Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Hasu & Kain Warwick: Diving Deep Into Liquidity Mining

Episode Date: December 16, 2020

Crypto is largely reliant on incentive mechanisms, and liquidity mining is one of the more recent cryptoeconomic incentive models to emerge. When decentralized exchanges need liquidity, they can leverage liquidity mining to incentivize users to provide it. In turn, the “miners” generate revenue, generally in the form of a native tokens, proportional to their share of liquidity in a pool. This summer saw a surge in activity surrounding this concept, with Synthetix a notable player.Kain Warwick is the founder of Synthetix, a company creating synthetic assets for DeFi, enabling exposure to fiat currencies, commodities, and cryptocurrencies. Hasu is a crypto researcher and writer with a focus on game theory and economics. They joined us to explain the key concepts behind liquidity mining, how and why it was created, and its increasingly important role in DeFi.Topics covered in this episode:Introductions by Kain and HasuHow and when liquidity mining was createdWhat they hoped to achieve with their liquidity mining programsHow liquidity mining works in SynthetixIncentive mechanismsYield Farming and 'getting rich'How Automated Market Makers (AMM) played a part in the success of liquidity miningHow Uniswap leverages liquidity miningProjects that don't currently have liquidity mining but would benefit from itUse cases in pre-blockchain systemsEpisode links: Synthetix websiteKain on Epicenter, Episode 325Uncommon CoreDeribit InsightsSynthetix on TwitterKain on TwitterHasu on TwitterSponsors: cPanel: cPanel's WordPress Toolkit is the all in one solution that makes hosting your website easier than it's ever been - https://epicenter.rocks/cpanelAlgorand: Learn more about Algorand and how it’s unique design makes it easy for developers to build sophisticated applications - https://algorand.com/epicenter1inch: Discover the best rates and most efficient swapping routes across leading DEXes. Optimize on gas cost and execute DeFi trades faster with 1inch V2 - https://epicenter.rocks/1inchThis episode is hosted by Friederike Ernst & Sunny Aggarwal. Show notes and listening options: epicenter.tv/370

This is Epicenter, episode 370 with guests, Kane Warwick and Hazu. Hi, I'm Sebast Sankujiro, and you're listening to Epicenter, the podcast where we interview crypto founders, builders, and thought leaders. On this show, we dive deep to learn how things work at a technical level, and we fly high to understand visionary concepts and long-term trends. If you like Epicenter, the best way to support us is to leave a review on Apple Podcasts. And if you're on a Mac or iOS device, the easiest way to do that is to go to epicenter. Dot rocks slash Apple. And if you're new to the podcast, be sure to subscribe. subscribe on iTunes, Spotify, or wherever you get your podcasts.

Today, our guests are Kane Warwick and Hazu. Kane is the founder of synthetics, and he was on the podcast earlier this year on episode 325. And Hasu is a crypto researcher who's quite active on Twitter and who writes about defy and crypto. He also hosts a podcast called Uncommon Core. So in this episode, Sunny and Freelika speak with our guests about liquidity mining. We were going to do this episode earlier on the year, but for different reasons it's only

happening now. But I think that, you know, having a little bit of distance from the surge that happened in this last summer actually makes for a much better conversation than if we had ended up recording it right in the middle of the boom. So this is a really information dense episode. I listened to it once. I think I'm going to have to listen to it again to really grasp everything that was discussed here. But some of the things they talked about were, you know, the history of liquidity mining, how it started, where it sits relative to other crypto economic incentive mechanisms like mining and staking, how value flows, things like impermanent loss, and how the market could evolve. One aspect which I thought was really interesting, and I hadn't really considered before,

is who will own the customer relationship? You know, at the lower end of the stack, we have AMMs, and certainly it's possible to interact with them directly. Like, anybody can go to Uniswap and, you know, use the app directly. But as you go up the stack, you know, there's other participants there that provide a lot of value for users as well. So you have aggregators, for example, You have wallets. And the question is, who will own that relationship with the customer? And I think that it's possible that most people will simply end up interacting with aggregators and their wallets and that AMMs and the underlying infrastructure will end up becoming more of utility, more of a commodity. One of the aggregators that I really like is one inch. It's the leading

dex aggregator and it discovers the best trade prices across all dexes. It's my go-to aggregator love that it shows me how much I'm saving in fees on every trade. I'll tell a little bit more about one inch later on, but if you want to check them out, you can go to epicenter.rox slash one inch. That's the number one in the letters, INCH. If you build a lot of WordPress websites like me, one of the things that you'll probably find most time consuming is frustrating is DevOps, deployments, maintenance, backups, and database management. The folks at C-Panel have built the WordPress Toolkit for C-Panel and it's a tool that makes it easy for you to manage your WordPress infrastructure. I'll tell you a little bit more about that later on, but if you want to learn more

right now, you can go to epicenter.rox slash c panel. And our friends over at Algarand are hosting after our series where blockchain developers can meet with their team and other members of the community for informal conversations about Algarand. I'll also tell you a little bit more about that later on. But if you want to learn more right now, you can go to Algarand.com slash epicenter. For now, though, here's our conversation with Kane Warwick and Hazu. Hi, this is Epicenter, and I'm Friedricha Ernst. And I'm Sunny Ackerwahl. Today we're having a bit of a special episode in that it's not on any one particular

projects, it's on liquidity farming in general. And we have two guests today, Kane from Synthetics, who we've had on earlier this year as well, and Hasu. Maybe both of you guys can give a very... brief introduction on your backgrounds and who you are. Cane, do you want to start? Yeah, sure. I'm the founder of Synthetics, which is a synthetic asset platform built on Ethereum. So we allow people to get exposure to a range of different assets like gold, silver, oil, etc. Yeah, I'm Hasu. That's a pseudonym, not my real name in case you wonder.

Before crypto, I used to play online poker professionally for 10 years. I played pretty high stakes for a long time, but something that I increasingly learned was that I enjoyed the studying aspect of the game more than playing and basically discovering the hidden rules and strategies of the game and then teach that to others. So when I was done with poker, I looked for a space where I can apply that same approach basically and got very quickly sucked into crypto. And I would assume you would all agree that crypto is like you have like a million strings around you and you can pull at any one of them for years and basically never never get to an end and I think that's so fascinating about it so yeah I basically do like research full time but I just do it for myself

invest my own money and like for the last year or so I also run the research desk for Derribut Deribit is the largest options exchange in the space I so We write weekly research columns. That's me and Suu of three arrows. And a few months ago, we also started a podcast together called Uncommon Core. So that's what I do pretty much. And it's super interesting. We are linked to it in the show notes.

