance tool just as previous advances gave us new governance tools, like when we created courts and contracts and private contracts, right? That was a big unlock or that was a big new tool that we were able to use to create agreements and have them enforced versus, say, just verbal contracts, right, which are not very reliable. And so once we went from verbal agreements to written agreements,

Starting point is 00:59:19 that kickstarted a whole new era of productivity. And with crypto, I think we are making a similar leap going from the inefficiency or the relative inefficiency of paper contracts over to digital contracts. We have a new tool. But as for whether we have a new governance system depends largely on what we do with that tool, because I can create a Dow or a crypto network governance system that, works exactly like a traditional company with a CEO and different roles and departments and a hierarchy. And there, I'm using the new tool to implement an existing governance system.

Starting point is 01:00:08 But at the same time, we can use the new tool to create vastly new or vastly different governance systems. And I think we are in that process of formulating those new kinds of governance systems. It does feel like we're in this awkward process right now. For example, I have a personal gripe, Joel. I don't know if you show this at all with everyone calling everything that has a token decentralized governance, you know, or a decentralized autonomous organization. When a lot of the governance structures that are proposed to me look just similar to like shareholder governance. Like how do you make decisions on the network? Well, or in the protocol, well, it's a coin vote, right?

Starting point is 01:00:51 Well, this looks a lot like stock voting and like proxy voting in. in corporations. So to me, a lot of what crypto calls in this awkward phase that we're in, decentralized governance actually turns out to be very much a close mirror of governance that we have in the traditional world, in a C-Corp. Can you maybe reflect on that? Do you share that opinion that sometimes token vote is just analogous to like C-Corp vote? Or do you think that there is actually something new here that I'm missing or some other governance forms that are going to be completely different and much more unique in the crypto realm. Yeah. I think it's a mix of both. On the one hand, I share some of that gripe. And I'd like to think of Dow's, for example,

Starting point is 01:01:40 not as decentralized autonomous organizations, but just digital organizations to not necessarily say that they're inherently decentralized because they don't always... Much more precise, in my opinion, of a definition. So do's, not DAWs, guys. Just digital organizations. Well, you still have the autonomous in some sense, right? Depends on how much functionality you bake into the contracts. Because you have a broad spectrum.

Starting point is 01:02:04 You have protocols where the token votes just provide a signal, and then someone else has to go and execute it. And so there I like the analogy of nation states better, where you have the extent. executive branch, which are the core developers, and they are there in the day-to-day, understand the system really well, and they make decisions all the time that are not put up to token holder votes, right? You don't want token holders to do your code reviews, for example. And you don't want always to allow everyone to make every proposal, or you don't want to create

Starting point is 01:02:45 a whole governance proposal in a protocol to decide whether the button should be red or blue. That's not something that is a productive use of a doubt. But then you also have situations where keeping some of the similar structures, like say a company hierarchy, but opening some functions out to the public creates this kind of hybrid, sometimes awkward situation, which whether it's good or bad, I think, depends a lot on the specific circumstance of the underlying. network. But for example, one line that we could take is, yes, in some cases, it may be frustratingly similar to the concentrated levels of control that we see in traditional organizations,

Starting point is 01:03:37 but we have much more open processes, for example. And that is arguably a positive thing. You may not want to vote in every decision, but you may like to know that you have the right to vote in every decision, whether or not you actually participated in or not. But ultimately, I think that first generations of any new idea or any new concept tend to be very similar to the things that we know and understand. So, for example, early web in the 90s, a lot of it was mimicking the traditional media business models of, you know, pre-Internet. Like, for example, Craxlist was classified ads, which is a straight copy of what you would see at the local newspaper, very different from, say, eBay,

Starting point is 01:04:32 and or Amazon or the e-commerce boom. And so I think we're at that stage where the best we can do with the new tool is try to mimic what we know. And it may be up to the next generations of innovators who don't have as many preconceptions about how governance should work to come in and create vastly new systems. Like, for example, we've talked about the Molok Dau in another conversation about how this idea of a rage quit is really quite innovative. That, you know, there isn't, that's not common, for example, in any organization that I know of, of the kind of industrial paradigm, where you can just take your share of the assets and go whenever you want. And so that's an innovative use of the new tool that we really couldn't implement before.

Starting point is 01:05:27 Yeah, by the way, just on the Molok Dow, I showed one of my accountants looked like an illegal guy, basically the prospectus of Meta Cartel, which uses a concept from the Molok Dow. And he loved, absolutely loved the term, rage quit. Perfect. Because he was like, I've seen the need for rage quit so often inside of the traditional deals I've done that I wish it was embedded in every single company contract that I wrote. So there are some cool things being unlocked here for sure. Indeed. And in that very example, like try to implement a rage quit in an actual company contract, right?

