The Breakdown - The Unsolved Mystery of How to Fund Public Protocols

Episode Date: January 30, 2020

The best way to fund open source projects remains a question, and one that - in the context of crypto protocols - has never had higher stakes. Over the last few weeks, we’ve seen live action experiments in a number of different approaches.  Gitcoin grants used a quadratic funding program to match grants to technology builders and media creators in Ethereum  After months and months of concerted community debate and conversation, Zcash will implement a new Dev Fund of 20% of the block rewards after the Founders Reward runs out in November, splitting it between the Electric Coin Co (7%), Zcash Foundation (5%) and 3rd party developers (8%) A consortium (cartel?) of the 4 largest BCH mining pools tried to insist upon a 12.5% block reward diversion to a new dev fund, with a threat to orphan blocks that didn’t comply. The plan ran into a barrier when Roger Ver’s bitcoin.com backed away.  Also in this episode, @nlw looks at the latest in CBDCs - including Japan’s continued hedging that they’re preparing for the possibility of needing to move quickly and Cambodia’s announcement that they will be implementing a CBDC this quarter.  Finally, Andrew Yang took a few minutes yesterday to talk about cryptocurrencies and why regulation with the intent to stop them would be doomed to fail.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Thursday, January 30th, and today we are going to be talking first about public funding in protocols and blockchains. We're going to recap a couple stories from last week and look at a new vote from ZCAP. on the future of their dev reward. Second, we're going to check in on the wild world of central bank digital currencies, CBDCs. Japan is in the news around comments about a future possible digital yen.

China was in the discussion today on the back of a report from last October that was resurfaced by Baidu, and Cambodia has announced that they are in late stage trials for their own CBDC project. Finally, we're going to wrap with a conversation with Democratic Dark Horse Andrew Yang, a contender for the Democratic nomination for president, who sat down this week in Iowa with Joe Wisenthal from Bloomberg to talk, among other things, cryptocurrency. Andrew Yang is obviously probably the favorite politician of the crypto crowd, so we're going to see what he had to say.

But first, let's dive in around public funding. Last week, we had two separate stories around different approaches to public funding issues with blockchains. And basically at core, and what we're talking about with public funding is that blockchains aren't organized as traditional for-profit companies, where those companies have revenue lines and they spend some of that revenue on marketing and some of it on R&D and some of it on development. They are effectively these open source networks that have lots of contributors from different places, different companies, different backgrounds, different economic situations, all working together for the good of the whole. Now, of course, companies are built on top of those

public blockchains. However, there often comes a question of who is going to fund the core and necessary infrastructure for building on those. And you have an issue of a classic commons issue where oftentimes key things aren't getting funded because they benefit everyone rather than just one company specifically, and companies want to focus on what's good for them in a defensible individual way, not just what's good for everyone. There are a number of different approaches emerging to how to deal with public funding issues in the context of blockchains. One of them has to do with a grant system that actually involves members of the community being able to vote with their dollars, with their contributions on what projects and what people are worthy

of funding. Last week we had Kevin O'Walky, the founder of Gitcoin on the show, to talk about Gitcoin grants, which is a program through which members of the Ethereum community can propose projects in either a technical or a media and marketing dimension, and then other members of the Ethereum community can use a matching grant system to actually vote on what they think is most valuable to the community as a whole. So the way that Gitcoin grants work is that people indicate which projects are most important to them by pledging to contribute their resources towards a specific project. However, there's an additional layer of a quadratic voting mechanism that allocates a matching pool of resources that, in the case of Gitcoin, came from some

funders like the Ethereum Foundation and Consensus. And the way the quadratic voting differs from just a traditional one-to-one matching fund is that rather than it being denominated by dollars, they use effectively a ratio that takes into account the number of people who are contributing to a specific initiative, not just the amount that they're contributing. So you have a scenario where someone who has more overall people contributing might get a higher portion of the matching pool than a project that gets a higher total amount of actual value in contributions, but from a smaller number of quote-unquote voters. This is a mechanism that Vitalik Bouturin and others have talked a lot about, and this is one of the first wide-scale trials of it in practice.

