Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - The Far Future in Front of Us

Episode Date: May 2, 2016

As the blockchain field continues evolving rapidly, Sebastien, Meher and Brian take some time to discuss the current environment and the longer term implications of blockchains. We discussed how smart contracts could affect the pace of innovation and the competitiveness of industries. We also talked about the role DAOs will play and what we can take away from the current DAO crowdsale and its connection with Slock.it. Topics covered in this episode: How companies running on smart contracts could impact the pace and cost of innovation A smart contract-based insurance example Why smart contracts and blockchains will challenge our understanding of organizations The current state of DAOs Slock.it and the DAO crowdsale Episode links: Maciej Olpinski's Blog Slock.it The DAO EB108 - The Big Chain Powwow This episode is hosted by Brian Fabian Crain, Meher Roy and Sébastien Couture. Show notes and listening options: epicenter.tv/129

This is Episinter Bitcoin episode 129. Hi, welcome to yet another edition of Epicenter Bitcoin, the show which talks about the technologies project and people driving decentralization and the global cryptocurrency revolution. My name is Sebast Nick Wuchio. And my name is Brian Fabin Krain. So yes, that's right. It's the three of us. Back together again, we've done, I do know how many episodes we've done together. We definitely did one sort of state of blockchain, which I think might have been at the end of last year.

I think so. Yeah, it was right before, yeah, it was right before New Year's, I think. Yeah, yeah. So we're doing that again. We wanted to do a quarterly, a little bit less now. Now, this is going to be somewhat different than last time in that we'll talk also about our expectations, about the future, some ideas about where this is all leading that go beyond just looking the next six months,

but thinking a few years ahead. And then what I'm also really looking forward to is that. Meher, who's the man on top of everything going on, especially all the crowd sales and stuff. He's going to speak a bit about Slokit, so we're going to discuss that and their crowd sale or not their crowd sale. So, yeah, I'm sure many people are curious about that, and I look forward to that as well. So with that out of the way, I wanted to kind of introduce to the first topic we have here, which is an idea that has been on my mind for a while

because it's easy when you sort of work on in this industry and you know work on blockchains and stuff you know you tend to think what's possible in six months is possible in the year but if you think a bit further out right if you think of what's what's what are the effects going to be in 10 years it's quite interesting and and one of the ways that one of the things that I think will happen and one of the ways I've been phrasing it

is that this concept of open source business. So let me explain that. Of course, we all are familiar with open source software, right? So, for example, open source, you know, web development platforms. It used to be very expensive to start a website. You used to be expensive to start online shop. And today that's very cheap. You can sort of get it out of a box, set it up, and go.

So starting some businesses has been, become super cheap, where in the past, you know, you had to buy servers and custom software and database, et cetera, et cetera, which could have cost millions of dollars just to start up. But if you look at organizations today, this sort of technology components, be it databases or websites and stuff like that, is just one small part of their costs. A lot of it are as other things such as HR processes, compliance, accounting, auditing, and all the kind of internal logic processes that run an organization. And those haven't really been affected in the same way by something of open source.

But if now what's going to happen is that we will implement some of these processes using smart contracts. So that really the core processes, decision processes and logic of an organization could be, done using smart contracts. And then let's say that gets open sourced. So an example could be an insurance company. So you have to all the core logic of an insurance company, how our claims managed, what happens when this happens in these conditions. Like you implement all of that using smart contracts, you open source that. And all of a sudden, the cost of creating, for example, a new insurance company has shrunk maybe by 95% right. So maybe in the past it would cost you, let's say, $100 million and it take five years to create a new, you know, sort of regular full-scale insurance company.

And maybe then you have all that logic. I mean, you still need to do something. So you need to hire and a lawyer incorporate, maybe deploy this, do some marketing and stuff. But maybe instead of taking five years, it's going to take you five months. Maybe instead of $100 million, it will cost you $1 million. And maybe for other types of businesses, you could have similar. kind of cost savings. So I mean, that's a really interesting idea.

I think even for some of the costs like hiring a lawyer, similarly, a lot of that is going to shrink in costs as well. And so what are some of the effects of that? So, you know, for example, you can think of that there's going to be a massive increase in competition. You can also, another way to think about it is in terms of the pace of innovation. Because let's say now I, the insurance company I run, I didn't design it myself, right? All the core logic processes, basically it's some open source project that I just pulled and implemented. And now if people contribute to the open source process, new innovations, new ways of working,

I can implement those in my own company at an extremely rapid pace, right? It could essentially be sort of, you know, pull the changes and implement them, which, of course, could mean that you have maybe 100 different companies that use the same code that innovate at an extremely rapid pace all over the world. Whereas you will have those companies built an old way, they wouldn't be able to do that at all. They would have to sort of finance all their innovations internally as opposed to kind of benefiting from the innovation that's happening with the public open source code.