So if you guys need more podcast fodder, I would totally recommend it. Cool. So let's talk about liquidity mining. So the entrance of liquidity mining has been somewhat gradual. So basically, if you look at the... earliest instances of liquidity mining, when do you think you would say it actually started? I think my view is that there's been a few different iterations, right? But certainly, you know, things like Live Pier, for example, you know, were early iterations

of trying to work out how to do some mining like distribution that wasn't at a base layer, right? like something above the base layer that allowed you to distribute, you know, tokens or assets based on some, you know, provable, you know, piece of work that you were doing. Yeah, I agree. So, um, so one thing that basically I, like when I first heard about liquidity mining, and that was actually not, um, when synthetics did it, uh, which did it, it was probably the moment when it went, when most people first heard about it, but when compound did it list this year and it basically, like hit the mainstream in a big way.

When I heard about liquidity mining, I immediately thought, okay, this is basically proof of work mining, right? This is basically like mining, as we have it in Bitcoin or as we have it even in proof of stake, like Cosmos, but in a more generalized way. So in these networks, like Bitcoin or like even the depths, they also like networks. If you want to think about them this way, you have different groups or actors. And often like one group incentivizes the other to perform. certain work for them.

And yeah, that's basically what we have in Bitcoin, right? So in Bitcoin, you have the users who want to transact with each other, want finality on their transactions. And the way we get this is the users pay miners to collect transactions in a block and then attest to them with a cryptographic proof of work. And that proof of work is what creates finality over time because basically makes transaction is to be harder and more costly to reverse. I like that you brought up LifePier because I also wanted to go into that direction in terms of explaining it that.

So it all started kind of with Bitcoin, but then we already had back in the day like different, basically the network incentivizing different things that were not just attestation of messages. For example, we've had storage, right? So we've had like stuff like I don't know how to pronounce it, storage, storage. And then SIA, for example, so that's where actors in the system are paid to basically provide, like, store data and then provide proofs that the data exists and so on. So the way I think about liquidity mining is basically is a generalization of that concept as it relates to providing financial liquidity. So in like storage and SIA, it was mostly like other users paying other users. other users for like storing of data, would that still count in this like liquidity mining? Or does liquidity mining necessarily imply that it's some sort of new supply that's being

distributed? I think for me, it needs to be like a protocol level incentive, right? That's designed to bootstrap, you know, before people are willing to pay, right? Or like augmenting what people are willing to pay. Maybe that's not strictly necessary, right? You know, you could launch a network that immediately had sufficient network effects that people were, you know, paying each other enough. But at that point, I would say you almost don't need liquidity money. You just have, you know, payments.

So I do think there is a component of it that's like about generating those network effects and bootstrapping. Yeah, I think that's a good point. I mean, on the one end, like if the Bitcoin, the block subsidy would go away, we wouldn't say Bitcoin no longer has mining, right? So it still has that aspect. But the way that we talk about liquidity mining, the way that it's used in the public discourse is basically synonymous to a subsidy that's basically supposed to create network effects early on. I would agree.

So when I think about liquidity mining, there's actually, I mean, obviously network effect. And basically I would call that growth marketing in the broadest sense. Obviously, they play an important role. But there's also different aims here, right? So basically there's programmatic decentralization to a certain extent. So basically you want a broad distribution of your token and an inclusive governance. And you want, I mean, basically the entire fair launch movement kind of grew out of this.

And you also ideally want close alignment between your own token holders and the people who use your protocol, right? Because, I mean, if you look at the token distribution after the 20s, 17 ICO bubble. A lot of it was just for speculative purposes, despite the fact that almost all of these tokens were branded as utility tokens, but people held them for speculative purposes. Is the core aim for you guys of liquidity mining? Is that growth marketing? Or does it have deeper ideological goals? I think it has two very practical goals. And you basically touched on both of them. The one is always to incentivize kind of the, the provision of some work or service to the network. And that's, and you, you need that early on in two-sided marketplaces. Because the,

like, for example, on compound, you won't get any borrowers unless you have lenders and vice versa. There are no lenders, unless they are borrowers. And that's why it's important early on to bootstrap or to, to, to kind of provide an additional subsidy beyond just that the supply or or the utility that you can already get. But the second is the initial distribution of supply. So you have this kind of fair launch theme, right? So that coins that had a fair launch, fair launch meaning that basically everyone had to pay to acquire the supply

and everyone had to pay the same market price. That's kind of the definition. No one got any coins for free. There's no pre-mine, no VC allocation. That basically, that's the fair launch. and we've seen that again and again that coins that do have a fair launch get assigned a premium by the market.

Those coins are seen as more valuable, their distributions are seen as more fair, more egalitarian. And that's why more and more projects nowadays do it. And that's why you can also see liquidity mining, basically that different projects use liquidity mining in very different ways. If you look at Yern, for example,

you're distributed or also used liquidity mining but basically there there was like the kind of work they incentivized was just to lock up liquidity in a pool that no one can interact with so it's just staking but the staking doesn't serve anyone right so it's completely useless work other maybe that people go to the website and that it builds brand awareness and so on but that's that's an example of a project that completely focused on the second part of liquidity mining, which is to distribute all of the initial supply into the hands of the market. And that's what we ended, right? I think it was two or three weeks. And then 100% of all YFI was already issued. I'd actually be interested in Kane's point on this,

because, I mean, at synthetics, you actually started a fairly early liquidity mining program. So basically, what did you guys hope to achieve with it at the time? I think that, look, there's a lot to unpack there, right? So, you know, I think that the, we can go, we can go into like fair launch and like what that means and like the ideology behind it. But I think there's a practical aspect to it, which is maybe mixed, right? Like there's correlation between fair launches and like very militant, like devoted communities, right? But I think the causation is actually the wealth effect, right? It's, it's the fact that, you know, people who mine Bitcoin in the early days, their cost spaces is zero, right?

The people who liquidity mined Wi-Fi, their cost bases is zero, right? If you can get someone's cost spaces down to zero, everything's upside for them, right? And I think that that, you know, if you look at the projects that survived through the bear market in 2018, you know, at one point the price of SNX was down to 2.5 cents, right? And there are people who are buying it. You know, for every seller there's a buyer, right? And those people are deeply devoted. Their livelihoods, their identities are very strongly tied to those things.

And so I think that liquidity mining enables you to distribute tokens with effectively zero cost faces. You know, there's an opportunity cost, obviously. You know, but I think that that creates maybe more alignment than people kind of realize that there is this, you know, there's an ideology and there's like a, you know, a fair component to it. but I think there's also just like a pure economic incentive component. One inch is a decentralized exchange aggregator that sources liquidity from the top dexes and the AMMs to save you money and time on swaps. One inch finds the best possible trading paths across over 20 supported liquidity protocols and splits them up across multiple market depths.

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We'd like to thank one-inch for their support of the podcast. So could you explain a bit about how did the liquidity mining process work in synthetics? What exactly in the synthetic system was being incentivized? And how did the process work? Yeah, so we needed, we had this like magical like walled garden, right? That, you know, if you were inside of it, you had this cool property where you could take any asset and go from one asset to another. right, with zero slippage. But you had to get in there first, right?

