Bankless - The Trillion Dollar L2 Opportunity | Part Two

Episode Date: May 5, 2022

This is part two of a two part Ryan and David masterclass on the trillion dollar L2 opportunity. A paradigm shift unlike any other is unfolding at this very moment. Countless crypto newcomers wish they started experimenting with parts of space sooner vs. later. There’s still time, though. Especially as it pertains to L2s. Tune in to learn more about what makes this opportunity so immense, how to take advantage of it, what it means for the future of the space, and so much more. ------ 📣 OPOLIS | Sign Up to Get 1000 $WORK and 1000 $BANK https://bankless.cc/Opolis  ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  ------ BANKLESS SPONSOR TOOLS: ⚖️ ARBITRUM | SCALED ETHEREUM https://bankless.cc/Arbitrum  ❎ ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across  🏦 ALTO IRA | TAX-FREE CRYPTO https://bankless.cc/AltoIRA  👻 AAVE V3 | LEND & BORROW CRYPTO https://bankless.cc/aave  ⚡️ MAKER DAO | THE DAI STABLECOIN https://bankless.cc/MakerDAO  🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave  ------ Topics Covered: 0:00 Intro 5:30 Public Goods Explained 14:00 The Fault of Block Rewards 19:40 Where the Money Comes From 23:50 Types of Public Goods Taxes 27:25 Good vs. Bad MEV 28:55 Where Revenue Goes 32:40 Retroactive Public Goods 44:30 Public vs. Private Investing 46:30 The Untapped Potential 53:40 Public Goods Building Ideas 56:23 The Opportunities 58:05 Disclaimers ------ Resources: Part One https://youtu.be/HMFxgTbY_9Y  Tascha Labs https://twitter.com/TaschaLabs  Optimism https://www.optimism.io/  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

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. Guys, we have a sequel to our excellent episode from yesterday. This is part two of the episode on the Bull case for layer two, the trillion dollar case for layer two. Just to recap, part one we did yesterday. If you haven't listened to that podcast, go listen to that.

I think it's helpful context for part two today. In part one, we covered ether economics in an L2 world. What L2, that is layer two's, will do for the price of ETH? And we ask the question, will we get a layer two season with all of the new layer two tokens that are coming? But today's episode is all about public goods. Public goods are the new alpha. David calls this a trillion dollar opportunity as well. we're going to talk about how L2s are going to compete, how some L2s are going to beat other L2s

with growth and adoption through public goods funding. And here's what the opportunity comes in. We talk about how you can become a public goods entrepreneur and also how to become a public goods investor. Because, of course, public goods investors and builders are the new alpha. That's what we're talking about today. David, what were some of the highlights from this episode? Yeah, I feel like I'm about to become a,

broken record with how many times I'm going to say, public goods are the new alpha. It's the new frontier. It's the new way to make money. And we are just on the horizon of this. We can see it on the horizon. optimism is leading the charge into this whole entire movement of turning alpha into public goods, where public goods and public goods builders and public goods investors has the same amount of upside that we saw power Silicon Valley and Web 2. So with retroactive public goods. We're putting the upside potential of a brand new startup, but we're injecting that with the products and opportunities that public goods create for the world. And so the reason why I'm calling this, a trillion dollar opportunity. The second trillion dollar opportunity of the layer two

ecosystem, the first being the one that everyone knows, L2 tokens, apps on layer two's, ETH itself, of course, trillion dollar opportunity there. But this brand new one has never before been seen on the face of this earth, it's something that is uniquely enabled by crypto and by layer twos themselves. And it's going to be the vector that all layer twos compete on. Whether or not layer two survive and see adoption and see growth is whether they can compete with other layer twos as to how well they can fund public goods. And with the innovation, the tinkering of mechanism design using retroactive public goods funding gives layer twos the path towards turning the upside of of building public goods into market opportunities

and injecting the power of the market with the opportunity of public goods. So Ryan, we walk through this whole entire subject matter and give you the narrative and the reasoning behind why you might want to be the first of its kind a public goods investor or public goods builder. A lot of opportunities here, and that was the word we used so many times

in our last episode. We're going to use it more today because that is the truth. There are a lot of opportunities in this brand new horizon opening in front of us in layer two. So that's what we're going to talk about. We're going to get right into the episode.

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Diversify like the pros and trade without tax headaches. Open an Alto crypto IRA to invest in crypto tax free. Just go to altoira.com slash bankless. That's A-L-T-O-I-R-A.com slash bankless and start investing in crypto today. All right, hey, guys, we are talking. This is part two of our bull case for layer two's, the trillion-dollar opportunity in layer two's. And in the part two, I think we're going to make the bull case for public goods and where all the opportunities for you are in the public goods space. Let's first talk about public goods a little bit, maybe some definitional characteristics. But David, what are public goods? And we could use this analogy we've been using throughout this episode in part one and now this as well,

of like chains being a little bit like nation states and countries and nations, they have public goods. And so why shouldn't chains? And what are public goods and what's the analog to the nation state world here? Yeah, public goods are globally shared resources that are like non-rival risk and non-exclusive is like the technical definition. But it's also, it's things like clean air and clean water. These are all public goods. Roads are things that we all use when we drive to the grocery store. And so public goods are these public utilities, basically,

like transportation and, like, access to health care. These are all things that we all need. And it actually benefits everyone, even if other people have them. Right. And so clean air is beneficial to you, if I have it. Like good access to roads is beneficial to you if I have access to roads. It's like when we generate good economies, it benefits our neighbors, which benefits ourselves. And so it's these globally shared utilities, like these commons, these common utilities that just make the quality of life for people better. Like it's better when we have clean air. It's better when we have clean water.

