Unchained - All Things Cryptoeconomics, Pt. 1, With Olaf Carlson-Wee and Ryan Zurrer of Polychain Capital

Episode Date: April 3, 2018

In an intermittent series on cryptoeconomics, Olaf Carlson-Wee and Ryan Zurrer of crypto hedge fund Polychain Capital describe what cryptoeconomics is, what goals it typically helps networks accomplish and what behaviors token systems might someday incentivize. We discuss when cryptoeconomic models don't make sense, how the type of consensus algorithms a blockchain chooses can affect behavior in that system and which consensus mechanisms excite them now. We also dive into whether or not it's desirable for a cryptoeconomic system to depend on a small number of knowledgeable participants, how to manage on-chain governance so networks don't vote themselves into a "black hole," and what disciplines are helpful in designing smart cryptoeconomic systems. Polychain Capital http://polychain.capital/ Thank you to our sponsors: Preciate: Recognize someone with a shout out: https://preciate.org/recognize/ Bitwise Asset Management: https://www.bitwiseinvestments.com/unchained Keepkey: https://www.keepkey.com/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. Welcome to Unchained, the podcast where we hear from innovators, pioneers, and thought leaders in the world of blockchain and cryptocurrency. I'm your host, Laura Shin. If you've been enjoying Unchained, pop into iTunes to give us a top rating or review. That helps other listeners find the show. And be sure to follow me on Twitter at Laura Shin. Unchained is sponsored by Appreciate. Founded by Ed Stevens, Appreciate is building the most valuable relationships on Earth. In each episode of Unchained, Appreciate sponsors the recognition of an individual or group in crypto for an achievement. Who in crypto will be recognized today? Stay tuned to find out. This episode of Unchained is brought to you by Bitwise Asset Management. Last year, Bitwise created the world's first cryptocurrency index fund, the Bitwise Hold 10, which holds the top 10 cryptocurrencies and rebalances monthly. The fund has several hundred LPs and is currently accepting accredited investors. To learn more and invest in the Bitwise Cryptocurrency Index Fund, visit at www.bitwiseinvestments.com slash unchained. Today's episode is brought to you by KeepKee, the easy, safe, and simple way to protect your

Bitcoin, Ether, Lightcoin, and many other digital assets. There's no time like the present to protect yourself from hackers, malware, and viruses. Rest easy knowing that your digital assets are protected. Visit KeepKee.com to order your secure hardware wallet today. Today's topic is Crypto Economics, which is easily one of my favorite things to think about in this face. Here to discuss this topic are Olaf Carlson Wee and Ryan Zer of Polychain Capital. Welcome, Olaf and Ryan.

Hey, Laura, thanks for having us. Hey, Laura, thanks for having us on and to talk about my favorite topic in the world, crypto economics. Super excited for this jam. Thanks, Ryan. I'm glad that you're excited. So let's start with the basics. What is crypto economics?

So for me, crypto economics is the field that studies, using tokenized representations of digital scarcity to incentivize a distributed network of actors, and these actors usually contribute some valuable resource to a network and self-organize in a specific way and then are remunerated for either the contribution of these resources or pay for a specific resource on a network. And the simplest and first version of a cryptoeconomic model is really the block reward in Bitcoin leading to a very secure network for the users of Bitcoin. And that's really a key point because crypto economics typically either drives security on a decentralized network or accelerates network effects. And what we look for in crypto economics is typically one of those two things or a combination of them.