So they released their final tallies. Gitcoin released its final tallies, and in a lot of ways, the most contentious questions, and this was the case when Kevin was here last week talking as well, had to do with pledges around the media category. And in particular, a Twitter account, Antiprosynthesis, who ended up having something like the third highest match of any project over some other larger newsletters or larger content producers and over other technical projects. And so the issue has to do with what's a public good, right? People have very, very different opinions about whether this sort of media engagement and social media engagement is a public good.

Vitalik took to his blog to talk about this, and one of the interesting proposals has to do with being able to send negative signals, not just positive signals. So the idea here is that there's a mechanism not only to vote for things you want, but against things that you don't want, to be able to signal a negative opinion. Now, the way that they tried it this first time was based on the idea that you signal your discontent by simply supporting other things. However, it may be that a stronger negative feedback mechanism is also important. So Kevin Awaki already has mocked up a version of this for the next round of Gitcoin grants

and is soliciting feedback. So all in all, it's to me a very interesting experiment in community-based funding that tries to take into account some of the ways that community-based matching funding has been captured in the past or is more gamable. It tries to address that. So I think it's a worthy experiment to watch, even if you don't particularly care about Ethereum. Let's shift over now, though, to BCH Bitcoin Cash. In an aggressive announcement in some ways, last week, a consortium,

slash cartel of the four leading mining pools for BCH announced that they were supporting a new dev fund, a new protocol reward, mining reward-based dev fund, where they wanted to divert 12.5% of the mining rewards, of the block rewards, to a new fund that would fund protocol development. This was in response to BCH having issues with protocol developers staying engaged and being able to support their work and so on and so forth, right? The same types of challenges that face any public blockchain, any protocol community that relies on open source contributors. Now, this, of course, is not without precedent. Zcash runs in part upon a founder's reward that funds the core operations of the team building the protocol or has up to this point. And other chains have different versions

of this. What was contentious was the way that this was announced with this consortium, again, Reed Cartel of actors saying that they were doing this. And if you didn't go along, if others didn't go along with them, they would actually orphan the blocks that didn't support this dev reward. So this is obviously a very aggressive posture. And it didn't really stick. Roger Verr and his Bitcoin.com mining pool have subsequently backed away and effectively said that he was just along for the ride on this one. So I think this kind of shows the challenge of not engaging with the community. around something that is fundamentally a community issue and a community decision, or at least needs to be for it to have broad-based support within the community. Which brings us to Zcash. Zcash has

been gripped in the debate for a long time around what would happen in November 2020 when the four-year Founders Award ran out. How would they continue to support protocol development around Zcash and specifically how would the Zcash community support the existing team which built Zcash, which has now been rebranded and separated as the electric coin company. Would the Zcash community continue to fund their efforts? And if so, in what way? Would it change? Would it be different? And for months, there's been an ongoing debate process across a variety of forums. And yesterday, the vote finally went through that really settles things. And effectively, what's going to happen is that there will be a new development fund created that will take 20% of the

block reward. So 80% of the block rewards will go to miners and 20% will go to this new developer fund. That will be allocated and distributed differently than it was before than the founder's reward was. So in this new paradigm, 7% will go to the electric coin company, 5% will go to the Zcash foundation, and 8% will go to third party grants. So their goal and their stated materials around this was that by having the highest portion go to external sources to third-party sources, they create more and more incentives for true decentralization, for new actors to come in, for new companies, new people to get involved in the building because there is this pool of resources that is available to them. Now, what I've seen from the community is that this is both

not a particularly surprising outcome for those who have been following along with different proposals, but also a generally welcome one. Certainly the price of Zcash has roused, on this news, suggesting that there is, again, market agreement that this is a good path forward. What makes Zcash such an interesting case study to watch is that there are many people in this space and many protocols that think things like a founder's reward is just anathema to the idea of how you build something. Part of this obviously comes from the mythology and the mythos of Satoshi, right, and the total lack of a founder's reward. In fact, we saw last year Grin launch with no pre-mines, no founders' reward. They made a big deal about it being a fair launch. It's