Kevin O'Walky likes this line. It's like, what's the point of having a Lambo if this guy is on fire? and it's just been a part of the grand story for crypto at large is how do we actually price in the value of these public goods into our markets? Because previously before crypto, and still to this day, because crypto hasn't solved this yet, but we're working on it, that we can't find ways to protect public goods without top-down government intervention. So this is ultimately what taxes are for. Like the governments take our taxes and they are meant to protect public funds. public goods, protect our national parks, like clean our water systems, make sure we have good roads, fill our potholes. Governments, you know, are famously inefficient for this, but that is the ultimate

purpose of taxes in the first place is to produce public goods. And governments that can figure out how to make their public utilities more and more useful ultimately help generate economies that are stronger. Because when our roads don't have potholes in them and they're efficient and we have clean water, just life in these in these countries are is better. They're more desirable. It's a more desirable place to live where commerce can happen more efficiently. And so the the countries that invest effectively into public goods ultimately become stronger economies because there's just lubrication everywhere. The populace is happy. And they can actually charge more in taxes because they have created a more desirable place to live. And people aren't actually like

dissatisfied or disgruntled about paying their taxes. Because they see it going to things that make their lives better. So public goods are just a part of this world and they're also famously difficult to price in. This is why we have the concept of the tragedy of the commons, right? Where like if it's a public good, people will just consume it all as much as possible for free without giving back. So how do we establish a business model for public goods has been one of these core drivers of crypto economics? And part of the layer two opportunity is that we actually have an actionable, concrete, known path forward for actually producing valuable market prices on our public goods. And that is a trillion dollar opportunity that is coming. And it's like

not just coming in a decade from now, but it's coming just like in a mere months and something I want the bankless nation to be prepared for. All right. I think we'll talk about that in a, in a minute, like how to get access to these public goods or how to, you know, be a builder of these public goods because I think that's sort of the opportunity and the invitation, right? And this, this whole podcast series is all about layer two opportunities. But, you know, just to kind of establish that a little bit, so like a public good is kind of a utility that benefits everyone. And it's generally not, like, privately funded either. It's like funded by like a collective. Right. It's owned by the people for the people. Yeah. And so like the, like, you know, and I think people who'd say, well, public goods aren't

aren't important. You haven't really looked at the public goods that they benefit from in their own lives. Who goes and looks at a house and doesn't look at, you know, if you have kids, the neighborhood, and you're looking at the school system where the kids can play, and is there green space, and how are the sidewalks? What's the flow of traffic like? Do I have easy access to downtown? Is there, you know, a metro station nearby? All of these public goods enhance the value and the network effect of the place I decide to call home. And so the idea, of like, first of all, neighborhoods have public goods. Cities have public goods. States have public goods. Countries have public goods. And it is a way for one country to compete against another,

one region to compete against another. Where I live is ultimately a determination of, okay, does this have the best public goods infrastructure at a reasonable tax rate? Right? And so that can be part of making the calculus. And there are some like countries or jurisdictions that might have high taxes and like terrible public goods. And you're just like, why would I want to live there? It's not worth it. In other countries that try to give you kind of the right mix. And maybe chains are no different. There was actually a tweet thread from at Tasha Labs where she talks about chains needing to subsidize various industries. And she advocates this in the future. And so like, if you think of like, what does a blockchain produce? What is its original

public good, it's like block space. It's defense is the original public good. It's security. When you pay your transaction fee taxes, what are you actually funding? You're funding national defense of the chain. You're funding the security of the chain. You're funding the miners or the validators who are economically protecting the chain. And that so far has been really the major, maybe I might say the only, aside from new experiments that are happening, But it's been the original public good that chains produce. And the reason it's so useful and valuable is, of course, we need these security for the chains to function. But it's also the distribution of it is very, very fair.

It's like it's credibly neutral distribution. How does Bitcoin decide who to reward? Well, it's based on your hash power. Everyone's treated equally. It's like if you have X amount of hash power, you get Y amount of tokens. It doesn't matter who you are. anyone can permissionally participate. Same with ether. If you're staking, you have, you know, allotment of eth and you get a share. Tasha, in Tasha's Twitter thread, she was actually

talking about the notion or the idea of chains starting to fund other things as well. So you can imagine a different industry that a government might want to fund, like the green energy industry, or the solar industry, or like healthcare. Electric car industry or something. Electric car innovation. And so what types of things might a blockchain want to fund? Well, probably like wallet infrastructure, potentially. Maybe liquidity funds to, like, incent people to come in.

Maybe, like, marketing budget. Does a chain want to stand up like a propaganda ministry? Like, all of these things. Our blockchain is good efforts? Exactly. Or, like, maybe we're just funding all of these influencers to talk about our particular chain. like you could start using public funding, which effectively is how to chains pay for defense, it's issuance of the underlying asset itself.

They produce more, you know, there's a Bitcoin reward, block reward, and Ether has block reward. So you could actually issue, mint some of your chain's coinage, some of the assets to pay for some of these other things if you wanted to. But I think that has a fault, doesn't it? What is the fault? I mean, you know, Bitcoiners realize this very early. I think the Ethereum community realized it early as well. But like what happens when you start rewarding and picking and choosing different industries or different things to fund with block rewards? There is certainly a place where public goods should be invested from, but at the L1 layer,

it gets a little dangerous. We also have to remember that money, the system of money is a public good where like the actual unit, the actual like dollar or unit of ether, is a private good, as in that like that's my ether, that's my dollar. But the system itself is a public good. Like the system of money is a public good. And we need to, and money, this is a very famous Bitcorner approach, is that money is the ultimate public good because it coordinates resources around the world. Like money is this resource coordination mechanism.