Yeah, actually, well, that was going to be my next question is what behaviors you're trying to incentivize or what problems you're trying to solve. But are those really the only two or are there other ones? So there's a number of different like resources that could be that could be exchanged on an open source network. So it could be, you know, trust. It could also be, say, computation or storage or basically anything else that we can bring, say, a distributed group of network actors together to, to exchange. And, you know, in some sort of value. And one of the things that we like to talk about here at the Polychain office quite a bit is that the resources on these decentralized networks that will be exchanged, there are a number of different ones that we haven't even thought of yet. And we're really excited about what could come up next. So it's definitely not just security and network effects among users. It could be a range of different things. Yeah. And I think to date, securing blockchains has been by far the number one use case of crypto economic models. I think looking into the future,

though, you could imagine, for example, the contribution of intelligence leading to a sort of block reward rather than a kind of proof of work or proof of stake style block reward. And so then you can, instead of securing a blockchain, you could grow a pool of, you know, data, say, or a pool of, you know, people that are curating. content. And you could gather a group of people that are curating content in an intelligent manner. So I think that going forward will actually see many more experimental types of crypto-economic models that accomplish many different goals outside of just security of networks. And then really we're also seeing the emergence of sort of crypto commodities, right?

And again, this could be computation, like which is represented by gas on the Ethereum network. It could be storage, for example, with IPFS file coin. And so any sort of important online resource, you could essentially derive down into a crypto economic model and achieve greater levels of market efficiency for trading those resources. This could be bandwidth. It could be energy one day. It could be, you know, essentially anything. effectively where today we have a network and then on top of that network either an intermediary

or maybe a very inefficient market, that can, that will be disrupted and will be made into a protocol that operates on a perfectly competitive and highly efficient market. Yeah, that's something I wanted to ask about. What's an example of where a crypto economics model makes sense or where one doesn't make sense. And to my mind, I've been thinking a lot about how tokens or crypto economic models only make sense in networks that are actually displacing middlemen. So you can either have kind of like a centralized company, like let's say a Facebook, or you can have a decentralized or distributed network, social network, that's powered by tokens. But that's why, and I sort of hesitate to name names,

but there are some even really huge coins in the marketplace that. aimed to somehow maintain middlemen and yet still have coins, and those don't make sense to me. Am I think, am I just missing something? No, I think in general, peer-to-peer tokenized models are incompatible with centralized revenue extraction. I just think it's too easy for an open-source developer, you know, anywhere in the world to really fork the network and remove the revenue extraction mechanism. You could, for example, imagine an alternative Bitcoin where I, you know, a company or the founder of Bitcoin really tried to charge 1% transaction fee for every transaction

in the Bitcoin network. But this would be trivially easy for anyone to sort of route around and not abide by that rule. So I do think that in general combining a for-profit company that has revenue extraction and a peer-to-peer token model often doesn't make sense. Yeah. And I think the only reason why some of these what we call rents, Seeking tokens have not been forked out of their networks is because there just isn't enough sort of resources or developers building in the space right now. But I think in relatively short order, you will see some of these, you know, not very sensible token models that are effectively rent seeking on top of their networks be forked out and that network be offered free of that rent seeking. Yeah. So we'll see.

hopefully as the space develops, we'll see some of these tokens that I think don't make sense, get shaken out, and hopefully the people who've bought them won't lose too much money. So let's talk about actually these basic problems then. Like, let's start with security. How does crypto economics solve for security? And by that, I mean, you know, why don't you describe how proof of work works and some of the other consensus algorithms? Yeah. So I think in a proof of work system, really what is happening is your, your,

incentivizing rational for-profit actors who are really not behaving altruistically in any manner, who are just trying to receive block rewards for hashing in the case of proof of work. Those actors, though, who are performing those hashes are actually effectively adding security to the blockchain so that it becomes harder and harder the larger those block rewards get as the value of the underlying coin increases. It becomes harder and harder. to attack that network, for an adversary to kind of attack that network and alter that ledger. So just by virtue of pure kind of rational selfishness, these miners are actually, in a sense, providing a massive service to the users of a proof of work network.