I think these are interesting ideas and I think they really could mean some extremely radical change yeah so this is this is one of the things but I'm curious what are your thoughts on this I mean we can go ahead and look at the insurance

idea you mentioned with an example like let's let's say let's take one of the simplest examples of insurances which is like insurance against delays in flight. So we want to, let's say the three of us, we want to start a company that insures people against delays in flights.

If their flight gets delayed by more than four hours for whatever reason, they get a certain amount of money else for each flight they want to buy insurance for, they pay us a premium. So walk us through Brian off about how we would manage all our business processes using blockchain. like how we would do, you know, how we would sell our insurance, how we would do claims management, like when people are claiming us to pay something, how we would do that, and then tell us how we would do marketing. So we have a good vision of the way you see these companies being formed.

I kind of think of it like this, right? So now if you talk about something like claims management, if an insurance company is created today, they'll have to think about what does claims management look like, right? So they'll maybe hire some old insurance executive people who know that, and they'll have to set up this process. And it's essentially, you know, some inputs, something happens, and then there's some output, right? So inputs could be data such as flight data or customer data,

and then some process happens that determines, you know, for example, is there a claim to be paid out or not? and then the output could be a payment made. So we would have to think through now, how does that work? We would have to design those things from scratch. And then I think if you had a sort of smart contract-based insurance company, and I think the important thing here is not even that the whole thing lives on a blockchain. It could live on a block.

But the whole thing is that the core processes are implemented using a blockchain, using smart contracts. You can essentially pull that and then of course you can have automated data fees such as flight things and stuff and some of the stuff would be the same as the same as the day, for example, marketing, right? Wouldn't really change. So I guess my point, in a way,

blockchains is not even the most important part here. I think the most important part here is the ability to express a huge range of a company's processes in code. So you could potentially have a similar thing without blockchains and spark contracts, right? You could have somebody creating some software that runs, let's say, a flight insurance company, and it's open source that, and then, you know,

Meher, you could go and you could do this in another country in another continent, and you could have similar, provide benefit from similar advantages and cost savings. But I think what's different and what's particular about smart contracts is that people actually try to do this now. People are actually trying to take core business processes and implement in block in code,

which is something I think they didn't try to do before. So I think to some extent it's also this kind of mindset shift that's at the core here. So what you're saying is that the advent of blockchain technology, I mean, people could have done this before. People could have written the code to run an insurance company or the code to run a bank or any type of business and have that business logic open source and be sort of public and a public good in a sense, which is what open source technology is in a sense. But now since we have smart contracts, it's shifted the mindset. and people are now looking at how they can automate a lot of these things using blockchains. Yeah, exactly.

And there is a reason why this is happening now. And it's that before people probably would have been very hesitant to say, okay, let's take the core processes and implement via code because what if there's something wrong? What if, you know, there's an error? and then this is not just something that doesn't work on a website, but you know, core functions could go wrong.

And of course, with blockchains, if you can run this in a shared way, well, maybe you can pull in the auditing companies that they run a node and they see and they can certify that and it can be shared across stakeholders and all, so you can

have that assurance so that you can say, okay, we're comfortable now taking these core processes and actually automating them, running them by our code. And of course, the other thing is also if some of these processes involve various stakeholders, again, in the past, it might have been difficult to convince people then to automate them because they'll be like, well, who runs it now if there's different parties involved? And with smart contracts, you can kind of do that.

Yeah, I think that adds to the, so there's an incentive now because there's an incentive because you can run this code in a decentralized way where everybody is coming to consensus on the code that's being written so that we eliminate any type of errors or mistakes that may happen. And I think there's also just the incentive that your competitors are doing it

and your boss is telling you to look into it. So there's that incentive as well. So stating that a bit differently. Today, when you have an organization, that might be, say, an insurance company making insurance on flight delays. There are business processes, meaning there are a certain set of steps that the business takes to evaluate any particular claim. And these processes might be happening in, let's say, for lack of a better word, in an analog way. Which means the claim comes in into their, say, SAP system, something.

somewhere and then there are a set of people who review it, who then send emails to other people to review it, and then on an email thread, like when certain amount of people review it, then it gets sent to the accounting department, the accounting department, then disburses the money. Something like that, right? So there's a set of process that you go through and then followed by a conclusion. Now what you could do in a smart contract is... basically say that the claim comes in, maybe on IPFS as a transparent document.