And when we start tampering with the money, if we start tinkering with the money, we lose some of that power, we lose some of that effectiveness, especially if a privileged party can direct money into places where they think that it should go, because humans are inherently corruptible, and crypto is in the business of making uncorruptible systems. This is in the fiat world, this is called the cantalon effect, where if you are proximate to the money printer, you have the positive benefits of the new issuance of money. And there's like a bunch of industries that have been able to lobby their position to be close to the money printer. for example, the military industrial complex, like Lockheed Martin.

Lockheed Martin is really close to the money printer, and now they are incentivized to create wars or conflict. And so that's a corruption example. And so having money issuance at the layer one to fund block space security protects the system of money, but if we start, like, siphoning off, like a dev fund, right? Like 10% of all issuance goes to funding, like propaganda or funding, like, public infrastructure. that public infrastructure is can be corrupted, right? And like people, the entities that produce that public infrastructure can be corruptible. And so at the layer one level, it's my belief, and I think,

Brian, you agree with me, that the money needs to be not tainted. The L1 asset needs to be not tainted. However, this is where we can get into the layer twos, because layer twos can tinker with their own public goods funding without corrupting the layer one. And this is where layer twos can start to compete with each other about who can fund the best public goods, along with the other layer ones who do choose to take the risk of tampering with their money issuance and their distribution of their currency to fund certain efforts. And so layer twos, they also generate revenue, just like the Ethereum Protocol generates revenue at the layer one. Ethereum layer twos will also generate revenue from block space sales. Optimism has pioneered this thing called MIVA or a maximum extractable

value auctions, as in they can auction off the right. to produce a block, and that money goes into the optimism, like balance sheet, the optimism treasury. And all of a sudden, this gives the optimism, which is a DAO, the optimism DAO, has like ammo in the tool belt to start to fund public goods infrastructure for the optimism layer two. And I think this is going to be the vector on all layer twos, that all layer two is compete by is, can my layer two produce better and more efficient and more useful public goods to attract more people to come onto the layer two's. So just to recap here for people, public goods

are important in any sort of social structure, and, you know, including blockchains. The original public good that chains produced is security, defense. And the reason that worked is because there was a credibly neutral issuance policy. No group of people got to decide. It was basically you participate, you present hash power, you present validator power through a token. and you're allotted this credibly neutral allotment of total funding rewards, right? When we start to branch out beyond that, even though it could be hypothetically useful for a chain network to compete by creating other public goods, then you start to get into this governance territory of well, who actually gets to decide which dev team gets the millions of dollars

we are producing? And what happens if insiders start to sway that vote in one direction? or another. And once you end up doing, if you don't have credible neutrality, is you like corrupt your entire money system. You just recreate politics. Yeah, you just recreate politics and it's a worse politics because it's all kind of like plutocratic and insider. There's no like one person, one vote, you know, underlying democracy to protect this thing and you end up with a corrupt system that is destroyed from the beginning. And so that is why chains like Bitcoin will never introduce something like this. And also chains like Ethereum will never introduce, like, blockchain subsidy to groups that are arbitrarily, like, governed and arbitrarily decided. So you are saying

these sorts of experiments, while valuable, are not suited for the layer ones, but can be experimented with much more effectively on the layer two. And that's as far as we've gotten in our story. So is there anything else we should unpack there before we talk about retroactive public goods funding, David? Yeah, let's dive into how funding for retroactive public goods funding comes about, because that's an important part of the story, and we'll answer some questions that will inevitably come up anyway. So we have this thing called retroactive public goods funding, which we haven't defined yet, but we will in a second. Where does the money come from for retroactive public goods funding? And I alluded to this a second ago, there is minor extractable value or maximally extractable value on every single layer two.

Some people will propose blocks and they will sequence transactions in these blocks that will allow them to extract some value, some arbitrage opportunities on Uniswap, some liquidation opportunities on MakerDAO or AVE that exist on these layer twos. And block proposers can auction off for the right to produce these blocks. And there is such thing as good MEV and there's also such thing as unethical and bad MEV. And this is actually a very dense topic, so I'll do my best to summarize it. Good MEV is just like arbitrage opportunities. They make our markets efficient. They balance the prices across various dexes. They just make things very, very liquid. They also protect your positions. And so, like, if we don't have MEV opportunities where validators can sequence transactions, then, like, your liquidation position in compound if you get liquidated, will get liquidated at a worse price.

Highly competitive MEV opportunities, make sure that if you do get liquidated, you get liquidated at the most favorable price to you. That's good. It's a good thing. And it's just good user experience. Like, no one likes getting liquidated, but if you do, at least you get liquidated at the most favorable price to you. And MEV produces this.