And the problem was the walls were way too high and like there were no doors and it was like you literally couldn't get into the thing, right? And so we came up with this idea within our discord to incentivize the lowest risk pool that we could in Uniswap, which was like the synthetic ETH pool. And, you know, there's very little risk for people in terms of improment loss. and we put incentives in there to essentially allow people to go in and out of that pool. And that was like the most liquid on-ramp. All of a sudden we had a door and people could like go into this magical place, right?

So that was that was really the initial kind of incentive. And then it grew from there. We added different incentives and different structures. So it was like more of a, if there was like incentivizing people, the on-ramp into the synthetic system to allow people to easily acquire the SNX token. No, the actual synthetic assets themselves. Oh, I see. Yeah, it was like you wanted to be able to, you know, convert a synthetic dollar to a synthetic euro, for example, right?

But you needed to get one of them first to start that process going. So we said, well, people have ETH. We've got a synthetic ETH. We'll create a pool that lets people go from ETH to synthetic ETH, and then you can make the next hop to any other asset. I see. I see. Why do it with like synthetic Eith instead of, with SNX, which then could be converted into any of the synthetic assets?

I mean, there were, there were debates about, like, should we incentivize SMX liquidity, what with, the real reason was basically a permanent loss risk, right? Like, the only people that were going to be able to do what were fairly sophisticated about the risks of UNYSwap, you know, we didn't have the masses coming in and providing liquidity in UNYSWP at that point, right? So there was a lot of skepticism around, like, who's going to step up and put S&X and ETH, for example, you know, into un-swap and take on that aisle risk. And 2019 was a different time, right, in terms of what coins had the most liquidity,

because stable coins had like below $5 billion or like even like way less than that of liquidity. And nowadays it's like 20 and 30. So would it would you nowadays incentivize like the SUSD versus USD pools and not ETH for example. Absolutely. And we did when curve came out. You know, we had the S-U-S-D-D-D-D-T pool that was incentivized. Yeah, I think that synthetics is really the exact opposite of yearn, of the example that we gave. Basically, the subsidy said like zero purpose, right, other than distributing supply. And synthetics is like very picky about distributing supply. And you guys do basically like trial runs where you incentivize stuff for two weeks at a time to see how the different agents in the system

react to these incentives. And if they don't react like you want them to, then you basically change the parameters or try something else, right? So that's, I like that a lot. Yeah. So when we say liquidity mining, like, does it have to be something useful that's being incentivized? So would we call the, the urine incentivization or just like this idea of like, you know, of generalized staking, like, you know, when I staked all my tokens in the Yams protocol, was that liquidity mining or is that something like different? And then even when we talk about liquidity mining, does it have to be literally liquidity that we're incentivizing? Or is something like LivePier called liquidity mining? Yeah, I mean, that's why I think yield farming

ironically, you know, kind of took off, right? Because like farming is just like doesn't really mean anything right like so you you know there's a yield in this like you know governance token or protocol token that you're getting for like for farming it which could be literally anything right so i think that's why a lot of people it resonated with right and i remember when it was first kind of coined for me it was like oh yeah like that makes sense like because it's not presuming anything it's just like yield farming it's it's very adaptable yeah and i there wouldn't really be much point for us to come up with any like definitions because we we will have a hard time convincing the rest of the community to adopt them. But it's just a liquidity mining, like mining,

generalized mining, liquidity mining. That's and yield farming, of course, they are all used kind of synonymously. And I mean, if I had to give an attempt, then I think like mining is the act of providing kind of cryptographically verifiable work for another party in the network and that's incentivized by the protocol and then it's basically liquidity mining when the work that you do is providing liquidity and it's yield farming when it's that's basically what the user calls it when it feels like putting money in a bank account and then getting some kind of yield for it. I haven't really seen it used in kind of when the work is not just providing liquidity. Cane can you talk about your experience with synthetic? So basically the people who provide liquidity in the

incentivized pools, do they typically also become, you know, true users in the sense that they interact with the protocol when it's not not incentivized? I think so. And I mean, you know, the interesting thing with the initial yield farming incentives that we had is we weren't directly incentivizing you to interact with the synthetics protocol, right? Like, you had to get synthetic eath, right? So you had to have from somewhere, but you could have just bought it on unyswap. So we were actually incentivizing people to use a uniswap, right? Which is kind of funny when the retroactive unyswap rewards were were dropped on everyone and all these like early SNX people all of a sudden had you know uh hundreds of thousands of dollars worth of uni for just

being around in like 2019 right and you know maybe putting a few thousand dollars with liquidity in there so i think it was it was initially incentivizing people to use unyswap but we got a lot of utility out of people using uniswap and being lps on uniswap that was kind of our on rep and we thought well, we better use this thing. It's going to be huge. Let's kind of, you know, ride on the coattels of that rather than trying to kind of, you know, build our own liquid on ramp or, you know, build our own decks or whatever.

So it was about, you know, leveraging what was there. It's interesting that this kind of this watershed moment for liquidity mining actually happened before liquidity mining went mainstream, like this intellectual watershed moment. Because in Defi, you can incentivize things that happen outside of your, own protocol because you can observe that this thing happened, you know, and it's cryptographically provable, which are different blockchains, different base layer blockchains have a lot of trouble verifying stuff that happened on another blockchain. It's the kind of whole story behind the interoperability phenomenon.

So yeah, that's what I think is the most interesting thing about defy, that you have this one highly composable database where everyone can interact with what everyone else is doing. and liquidity mining is really us experimenting with programming like humans in this kind of composable environment. And it's extremely fascinating. Yeah, I think one of the things that became really interesting was the fact that like all the data on the chain is readable. And so now you have the ability to access any sort of data and like incentivize it in a way that

maybe wasn't possible before. To what extent do you think like AMM? were like very necessary in this liquidity mining. I was pretty excited about this project called Hummingbought that seems like never really took off, but it was basically like incentivizing market making on order book based dexes, but it never really quite took off. Why do you think that was? I mean, you had to run your own infrastructure, right, which just immediately filters out

like 99.9% of people, right? You know, I was, before we jumped on here, I was like, sitting, unplugging and plugging in my DAP note, trying to, like, get my E2 validators up and running and, like, not having the right packages and stuff. Like, if it wasn't for it being E2, there's zero chance that I'm, like, doing,

bothering to do that, right? Like, I just wouldn't be. And so, you know, I'd like the idea of hummingbob, but I think it was too difficult, you know, versus something like uniswapware there was a learning curve like no question especially the early like ux was not amazing but like it's maybe four clicks right like five clicks and all of a sudden you're a market maker maybe not a very smart market maker but you're a market maker and you know you're you're there right so i just think that made it so easy for people who had these assets that were just

sitting there and wallets doing nothing to go well like maybe i should you know I should put them into this pool and get some utility out of them and potentialists with these. Yeah. And for the other side as well, right? So there's a very little point in providing liquidity. So something like Uniswop, when it doesn't generate fees, when the only people training against it are the arbitrages. And then you kind of bleed out from the divergence loss.