And then all of these people who are supposed to evaluate that claim need to approve and sign it with their digital signature, send it to the smart contract. And once a certain number of signatures are accumulated, the smart contract automatically disburses it, disburses the money to the person who was making that claim. So you made this whole chain of processes that today might run in a thread of email. emails run rather on a blockchain and anyone can follow this, these, these, these, let's say, internal threads as to what really happened and why a particular claim was accepted or rejected, right? Now, I think like for me, for me the questions are mostly twofold. One question is, do companies really want that level of transparency?

Like is there is there going to be some sort of loss of competitive advantage because of this transparency? Second thing is one of the advantages of building a company or an insurance business transparently on the blockchain is that other people can come in to a company and contribute something and be paid for it. So it's more inclusive in a way to people who might be in different jurisdictions and who might want to extend your business in say a different country. So, I think that's the advantage of openness and the disadvantage is that everything is so transparent, so competitive advantage is lost. So do you think, Brian, that there are going to be particular businesses that flourish in this model and some others that don't? But you don't necessarily have to make it all public, right? So there could be a blockchain that's just run internally with the company and maybe, let's say, there's some auditing companies that also participate. in running that. So in this example, right, you probably wouldn't want to have that on a public

blockchain because let's say now claims are being processed. I can see whose signature is processing my claim. You know, maybe there's all kinds of, I could contact it, figure out their identity, maybe, you know, there's a lot of issues with that. So I don't think this kind of thing will generally be run on a regular blockchain. It might, for some instances, right? So I think you will have kind of insurance type things on Ethereum and blockchains like that. But what I mean more is that, and I think this remains to be seen whether that's actually going to happen, but you could imagine that the insurance company is going to be, as before, essentially, doing this in a way that's not transparent, not visible, but it's still being done using smart

contract. And it's, I think it's a very open question whether this actually makes sense or not. Whether the benefits there outweigh the, you know, all the cost of implementing that and operating that. I'm not sure. But maybe, right? And if it did, then I think that could change a lot of things. Also, because it gives sort of like a general framework of handling these processes. Like what you've described is a good example, right? So you have that claim, which is some sort of like object on a blockchain. And then there's sort of its state, which is like, where is it in that process of claims management, right? Like, and you're right, and some people would look at it, maybe certify something, sign it with the digital signature,

it's like a state change on that blockchain, right? So it's like a general paradigm of how this is done. And having even that kind of standardization of processes might be very interesting because then it could become much easier to say, okay, there is a way this is done generally. So I can just take that instead of building it from scratch. Yeah, I mean, much like in web technologies, you have standardization of practices and processes and the way you transact data. You could potentially have the same type of standardization and say the insurance market. I think that's a really good observation. What do you guys think about how all these things we've been talking about since a while ago might have an impact on, you know, on consumer experience? So everything that

we're describing so far is it's mainly, you know, back in infrastructure, implementing an insurance company as a smart contract or as an open source package that you just install and run. How do you think this might influence the way that us consumers subscribe to insurance staying in the insurance example, of course, subscribe, pay for it, get insurance benefits paid back. I mean, I guess in the end, right, for a lot of this stuff to really go to its logical conclusion, you kind of require that people have private keys that they sign things with. Maybe you don't absolutely need it, right? you could still have a web interface where people like enter their stuff and like maybe there's

maybe the smart contracts are just used sort of beyond that but you know to really get the the full benefits um you would require people that have private keys right so another thing that i think you need for a lot of these things is need people using some sort of a cryptocurrency yeah you're right yeah i mean again i think it's like you can do it without and you may maybe they will get significant number of the benefits, but to get the sort of full automation and, yeah, having cryptocurrency, yeah, I agree, right? So those things would be,

and I presume that will also mean people having hardware devices, right? Because so maybe that's going to become a ubiquitous thing, right? Everybody having their little wallets that they manage a lot of their applications with. So in a case of insurance where if you had some sort of an insurance company built from scratch using, no, sorry, not built from scratch, but built using an open source software package, you could do that for really cheap, as you mentioned. And even potentially, you could have a whole lot of automation in there where if you have an oracle or several oracles, it may be predict. markets feeding in your, you know, the data that the insurance company makes this decisions on, that could potentially change the way that, you know, claims are managed. I think about, for example, you're a victim of a burglary.