MEV can also be very, very bad and very, very unethical. There are things like sandwich attacks where you can put in a un-swap trade for one price. And because you're going to move the market, the person can front-run you, take that alpha, take that arbitrage, and give you very little in return. And it can get even worse than that. These can, MEV can even destabilize entire chains. And there's just, it gets crazy how bad it can get. And there's just a large conversation in the industry is like, how do we control

MEV to optimize for the good side of things and mitigate all the bad side of things? And this is also a vector that layer twos will compete on because layer twos, the protocols, will ultimately come to allow certain types of MEVs to be allowable and other types of MEVs to not be allowable. And so this is going to be protocols that say like the bad MEV types are just not allowed on our layer two. And if we discover that you as the validator are engaging in them, we will remove you from the validator set because you are doing what MEV strategies that we consider unethical and harmful to our users. Is that like protocol determined or is that like arbitrary? It's different for every single protocol, right? So every single protocol will allow certain validators in based on certain rules.

and they will also create certain rules for how to violate the rules of the protocol, the rules of the Dow. And so every single, this is, again, this is the vector that protocols compete on is how well they can do this. But basically, it's an optimization function. It's like, we need to extract MEV from our users

to fund public goods, but we want to make our users feel enabled and protected as they use our DFI ecosystem and not feel extracted from. So it's a balancing, it's an optimization function. Like, how much can we extract without being exploited, like how much can we extract that is actually good for our users, not bad for our users. And this goes back to the nation state example of how much taxes are we charging our citizens

versus how many public, how much public goods are we able to offer them? What are the quality of our public goods versus the level of taxation that we are pulling out of our users? And layer twos are going to get better and better at better at this and is ultimately going to create a very fantastic environment to live on. It's going to be an optimization of, can I produce the best layer two for my users? And it will force layer twos to compete for the love of their users, not just exploiting them for as much MEV as possible. I think this is a good thing to zone in on, right? So you're saying that a main source of public goods funding for layer twos is going to be this thing called MEV.

Yes. Right? As opposed to, and we call that a tax, a tax for public goods, as opposed to there are two other taxes. that chains impose and that layer twos could impose, but many of the designs are dwelling more on the MEV tax. Maybe it's worth just really quick defining what the kind of the three different taxes are to fund public goods, because this is true of a layer two, but it's also true of a layer one. The first type of tax is one we've already talked about, which is block rewards. This is issuance, right? So in the fiat world, we'd call this money printing. We print more money. We inflate more

supply and we use that supply and we pay for public infrastructure, right? We'll cut you a stimulus check with some money that we've just printed or we'll go bail out the banks with the money printing that we've done or we'll pay for the military with some additional ether we printed. That is what a blockchain block reward is. And this happens in Bitcoin. This happens in ether. It's not so much going to happen with most layer twos, although they could. I don't anticipate many of the designs at least at first will do a lot of money printing. I think like optimism, Maybe they're doing like 2% issuance per year, but they're not awarding that block subsidy to anyone in particular. It's kind of going to the Treasury.

Yeah, going to the treas. So that is the first category of tax, right? You print money, just like a government would. The second type of tax is an excise tax. So, you know, when you go to like a store and you buy some clothes, I don't know what you, what's the state tax in California, David, like just for buying stuff? Do you even know? I don't know. In Washington, it was seven.

to 10%, I think. There you go. 70% I live in Virginia. It's about 6%. And it's a consumption tax, right? So when I buy stuff in the economy, I pay 6% tax on things I'm consuming.

If I don't buy anything, it doesn't cost me anything. That's different than the money printing. Money printing costs everyone something equally if you hold that asset. Dilution. But the excise tax is basically only consumption.

So if I buy a block in Ethereum, for instance, I get charged to tax. What's the tax? It's gas fees. That's what gas fees are. They're taxes. And what does that go to? Oh, those taxes go to a public good, which is security, defense. Again, that's all that Ethereum and Bitcoin chains like it fun today. The third source of revenue, tax revenue, is the kind that you were just talking about, David, which is M.EV. And that is almost like a unique form of tax that doesn't exist very often in nation states or exists in various ways, which is like a tax. tax on the money robots.

Maybe think of it like that. All the money robots that are doing some nice like arbitrage for you and ordering of transactions for you, there's a tax that must be paid, and that is kind of like MEV, and that's where that comes from. And what you're saying is layer twos are primarily not using the category one of money printing and inflating their supply

for public goods funding, and they're not using category two of transaction fees, There are transaction fees on layer two, but those transaction fees actually go to pay for block space on layer one primarily. So the public goods funding is really coming from this big source of revenue in the future, which is MEV. That's what we're talking about here, right? Right. Yes. And this is the beautiful thing about MEV is. It's like it's largely totally invisible to the users. At least good MEV is. Bad MEV is very extractive and very exploitable. Good MEV is completely invisible.

And it's just, I use the metaphor of like, it's like pulling geothermal energy out of the layer two. There's a certain amount of economic heat. Some economies are hot. Some economies are cold. And hot economies generate more sustainable good MEV. And so it's like, the MEV is like the geothermal energy of layer two's. And it just is this perpetual heat source, which is a good economy, turns into funding for the Dow, funding for the layer two, which ultimately can go in towards funding. public goods. Now, I will say it's not explicit that all layer twos will do this. This is something

that optimism specifically is pioneering and why this opportunity exists in the first place, but I think optimism is going to lead the way into what is inevitably going to be a competition that all layer two must compete on, because if optimism makes the best public goods for the layer two, then it's just going to have the best layer two. And so other layer twos are going to also compete on this vector, and they're going to compete in the same strategy because I think it's a very viable strategy. I agree. So what you're saying is, well, all layer ones for that matter, but also all layer twos, they'll all have MEV, right? And some of that MEV is good. Some of that's bad. And let's

kick the can down the road on the bad MEV. That's a whole other podcast. We're not going to talk about that. But it's definitely a source of revenue. Now, what a layer two decides to do with that revenue is kind of up to them, right? So some layer twos will just pass that off to the validators in their network, like the block sequencers in that network, and they will receive a dividend. So they'll receive cash for providing this service, right? And others, and you think that this is a more game theoretically competitive scenario, will take a portion of that MEV, we'll tax it essentially, give it back to public goods, and build stuff for the whole network. So you don't have a bunch of wealthy elites that are extracting out of the economy. You're actually feeding some of that back into

the public goods of the network and you're building the parks and hospitals and roads that everyone can benefit from. And you think that if a layer two is not doing that public good strategy, then effectively like, no one wants to move there. Right. Like, why would I go live there? Yeah. Like, it's a nation state model where two nation states, they have the same tax rate, say 10%. Wouldn't that be lovely? But one nation state takes that 10% and then starts building parks, starts building plumbing, starts building clean water, starts investing in public transportation and the other nation state only gives it to. A lot of beer putt in the cronies.