Starting point is 01:06:08 You could write it. But then think about the expense of executing it. If we build in a rage quit into an organization and let's say that the three of us are the shareholders of that organization, and you can give me the exact same rights as the race quit and say, look, whenever you want, you just submit this notice to the group and saying, I'm rage quitting. I'm taking a third of all of the assets of the organization. And so what needs to happen after I've made that assertion? the two of you have to recognize it. Number one, we have to get to consensus that this thing actually happened,

Starting point is 01:06:47 that this ratio could actually happen. And then there's the entire process of, you know, it might be bank accounts. It might there might be lots of things that are indivisible, like, you know, a piece of property, right? And someone has to sign off on those distributions of assets, right? And so now we're talking about all the time that it costs to actually go through that procedure. Someone has to go to the bank accounts and calculate what a third.

Starting point is 01:07:10 is and send me the right amount. And let's say that the person responsible for that is you, Ryan, what happens if you don't do it? Then I have to take you to court. And then we might spend several months fighting this in court where they have to read the paper contract and say, well, you know, this is what happened and you know, got to defend this whole thing. And if you still don't do it, going back to where violence comes in, then the court can find you at fault and then threaten you with, say, prison time. that is a completely different process from just pressing a button on your wallet, calling the rage quit function on a contract, and all of the underlying tokens just being sent to you

Starting point is 01:07:51 within, you know, even if gas is expensive, it's nothing compared to how much it would cost to actually execute a rage quit in a traditional company. And Amin Soleimani, who coined the term rage quit, I think the name itself is actually really, really awesome because the metaphor, the illustration is that like you're playing a video game on the computer and all of a sudden you're really unhappy with what just happened. And at the click of a button, you're out, you're done. And it was so easy for you to just get done and exit. And in the game, you always announce it.

Starting point is 01:08:20 You make a big deal out of it. I'm about to rage quit. Right. But like the ease of exiting is so incredibly important. And we see the similar pattern or lack of pattern in the traditional nation state where there is an exit tax of 50% or more for most nation states, which is literally an anti-rage quit mechanism where if you leave the United States, you get half of all of your capital revoked from you and returned back to the nation state. And on Ethereum, all of your money is one transaction away

Starting point is 01:08:56 from going from one defy app to another defy app. And so if that defy app has governance, the ability to rage quit and immediately exit is always one block away, just 12 seconds away, right? And so migrating your capital from a system that perhaps you don't agree with the governance into a system that you do agree with the governance is so trivially easy. And this is, to me, a very powerful mechanism that puts power into the hands of the individual rather than the governing body. And it really is a check on the power of two heavy-handed, inappropriate governance that is not aligned with the people. Joel, how do you feel about that? I agree with you. And it's yet another example of the efficiencies that you have.

Starting point is 01:09:54 And when you play that out further, you mentioned forking, Ryan, which we haven't really pulled on that threat yet. But forking is embedded in it at the lowest level of everything in crypto, because you could always fork Ethereum and you get a complete copy of everything that's built on top, the entire body of activity. And that is insane. That's probably one of the most important governance innovations that come with crypto. And by being baked into basically the constitution or the constitutions of the entire space, this idea that you can make a copy and leave. One, it's something that only exists in the digital world. You can't have that in the physical world. It's just impossible. And two, what's interesting about it being baked at the core

Starting point is 01:10:52 is that it extends to the applications built on top. And we've seen lots of forks of say Dex protocols, right? There was a time back in the... the day where uniswap was presented as a fork of bank or without the token, which I think is kind of funny. And now we have, you know, forks of uniswap. And a lot of the forks that we see either at the blockchain level or at the protocol level, they tend to be because of differing values. You believe that a system like this should be governed in that way versus you believe that should be governed in another way. That's, I think, at the core,

Starting point is 01:11:32 there's forks that are opportunistic and you're trying to capture value kind of parasitically. But most governance disagreements that result in forks are due to deep differences in values among the participants. And that is subtly powerful

Starting point is 01:11:50 because it means that we might end up, or we're likely to end up with several parallel systems and markets for the same activity, say decentralized exchange, that provide you the same function, but where you are able to choose which one you want to use based on which one aligns with your values the most. And so in your example of the U.S., if you feel like the U.S. is not aligned with your values and you're an American citizen, it's very expensive for you to leave. But if you feel that Uniswap is no longer aligned with your values,