So I think like Uniswap and Define generally benefited from this peer two pool model or peer two contractors. It's also sometimes called where like something like Uniswold. always will trade against you when you need it. And that's the kind of building block that a lot of other, like this kind of invisible building block, that's actually the foundation of pretty much everything that's happening in DFI. Because every project is in some shape or form,

depends on being able to liquidate collateral of users, for example. And they all rely on Uniswop in order to get that liquidity when they need it and to be able to liquidate the customer's position. and when you don't have that assurance that in any market condition there is liquidity there, someone will quote you basically liquidity, then these projects wouldn't work. So I think that's basically the invisible foundation for all of Defi. I've been building WordPress websites for over 10 years, and the most frustrating thing has always been DevOps.

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so much easier. To learn more about the WordPress toolkit for C-Panel and be informed when it comes out, go to epicenter.orgs slash C-Panel. That's C-P-A-N-E-L. We'd like to thank C-Panel for their support of the podcast. Shall we talk about the elephant in the room, that being impermanent loss? Anytime you're a liquidity provider on an automated market maker, as a liquidity provider, under what circumstances should I actually provide liquidity given that the underlying assets are volatile? I mean, again, that's kind of why you guys started with S-E's against ETH, right? So what do you think the rational approach is here? I mean, it really depends on the intent of the person, right?

Like there's certain pools where if you've got a lot of one asset, right? And this is where Balancer, I think, helps, right? you know, it makes this a little more palatable, right? And it just opens up the number of people that can like rationally provide liquidity, right, or less irrationally provide liquidity, I guess, maybe. And so, you know, if you've got a lot of an asset and you're willing to sell that asset down continuously, for example, right? And you're not going to just sit there and hold it and hope that in some point in the future, you can liquidate all of it at a better price, right?

you're going to get a continuous price from whatever the ratio is now to whatever the ratio is in the future. And if you have a long time horizon and are comfortable holding both those assets, right? Like let's say, you know, you're holding BAL-Eath, right? So like I'm a BAL-Eth liquidity provider and balancer, right? And I'm very comfortable that balancer is an asset that I'm happy to hold, but I'm also happy to sell some down if the price starts running up. You know, so I'm, and obviously I'm happy to hold ETH. And so I think under those circumstances, it's totally fine to be in there and be in that pool as long as you understand what the tradeoffs are, right? You know, if you're someone who's saying, like, I'm buying, I don't know, ETH today at 500 and I'm planning to sell it at 1,000 and you want to wait till that targets hit and, like, no, you shouldn't be providing liquidity in univiswap.

Like, that's not going to get you that outcome. So, you know, I think it's very specific strategies that you want to be employing. But I think for the average person, it's like, I've got this thing, dump it in there, see what happens. And they don't really think too much about it. Yeah, I don't really have a ton to add to that. I think in general people should be aware what they're buying, when they're buying LP tokens. So structurally, when you put money into an LP liquidity pool, then what we basically say, the two assets that you put in and you buy an IP token.

and well that has very different behavior than just holding the two tokens initially and i thought it was i thought we we could uh there was there was a small chance that this would lead to disaster basically at the height of the the last defy run up when the first sushi swap and then uniswop and then all the copycat started basically everyone to become an LP even those that had never interacted with them before and they these people mostly had no idea what kind of financial product they're buying. They're actually selling volatility, basically. And nobody really told them that. So they were attracted by the allure of the liquidity rewards.

And, but I mean, I think at all, like the rewards turned out to be so big because the demand for these liquidity drugs on the market was so high that no one could have really lost any money there. So, and I guess now a lot of people know how, liquidity provision works and what they're actually buying. So it was a good education in that sense. But just in general, I think it's good if people who want to engage with this know that they're selling volatility. And hence, it is, they should look at the correlation between the two assets that they're putting in. And the more correlated they are to each other on a longer time frame, the better. That's why, I mean, you see that actually in the liquidity mining reward.

which is interesting because that's basically the market telling you what is the cost of putting assets in there so if you want to get a feeling for that just look at the rewards the different unisor pools and different balancer pools pay you and the more you can earn the more basically reward the market demands in order to be in that pool so I thought that's nice way to build intuition yeah that's that's a nice way of putting it can I kind of loop this back into the bigger economy. So basically, you said liquidity mining was so profitable that basically no one could have possibly lost any money. So this is very counterintuitive, you know, coming, you know, from a traditional point of economics. So where did this money

actually come from? Oh, I mean, I should clarify, I guess, what I meant with that one second. Yeah, I definitely lost money. I will say that 100. You know, not, not every time, obviously, but there were some, some cases, you know, based was a really great example, right? I managed to somehow buy like the absolute top, right? So, you know, I was, I was liquidity mining and based. I'd bought it like 200, put it into Pool 2, I think. And I was like, oh, this is going really well.

Like, I'll just, you know, double down. Or I think like 10x down actually is more accurate, probably. And like bought a bunch of base. at like 600 and then got utterly crushed down to like 150 and then capitulated at the bottom and you know it was it was a pretty painful lesson in a permanent loss right like so you know there were other things obviously that that I did pretty well in but you know there were some examples where if you like even I would say somewhat knowing what you're doing you could still get your face ripped off pretty effectively no yeah I should clarify that as can see

said that there were different pools. They had the tend to have different labels. And the pool one is basically, let's say you provide EFTC liquidity and then you get paid rewards for that. And it was it was quite hard to lose on that because the divergence loss relative to fees is very small, if at all. You mostly win without liquidity rewards even. But then there was there was usually a second pool called the pool two. And there you basically, you provided the the project's native token, let's say, based against some other money, let's say, ETH or USDC. And that was basically to provide exit liquidity for the people, like entry and exit

liquidity for those gambling on the project. And the rewards on those were in the thousands of percent per year. But it was also incredibly easy to get wrecked in those pools because it was basically a game of chicken basically when the large holders wanted to exit they could do it through this pool and then a pool would immediately collapse because all the pieces would stay in there they would end up with all of the these native tokens and they would sell off all of their eith or their usDC so yeah it was incredibly easy to get wrecked there and many people did for sure okay so there were definitely pools where basically making money was not a given but on the large a lot of

people got very rich with yield farming. So typically in the, in the, if you don't think at the scale of, you know, nations, money doesn't just appear out of nowhere. So what happened here? Is it, is it a zero-sum game or not? And if not, then where is the excess value coming from? I mean, it comes from the people buying the liquidity tokens on the market, right? I mean, look at curve, for example.

So you get liquidity rewards. in the form of CRV tokens in Curve, if you provide liquidity to their pools. And basically, how high that reward is for you depends almost entirely on how much you can sell the CRV for on the market. And I don't know if you've seen it, but there was the meme that the retail CRV buyers are actually the backbone or the foundation of the entire yield farming hype, right? because someone has to buy these relatively useless tokens at the time anyway. And CRV for a time had a high, I'm fully diluted market camp than Bitcoin even, right?