Yeah, the oligarchs, right? And so like all of a sudden over time, one layer two is going to be a very enjoyable place to live and one layer two just won't be. And so, yes, I think the competition collapses down on like, well, the ecosystem with the best public goods wins. AVE is the leading decentralized liquidity protocol. And now AVEV3 is here. AVEV3 has powerful new features to enable you to get the most out of DFI, including isolation mode,

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are already on Arbitrum, with many moving over every day. Go to bridge. Arbitrum.com now to start bridging over your ETH and other tokens in order to experience defy NFTs in the way it was always meant to be. Fast, cheap, secure, and friction-free. Yeah, I think that's totally true. Okay, so now we've established why public goods are necessary for chains. We've established where the source of funding comes from. It doesn't just come out of thin air. There are some, like, three different sources of the funding.

Now can we get to the definition part? The retroactive public goods. So what's the retroactive part of public goods? What are we defining here? Yeah, so retroactive public goods. This is the alpha, and this is something that crypto can only enable and why it makes me so optimistic that we are going to have a better future because of this mechanism design of retroactive public goods. This is where the historical disregard for investing in public goods is fixed, where it actually becomes profitable to build public goods. Rather than, like, building out this new private good, this new Web 2 social media app, or, I don't know, building out,

Lockheed Martin or something crazy like that, it starts to become equally advantageous, equally like upside exposure to all of those like highly extractive, highly, you know, like Silicon Valley upside projects. And that energy can be directed into building public goods via retroactive public goods. And so can we pause here, David, and just talk for a minute about like, A lot of the most important public goods in the real world and crypto are not getting funded. Yes. And why are they not getting funded? Is it because they don't have a like a business model?

They don't have a business model. There is no upside. It's like charity. So like how you can't really convince people to donate their money to help clean the water. There is no business model for cleaning water. Exactly. So it's like it's like these sorts of things like environmental is maybe the primary externalities, right? It's like there's no business model for going and cleaning all of the air in a particular city.

It's just false prey to tragedy of the commons. There's no business model necessarily if we didn't have an interstate highway in the U.S. There's no one company who's going to be like, you know what, we'll centrally like spend the hundreds of billions of dollars to build out this road system and connect and charge people taxes. That would never get done because it's not profitable to do that. And yet it brings so much public good to the network. as a whole. So there's a whole category of things that we could do to collaborate more tightly and to better society and to live in a better like world effectively. But we're not because the system of capital markets that we use today doesn't allocate funds to those things because there's no

short term research. There's no short term return and investment. Like research and development is another category. Like the general sciences. I mean, no one is actually investing. heavily in like general research that will pay dividends to future generations 10 and 20 years later as they discover things like quantum mechanics. Right. Yeah, education also a fantastic public good that like requires investment. Like that's where some of your tax dollars go is to educating the kids. And like I don't need to convince, I hopefully don't need to convince bank with listeners that like an educated youth turns into just that's, that's an investment in the youth and makes them build better things in the future. It's investment in the economy essentially. Right. Yeah. It's

but it's also long-term investment, right? And so where's the upside? There is no, like, equity upside for being a teacher or for, like, starting a school. And so, like, it's these things that retroactive public goods funding actually fixes. And, like how we said, like, MEV is a unique property of crypto-economic networks.

And so retroactive public goods is a unique property that comes out of being able to extract MEV, a source of income that we've never had before in humanity. and if we, it's really just the power of, can we direct the MEV that we collect from our layer two's into public goods, into things that humans deem to be valuable? And this is what retroactive public goods funding does. This is that mechanism. We're ready to get into it? Yeah, what is the retroactive part? That's the big question in my mind. Right. So, yeah,

in order to explain retroactive, we have to explain the whole entire thing. So let's go ahead and get started with that. Say you are an entrepreneur, a builder, and you are looking to build a building, and you are looking to build a product, but it doesn't have a business model because it's a public good. So you build this thing, and because of the commitment of retroactive public goods funding means that money will be there if you build this thing. And so it's partly like a confidence thing. And so retroactive public goods funding says there will be money if you build it. And so here's how this works. You come up with this idea. Bankless, for example, if we had started bankless when retroactive public goods funding, we might have started to use.

use that instead of Gitcoin, which is kind of a precursor to retroactive public goods funding. So we would go around to all of our friends and saying, hey, would you like to invest in bankless? We are going to make an education system for all of crypto. We're going to make the best podcast, the best newsletter, and we're going to provide a ton of education. And we are going to be retroactively compensated for that in the future by proving our utility and proving just the value of the education that we bring to the crypto world. And then some, we would collect some investors. We would have some sort of like seed investment round.

We would set a valuation as we do with normal seed investments. And so, hey, $10 million valuation. We're going to, we just need to raise half a million dollars. And we'll do it from our friends and family and people who believe in us. You can open this up to the world. And then we mint an NFT. NFT is part of this. And as, or tokens, it also works as ERC20 tokens.