Starting point is 01:12:27 there's 10 different other protocols that do the exact same thing that you can choose from if you want to the part. Do you know, the more you're talking about this stuff, like even just the concept of forking, Jule, forking is not possible in the industrial revolution era in the analog world. You can't just like, let me take your factory and like I will fork that automatically. I mean, I think so much of what we're talking about here is actually upgrading our capital system and if capital equals governance, then that means upgrading our governance systems for humanity's trajectory into the metaverse, into the digital world, right? We were in analog

Starting point is 01:13:07 world, and that's where our capital system has been created, but now we need new tools because we're in this digital world where it's completely different. There's the concept of forking. There's the ability to rage quit with the click of a button. Want to get to something specific here as we talk about governance, Joel. And this is maybe a concrete question that embodies some of what we've talked about that bankless solicitors and people on the journey often ask. And they ask this question. So a governance token, and there are many of these in defy, why do these tokens have value? Many are like pre-revenue, for instance. They're just the ability to vote in the protocols governance scheme. They're not attached to any sort of value accrual from fees within the protocols. We often just kind of

Starting point is 01:13:55 hand wave and say, oh, well, governance is going to eventually vote fees in and value accrual into the protocol. Is that your answer? Is it as simple as that? Or how would you answer the question? Joel, why are some of these defy tokens that are just governance tokens? Why are they valuable? So to answer the high level question first, this is where understanding that governance is the capital or the governance of a system is the capital of that system is incredibly important because at least to me, it creates a baseline assumption that governance is inherently valuable in proportion to the value of the underlying system. And so if the underlying system is not worth very much, then control or power of that system is not worth very much. If the underlying

Starting point is 01:14:47 systems worth very much, then control or power of that system should be worth more. And so when it comes to going down to the micro level and trying to think about the value of governance tokens in a particular network or a particular system, there it's, it's, there's a lot more variation that makes it kind of difficult to say, for example, this is exactly how governance tokens will capture value because it'll change from system to system. Now, a lot of the pricing that we see with governance tokens is speculative. And that's not very different from what a venture capitalist does in the industrial model of organizations.

Starting point is 01:15:37 We buy the governance tokens, which are shares of stock in young startups. and we value those governance tokens or those shares at millions of dollars, sometimes hundreds of millions of dollars, often before it's even clear what the business model might be or how that value might be created. And so I think to a large degree we're at that stage where you're not making a bet necessarily on the specific way in which that value may be realized, but you're making a bet that the underlying system is valuable. that the value of that underlying system is going to grow,

Starting point is 01:16:18 and therefore control over that system, or the value of control over that system is going to grow. Now, this is where going back to the idea of capital versus capital instruments is kind of interesting. In a company, the capital of a company is the equity, and the equity is a different but related object to the shares of stock, right? the shares of stock are the instrument of the equity and the shares of stock are contracts that distribute the equity among the different people involved in this in this organization.

Starting point is 01:16:57 Shares of stock as an instrument have evolved to be primarily focused on how to distribute the profits of the system. And so a share of stock is fundamentally a voting token. And it just also happens that the most important thing it has power over is how to distribute the profits. And so we have built markets and we have built valuation models based on how much profit is being redirected to the holders of that instrument, which is the share of stock. And it's what the holders vote on. And any time that a company decides to reinvest its profits as opposed to distribute them, that is a governance vote.

Starting point is 01:17:40 it was either established in the organization or it's an actual vote in the case of mature companies when there is a vote at the end of the year to decide what to do with the profits. With crypto networks, it's possible that we might create new instruments whose value is not necessarily tied to the profitability to the holder of the instrument. And this is a bit of an unexplored area, but we got a little bit of a little bit of. bit of a heads up to this future with Amazon's progression through being a public company, where for much of the early 2000s and even 2010s, a lot of the criticism towards Amazon from traditional financial investors was that you have the stock who was, the value of the

Starting point is 01:18:37 equity was increasing more and more. But there were no profits and no dividends being issued to shareholders. And so that broke a lot of the valuation models for a lot of people. Because if you just use them straight up, it would say this stock is worthless because they're just spending money and they're not distributing any to shareholders. The price to earnings ratios would be in like the thousands or like infinite, right? It breaks. Exactly. It just doesn't work.