So that was quite funny. And it has it has collapsed predictably, I think over 90% since then. But so the money is not created from thin air in that sense. It's coming from the people who buy to, who buy these liquidity tokens. Let me dig in there. So basically the liquidity, I mean, basically. basically the tokens that are, for instance, in the case of curve, it's a governance token. And most of these tokens are, right?

So basically, would it be correct to say that in a way, you're buying future equity or future to become a shareholder or, you know, in traditional terms, a shareholder of that project? by buying Curve tokens retail, are you in effect buying a bit of Curve as a project? So basically, in a way, do people actually incentivize with future bits of the project? Yes, but the problem with Curve is like you're the vision fund, right? Buying it like $48 billion valuation when the market, you know, doesn't really believe it, right? And so I think that my sense is there's two sources. One is reflexivity, right? Like these are highly reflexive assets that didn't exist, right?

And people are holding them and believe, and we all believe collectively, like, that there is some value to curve or uniswap or, you know, any one of the like new crop of assets, like yam, et cetera, right, that kind of popped out of nowhere. And as long as there's enough of them and they're sufficiently distributed and, like, sufficiently illiquid that some people are going to hold onto them and feel like they have value, that's where a big portion of this like new money came from, right? And then I think on top of that, you then had the fact that there was kind of energy coming into the system from Bitcoin flowing on to ETH for kind of the first time, right?

like we all of a sudden so all this btc like just crazily flowing from somewhere right like you know it wasn't doing anything sitting in my cracking account i'll tell you that much right and it's now all of my btc's on aetherium so all of that btc flowing in that is suddenly buying things like that purchasing power turned up and i think it was a combination of a few of these different things that kind of created this new value right that previously wasn't i mean it was technically there right because curve existed pre-token and had some value, it was generating fees, right? And all of a sudden there was now just this like tangible liquid-ish representation of what curve was, right, that was tradable. And, you know, you then multiply that by like 20, 30 different projects and you had stuff there all of a sudden.

Yeah, yeah, I would agree. And I would also agree with you, Frederica, that, I mean, it's definitely right to think about these governance tokens, even though they are called governance tokens as a form of pseudo equity. And while it can look like, I mean, the current buyers who are acquiring like CRV and these other tokens at seemingly very high prices, if curve would end up replacing kind of the large Forex exchanges or whatever, then of course that bet can also pay off, right? It's a sort of venture bet.

I think that's the way to think about it. And if it succeeds, then you would have incumbent financial service providers lose and current CRV buyers win. Our friends over at Algarand are starting an office hour series. So every week or two, Algaran will bring together their team, partners and community together for a live discussion intend to provide you with all the answers and resources you need towards building useful, meaningful blockchain applications. By joining office hours, you'll learn how to get started with command line tools and use the SDK and rest. APIs to help you build applications for use cases like crowdfunding, asset tokenization, supply chain management, and gaming applications. Each office hour will start with a theme, for example, smart contracts or writing contracts

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podcast. So so far we mentioned the idea that like AMMs were important for like the rise of liquidity mining. A couple weeks ago, we had SPF on the show. And his claim was that, like, you know, a lot of the incentive was the other way as well, that AMMs only took off because there was this giant amount of, like, liquidity mining that was incentivizing people to provide liquidity and that they probably wouldn't have otherwise. How valid do you see this claim? I mean, it's not a very credible claim. Like, the data doesn't support. I mean, I guess, it depends, right, on what your metric is, like how much volume, how much liquidity. But I mean, even curve, right? There were no incentives for curve, you know, and there were two, 300 million in liquidity

that was, you know, in curve because it was generating fees. Like, it was the best yielding thing. Pre, like, the crazy, you know, yield farming. Like, it was the best yielding, you know, location for your stable coins. Like, it was the only yielding location for your stable coins. It was the only place where you could put your stable coins in fairly comfortably risk adjust to the yield was amazing um you know so like that's been kind of washed out with like the these you know massive returns from uh from seniorage but like that was a good thing and it made sense and it was tangible it was real yeah and the week the week before sushi sushi swap even launched which was the first um big scale liquidity subsidy for

AMMs. Uniswap made headlines in mainstream media because it actually surpassed Coinbase in transaction volume, right? So that was before any liquidity subsidies. So I think it definitely helped to I mean make it even more

liquid, even in some pairs where the traditional exchanges were dominant up until that point. But in general, I think the rise of AMMs was unstoppable even before that. And second, I think it's also an unfair comparison because you really like if you start a traditional exchange like FTX, then you raise venture capital typically or what they did is they sold a token and raised hundreds of millions of dollars from well from the market basically and then that flowed back into their market making operations. But usually when you when you start like starting a traditional exchange is very difficult.

It has the same problems of bootstrapping liquidity. You won't get any takers unless they make us. So they all start out either by making markets on their own exchange or, and I mean, a lot of exchanges get super wrecked making markets on their own exchange because market making is very, very difficult. And what you, this is like, when you're making markets in a poor way on your own exchange, what happens is you attract the smart take. who will pick you off whenever you're quoting some like a wrong price and you will bleed out hundreds of millions of dollars over the first years of your operation. So what they tend to do is they take that the money that they raised and they incentivize basically market making by professional market making firms. And they also pay. So this is just the same. This is just they pay liquidity rewards for market makers. So it would be really unfair to to say, well, AMMs only took off because of liquidity.

mining because they they use the kind of subsidies to attract market makers while order book based exchanges do the exact same thing and nobody talks about it. So I mean, either we accept it in both or I mean, you would see none of these large

exchanges if they would give maker rebates. That's a very good point. But how sticky do you think the liquidity provision is? Sushi swap for the liquidity from UNISWAP and then they kind of forked it back. And then Uniswap kind of upgraded to V2. And basically, I mean, all of them,

a lot of the liquidity kind of migrated incredibly quickly. So what's the sticky part here, actually? I mean, is it the brand Uniswap or is it, I mean, it can't be the contract, right? I think if you take a step back, right, the stickiness is in the market itself. Regardless of which contract it's in, there are people with assets willing to provide liquidity regardless of whether it's in sushi swap or a curve or unyswap or whatever, right? So I think when people look at it and go, oh, well, it went from here to here to here and it's bouncing around, like those people are optimizing for the best yield they can get at that time. But they have bought into the idea that providing liquidity, being an LP in an AMM is a thing, right?

So some AMM liquidity is going to exist. It's kind of created this network effect, which I don't think is going anywhere. Yeah, and I think this touches on a very important question, which is what are we actually incentivizing? I mean, and this is what synthetics is so good at, in my view, because they only incentivize liquidity when they have actually a thesis that they want to invalidate and they know exactly what they want to test. But when you create this large-scale incentives for market makers in like Unisop, for example, or sushi swap, it doesn't seem as focused. It's like what is the, I mean, so in my opinion, what they should incentivize is basically incentivized to own the customer, like a focus on owning the customer.