Now, that is being paid for, in a sense, by the users through inflation, right? So it's not to say that it's free, but the users of Bitcoin effectively pay the inflation rate to these block validators and in return, you know, can be sure that their transactions aren't going to be reversed at a later time. And you and I have actually talked about this before, but I just want to point out how you keep saying that they're not doing this altruistically. And we've spoken before about how we have had decentralized or peer-to-peer networks before Bitcoin, but those were ones where people operated them. altruistically, just out of the goodness of their heart, where they, you know, put files on

Napster or on the Tor network or whatever, but they weren't being compensated. And so this really was a breakthrough where you don't need for people to just decide to kind of make this charitable, take this charitable action, and instead they can be compensated just the way that you would if you were doing a job. Well, I think the really interesting thing here is that when you add in incentivization, and this is sort of the aha moment of crypto economics, when you can add in incentivization, you not only drive network effects on these decentralized networks such that the amount of people willing to participate goes up quite expressively, you accelerate these network effects like rocket fuel. And this is really one of the great things about crypto. economics is that using these digital incentives, we can create a certain mass very quickly that are willing to contribute, say, you know, computation or some kind of resource to a network. And you don't just rely on altruism, but then you can also program in further incentives

such that, again, security is delivered so that people won't say, you know, try to include transactions that are, you know, that are a double spend or or some kind of transaction that shouldn't be there. You force people to sort of act, but act honestly because of their own sort of economic self-interest in doing so. I would also say that it depends on the level of adversary you're dealing with. So, for example, the Tor network, which you mentioned, Laura, is a very breakthrough and innovative anonymity network. However, I would argue that it it is insecure against nation-state actors who are trying to, you know, decode kind of who's using that network and actually connect endpoints despite the fact that packets are being

encrypted and routed. So to me, if you were to build a sort of tokenized tour, so to speak, which wouldn't be that dissimilar from, say, the Bitcoin network where users could effectively pay to use the Tor network in the form of inflation, that would, would go towards the nodes in the Tor network, I would argue that if designed successfully, and like, for example, the project, the Orchid protocol is working on this, that you'd actually get a much, much more secure version of the Tor network. And I don't mean like a little bit more secure. I mean like 100 or a thousand times more secure because people are now doing this in a kind of professional industrial scale and for profit, right?

And this would replace all of the current nodes in the Tor network, which are more kind of academic or experimental, and they aren't really being done at scale. And it doesn't provide sufficient defense against a really sophisticated adversary. Yeah, so not only greater security, but also greater performance than what we see today on Tour. Interesting. And just out of curiosity, did you guys invest in Orchid? Yes, we did. Okay, because I have heard quite a lot of criticism also that project. I don't want to get off into that tangent right now. Maybe I should explore that in a future episode, but I have not explored it in any depth, but I definitely know that there are some questions being raised about the viability of that. But I do agree just like on an abstract level that, of course, when you have incentives, you're going to direct economic incentives that people are going to be much more motivated. and there's just going to be a lot more activity. And I think this goes to an earlier point that Ryan was making about the speed with which

these networks can take off. I mean, we've seen it time and again, you know, if you look at the Dow, if you look at the ICE took off, if you look at CryptoKitties, I mean, there's just like what's so crazy to me about this whole space. And Olaf, you made this point in your speech at consensus last year, is that I do think that because the incentives are much more direct than you would find in most. other systems that I guess we partaken in the world, that that is part of the reason why we're seeing this level of speed for a lot of these projects. So to kind of keep going in this vein

around security and talking about proof of work. So I'm curious to know like what you guys think are the crypto economic differences between proof of work, proof of stake, delegated proof of stake and any other consensus algorithms you find interesting. And as you describe them, if he could sort of define some of the new terms for the listener, that would be great. Yeah, so one of the major breakthrough consensus mechanisms that we're very excited about is the DFINITY consensus mechanism, which is called Threshold Relay. And so Threshold Relay uses something called a BLS signature, which is a cryptographic signature that was developed at Stanford.

And the threshold relay in simple terms allows randomness to be natively generated within the block creation of the protocol. And this randomness allows you to randomly select the next block validator set from a massive potential validator pool. So you have a pool of call it 500 potential validators, and each block is validated by a, a small subset of those, and it also selects what the next subset of validators will be. In short, this model allows for very, very efficient block times. So in the DFINITY system, blocks take about one second to be created, and because this is not probabilistic, the way proof of work validation is probabilistic in nature, you have finality in just two blocks.