Starting point is 01:19:03 And so if you're just following the traditional models, it'll break every model. I think 20 years later, we can agree that Amazon as an organization is an incredibly valuable thing, whether or not it distributes profits. Because at the end of the day, a share of stock in Amazon is a proportional right to the entirety of Amazon. And whether or not Amazon distributes profits to its shareholders is independent of the value of Amazon as an economic system. And this is where it's interesting to think about the value of control when we talk about the value of capital. because control over Amazon is an incredibly powerful thing. And it's an incredibly valuable thing. If you owned 51% of Amazon stock, whether or not you're able to capture that value for

Starting point is 01:19:51 yourself and extract dollars from it, I think it's easy to agree that that power is very valuable. And now I think that we're closer to markets, financial markets, pricing in the value of the asset, not necessarily the value of its cash flows. and we might end up in a similar place with crypto protocols where over time we might discover valuation models that tell us what the value of governance power is in a system without that system necessarily having to distribute profits to its token holders. You know, I'll give you an example, Joel, of a time I was wrong about this in Defi and Defi tokens.

Starting point is 01:20:31 2017, it was the era of futility tokens, right? Every ICO had a new token that was going to serve as maybe a money, do something inside of its economy. ZeroX, the zerox network, had one of those two. And I remember they released their token and what was the utility of the token, what was the token going to be used for, governance, voting in the system. And to me at the time, that felt very like hand wavy, especially given the valuation that ZRX token had at the time. It was just like, well, like, how do you value something like governance. Flash word now, ZRX is actually receiving a portion of the system value in terms of cash flows, in terms of revenue. And now I clearly see the value of XRX as a financial

Starting point is 01:21:20 instrument. And it was really the governance vote that has given it this value. So that's a time maybe I was like, I was wrong about the value of governance. I think I've like kind of learned my lesson. But is that an example of that sort of thing what you're talking about here? 100%. And in the same time frame, we were raising our first fund. And XRX was an example that I used of the kinds of things that we would invest in. And we did end up investing in XRX. And it was an interesting argument to defend with our investors where You know, why is governance over zero X valuable? Well, if there is a chance that a decentralized exchange protocol like 0X grows to, say, be responsible for the exchange of, I don't know, 10% of the world's value, trillions of dollars, right?

Starting point is 01:22:19 If trillions of dollars are flowing through this network, I can't tell you how that's going to translate into value for XRX in terms of cash flows. and as you described over time, then indeed the governance voted in fees, and those fees are now being distributed to the token holders. But it was easy to get people to understand that if, for example, CRX is responsible for trillions of dollars in transaction volume, it's clearly a valuable system. How much is control over that system worth?

Starting point is 01:22:49 I don't know, but should be a few billion dollars if you're responsible for trillions and trillions of transaction volume. And so that was kind of the picture that I painted in terms of, of, you know, why? And this is before thinking about making that relationship between governance as capital, but this kind of basic intuition that control over a valuable system is itself valuable. Well, it turned out to be the right call, but like I'm curious as to, because I remember the debate in that era was basically, oh, should we buy the token or should we buy equity in the entity?

Starting point is 01:23:20 Right. How did you wrestle with that debate and how has it turned out? Well, the equity in the entity is in large part. the value of that equity is in large part valued by the value in the token. And that is actually, because the equity holds a lot of the tokens, and that turned out to become how we think about investing in crypto network companies, because we can then map out, okay, if this company is going to launch a network and they're going to keep, say, 20% of the token supply or 30% of the token supply,

Starting point is 01:23:58 then we can basically value the equity in the company in proportion to the value of the equity of the network. But in general, I think you have to basically hold those two ideas at the same time. There's the equity of the company and the equity of the network. And then you have to make the decision about whether you want to participate in the equity of a traditional organization or you want to participate in the equity of a decentralized network. And we started a placeholder to participate in the equity of decentralized networks. And that was one of the main ideas that we wanted to pursue. XeroX is an example of when fees was actually turned on as a value capture mechanism.

Starting point is 01:24:41 But we actually don't need fees to be turned on to have similar valuations. And Joel, when we were planning out this podcast, we talked about Uniswap. Uniswap is the classic example. I was like, oh, we'll just turn on the fees. And then the Unitoken holders will get the fees and then they'll be valuable. but perhaps not. I think the reason why perhaps not is because the users of the system, not only the traders, but also the liquidity providers, could have different incentives or different motivations or different desires over how the Uniswap economic system operates that bakes in the values of the cash flows regardless of whether they are paid out or not. So perhaps you can illustrate an example of where an economic system is generating cash flows and it's specifically, does not distribute fees, yet the value of those fees still gets captured by the governance token. Yeah, and we could use that same example of uniswap, because it's easy to think through.