I think that is the thing that is actually sticky, like the users who go to to the Uniswop app and to then take basically their business there because we know that for the LPs themselves, they can switch with the click of a button, right? but it's the users who are more sticky and it's not sure yet that a system like Uniswap or like Sushi Swap that they can own any customers long term or if basically the customer will be entirely owned

by aggregators like one inch or matcha who basically just search the market for the best route and then the route the users order through there and they are the ones charging them then all the fees on top of it. Or maybe if it goes even a step further than that, if it will be MetaMask or Argent wallet or Coinbase wallet who will end up owning the customer.

So we have no idea yet at this part of the market cycle, in my opinion. So it could be that like all of this liquidity incentivization will be for naught in the end in AMMs. I think that's entirely possible. So, Kane, at the beginning of the episode, you mentioned that like, you know, liquidity mining is most useful when you're trying to, like, create a network effect. So how do you explain this sort of like uni token where it's like, you know, Unisop clearly within the DFI space has already such a strong network effect.

What was the point of introducing liquidity mining there? I mean, it was pretty obviously a reaction, right? You know, I think there would. I think there would, was there was an intent at some point to deploy a token. And like, I'm maybe the most out there person that I know of in terms of like, you know, and have been for a long time in terms of like token maximism, right? Like, I believe that tokens are inherently valuable. And I think the design space of tokens and using them as coordination mechanisms, we're not even like close to having exporter. Right. I think that there's so much more that we can. we can do around like coordinating, you know, behavior.

And so when we look at UniSomp and say like, okay, was it that effective? Like is it kind of wasting like probably, honestly. Like if I have to, you know, be totally honest, I think it is. But it's also distributing the token and someone needs to decide whether they want to hold it or not. And therefore what they will, what they will do, right? Like there's some long term alignment in terms of people who are holding Uni tokens. So, I mean, what you needed interestingly that a lot of the other liquidity mining programs didn't do is they did this backward distribution, right? So basically anyone who kind of was a regular and possibly even privacy conscious uniswap user, you know, over the past year or so got a lot of uni tokens.

So don't you think that the way that Uniswap actually did the distribution? kind of targeted an organic distribution of the uni tokens among the users more than the forward usage? I mean, I think it was kind of a second order effect, right? I don't know if it was the primary goal to do that or not. What I will say, though, is that it did what I had kind of described earlier, right, which was established for a ton of people, a zero cost base on their uni. holding, right? So of course some people, you know, if you give them selling for free, you got to dump it,

of course, right? You know, but the market was pretty happy to kind of absorb that selling. And we found them equilibrium fairly quickly. And we're now in a position where there's a lot of people who are still holding those uni tokens that are very bought in, you know, to the project. The one issue I think that Unisop has is because the token is so new, they haven't had a chance to kind of get that community in the way that like some of the other projects out there have, like a, you know, an Ave or, you know, there's a bunch of examples like, you know, where the token's been around long enough that a community's kind of formed. Like, there's a lot of the users out there.

But if you go into the, I mean, I remember being in the Unisop Discord and just being like, this is fucking incomprehensible what these guys are talking about, right? Like there are a bunch of engineers in there and it was very smart people talking about very hard problems. And I thought it was cool, but it was like way above my pay break, right? I don't think that there were that many, uh, people in there that were like talking about like usability or like excited about the project like from a user perspective. And I don't think that community has ever really kind of emerged, like even from what I've

seen, uh, you know, today. So at some point that needs to happen if Uniswap is going to have like a, you know, user driven, community driven brand awareness and growth. mechanism and I just don't think it has that now. It's getting away without it, but it would be far more beneficial if it had it. Yeah, that's one of the main benefits of a token, right?

In my opinion, that it crystallizes community. There's way less just incentive to engage in a community that doesn't have a token because you're not financially invested in it. Whereas with projects that do have a token and there has this kind of double

incentive to be part of that community. We could talk about as well about the retroactive distribution of uniswap. So I think that goes back to the two goals for liquidity mining, which is one, distributing the initial supply. And second is to basically incentivize future behavior. And you're totally right that if you retroactively distribute tokens, like what's that going to do for behavior of people in the future, at least not in a very direct way?

But I mean, the second aspect is also important. And if you think about what happens every time when you say, okay, the people with the biggest pockets get all of the tokens in a highly predictable way, then you always get the same outcome. It's the same three to four firms that own 90% of your tokens. We've seen this with many projects. And I mean, most people don't really notice that, right? But it's true. That's why projects are looking for ways to distribute some tokens. is also in a way that is not

but just the amount of capital that you have is not the only factor that is looked at but other factors are so hard to to do like in a non-gamable way and the only way like the way that UNISOP did it which was very elegant is to look at

something that has already happened because then it cannot be gamed anymore and giving it away to these early adopters I thought was a great way that I would think that some other projects will probably copy in in some small way at least. So in a way, Uniswap actually did a 180, right?

So basically, I mean, they were always this community darling. And then I know a lot of people who personally would have loved to invest into Uniswap. But instead, they actually went the VC route. And then kind of after the entire sushi thing happened and their liquidity was forked, they kind of came up with this Uni token and gave it out to the community. Do you think that was, I mean, obviously that can't have been intended, or at least that's my son said it probably wasn't intended from the get-go. Do you think this will kind of put an end to these VC offerings of, you know,

fairly established projects in the space? Do you think, I mean, Kane, we all know that you're a token maximalist, but do you think, I mean, UNI could have, UNISOP could have done a token earlier, right? instead of going to VCs. Do you think we'll see that more and more? I think the reason why they didn't do a token is not because it was a choice between VCs and selling a token, right? I think it was anti-token rhetoric that it like infected the core Ethereum community, of which, you know, Hayden was paying a lot of attention to, right? there were a lot of people within the community that had very deep distaste for what happened in 2017, right?

And even all the way going back to 2016, right? Like this idea that if you had, you know, created a token, ever read the ERC 20 contract, whatever, like, you know, if you'd even come within, you know, 100 feet of it, there was some kind of like black mark against your name, right? And that was, like, deeply embedded in the community for a while, which was this just very visceral reaction. to the craziness of the ICU boom. And I think it overcorrected massively. And I think had that not happened, Hayden probably would have been much more open to doing a token. And maybe it would have been like VCs and, you know, a token in parallel or something

like that. But there was very clear and obvious anti-token kind of stance from a lot of projects at the time, right? And they would even come out. And I don't think Hayden did this, right? But like a lot of people would come out and like, you know, even, you know, use it as like oh we didn't do a token right let go to their website and like the first fucking line is like we didn't sell a token we never did an ICO like that was like uh you know

like a rallying cry like for a long time right in the community and i just think that was misguided i think it just it was not really uh you know beneficial in the end it was an over correction i think that there's um that's kind of you have a market cycle within the market cycle in crypto and acceptance for tokens is definitely one of them. So everything needed a token, even stuff that really doesn't need a token, 2016, 17. And then now we, I feel like we are maybe a bit overcorrecting the other direction right now. So right now, like everything that can have a token, should have a token, even if it maybe doesn't make sense. Like, you see this with governance, right? So governance is not just, I mean,

I mean, governance is used as an excuse right now to launch tokens when the governance is really not something good for the project, but it's more of an attack vector than actually is maybe necessary for the project to work. I mean, on something that compound, right, you could argue that there needs to be someone who sets the safe collateral limits, who can add new tokens, like approve them and tune the interest curve and whatnot. Turin, right? That should be Turin just sitting in his ivory tower, just tweaking all the components. Yeah, exactly. I think that's where they're going, right?