And then we just give programs. out of shares of who invested into bankless before we were like doing our work. And so then we have our investors with these tokens and we get to work building bankless. And then later, as we've built out bankless, as the podcast gets listened to, as a newsletter educates people, and as we onboard people onto Ethereum or onto crypto at large, we get to go to the Dow and say, like, look at all the funding that, or look at all the benefits that we've given. And this is where the role of optimism's two bicameral governance system comes into play. They've had the token house and the citizen house. The token is the OP token. The citizens' house

are these known entities that direct public goods funding. The token house does like protocol upgrades and things like this. And the citizens' house, which is an identifiable human, like on-chain identity, is the citizens' house of optimism that directs funding towards public goods. And so they will, the, they generates, like, optimism generates like $10 million dollars every month or so. And so that's the $10 million budget for retroactive public goods. And the Citizens House just allocates funding from their monthly budget towards the projects and the ecosystems that have benefited the optimism layer two or benefited the system as a whole. And so what they do is they go and like reward token holders who invested in the public

good in the first place. And there's many different mechanisms of doing that. You can literally buy and burn the token or you can just put cash in the pockets of token holders. But basically it is a commitment to funding the projects that invested or the people that invested in this public good. So by like putting the public good into a token on the layer two or on Ethereum, you can identify the early believers, the early investors in this thing and start streaming cash into them as determined by whether or not they actually provided good utility and good value to the layer two. So it is a top-down, like, governance system, as in the Citizens' House of the Optimism Dow votes and determines how to allocate their retroactive public goods funding that they have. But it's baked into the social contract of the Optimism Dow to do this. And so there's a little bit of a bootstrapping problem, as in, like, people might not take the risk of venturing out to produce this public goods venture until they have assurances that money is coming. but if you believe in the optimism social contract,

and then later, if you actually see this actually working out, your VCs and entrepreneurs are going to have better and better assurances that money will come to them if they provide something of value to the optimism layer two. Do I explain that okay? Yeah, I think that's cool. Yeah, I just want to dive into some of this and repeat some of it back to you. But first of all, I just wanted to clarify,

I think you explained this before everyone. like the citizen house, at least in optimism, these are individuals, like individual people. Yes. Like one-to-one, one-person-one vote. This is not capital voting. Yes. It's kind of like a essential, it's an identity protocol, if you will, an optimism that shows you are a person living in the optimism layer to you. And your vote matters and counts. This is public goods funding. You're essentially a member of Congress that's allocating budgeting decisions, right? Not setting laws, but actually, imagine that.

Imagine if you could actually, as a citizen of your country, vote where your tax dollars were spent, like, more directly. That's what this is kind of providing for, which is super cool. But it strikes me that's like what you said was if you are a startup, right, you can start to think about developing an entirely different set class of applications and products, right? You're not necessarily trying to convince investors of, like, revenue. and profit and like the hard capital metrics. You actually just have to convince investors, like you start measuring things differently. You start to convince investors of like,

oh, this is the utility, the public utility that we are going to add. We're going to benefit X amount of optimism residents, right? We're going to benefit the citizens of optimism by growing the community tenfold through education and bring more of those citizens into the citizens' comments. right into the citizens house your your metrics your success metrics completely change from success metrics based on like revenue and profit and all of these capitalist for-profit things to like impact what impact did you make in the network in the community these are these are notoriously like

not captured by capital markets right so something like um god what is the value of the geth team right and the ethereum client so geth if you're not familiar with it this is the client the main client that runs all of Ethereum and that all of these other alternative layer ones have forked and used for Binet's smart chain and for like, what is the value of that? Right. The avalanche, L1, fork of death. Binance smart chain, fork of death. Ethereum, it's Geth. So like, imagine how much market cap stands on top of the shoulders of Geth. And they have received zero funding other than like grants and payment from the Ethereum Foundation. Grants. It's unsustainable. Not sustainable. And so what is the value of Geph, like you could show all of these metrics for impact, and then the community

would effectively vote and say, like, yes, this is so valuable to us. We are going to allocate funding to this. And I would imagine, David, correct me if this is not true, but like the token economics behind this further supercharge it, right? So what you're saying is a startup gets funded, and it has a liquid token. And that token can trade up or down, but it's not trading based on profit is trading based on, oh, there's a new report from the bankless education platform that they just crossed a threshold. And they're now educating from 5,000 individuals to 10,000 individuals. Oh, it's doubled in the last month. Well, that's worth double the value. And so the token trades upwards. And why? Because it's expecting that liquidity event at the end of this road when the

the public goods, essentially voting body, votes to fund it and provide, that's the IPO, right? And so, like, you're trying to get from, like, you know, PMF, product market fit, or PMF, is now it's like public market fit. Yes. It's like how, how can you design a product that benefits the public the most, the most, and showcase those metrics in order to get funding and have your IPO? So it kind of flips it on its head. Am I right about that? Yeah, is that right? You articulated that so well.

And the flag in the ground is that, like, retroactive public goods funding funds, it creates impact equaling to profit, as in you profit as much as you impacted positively the world around you, where, like, old investments are investments that, like, maximize private financial return. Like, in retroactive public goods funding, these new investments are,

are investments that maximize public financial return. So it's a question of how wealthy did you make your community, not you? Like how much did you spread and share in wealth and upside and knowledge to everyone around you rather than extracting and pulling that in for yourself? And so like you can now, as an entrepreneur, you can now build a whole new slew of products that have never been seen before on the face of this earth, which is why this opportunity, Ryan, is so big because it's completely untapped snow.

It's like the internet. we don't even know how big it is. And so if you can build a product that maximizes public financial return, then you get your share of the L2MEV that gets pulled out of the economic energy of the layer two. And so this turns into like a positive feedback loop where if you generate more public goods, you make that layer two a more like a more lovely place to live. It's got better infrastructure. It's got better roads.