So the equivalent kind of finality in Bitcoin would take an hour. In Ethereum, you're looking at 17-second blocks and maybe about 30 blocks for that level of finality, whereas in definitive, this is just two seconds. So this is the type of improvement in the underlying consensus mechanism that's actually been enabled by cryptography that was literally invented since the creation of Bitcoin. Well, actually, I want to ask about that. So I understand something like proof of stake or proof of work where the probability that you'll get the next block reward is based on how much you've put in, whether it's hash power or coins. But in this case, where it's random, is there some way to, you know, kind of improve your chances of being the one to add the next block? So that's the brilliance of the design is there is in fact no way to kind of game that system. Again, this is all experimental. I don't want to make any guarantees about anything that hasn't been live and tested for a few years. But at this stage, it appears that this kind of randomness is kind of true randomness and cannot be gamed by that validator set. But then does that remove the, the,

incentive in some fashion. Do you know what I mean? Well, so as a validator, though, your profit is still quite predictable. It just based on probabilities over a long time horizon, it becomes very stable. Obviously, it's random

on a block by block basis, but over an entire day, you know, each of the say 500 validators should receive a pretty equivalent number of blocks. And then there's sort of a second part to this with validation towers such that, you know, the The subset that proposes the transactions in a specific block are randomly selected, but then

the validation through kind of validation tower height, which is based on sort of who owns what, looks somewhat like the payout there would be somewhat more akin to who owns what. It is similar in proof of stake, so just to review them proof of stake. Effectively, your level of confidence and say the transactions proposed by, a given minor is proportional to the amount that that minor has at stake if they're proven to be wrong and thus are slashed. So basically it's just an economic Nash equilibrium where you're not going to try to, say, stick in faulty transactions or double spends in an economic system that you're, you know, highly committed to. And thus your stake is sort of the level of confidence that the network has

in what a miner is proposing. That needs to be then paired with a sort of like a challenge period where others can challenge in case somebody with a high amount of stake were to still propose blocks or transactions that are a double spend or we're not supposed to be on the blockchain.

We skipped over, like delegated proof of stake is that another one that you could discuss a little bit and what you think that's useful for? Yeah. So I think delegated proof of stake is also significantly faster than Bitcoin's proof of work. However, I think that delegated proof of stake runs a risk that's pretty well understood at this point of having a somewhat small pool of validators and risks a sense of potential centralized. and thus censorship or control by endogenous parties to the network. So to me, delegated proof of stake, you know, similar to threshold relay is a continued area of research. It's very promising. But I think that, you know, until these things are in the wild for many years,

it's hard to know the full implications of these decisions. Yeah. And that's kind of similar to, say, proof of authority. So with delegated proof of stake, you've got a group, you know, all of the token holders in a network that will sort of delegate mining authority to a subset of miners. And those are probably very professional miners that are well structured to do that. However, that creates a certain amount of centralization, similar to proof of authority where miners are chosen based on some selection criteria. Maybe they're like notaries or maybe they have some kind of celebrity status in that network. And so they're chosen as authorities and and thus trustworthy in that network.

But then the problem with that is that it's sort of orthogonal to the, you know, to the very culture of our space where it's, you know, giving power back to to some authority. And it's not decentralized and in the hands of each note on the network. And so we tend to prefer, you know, a permissionless system, an open network, rather than, say, like, some kind of proof of authority network. That's somewhat similar to what we already have today in the world, right? Yeah, I think actually some of these systems lead, and this is maybe the point Olaf was making to is they lead a little bit toward oligarchy, which doesn't feel very... Which is what we have kind of, right? Well, yeah, the thing is, though, that it's very tricky to predict how this will play out on a mass scale over many years.