Starting point is 01:25:39 If you're an LP in uniswap and you're staking in different pools and providing liquidity, you are capturing fees that get distributed to you as an LP in uniswap pools. And so let's say that you run an LP operation in Uniswap. You're making X amount of fees every month from this operation. It's very profitable for you. You're very happy. And along comes a proposal to say, we're going to essentially tax that fee income that every liquidity provider is receiving. And let's say that I make that proposal and I say, hey,

Starting point is 01:26:22 You know, let's take 50% of all the fees generated by LPs in Uniswap and put them in this pool that gets distributed to Uni token holders, right? If I am a Uni token holder that's not an LP, I quite like that idea because it means I'm just getting this distribution of the income in the system just by holding uni or just by staking it. But if I am an LP and I'm running a very profitable operation being an LP, I may very well not want that tax to be introduced because it'll cut my LP profits in 50%. And I may do some math and realize, well, wait a minute, if this proposal passes, my income gets cut 50%.

Starting point is 01:27:05 And I don't, you know, the uni that I hold and I might stake to get a share of that may not complete and kind of make me whole. And so I may actually have an incentive to vote against the inclusion of fees to protect my own profitability. And the value of preventing that tax still gets captured in the token because then my incentive is to acquire as much uni as I can afford over time to prevent fees from being introduced into the system. And specifically, the measure or magnitude of that incentive to purchase and hold that

Starting point is 01:27:44 uny token to sway that vote is proportional to the fees no matter what, regardless of whether the fees are paid or not paid. Correct. If there's a lot of fees being paid or a little fees being paid, the magnitude of the incentive to sway that vote is still proportional to the fees. And so at the end of the day, it collapses back down to how much control does Uniswap have over economic resources inside of its system, which goes back to how we're talking about capital as governance and governance equals control.

Starting point is 01:28:13 Correct. Because the main thing that you want to control is how those resources are distributed to whom and why. And it's the same as in a company as it is in a crypto network. In most companies, the governance of the equity votes on how profits are distributed. And it's usually fairly straightforward. It's distributed based on token ownership or sorry, on share ownership. And that's pretty easy. It's not always distributed based on share ownership, right? So if you have, for example, common shares versus preferred shares, the reason investor shares tend to be worth more is because because they have things like liquidation preferences,

Starting point is 01:28:51 which means that in a liquidation of the companies being dissolved or acquired, that the holders of preferred shares get paid up front or get paid first before the holders of common shares. And so that's why you often see very wide discrepancies in the value of investor shares versus the value of common shares in a company. And that means that you have two different stakeholders with different incentives when it comes to voting on things. and we subscribe or we invest different voting rights and different classes of shares.

Starting point is 01:29:23 In a crypto network, you may have the same instrument, but you may have different stakeholders with different incentives. And indeed, the power to prevent fees is just as valuable as the power to introduce fees. Joel, one thing that makes me optimistic about crypto network governance is that the topology of network seems to be a lot flatter than in previous systems, as in there is, seem the different parties, whether you are a uniswap LP, you are a uniswap transactor, or you're just a uni token holder, you still are different parties, but in comparison to previous systems where with what you were just talking about with privilege shares or privileged stocks over other shares with different governing powers, in crypto networks, everything seems to be a little bit closer together as the users. We all have more aligned

Starting point is 01:30:16 interests, yet we are still not one homogenous global organization of people. Different people have different incentives. And so my question to you is, have we really just made a marginal improvement on how these economic systems can treat everyone? Or are we still going to be presented with the same problem that humans have been presented with since the dawn of time, which is that some people have different incentives than others, and over time those differences will turn it into. to frictions and will cause disorder and chaos.

Starting point is 01:30:50 And so really I'm trying to get at a very long-term multi-generational perspective here where how can we make sure that these systems that we are governing over, like maybe uniswap is actually an economic system that spans centuries. How can we make sure uniswap answers to the needs of everyone that uses it, not just perhaps people that are using it today, but people that are using it tomorrow and in 50 years from now, how do we make sure that like and we talked about um how facebook is really governing over people that don't get to determine how that governance works and that is one of the reasons why facebook is an example that we keep on using as a bad example in this podcast as to how perhaps we don't want governance to look like into the

Starting point is 01:31:34 future how do we make sure that the governance over these defy apps or crypto networks stay aligned with the users that use them now and into the future so i don't think we we can guarantee that. And there's kind of a lindy effect of human issues here, where if we've had this issue since the dawn of time, we're probably going to have it until the end of time. And, you know, I'm optimistic that with every new kind of innovation and governance technology, it is easier to coordinate.

Starting point is 01:32:12 There is less conflict and there is less violence. And so I do think we make a significant leap forward in reducing the space for disagreement. Because the more we rely on code and automation, then there's just fewer avenues for discord among people. And that is a good thing. But it's generally difficult to make everyone happy at the same time about anything. And in part, the role of a consensus protocol is to get people to pre-agree to disagree on certain issues. Like if we look at nation states, you know, you may vote for the candidate that lost and, you know, that's okay. We've pre-agreed that if you lost the election for, you know, any kind of office, that you can vote again in four years.