And so because of that, more people will live there. and they will go to that layer two, and that will generate more revenue out of MEV because there is more people paying their small share of taxes to the layer two, and that layer two now has more funding to fund in further public goods. So it's a positive flywheel effect.

And Ryan, like, right now, like I said, optimism is producing like $10 million a day in MEV fees and rewards. Like, then the token's not even launched. Like, we talked about this in layer one. There is a coming mania of layer twos and is going to generate so much revenue for this opportunity. And so, like, this isn't just like Ryan and David saying, like, oh, like, public goods.

Let's all, like, remember to celebrate public goods. Kumbaya. No, no, no, no. This is going to put money in your pocket. We made it. We made it capitalist. Yes. Public goods are now capitalist.

Yes. Well, I guess what's cool about this is it feels very scalable in the way that capitalism is scalable. Yes. Right? In that, like, you know, part of, I think, we want to get to some examples of potential public goods for layer twos. But before we get there, like we could just say, we don't even know what the best public goods are going to be.

They're going to start skeuomorphic, probably. Yeah. Yeah, but like, yes, but it's almost a matter of like, yeah, that's what the market is for. The mark, like, all of the public goods entrepreneurs out there are going to innovate ideas and create ideas that no one else has. Like, so the other way of distributing your public goods is basically, it's non-market. It's basically top-down. I'm I'm going to allocate a little bit here, a little bit here, a group of managers making decisions. Effectively, that's what they are. If you're managing a budget for like even a public, a city or like a nation state or anything else, this takes the opposite approach. It's like, go build us an awesome thing first, right? And like, show the success metrics for that thing.

We don't even know what the roads are, the hospitals are, what they're. analogs are in the layer two space, but we'll know it when we see it and go let a thousand ideas bloom and the ones that survive, the ones that make it through that gauntlet of public market fit, kind of like these survival of the fittest, the best ideas will win. And those are the ideas that will be handsomely, generously rewarded on the other side. So it kind of solves the problem of like, well, what should an L2 network actually build? It's kind of like we know some things, but the market in general will solve the problem of what to build. Right.

And you could imagine, right, like, you know, all the people that play, like, the token rotation games is like, all right, is it going to be this token this week that's going to pump or is it going to be that token next week that's going to pump? Like these shelling point games are like who's going to buy what tokens next? The shelling point, as a result of retroactive public goods, becomes public goods. Like, people become fascinated by public goods because that's where the alpha is. That's where the upside is. And so, like, people play these D-Gen games.

trading games in crypto all the time, what retroactive public goods funding does is it injects that energy into the public goods tokens. And so like it's so bullish for not just like public goods, but just humanity at large, Ryan, because the cool thing about optimism and what they're doing with EVM equivalents and Arbitrum is also EVM equivalent. So they're doing this as well. They haven't talked about retroactive public goods, but perhaps they will, is that EVM equivalent layer two is like optimism and arbitram. When they fund something that is useful on that layer two, it becomes infinitely copy and pasteable for all other layer twos and the Ethereum layer one. So these aren't privately owned public goods by, which is an oxymoron, it becomes a public

good for the whole entire ecosystem. In the same way that like Avalanche forked geth to produce Avalanche, Avalanche could also benefit from all the public goods innovation that happens on optimism. So this isn't contained inside of the optimism ecosystem. It's a public good for the whole entire crypto ecosystem. Yeah, it's kind of like, like, let's say a. you know, a wealthy country does the R&D for a new vaccine, for instance, and builds up the public institutions, educational institutions to spend the time and effort

to develop this vaccine in a lab. And then the rest of the world can benefit from that knowledge. But it also doesn't stop at crypto networks, Ryan, because it can go outside of crypto networks. So we can just start funding public goods, like not crypto public goods, but public goods for the whole entire world. It's like, yeah, it is interesting to think about, like, probably one step at a time at some level. But like if this is successful in crypto, this could be a mechanism that that nation states end up using. Or crypto could kind of step in and be like, you know, the U.S. isn't funding this specific thing very well. Maybe this crypto network needs to fund it a little bit better. Cryptography education, right?

Could you imagine a layer two funding a university program, a massive online university program for cryptographers in a way that a nation state might, but now they're doing it like for layer twos. And part of this like excitement that I have about this is that because this is extremely legitimizing for crypto networks. For public populace that like still think crypto is scary and foreign and going to come destroy the world, imagine if like retroactive public goods funding starts funding, literally starts filling in the pave holes that the nation states forgot to fill in.

And like extrapolate that as a metaphor, not as literal. Where like, look man, I think financial literacy is one. Right. It's like I don't think nation states and education system provide financial literacy to kids growing up. What if, what if crypto networks started to get into that space? They benefit from it because eventually they'll become citizens of their respective layer twos. But like, what if crypto networks stepped into disadvantaged communities and started providing financial literacy training through crypto tools? Right. What happens when when retroactive public goods allows for layer twos to, start filling the shoes of government, starts filling the gaps that government's left behind, because this is just a market-driven source of public goods funding, which is something never

before seen and uniquely available to layer twos. And so this is where we literally create what we call the bankless nation, Ryan, where the roles of government are like deconstructed and then reconstructed on crypto economic layer twos. And so this is what makes me so bullish for humanity is because we actually have a known, concrete, actionable path forward to creating better social structures for the whole entire world. A lot of steps to get there, but yeah, this is kind of a new mechanism, right? There are very few new governance mechanisms, but this feels like one of them potentially that's not being used in the real world. But let's talk about a few examples then, the here and the now, in our limited brains and our minds and that, like, we can only see a foot or two in front of us.