It's parameterized tuning as a service, right? And then get paid in kind of tokens of fees. Very interesting business model. But yeah, I mean, you can have other projects. I mean, for UNISO definitely, you can argue that a token has a lot of benefits to them in terms of crystallizing community. but like what is really the benefit beyond that, right? Luckily, we haven't really seen any big take down of project with governance tokens

where they're kind of rogue approved some kind of dramatic change and store customer funds. I mean, we could have seen it with Maker where anyone could have, like, I think it was like 4% of the total MKR supply. That would have been enough to stake them on a new executive contract. And that contract could have paid a billion. million dollars to have the hacker, right? And, and now a bit later, we saw that the maker approval was actually a maker proposal was approved with a flash loan. So we kind of saw the first interaction between those two concepts. And I think we are getting like we are getting, we will get to a point

where the community starts to see governance token as a risk vector again. And then we might see a correction in the other direction again, in my opinion. What are some projects right now that you think would most benefit from some sort of liquidity mining system that maybe don't have it now? Tornado cash? I mean, yeah, anyway, that's a long story. We've been talking about that with the two Romans for a long time. And I think it will get one.

you know, and I think they maybe in the early days fell into that same, you know, anti-token mindset a little bit, you know, and I don't think you need, you don't need a token to build a project, clearly, right? And you don't even necessarily need a token to govern a project. I mean, even with us, right, like our recent governance moves, the fact that we're not even using the token as the waiting for governance anymore. We're actually using your percentage of the debt pool that you represent, right? Which doesn't even really, like, necessitate a token at all. Like, we could have another form of collateral and then be weighting it against the debt pool.

And, you know, so there's other, I mean, this goes back to the point, you know, that I think you made something about, like, you can read anything. Like, we can, we could use, like, your unyswap holding as, like, our governments, right? If we want it to, like, you know, if you're a unyswap LP, you can come and govern synthetics. Like, there's nothing stopping us from doing, like, any arbitrary, uh, kind of, you know, read, um, within the, the Ethereum state and then using that as governance, right? So I think you can still govern the thing. It's just a question of like, is the incentive alignment going to be right there? If we're using uniswap LPs to govern synthetics, like, is there any, you know, misalignment

there? And I think in some cases, yes, in some cases maybe no. I give another answer. So what project would benefit most from liquidity mining and i would say the lightning network for bitcoin and really any layer too right you have the same problem on ethereum and you're going to have this problem with optimism um and other chains any layer two is basically a blockchain of its own and um starts with zero network effect and so i think um you will see liquidity mining there in order to basically bootstrap the network effect. And I'm way more optimistic that optimism will succeed with that than the Lightning Network will because of this aversion against tokens.

That's very unfortunate. I just went down like a micro-rabbit hole there for a second. Like I feel like if you did try to propose some protocol incentives to the Lightning Network, A, it would be contentious. everything's contentious, it's Bitcoin, right? But B, you would need to, like, it would end up with some, like, contentious hard fork, right? Where, like, one version actually incentivized Lightning Network and the other one, you know, like big block, small block kind of, you know, internecing battle, right?

And, like, I think maybe ironically, the, like, lightning network incentivized version of Bitcoin that, like, pays out, like, you know, BTC level, you know, block rewards to the Lightning Network could actually be more successful. Yeah, I mean, I'm not sure it would lead to a fork. The interesting thing is you could do it in a way that doesn't break the Lightning Network. I mean, if you would have a second form of channel that pays out future equity in its routing fees to people who wrote like money through it today or whatever. I mean, that could exist in theory, right? And anyone could interact with it without partaking in the liquidity mining itself.

So I mean, but the reason that we don't see this is, of course, because of the huge social barrier against entertaining any form of token in the Bitcoin community. So I don't think really it's the technical hurdles or it's even the threat of a hard fork. It's purely like the kind of social pressure on anyone entertaining these ideas. It is possible to have the source of the liquidity mining incentives be from something other than. the base protocol or like the lead development team. Not for Lightning Network. I was like once a couple of months ago, considering trying to build some something for interledger to do exactly this.

Like how do we create incentives for people to participate in the interleger network? Or even like before the UniToken was launched, there was this like short-lived project called Uni Dow, which was like, it was just like reaction to the sushi swap where they were like, oh, let's air drop tokens to all the uniswap LPs. And they asked me to be a multi-sig signer for that. So I'm like, sure, I wasn't involved too much otherwise. But like, so far we haven't seen one of these like really take off where like all the

liquidity mining has always come from the protocol or from the lead development team. But do you think we will see some successful ones from other sources eventually? It's a very interesting question for sure. I mean, in theory, we have this huge developer funding. system or builder on Bitcoin, right? That's very mature. You have a lot of grant giving institutions and in theory nothing prevents these same institutions to incentivize liquidity on the night network. If they think that's the best thing to make Bitcoin grow, you don't necessarily have to pay developers. You can also pay liquidity providers. I think that's totally viable.

I don't think we'll see it in Bitcoin, but in general, I could imagine like, for example, the Ethereum Foundation or any kind of other foundation could also do this kind of incentivized these kind of programs. In a way, if you think about it, Sushi Swap for a while, it was basically incentivizing liquidity on Uniswap. Yes. Totally right, yeah. I think when there's like a power vacuum, right?

Like when there's no clear intent to kind of step in, that's when the opportunity arises for someone to say, well, if it's not going to coordinate itself, then we'll create this new coordination mechanism that maybe exists outside of like whatever the core team or project or, you know, and go and do it on their behalf, right? Like, there's nothing stopping anyone from doing something like that. So, you know, it's certainly possible in the future if there's protocols that aren't doing much for that to happen. And so far, we have only talked about things that benefit a protocol, right? at least in like you can incentivize liquidity in something like unisorb to drive more liquidity to it but then we saw sushi swap which was the first instance the first instance of okay let's create liquidity

to take something away from someone else and i mean this always kind of exists right um you probably saw tarun's paper saying that like proof of stake always competes with the yield is provided by defy for example right so and if defy is a very high then proof of stake system could have very little money staked and therefore be very insecure as a base layer but so that just goes to show that like liquidity always competes with each other on on even like global scale but sushi so shesher was a very direct attack on the on the liquidity of unisrop to pull that over but i mean ultimately nothing would stop let's say like a nation state to to incentivize miners, for example, to join the mining pool.