Starting point is 01:33:12 to pick a random example, right? And so we've bought into the idea that you may not always get the people in power that you want, but there are systems and pre-agreements that, you know, make sure that you get the opportunity to vote again and so on. When it comes to crypto, there's all kinds of interesting things that I don't know how they will play out, but I know that they are different. one is especially when you compare crypto to say governance over a company is you tend to get well you have no guarantee that the people who voted today are going to be the same people that vote tomorrow not in the same way that you have it in traditional organizations at least where if I put a vote on uniswap I don't know who's going to vote and I don't know who the people are behind that vote whereas if you think of the decisions that get made at the board of a company, usually the people in the board have been there for some time

Starting point is 01:34:12 and have known each other for some time. And you can kind of predict how one person is going to vote versus another. And that brings certain efficiencies and certain inefficiencies. And similarly, having a much more open process will bring some efficiencies and some inefficiencies. There's one kind of subtle difference that I think is very powerful. And one of the main ones when comparing governance in crypto, to governance in the industrial world at a societal scale, which is that if we think of the governance systems of a country, for example, say the United States, and you're voting on,

Starting point is 01:34:53 you know, the precedent, for example, or the, as a representative vote for the broader governance machine that is, you know, say the government, you have to make, you make a vote. or a single vote on the full spectrum of decisions of the United States, all markets, all spaces, all economic activities. And so you have to choose the precedent of a governing body of an executive branch that governs over all markets. And that's an incredibly difficult thing to do because most of us only understand a few markets. can't say anything about farming. I have no idea. So if I see a proposal for like, you know,

Starting point is 01:35:42 how farming policy is supposed to work, I just have no, it, it just flies over my head. But if they're proposing finance regulations, then I have a much stronger opinion about what's right and wrong. Something that makes me optimistic about crypto is that every protocol or protocols tend to be much more specific in the activities that they, that they preside over. they govern. And I think that makes it easier to govern because it means that if I'm voting on Uniswap, then the scope of things that I'm voting on is fairly limited to what Uniswap does. And then, you know, I can go to Maker to vote on another thing, but it's still equally narrow. And so rather than having a single body preside over all markets, now we can have each market

Starting point is 01:36:32 and each subsector of that market have its own internal but open governance. system. And ultimately, I think that leads to specialization of governance, which is not necessarily something that we have today in traditional governance systems. Joel, for somebody who's listening to this podcast, I made it all the way through here today, but is still doubtful on whether this is a good thing for the world. So I'm picturing somebody who's listening to this and has heard you mention our trajectory into the digital, this new form of governance, this new form of capitalism. We've even used terms like hyper-capitalism. And they get this picture of the current state of the world, which is extreme wealth concentration, extreme power concentration.

Starting point is 01:37:23 And we talk about the bankless movement in crypto and defies as we're part of the revolution now. We're against that. We're for open access to the best self-sovereign money system that human can create. That's what crypto is now. How do we kind of preserve that ethos? Do you have any concerns that we sort of become, you know, when we're old men, we sort of become sort of the stuck in our ways and a new generation has to revolt against us? What's the case that this boomers? Yeah. What's the case that this hypercapitalism and everything we've talked about so far is actually good for people, good for humanity and good for the world. So that's almost an impossible question to answer.

Starting point is 01:38:09 But mostly because I believe that the future is uncertain. And I heard something the other day that I loved, which is that optimism, the definition of optimism is believing that the future is uncertain because if you're a pessimist, you're just sure that you're sure about the future. And so to be pessimistic about the future of governance is to be sure that this is going to fail, right? And I think the world is a little bit more complicated than that. I do think that opinions here will be drawn by generational divides.

Starting point is 01:38:51 And so part of the reason why this is a difficult question to answer is because for us who are part of this movement, and helping shape it in, you know, different shapes or forms or ways or forms, it's going to work for us because we are building it, right? But it's not necessarily going to work for tomorrow's generations. And because we have invested so much in this infrastructure, we're really going to resist challenges to this paradigm, just as our generation resists the paradigm. that were set by people two or three generations before us.