Well, you file a claim with the police. And if the police reports are served as some sort of an oracle to the insurance company, it's no longer the person who has been subject to burglary that makes the claim, the insurance company knows about it before you even have time to make a claim. Right. So you make your police report, and it's sort of a push process from the police report straight to the insurance company, and the insurance company will pay you, you know, reimburse you for whatever you've been stolen, right?

Yeah, yeah, exactly. You have a lot of automation, of course, for kinds of data feeds, and I think that would be very interesting as well. And then I think flight insurance is a good example, right? If I think that data is mostly publicly available. So, yeah, that could be automated there. I might want to present a different way of stating the same thing. So what we are saying is like this technology, A, it makes, it enables like business processes to be run on, say, open blockchains or open source software in a cryptographic fashion. And it allows many different organizations to coordinate to get to a particular result. right now we can actually I think I think there's a different way to state state the case as well so so let's let's let's take an example so one of the one of the most

interesting examples which I think many people are familiar with is the is the more gauge market and specifically these financial instruments called cdos that were implicated in the 2008 crisis so what happens in the financial market for example is let's say I want to go and buy a house and I want I want money to buy that house so I get I go to a mortgage company I get some money from the mortgage company as a loan I go and buy the house and then I give I give some claim to the mortgage company in in case I default so let's say I got a million dollars and I got it on the condition that I'll be shipping $50,000 for the next 40 years, $50,000 each so for monthly I might be shipping

them I don't know $3,000 so I go to the mortgage company making an arrangement like okay I get a million and every month I'm going to ship you like $3,000 in the future and in case I stop shipping you these $3,000 then you can basically claim my house and it becomes your house and then you can sell it and retrieve the initial money you send to me. So basically my house itself is guarantee against me not sending this money. Now, you could imagine, for instance, that this interaction could be replaced by the combination of a smart contract and a legal contract. So what the smart contract does is it gives me, as the user, an interface way to send these $3,000 every month. So let's say there's like a contract,

contract A, where I'm supposed to send like $3,000 every month. month. And then there's in this particular smart contract it refers to a normal English language contract and in that English language contract we have conditions for what happens if I fail to send these $3,000 over so they might be able to foreclose on my home, sell it off, recover their money, etc. Now the interesting part starts to happen when there are like thousands of these like mod game smart contracts on the same blockchain. So today the way this

system works is some big investment bank like Goldman Sachs might go to these a lot of different mortgage companies and end up buying their positions. So the mortgage company has a claim on receiving these $3,000 from me every month.

So Goldman Sachs comes to them and says, okay, sell this claim, sell this flow of cash to me so that I receive it in the future instead of you and take, say, let's say, take this $1.2 million in exchange for it. So the mortgage company gets $1.2 million from the investment bank and then my money, the $3,000 a month, goes to the investment bank in the future. Now, then what the investment bank will do is, and say, okay, this is going to collect like a thousand of these different

ones, similar ones, and then it's going to create a new security for it. So it's going to create, let's say like what this is technically called a CDO and then this CDO basically has money coming in from different mortgages made in the real estate market so maybe let's say a thousand of them and then it's going to sell shares inside this CDO to a lot of different investors all over the world so maybe somebody in Norway ends up owning one of these shares so one of these CDO shares what they entitled the person to get is a claim over cash flows occurring in different mortgages across different parts of the United States at a particular time. So it's like a fractional claim across a lot of different mortgage and that is what makes them safe, right? Because they're

like a thousand different homeowners who need to pay. And if some of them end up paying, you're fine. You get your money back as an investor. Now, as in a smart contract system, what could happen is like you could automate the whole thing where your mortgage with your mortgage companies represented as a smart contract which has let's say its own token right and then these tokens can be bought by other companies and then your your mortgage can be repackaged as CDOs or these other higher level instruments and then sold to other people across the economy and all of this buying and selling of these mortgages is happening through, you know, decentralized exchanges or other smart

contracts that are running on Ethereum. So this whole market, starting from all the people who are borrowing money to all of the people who are ultimately lending money, basically gets connected through a big giant system of smart contracts. And a lot of different organizations are participating to make this system run. So the boundary between organizations. kind of blurs a bit, but the whole system works in the aggregate. So the way the analogy I take for explaining this kind of process automation is the

analogy of the plumbing system. If you imagine the plumbing system, what does the plumbing system of a city do essentially? What it does is any city, any city, has like a set of different water sources. So in the city of Basel where I live, it might be the rind, there might be some wells around here, somewhere far, there might be a lake. There's a lot of different water sources. Those are the points, there are sources. And then there are points of drainage, which means like I am a consumer, so some of the water must come to me. So I'm, and there are like millions of these. What does the plumbing system do? The plumbing system is an infrastructure