So, for example, Bitcoin's proof of work, which I think on paper is very much so a decentralized system. In reality, as we've seen play out in the market, I think that just a handful of mining pools dominate validation in the Bitcoin network. And I think that kind of centralization that came with economies of scale of mining hardware, and power was very hard to foresee. So to me, you know, we can predict as best we can, but this is one of these interesting things about this area is that when it plays out in the wild, in an adversarial environment, and in the real market, it can often be a bit different than it was, you know, thought to be on paper. With Amex Platinum, $400 in annual credits for travel and dining means you not only satisfy

your travel bug, but your taste buds. too. That's the powerful backing of Amex. Conditions apply. Yes, and this will definitely be a continued area of research. So we're going to discuss governance and other issues, but first I'd like to take a quick break to tell you about our fabulous sponsors. Founded by Ed Stevens, Appreciate is building the most valuable relationships on Earth. In each episode of Unchained, Appreciate sponsors the recognition of an individual or group in crypto for an achievement. Today, Appreciate is recognizing Bill Shihara, founder and CEO of Bitrex, a leading U.S.-based crypto exchange.

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research, visit www.bitwiseinvestments.com slash unchained. I'm speaking with Olaf Carlson Wee and Ryan Zer of Polly Chain Capital. We were talking before about blog rewards. and I know that was something you wanted to explore, but I didn't know if we'd gotten to everything that you wanted to say about them. Well, one thing, you know, we're very optimistic of the Block Award. I like to say that, you know, we had this moment in 2017 where projects were selling kind of a majority of their tokens all at once in a crowdfunding moment. And then with Juan Benaise's file coin, we saw what I call the Return to the Block Award,

where Juan prioritized fully 70% of his network over time to incentivize that network over time. And we think that that was a very prudent move. We like to see that in other teams that the reward, the token is doled out over time to incentivize actors over the long run to contribute a specific, like, resource or relevant activity on that network. And what we're also seeing is the emergence of block rewards that can go to different actors in different ways. So where a network needs a combination of, say, software developers developing applications and, you know, miners confirming transactions and, you know, other entities doing other things and contributing other resources. You know, the block reward, interesting way to approach the block reward is to have governance that, allows it to be doled out to these different constituents and these different value-ad groups in accordance with what is important or what is valuable for that social network,

that network of nodes. And so we're spending a lot of our time today jamming with projects on how to design their block reward such that they bring together all of the different groups that they need to incentivize. They've got, you know, a higher abstraction. software developers building applications, that they can also incentivize low-level protocol layer development while having security in transaction confirmation and different things. And the block award doesn't need to be just isolated to one group. You really should think

very carefully about all of the different constituents in your network. So you can imagine a thought experiment where instead of 100% percent, of block rewards going to validators or block validators in that network. You could imagine say 10 or 20% of that block reward going to a treasury. This could be a multi-signature

treasury which could be managed sort of like a Dow or decentralized autonomous organization where the token holders can actually vote on how that treasury is spent. So there's no reason you couldn't use the block reward to subsidize other types of activities outside

of just a blocker validation which adds security to the network. One thing that I, you know, would be very interesting to think about is suppose in Bitcoin if 50% of the block reward were paid to core developer contributions as determined by the community of users. Now there's some pretty difficult governance problems around voting and how that allocation is decided based on the community of coin holders. But the hash rate of Bitcoin would be, you know, mathematically about one half of what it is today, which I don't think would materially alter the security of the network in a meaningful way. But then you would have, you know, literally tens of millions of dollars in a sort of

centralized treasury controlled by the decentralized network of users that could actually be allocated to core protocol developers to, you know, anything that could kind of increase the size of the network, increase the reliability of the network, increase the visibility of the network. So this idea of a kind of decentralized, you know, Dow Treasury that could actually be used by the community to pay for things outside of just block validation is a very interesting concept to me. Yeah, I love that. And just so I understand, then those funds would be held in a smart contract, and then there would be some function by which people would vote on how to dispense the funds. Yes, exactly. And it's like it would.