Starting point is 01:39:36 There's actually a book that helped me understand this a lot. It's a fantastic book. It's called Generations, A History of America's Future. It's brilliant. It was written in the 80s. It's by two researchers, Strauss and Howie, who actually coined the term millennial back in the 80s before millennials existed. and they go back through the entire history of the United States,

Starting point is 01:40:03 define every generation, and then try to find patterns between the way the different generations emerge. And what they found is that there is this kind of 100-year pattern in the way that generations behave that is heavily driven by each subsequent generation's reactions to the previous generation. And they found that this is a... And bankless listeners, we've called this the fourth turning thesis. And so bankless listeners will remember.

Starting point is 01:40:28 that term if they have been following along. Yep. Very, very similar paradigm or set of ideas. And so what generation theory kind of suggests to us is that there is a general repeatable pattern to how different groups of people think about the world. And I think that we will find the limits of this technology, generations into the future, just as our generation is finding the limits of industrial capitalism and the problems that it created. And so while I think that this technology helps us solve a lot of the problems that we observe today, I don't think it necessarily helps solve the problems that will emerge tomorrow

Starting point is 01:41:15 as a result of the introduction of this paradigm and this technology. And so we'll need the next generations to figure out what the issues are and solve them. And it's on us to get out of the way when they come and, you know, we're just going to say these damn kids, they, you know, we fought so hard to get blockchains distributed all over the world. And now the world is run by Dow's. And they're probably going to complain about how difficult it is to change a blockchain and how expensive it is to fork and in all kinds of things. And we'll have to listen. And, you know, we'll have to be better than the current generation in allowing the kids of the future to take power. Joel, I've thought about this concept as well, and I want to run this by you, because here's

Starting point is 01:41:59 why I'm optimistic that this time it's different. I recently wrote an article called the Digital Culture Revolution, which touched on this a little bit, where I said, the reason why there is so much strife felt among young people these days is that the age-old institutions that were created out of World War II in the late 40s, early 50s. and 60s, those institutions, the keys to the kingdom, have not been passed down. The wealth has not been actually being passed down from generation to generation, and therefore the young generations are rejecting the older institutions because the older institutions are not working for them. And then, like we said, the boomers just don't understand this. It's like, why don't you guys

Starting point is 01:42:39 accept these institutions that we've created for you? And my critique of the boomers, and it's not totally fair to call them the boomers, it's really just the boomer elite. But to say that the reason why people have rejected them is because the boomers forgot to hand off the value of the system, the control of the system to the younger people. Therefore, these institutions are not updating. And this is perhaps less of a technological problem and more of a psychological or sociological problem, right? This is not something that can be completely solved by technology, but I think the technology can really, really help. And the difference between legacy technology of C-Corps and nation-states and blockchain technology and crypto networks is that money and technology are the things that

Starting point is 01:43:25 intermediate all of our relationships. And when our relationships can become disintermediated, us as a people can become closer together. And that can actually change our culture and change our psychological disposition. And this is something that I'm hopeful is something that I'm not just blowing out of proportion, but I am seeing what could be a change in psychological disposition on the economic actors of these networks. And I wrote about the Uniswap v3 NFT that was minted and then sold for half a million dollars and 100% was donated to charity in my mind a wealth distribution event. And we saw the Edward Snowden NFT be minted for $5.5 million and all of that money donated to a freedom of the press wealth distribution event.

Starting point is 01:44:13 And so what I am hopeful for is that this more distributed technologies, changes the culture of the people that use them and allow them to have a more inclusive disposition of being able to pass wealth down. And maybe this doesn't solve the problem, but it postpones the problem and allows blockchain technology to really be more inclusive for more generations for longer and really is capable of kicking that calcification problem down the road for much longer than like the nation state lasted or the C-Corp organization lasted. How does that land with you? I would like to agree.

Starting point is 01:44:54 And today I agree with you. I don't know why I would disagree in the future. But the reason I qualify my answer like that is, you know, we have a good couple hundred years with the current system in terms of like how it's been working. And so, you know, I would give. I would give a little bit more credit to industrial capitalism and what it did. And relating it to generations, I think your opinion or our opinions on each paradigm

Starting point is 01:45:30 depend on when we came into the system along the curves. So we came into this system at the tail end of industrial capitalism, our generation. And so we are predisposed to have a negative view on the institutions that are now established. And we're predisposed to have a very positive view on the institutions that we have established. But this new paradigm is not old enough yet to show its limits. And right now it's full of promise more than we can see where, you know, we can see. places where there's crypto networks that concentrate too much wealth and, you know, there's, there's ways to address that. But I want to bring a couple of elements from the conversation

Starting point is 01:46:22 back to this answer. One is forking. Part of the reason why it's, it's so hard to transfer the wealth from one generation to the next. It's because it's very expensive to leave. You know, you had that the example of the exit tax, but also in physical space, it is very expensive to leave. The more we transition these systems over to digital space, it'll be much cheaper to leave. And you use the example of how easy it is to move your assets from one protocol to the next. If we expand that idea to the macro scale, it means that we will be able to leave governance systems or that the people participating in the system will be able to leave at will without much cost and without much violence.