that gives away for this water to flow physically from the point of source to the point of drain. Now, if you look at the mortgage market, what's happening is there are points of sources, which are people paying their monthly dues, like me paying $3,000, so that's like I'm a source in this system. And who is the drain? The drain is some investor who basically gave the principle and ultimately wants a fraction. claim over my reserves. So just as you have the plumbing system for a big city,

you can build the real estate plumbing system on a blockchain with a set of like thousands of different smart contracts working together with each other. And the kind of market keeps adopting and the plumbing system also keeps changing, right? So would, do you agree with this kind of vision that, vision that is just any system where you have money flowing in from a big set of people, going towards another big set of people, and the linkage between these two, the ways by which

money must flow from one to another is very complex. You can build that whole system using smart contracts. Exactly right. And I think there's some other interesting things that you can sort of take from there. So one, coming back to the mortgage example, right? So one of the things was that when all these mortgages started going sour, right, there was a sort of a disconnect between these securities that package for all these mortgages and the mortgages themselves, right?

So I might buy this mortgage-backed security, and I wouldn't know exactly, first of all, which actual mortgages are in there, and what is the current state, you know, are they being paid or are they in delay? And of course, if you had those mortgages being managed on a blockchain and that sort of triggers all up to the security, you could have in real time see the state of that mortgage and I think that same sort of analogy works for lots of things, right? It also works for supply chains and having transparency about where your products came. I

from or another example is this idea of liquid democracy maybe I'm misrepresenting it a little bit but this sort of idea would be that I I can delegate maybe my voting rights to somebody else who then votes right so you could also imagine something like that that democratic rights but currently as in a representative democracy you sort of give it to somebody and they just vote for you but if I could like delegate it according to some rules I set up, and maybe the person

that delegates it further on specific issues because they're not the best expert there, you could have that same kind of transparency there, for example. And I think that same thing holds in so many use cases. So, yeah, I think the example you made is great, and plumbing is sort of a nice way to think about it. Actually, you wrote this in some of the notes here, Brian, that lines between your organizations might blur.

And I think much like the plumbing system, you know, the plumbing system interconnects from sources and then comes through, for example, you know, pipes belonging to the city and then may flow into pipes belonging to some, like in a house or a business and back into the city pipes. But the contents of those pipes knows, you know, no owner, right?

So those lines may become blurred and it may be difficult to know when information is flowing or when values being transferred exactly where it is in the system and who it belongs to. Today's magic word is plumbing, plumb, B-I-N-G. Head over to letstockbidcoin.com to sign in, enter the magic word, and claim your part of the listener award. If you look at something like chemical engineering, right, like, which is basically the science of making fluids flow and like flow on a certain set of conditions across point A to point B, right? Chemical engineering is essentially that. The plumbing system is exactly that. And so in chemical engineering you have like fluids that are flowing. and in this case what we are doing is like instead of fluids it's it's money that's flowing and we just

have built sort of the with the blockchain and smart contracts we have a new kind of infrastructure by which we can build the the pumps the walls and all of this that are needed to make financial money flow from people to people and not only that we have a way by which we can make this infrastructure, as you correctly say, publicly owned, like not owned by a single company or maybe owned by lots of different organizations at the same time. And it just flows from the points where it's needed to the points where people are supplying it. Yeah. So let's maybe take this opportunity to talk about the infrastructure and what the infrastructure might look like. And this is something I've thinking a lot about recently. And so, you know, we, we talk about public blockchains and on one end

of the spectrum and the other end of the spectrum, we talk about private or permission of blockchain, although sometimes those two terms get interchained or interchange, not necessarily. So what I'm getting to is that all of all of these blockchains that we expect that will happen to, that will come to exist in the future will be on this spectrum at some point. You'll have fully public blockchains and fully private blockchains. And somewhere in the middle, you may have a blockchain that is owned by a federation of companies. You may have blockchains that are owned by states. You may have blockchains that are owned by continents.

You may have a European wide blockchain that handles transfer funds between different countries or that handles transfer of information about citizens, that sort of thing. And interoperability, I think for this sort of war, world to come to fruition is essential. So you need to be able to have ways through which this information and value can transact from one type of system to another. Otherwise, you just end up with the same type of system we have now where everything exists in silos.