And that mining pool sends us basically non-whitelisted transactions or whatever. So that is the word of basically this new era we are in, right, where anyone can create the incentive for anything in a permissionless way. And we are barely scratching, I think, the surface of that. And there are some very scary, some very scary possibilities there. Are there any good examples of liquidity mining sort of being done in pre-blockchain systems? I mean, I think a lot of the growth happening. You know, I remember, I don't know what year it was, like in the late 2000s, reading the Andrew Chen, like, growth hacking ebook, right, that he released for free.

and like some of the example like that was mind-blowing for me right like at that time to to read that because some of the examples were like so ingenious right like you know the example of like Airbnb injecting their like you know basically tapping into the craigs list not even like an API there at the time but like into their like front end flow right to to you know post listings right and so they like basically were it was like create this weird like overlay on top of Craigslist that would allow anyone to just cross post their Airbnb listing to Craigslist right which obviously had much bigger network effects like that actually pulled that like Craigslist was getting value out of people paying you know to

or like from you know, uh, add impressions or whatever paying to view that content right. Those, uh, and it was one of the big like categories within Craigslist right. And all of a sudden there was this like parasitic entity that, uh, that, you know, pulled. And then, like, obviously, did. Like, you know, Craigslist, I don't think has, you know, for, I mean, maybe, like, for rentals, right? But, like, short-term rentals, I think that game is up, right? So I think there are examples where, you know, if something is not well defended,

people can turn up and siphon off, in this case, like, rental liquidity. I don't know. I don't know exactly what the best term is for it. But, like, and I think a number of the other examples were very not nefarious, but certainly a little bit underhanded, right? Like taking advantage of someone who was like slow moving and not really paying attention what was going on. They were a startup, they were fast, they had the tech,

and they built some cool things to just inject themselves into this flow of some other larger lumbering beasts like Craigslist and you siphon off their users or attention or money or whatever. Yeah, I guess depending on how you define liquidity mining, you can find examples that go back to the beginning of time. I think one thing that basically the blockchain has enabled or has upgraded liquidity mining in that sense is that a lot of things that can be now cryptographically verified,

that that the work actually happened. And that often enables the work itself to be done in a permissionless way and by anyone in the world without having to KYC and so on. So that I think is it kind of puts these kind of liquidity incentives into, it globalizes them and democratizes them in the way. I feel like another piece was like, you know, oftentimes past the quitting incentives, it's very easy or it's easier for like companies to air drop like dollars to users, but like air dropping their own companies shares is like not really feasible in a traditional world.

Yeah, totally. It's kind of frown upon. Yeah. Do you think there's going to be an increase in more traditional companies doing this? Like I don't know if you guys saw the Snapchat announcement where they like. are giving away like a million dollars a year for like the top snaps on their platform and stuff. Well, a million dollars is still not equity, right?

I mean, you're still not an owner of the business. So which company was it a few days ago that asked to IPO with security tokens? I'm not sure, but I read some proposal like that. I mean, ultimately, I think you would see a lot of equity exists on a blockchain. And I think once you're there, then it will be way easier to, distribute these shares as well to like users of that blockchain. I think you will see a convergence between the two worlds. Is the typical defy user not a lot more risk taking than the average human?

I mean, do you think the same mechanisms will work on average Joe than did on Defy Joe? I think so. I mean, it really, you know, it depends. I guess the longer term incentive of owning like some aspect of the thing, right? Like, you know, if you think about, you know, a lot of marketplace network effects, right? Like, you know, things like, you know, Amazon, et cetera, when when the third party marketplaces were launched, it was really hard to get people to participate because, you know, there was this idea that there was cannibalization, right?

like they were just going to cannibalize their own revenue from their direct business or whatever. I think you could temper that concern significantly by saying, well, you're going to have, you know, if you participate in this new marketplace that we're setting up, you will have some longer term ownership of it, right? But I feel like there's someone who's running a business who kind of understands what the potential value of that is versus like an end user. It's maybe a little bit harder to, you know, I don't think deep. users or like end users in the sense that we would normally describe them, right?

Like they're a little bit more involved in the process. So I don't know is the honest answer, like whether that will extend to like everyone, everywhere. But it's certainly worth trying. Let's see. You could see it in a way even as, you know, some sort of antitrust action, right? Because if you look at traditional marketplaces, I mean, there's always a natural a monopoly that emerges. If you say, look, there is a monopoly and we kind of accept that,

but it's not going to be a company. It's going to be a DAO or it's going to be, you know, the users as a group. Then obviously having a monopoly is way less concerning than it would otherwise be. And I think there's another critical component to it as well, which is like barriers to entry. So, you know, if you have an incumbent that has a pseudo monopoly or whatever that's a Dow, right, and doesn't have the ability to coordinate, institute some sort of regulatory capture such that their, you know, poor position in the market is maintained through, you know, some like extra market activity, right?

Like that's outside of, you know, just operating and being efficient, then I think it's okay, right? If the Dow, you know, captures the U.S. government and, you know, has a bunch of senators or whatever. in their pocket, then I think it's equally bad, right? Like, we don't want inefficient markets, even if they're owned by everyone. I think that's still like a net negative outcome for everyone. I think it's my theory that we go to, I mean, we're talking a lot about breaking up

monopolies right now and decentralizing the world, but I think that crypto can also have the opposite effect because of how much more difficult it is to capture value in crypto. And I think this will lead to there being even fewer, even larger when us who then emerge, right? So I think crypto is all about networks and network effect. And I think we could see like something like crypto could have the effect that like we replace like three large companies with one huge network. Right. And that will be a monopoly of its own then. But I think the switching cost is so low, right?

And this is, I think, the critical thing. like provided the switching costs to go from uniswop to sushi swap if sushi swap is able to come in and uh you know create a slight tweak to the uniswap model that is much more efficient and everyone can switch very easily and coordinating it is is not hard then i think it's okay i think that's fine like then you just have you know this chain of behemoth decentralized entities that like constantly are getting replaced i think that's actually an okay outcome Yeah, that will be a fascinating outcome for sure. I think that that's the big promise, right, of crypto is to lower the exit cost for the user,

create more competition by being open source and forcable and having these, anyone being able to bootstrap incentives basically from thin air, right? In traditional markets, you have to have access to capital upfront from some kind of venture venture fund or whatever in order to even compete with an incumbent business. But in crypto, you can, like so far at least, you can just create your own token and say, hey, this basically stands for any future revenue we generate and then let price discovery run. And very often these tokens will then be regarded very highly by the market. And so it definitely lowers the barrier to entry for competing in the market.

And it lowers the barrier to exit for the user, which is in both cases very good. I think this is actually quite a nice note to end on. It's a, you know, a good outlook. So Kane and Hazu, thank you both for coming on so much. It was fascinating. Thank you. It was really fun. Thank you.

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