taught tons of VC interest right away. And so this idea, this question of how to launch a project, how to continue to support a project, is, I think, a very alive one in the context of all these protocols. So the fact that the Zcash community has gone through their four years of a founder's reward and redesign the system, but that ultimately has a similar distribution between miners and developers in a way that is formalized is another interesting case study. I don't think that these things even together solve or tell the full story of how public blockchains are going to be funded in perpetuity and how public goods are going to be allocated for and addressed. However, I think that they represent a bunch of different case studies that collectively show where this conversation is,

why it's important, what to do and what not to do, I think, in a lot of ways. So really interesting stuff. But now let's shift gears to a very different aspect of the industry, an emerging aspect of this industry, CBDCs. Another day, another announcement around some central bank getting involved with digital currencies. As anyone who's listened to this show this year will know, I think this is the most significant mega trend in our entire space right now. I think the implications are unknown. I think it's incredibly important for us to be paying attention to. Today, we saw first the resurfacing of a report around China's planned digital yuan that actually was published in October of last year, but came back up via Baidu, was caught and

translated a bit by decrypt. That basically just reinforces some of the things that we suspected about the design of China's digital currency, that it will be centralized and controlled by the central bank. of China, the People's Bank of China, that there will be surveillance in these transactions, but that surveillance will be available only to the central bank, not to the commercial banks who are part of the system, and so on and so forth. So nothing new in particular, but just reinforcing some of the fears and concerns that people have over the surveillance potential of a Chinese digital currency. So that was a little bit of news one. A bit of news

two comes from Japan. Now, last week during Davos, Japan basically was saying that they were exploring a digital currency, a digital yen, in part out of fear of what a Chinese digital currency does for China's influence among emerging economic powers around the world, but in the region specifically. And today, Reuters reported that the deputy governor of the Bank of Japan said that effectively there may be demand for a central bank digital currency soon, and that they need to be laying the groundwork for the technology now. The direct quote is, the speed of technical innovation is very fast. Depending on how things unfold in the world of settlement systems, public demand for CBDCs could soar in Japan. Now, if Japan is strongly considering and hoping

to prepare themselves for the eventuality that CBDCs become more in demand, the national Bank of Cambodia is way ahead of that point and is saying that they are ready to launch a CBDC at some point during the current fiscal quarter. So the project is called Project Bakong. It was first trialed by the National Bank in July of last year, and it's promising the same thing that a lot of these central bank currencies are promising, cheaper, and for users, ultimately more convenience. And that's really the promise of CBDCs. They are convenient surveillance money. So we understand that it's meant to be more convenient, but what about the surveillance part? Well, the National Bank of Cambodia has said that it will store all transaction data from the platform, which suggests, of course,

that these transactions will be surveillable. Cambodia is an interesting case because they've consistently cracked down on crypto trading. They have not been a friendly jurisdiction for other types of cryptocurrency activities, but they're moving full bore into CBDCs, which just reinforces the point that I was making last week that I think that we're too blithe sometime about the clear and inevitable path between CBDCs and government digital currencies and people finding their way to these decentralized currencies like Bitcoin. I think that if we want that path to be real, we need to make it so. We cannot just assume that it's going to happen. In fact, we can probably assume the opposite, where many, many people will just look at this as a convenient new thing

in their pocket and never think twice. That is one of our great challenges in this industry. But it's a challenge we have to face because as you can tell from the continued beating of the China drum to Japan seeming to wade its toe into this conversation, to countries like Cambodia actually preparing to launch these things, CBDCs are real, they're happening and they're happening now. All right, last up today, a fun little one from the campaign trail in Iowa. My favorite political book of all time is Fear and Loathing on the Campaign Trail 72, where Hunter S. Thompson follows McGovern, George McGovern, as he tries to unseat Richard Nixon