What are your thoughts on how interoperability can occur in a future where we have thousands, perhaps millions of different blockchains, not all operating on the same protocols, you know, different blockchain protocols are coming to the ecosystem, you know, things like tendermint, things like open chain, multi-chain, big chain, db, etc. We need to have a sort of some rails on which we can exchange value at the top,

like, for example, Bitcoin, you know, we all agree today that Bitcoin, is one blockchain on which we all agree that has value. And that's why Bitcoin has remained the biggest blockchain. And that's why Bitcoin is the point of entry for buying any other type of cryptocurrency. How do you see interoperability operating in the future, given that sense? So I think, I personally think, like, there are many companies that are already solving these companies and projects that are already solving this interoperability problem.

and and and it's a big problem right like the way to see it is you essentially want financial plumbing but like parts of this system might exist on different blockchains and they might you might need for value to flow between these blockchains seamlessly right so how would we do that in the future now there are already like two interesting projects in this direction. So one is BTC relay. What does BTC relay do? BTC relay is a smart contract, a set of smart contracts on Ecerium, which have the ability to verify Bitcoin transactions. So the kind of thing that is possible is with BTC relay, you can build some logic like when Sebastian transfers to Brian on the Bitcoin

blockchain 10 BTC, then a particular smart contract, contract will transfer Sebastian, I don't know, 100 Ether automatically. So when Sebastian transfers 10 Bitcoin to Brian, he can publish this proof on the Ethereum blockchain. VDC Delay will verify this proof and if correct, they automatically trigger this smart contract to transfer, let's say, 100 Ether to Sebastian. So there's already a step on the interoperability between blockchains. The other big project on the interoperability space is Interleger, which we have an episode coming up with the Intelleger folks.

But in a sense, it is a way by which value can flow between chains like Sebastian is on the Bitcoin blockchain and Brian is on the Ether blockchain and Sebastian wants to pay Brian and they are on different blockchains, but Intelleger makes a series of infrastructural hops by which this value. this value can throw from Bitcoin to Ether seamlessly. Then you have some centralized versions. So these are all decentralized versions, both interlegged and BDCLA. Then you have centralized interoperability like ShapeShift.

But I have the centralized interoperability meaning like if you want to do the same thing, instead of Intellegger, you can do it with Shapesh. But then I personally suspect that there are going to be more complicated forms of interaction, where there are smart contracts on one chain interacting with contracts on another chain. And these are going to be kind of hard in the beginning. Vitalik himself has a lot of a big paper on making this kind of interoperability work. And somehow I feel like zero knowledge proofs have a role to play here in the future. So once you have good system search, zero knowledge proofs,

interoperability between chains is going to become really easy. because there might be a particular computation on one chain with a zero knowledge proof, you can prove to another chain that that computation was done correctly, and then the other chain can just trust this proof and do something else in return. So that kind of systems are also coming.

So yeah, I do believe the future is like thousands, thousands of chains, but the interoperability problem is only solved for a certain limited set of interactions today. Yeah, I may have absolutely. I think you have put it so beautifully and elegantly. And actually, I would love to read that paper from Vitalik. Perhaps we can also link to it in the show notes.

So I don't have much to add here. But let's talk a little bit about Slokit, because they've been, if you think ahead of, you know, where is the space going, what is the human ecosystem going to look like? What are all these applications going to look like on there? I mean, we haven't actually seen very much so far, right? It's still mostly experiments, planning, or people developing some code that nobody uses. But now with Slocut, they're getting serious.

So can you give us a little bit of background? What's been going on there and what that will mean for the future of Ethereum and of DAPs? Yeah. So in the big picture, like when Vitalik came out with his white paper, he essentially popularized again the idea of the decentralized autonomous organization. This idea kind of was floating around in the cyberspace for quite a while even before Ethereum came in, but Vitalik basically pitched Ethereum as kind of the substrate on which you could build organizations like that. And now that Ethereum is kind of

operating what we are what we seem to be heading into is is a phase where there are different models of how DAO should build and what they should do. So, Slocut is one of the first projects to come out with, come up with a serious vision of what a DEO should be built, how should it operate itself, what should it do, and what kinds of returns should it produce for the people that are invested in the DAO. Now I must say that there are a couple of different visions that are coming together and Slocut is not the only one. But since it's the most further along,

let's just describe what their vision really is. So the way Slocut is approaching the building of a DAO, is it says that DAO's a best thought of a set of people who come together and build like a decentralized capital allocation firm or a decentralized VC if you want to go colloquial. So they essentially say that the DAO ecosystem will consist of many different players. So the first player is the DAO itself, which is essentially a set of people who invested some ether and got a token in return. So let's say I might invest 100 ether and I got a 10,000 slot tokens, right, in the current crowd sale.