Starting point is 01:47:10 And ultimately what that does is it increases competition. And this is where I like using the term hyper-capitalism, even if it evokes the wrong ideas in certain people, because one of the main principles of capitalism, pure capitalism, is competition, the idea that you solve a lot of problems through competition. And the thing that makes me most optimistic is that we now are creating the space for competition

Starting point is 01:47:34 among just purely the governance philosophy and in a paradigm of a system where, you know, you, for example, may disagree with the way Amazon is run, but you can't go to an Amazon that provides the exact same service and is just governed differently. And now we can. And so that may create the incentives for the system as a whole to be more inclusive and more in line with,

Starting point is 01:48:04 the needs of its participants and it may prevent the ossification that we see with industrial capitalism. But then there's another side of it that you've got the opportunity for forking and then you also got the participation is more liquid. And it's that conversation that we had in the beginning where political capital doesn't have instruments attached to it. And so much of what prevents the transfer of wealth from, say, the previous generation to this generation is the policies that were established by the previous generation. But if you have, and then a lot of it is captured in political capital. And that's something that it's a market that exists, but that we can't observe.

Starting point is 01:48:52 And so then that power is not very easily distributed. And so if we're able to distribute power more effectively among a larger group of people, then we might have less of a challenge in actually facilitating that state transition, so to speak, to the next generations. Because some of the pain that you described we feel in the U.S. today has a lot to do with the lack of representation in governments from the younger generations. I know that people observe that in this last presidential election in the U.S., both candidates were over 70. And that is, I think, a prime example of that discrepancy between the characteristics of most of the population versus the people in power. And if we have more fluent exchange of governance power, because we now have instruments to trade that governance power, then we can rely on markets to distribute that more efficiently.

Starting point is 01:49:47 And then hopefully that results in more efficient decision making. I think people can get behind the type of hyper capitalism that you're talking. about. What they reject is sort of the crony capitalism or elite capitalism, but what they embrace is the ability to compete and challenge and participate against the existing institutions, which if crypto plays out the way we hope it will, will be the case. I just want to ask this final question, Joel, to you is this whole transformation that we've been talking about. How long does it take? How long will this take to play out, do you think? probably hundreds of years if we don't annihilate ourselves before then but it's it's it's it's

Starting point is 01:50:33 slow and it'll it'll take it'll take a couple generations but I do think that we are in the middle of a a new turn of the wheel where we're establishing new institution and new beliefs and new values in society that will be embedded into systems that we create. And that takes a while. Generational transitions take anywhere between 50 to 100 years. Because part of the theory of that book, Generations, is that we don't really react to the generation immediately before us.

Starting point is 01:51:15 We react to two generations prior. The one that raised us. So that's why you see them. Right. And so you have, you know, millennials reacting against the boomers, which are our parents. And so I think for people to react to our institutions, it'll be two generations down the line. And as we're seeing today, just a reaction does not drive change. And so I think we're in for this right for at least 100 years before we really begin to transition to a new model.

Starting point is 01:51:48 We always talking crypto about this being like the internet in the 1990s. I also wonder if it's like governance in the 1770s. Yeah. You know, this whole like generational change that we're revolting against essentially. And that's part of what the crypto movement is as well. Joel, it has been an absolute pleasure. We really appreciate you coming on bankless. Thank you for sharing so much of your insights with us.

Starting point is 01:52:11 Thank you. Thank you for having me. And I could talk about this for hours. it's so broad and important. So thank you for this space. Well, I am looking forward to sharing a place in the coffee shop when we are old and arguing with the kids about immutable blockchains with you guys and talking about this and being present for this revolution.

Starting point is 01:52:34 Of course, Bankless Nation, we are glad that you are with us as well. Some action items following this podcast. Make sure you check out Joel's written work at Placeholder VC. see. If you have enjoyed some of his thoughts here, you can find this in written form there. Encourage you to check that out. We will include a link in the show notes. Also, we'll include a link to the book that Joel had mentioned called Generations. So make sure you check that out as well. Risk and disclaimers, of course. Crypto is risky. Eith is risky. So is Bitcoin. This is the revolution that you signed up for. You could lose what you put in. But we are

Starting point is 01:53:09 headed west. This is the frontier. It's not for everyone. But thanks for joining us on the bankless journey.

Bankless - 62 - Governance and Capital | Joel Monegro

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