unsuccessfully, spoiler alert. And he was writing about just the sense of depression in that campaign. He says, I was beginning to sense something very depressing about it. How many more of these goddamn elections are we going to have to write off as lame but regrettably necessary holding actions? And how many more of these stinking double-downer sideshows will we have to go through before we can get ourselves straight enough to put together some kind of national election that will give me and the at least 20 million people I tend to agree with a chance to vote for something instead of always being faced with that old familiar choice between the lesser of two evils? So this year for a lot of the crypto community, that force that is something at least to not be written off as lame but regrettable necessary holding action has been Andrew Yang, a refreshingly forthright and independent thinking candidate who doesn't come from a traditional political background,

who has a core issue in universal basic income, and who is engaging deeply with some types of issues that others aren't, notably crypto. Andrew Yang has spoken about Bitcoin. He spoke at CoinDex Consensus Conference. He has been around this world and has a sense of it, an understanding of it. So I was excited to see that he, in a conversation yesterday with Joe Wisenthal from Bloomberg, took a couple minutes to talk about his perception and his thoughts on the cryptocurrency industry. So I'm going to play the clip, but just a couple takeaways that I saw. The first has to do with the convoluted regulatory apparatus and how it clearly is bad both for regulators and for innovators. Without clarity

around the regulatory regime for crypto, and by having it be the providence of so many different departments, it creates a situation where people are actively disengaging from the U.S. and looking to build elsewhere. And if you care about American competitiveness, which presumably if you're a candidate for the president of the United States of America, you do, that's a concerning thing. So that was one interesting takeaway. A second interesting takeaway, which was the real social media takeaway line of the whole thing, was the question of whether it can be stopped or not. Joe Wisenthal basically asked Yang whether he supported people being able to opt out of the existing financial system into something like Bitcoin that is outside the purview, outside the control of the government.

And Yang's response was, well, you know what, actually, let's just listen to the whole interview and then I'll come wrap it up. So your campaign has obviously attracted very sort of wide, unusual support from people who previously were disengaged, or maybe they were Trump supporters, or maybe they have other niche interests. There's a lot of people who are like really big cryptocurrency fans, for example, who have, they love Andrew Yang. And when I talk to them, they're like, yeah, ask him about crypto. So what would you do with regards to regulation of that and, say, Bitcoin exchanges, do you support the right of people to use their bank accounts, credit cards, et cetera, to move into cryptocurrencies

and other forms of money that aren't as easily tracked by centralized authorities? Well, what I would say is that we need to have a uniform set of rules and regulations around cryptocurrency use nationwide, because right now we're stuck with this hodgepodge of state-by-state treatments and it's bad for everybody. It's bad for innovators who want to invest in this space. So that would be my priority is just clear and transparent rules so that everyone knows where they can head in the future and that we can maintain competitiveness. Because to me, the underlying technology of cryptocurrencies is very, very high potential and we should be investing in it. But do you support sort of monetary freedom for people that want to move their money away

from fiat currencies, get their money out of the banking system into cryptocurrencies. Right now, you have banks restricting payments to these platforms and so forth, and people feel like government regulations are essentially impeding in their desire to do that. Well, right now, people who are investing in these currencies are finding a way to do so and make use of their investments. No, I don't think that you could impede it with regulation if you tried. I don't think you could impede it with regulation if you tried. Does that remind you of anything?

Does that remind you of when Patrick McHenry, the congressman from Virginia during the first Libra hearing, said that Satoshi had created an unstoppable force that regulators around the world had tried to stop and found that they couldn't? I like this narrative. I like this couldn't stop if you tried narrative because it creates a different dynamic in the power relationship between this new economic force and the decentralized network and all of us who help build it and the existing power structure. I think that that's important. I think it's important that there's more equality as we engage around regulation and around freedom and autonomy

and ability to create new systems, even within the structures that we have. So it's great to hear that perspective represented by a candidate, even one who still remains at this point an outside shot. there's no doubt that no matter what happens yang has impacted the national conversation has impacted the rest of the field and is not likely to retreat and no longer be a force in public American life so cool stuff to see for sure but with that guys I'm going to wrap up I hope you're having a great Thursday I hope your week is coming to an exciting conclusion and you're looking forward to the weekend either way I will be back tomorrow for one more episode of the breakdown see you then