So there are many people around the world who do this. and let's say they're like 100 billion shares owned by 10,000 different people. So they constitute the DAO. And while creating this DAO, all of the ether they invested becomes kind of the capital of the DAO. So the DAO might have, say, $30 million of capital. Now that's the first player, that's player, the DAO. Then there's another player which is the service provider or contractor. They keep changing between these names.

So the contractor is, let's say a company that has, that is an INC, a GEEMBHA or AGE. And what the contractor does is it comes to the DAO and it says, I want to build a particular product and I need, say, $5 million for developing this product. So here's my proposal for building this product and what I'll do with it, give me $5 million worth of ether. So in this case, what Slocut itself is doing, is it saying that it's going to build the what is what it calls the Ethereum computer, which is essentially a system which merges IoT and the blockchain, is going to go to the DAO and say, okay, give me these many million dollars worth of ether, and I will take this money and I will build this particular computer. Now the DAO members, the DAO shareholders essentially need to decide whether they want to invest $5 million of that Dow to the contractor, which is

Sloket game behind this case. So they have to make this capital allocation decision. It is like a VC like decision, right, whether they want to fund this speculative project or not. And the idea is once, if they agree to fund this speculative project, then the contractor goes and builds the product, it ships the product, and whenever this product is installed somewhere in the real world, this product makes some kind of revenue for the DAO.

So, Slocut's main thesis, now, what is Slocut's main thesis? This thesis is that a set of people who are collectively unknown to each other and who came together during a moment of creation of a Dow will be collectively great at making these capital allocation decisions and they just might be better than conventional VC firms or angel firms. That seems to be the hypothesis that they are testing. So that's one of the models. Okay, interesting.

I have, being a little bit skeptical here, do you really think that is their motivation? Because if you think of it as a we see, right? So now they've raised, which is crazy, actually. They've raised $9 million. As we record this, when you went through the show notes before, like an hour ago, they had raised $2 million just in this time. So if you think of it as a VC, right?

So VC is going to invest in all kinds of things. Also, VCs tend to be fairly diversified, right? They certainly wouldn't put in like, you know, 60% of the portfolio or whatever into slot it. So it doesn't seem to make any sense for them to say, okay, we're going to try to raise crowdfunding by trying to create this VC-like structure and then hoping they invest money here. and probably this our thing is not going to have that kind of independence, right? Probably it's just going to give the money to slocut. Isn't that right? If you look at the code itself, and I have actually studied the whole slocut code,

and there's a paper for interested people, there's a paper from Christopher Inch describing the whole code, and it's actually a pretty simple set of smart contracts that do this. If you look at the code itself, the future shareholders of this DAO, which they call the DAO can actually reject SLOCET's proposal and not decide to give money for the development of the Ethereum computer. It is certainly possible if you just look at the code itself. Now in reality, I do think that they will end up giving the money

to Slocut-Giambia. Simply for the reason that it's such an early model that they won't have too many competitive proposals, I guess. Like, I mean, like startup guys around the world are not thinking that they are going to make a product and pitch it to this Dow instead of a normal VC today. So there's not much, I don't think there'll be a lot of proposals that come to them, at least when the system begins. And Slokit GameBah's Ethereum computer might be one of the first ones to come. So they'll end up approving it. But in theory, they could reject it because the Dow is supposed to be a separate entity from Slokit Gmbia itself.

And even in the token sale, none of the founders of Slocut-Ga-M-Beha get any stake in the DAO itself. So that at least seems to be the plan. Now, the fundamental question I think about is, is this statement that a big chunk of people collectively unknown to each other can make great capital allocation decisions? is this really true? I mean, if I look at the great capital allocators of the world, you know, I always imagine a person, like you see Warren Buffet, that's a great capital allocator. He knows where to invest and where not. Or somebody like George Sores, that's a great guy.