What are some examples of public goods that people could start think about building? We're talking about one, which is like education, right, bankless education, but all sorts of different education you can imagine for crypto. What are examples of other things? I know we mentioned clients. So if you have dev skills and you want to build kind of the layer two's version of a of a gath or something like it, maybe the ability to run a layer two, you know, sequencer on a phone or, you know, from individual. houses, decentralized the network a little bit more, that that is a public good for certain.

Maybe that's something that could get funded. Do you have any other ideas? Yeah, like FlashBots definitely comes to mind. And FlashBot is, I think it's a fork of Gath, but it's a main Ethereum layer one client that helps solve MEV, helps mitigate bad MEV at the layer one level. So it makes the layer one less, less extractive from the users because it mitigates against the bad MEPV and only allows the good MEP. That's a public good. And that just has come from just like the blood, sweat, and tears of people like Phil Dianne without any, I don't think there's any upside there.

So like flashbots could have been of retroactive public good funding ecosystem. David Mehal's websites, like all of the websites that we frequently use on the weekly rollup, the moneyprinter. info, cryptofees.com, he's got all these fantastic data dashboards that are just public for us to consume that data. He could build that and get funded and further, rather than that just being a passion project that he just thinks is fun, he could get retroactive public goods funding

for producing all of that. We can talk like at-home node hardware, like new types of wallets, layer two bridges, like anything that the public uses that is beneficial for all of us can get funded with retroactive public goods. Uniswap.

Uniswap could have been a retroactively public good thing. It was a grant. It was a grant. It was a great. Anything that's a grant can now have a sustainable business model. Yeah, and that's kind of what you need. So I guess, you know, please don't be limited by our ideas. This is not an exhaustive list.

This is just things we can think of kind of on the fly. I think the best ideas will come from the market as they usually do. Which is the power of this whole thing. And the answer to the question of why layer twos would do this is because it's good for their network, right? It's basically why does a nation state invest in public? goods. It's because it's good for the people of the nation state. It makes more people want to live there. It increases the economy, increases GDP, and there's economic benefits to doing this. So what is the invitation? What is the, I guess, opportunity? This whole two-part

series is all about these layer two opportunities. We're basically saying that there is a massive amount of future public goods funding out there for you. In the same way, like, you know, minors, You could be a public goods minor. Miners provide a form of public goods, which is security and defense. Now we're saying that same mechanism is going to unleash a whole bunch of other categories beyond security into education, into like a general protocol development, into like decentralization public goods. These are the roads and the hospitals. And so are we basically saying, hey, go become a government contractor. go work for the public goods.

Think about some startups that you could develop for this future. Is that the invitation? Is this the big opportunity that you've been talking about? Yeah, that's one of them. There's a second of them as well. And overall, the call to action is like, prepare to get good at this, because this is going to be a new skill to develop.

Can entrepreneurs and builders build public goods and get the retroactive public goods funding? That's going to be a brand new skill. But also there's going to be a new skill for VCs is can you identify viable public good projects ahead of your competition? Because can you get that early investment? There's like the world of VC investments is super saturated right now and we're about to see an explosion of new types of potential investment opportunities. And the VCs that can identify public goods projects that are going to produce a lot of value and a lot of impact for the surrounding communities are going to win at getting good at investing. in retroactive public goods projects.

And so the call to action for builders is that there is going to be a wave of just a tsunami of cash coming available as soon as this project gets rolled out out of optimism and the layer two start to compete on this vector. And then the other call to action is like, yo, get good at investing in these things. Maybe building is not for you,

although question that. But if you want to just invest in projects, like it's a skill to identify ahead of the curve projects where impact equals profit. There you go. That's the action item. I think that's the bottom line. Anything more to say about this, David?

Yeah, there's a link in the show notes that we'll put in for just the metrics for optimism's revenue fees on a daily basis. And remember, that's before token incentives. That's before this layer two phenomenon. I think this is going to 10x maybe by the end of the year and 10x again in 2023. So seriously, the amount of like just massive amounts of cash that are coming towards retroactive public goods funding is significant. And this is something never before seen in humanity. And this is something that, like, when you got into crypto and crypto made you optimistic about a better

future, this is why. This is why. We actually have like a path towards solving global human coordination problems. And if you want to get to a Star Trek future, it's retroactive public goods that can do it. I do think that there's going to be a time period, like a window of opportunity where there's going to be all of this public goods funding available and wanting to get spent and not enough builders in the system to actually build out good public goods. There's kind of an arbitrage there, right? So much money flowing in for public goods and yet not enough builders. And so we're at the very beginning stages. That's a good place to be if you're a builder because you'll be more handsomely rewarded before things get crowded. You can, you know, what do we say at the beginning of every

bankless podcast? This front run the opportunity. Right. Here's an opportunity to front run. That opportunity is public goods funding. So tune into that. Optimism is the first one that's doing this big retroactive public goods funding experiment. So that'd be the first one to tap into. We expect other layer two is probably some alternative layer ones to start attempting this in the future, too. So you may as well get good at it.

We will include some links in the show notes. Anything else, David? Bullish humanity, Ryan. There you go. Bullish humanity. What would a bankless podcast be if we were not bullish? humanity. So we'll include a link for the action item in the show notes to start building out public goods. You want to consider what public goods products are now viable and what you can

build in the future. Of course, risks and disclaimers, none of this has been financial advice. Heath is risky. Layer 2 is risky. So is DFI. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.