You might think like Andy Groves, Intel CEO, that's a great capital allocator. Now, what they're saying is the wisdom of the crowd can be better than a single person capital allocator. Quote and quote and if if this hypothesis is true then it's a big conclusion I just wonder if it's true or not Yeah and the other thing is if you say wisdom of the crowds right so it's still going to be a very fairly small set of people Who will participate in this and you have to imagine that many of them even if you think about it rationally let's say now I'm going to put in $200 worth of money in this dollar thing or even a thousand. It's not going to be worth my time to like look at all these proposals and like contribute to it. So it's only going to be make sense for a small portion. And I think

one of the problems here is even if we accept that, you know, somehow aggregating intelligence can lead to superior outcomes is that there's sort of a lack of responsibility here. But you can always say, okay, somebody else is doing it and in the end that might just mean that everybody is going to kind of go with the default choice, whatever that is. Well, let me put it like this. I think there's kind of two different questions. One is in the abstract, our crowds good at making certain predictions. And I think in some cases they certainly are.

And the other is, does that help with something like making investments decisions for a VC-like vehicle, especially at this context as well, right? Because a big part is also software. Like, how easy is it for me to evolve? these proposals cast my vote there's no real software for this which is going to make it for a terrible user experience I would I would agree on on kind of at least the second count I would definitely agree on that if I look at like governance software today they are very badly adapted to a problem like this so

you in a sense have say 10,000 people that need to agree on what should be the name of the Dow for one. And then they must agree on whether they want to ship $5 million to Slok it game Bay or not. And I suspect Slack is the most common tool we use today for this kind of inter-DOW collaboration is Slack. And I suppose Slack is completely inadequate for something like this because you need kind of voting systems, you start to need prediction markets,

you need like ways to analyze these investment opportunities. And I just think the governance tools are not there. So currently what I've kind of observed from this ecosystem is there's this company which is called Dow Link, which has kind of taken upon itself to build some of these governance tools. And they are going to themselves try to become some contractor or service provider to the DAO in addition to Slokit Gmbia. So they are going to come up with their own. proposal in the future. But it's a very interesting experiment that's like, look, Bitcoin has

trouble just coming like Bitcoin, which is like, you know, these, I don't know, a hundred different people, 100 different important stakeholders distributed across the world. Bitcoin has trouble coming to consensus on something as simple as a block size. Now this is a DAO which might have like that like more than a thousand people or maybe 10,000 people, and they have to come on consensus on like decisions on how they're going to spend all of this money. So it's going to be like a great experiment in governance mechanisms, like decentralized governance mechanisms. And I, and that's what makes this investment really risky.

Like not knowing how these things will be done and knowing that there are no tools for it makes it like a real pioneer. experiment. So that's like, but, but you know, like, Slocut is just like one vision of what the Dow should do. Slocke's vision is simple. The Tao should be like this set of people who make investment decisions. That's it. That's what the Tao should do. But then there are other kinds of visions coming along as well for how, how should, you should, one should build the Dow economy. And maybe like interested, listeners should follow Machie or Pinsky's blog. And we'll link that blog in the show. And he comes up with a vision of how Dow should be.

So in Machia's case, what he says is that investment decisions should be made by the market, not through governance mechanisms. So Slokit says it should be governance mechanisms to make investment decisions. But Machia says is investment decisions are kind of the prerogative of the free market, not free market as a whole rather than a governance mechanism of one kind. so check out kind of his view which is the economy we'll end up building with these organizations is there will be like thousands of DAOs and they will be all linked to each other through through financial means so there might be let's say a parent DAO that pulls some money to do some particular thing and then some other person a different part of

the world might think, okay, he wants to iterate on the product of this parent Dow. So he ends up creating a new Dow and decides to give some of the shares in his new Dow to shareholders of the old Dow or some of the profits in his new Dow to the profits of the old Dow, get some support from the old Dow members and build this product and commercialize it. And then some other guy basically forks this new Dow's product. And so you end up with the system of DAOs where they're like thousands and they have relationships between each other. The market decides the value of the token of each DAO.

And in combination, you get like a superorganism made up of like thousands of different DAOs doing solving thousands of small problems together. So that's like another vision that's coming. And we don't know what we are walking into here. So these are all experiments. Thanks so much for your insights. there. And I personally look really forward to our Slok-ed episode, which should be coming up soon as well. And I'm sure that's going to be very interesting to dive a bit deeper in there. And this is exciting. Also, from the perspective, this is probably going to be the biggest crowd sale since Ethereum in this

ecosystem, maybe even bigger than Ethereum. And that's pretty crazy if one thinks of the kind of speculative nature of this project. I guess Ethereum was a bit like that, too, in big extreme. speculative and kind of out there. So it seems people have not lost their risk aversion when it comes to things like that. And of course, if the Ethereum success, it has been, that's quite understandable. So thanks so much for the discussion. Hopefully we'll do something like that soon again. And thanks so much for listeners for listening.

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