likely be a system of smart contracts. You know, one would probably hold funds. Another would be a voting contract, which could control, uniquely control the actual contract that held the funds. So it's not a simple architecture, right? And the security of such an architecture would obviously be paramount. But it is the type of thing that I think we will start to see emerge so that, you know, funds can effectively be used by the community in ways that, you know, we've never seen that type of capital coordination built directly into a protocol. And I think it would be a very, very interesting experiment to see play out. And are there any particular tokens that you think are really interesting in this way? So anything that is really focused on on-chain governance

is capable of creating such a system as this. So, you know, systems that are working on on-chain governance like Tezos and DFINITY, I think, are some of the most promising contenders there. I do think that... Yeah, also, Pocodot, some really interesting work coming out of that team on on-chain governance. But on-chain governance is very difficult, and we're still sort of researching and developing around security and secure models for on-chain governance. Because, yeah, the problem with, you know, I'm glad you brought up security, Ryan, because there's not just a sort of network security of on-chain governance.

There's kind of like ways you can vote yourself into a black hole, right? You like vote for no more voting or you vote for, you know, giving all the tokens to, like, for example, you could imagine a network where 51% of the people, or rather of the tokens, voted to steal the tokens from the remaining 49% and grant it to themselves. But, you know, that would not be good governance. Yeah, no, and, you know, one would hope that, you know, the market would react in such a way that there would actually be a net loss of value for that 51% that voted that way. But these are the types of problems that are not really network problems. They're more like game theory problems for how these voting and governance systems could play out. So I do think we'll see some really, really interesting experiments over the next few years, I think some of which will succeed wildly and some of which will blow away.

up, you know, in a large way. Well, so how do you try to prevent something like that? Because actually, before we got into this topic, one of the questions that I had for you was that if I think about kind of the pros and cons of on-chain governance versus more like an Ethereum or Bitcoin model, my take on it is that obviously we've seen the pitfalls of off-chain governance. However, with on-chain governance, that can be something. want more easily gained, since people sort of know the thresholds they need to meet in order to affect some sort of change that they might want. Whereas with something like Ethereum or Bitcoin

where human judgment plays a bigger role and so governance is less predictable, attackers can't just say to themselves, oh, here's what I need to do. This is like the minimum necessary to push this decision to my advantage. So like how do you prevent that kind of thing from happening? So I would say with respect to on-chain governance, yes, it's difficult, but that doesn't mean that we shouldn't move towards that. So it is a more difficult goal to achieve, but it's a very noble, and I think it will be a very valuable goal once we get there. Now, with that in mind, it's important for projects to grandfather in governance over time. And there are some checks and balances that you can put in place to help do that. And we, for example, this is what we did with Maker, where the core team held sort of veto power on any decisions with respect to Maker and its development.

But they fostered this community of token holders that were very participatory. So that once a week on Sunday mornings, there's a governance call that all the major token holders participate in. There's kind of a culture of expectation that to be a major token holder, in the network that you have to participate and have to be vocal and have to have to contribute. And then this voting became sort of a natural process. And then the whole community was also able to vet out over time that there is a threshold, a sort of quorum of, you know, reasonably competent participants in that network such that there, you know, there's confidence there that when Maker migrates to fully on-chain governance, that there are a group of actors that

understand the decisions that they're making and that there's kind of a voting block that can prevent, say, negative things from going through. But again, that needed to be developed over time through the culture of that network, which I don't think we talk a lot about in our space, but really it's an important element there. And I think you'll probably see it in some of these other emerging governance platforms that there are some large token holders that are, known entities that are sort of benevolent actors that will contribute to the network

in a positive way and there's an expectation of that and they work together and coordinate such that attacking the network is then more difficult. Now that does unfortunately mean that sort of like the whales have a certain amount of power in that network but again I think

the benefits of on-chain governance and the speed that it will offer to a network in evolution of itself, of the network will dramatically outweigh the drawbacks. I guess my thing about that is then it doesn't sound, it sounds quite centralized. Is this more, like, is it just that these people have, that their, their weights are voted more heavily? Sorry, that their votes are weighted more heavily? Or, you know, I'm just trying to figure out because that just doesn't sound. as decentralized as as as as typically think of a decentralized network being sure but we just we just

went through you know discussed a few minutes ago how um bitcoin and and and also ethereum have kind of consolidated around uh some you know some powerful nodes that do a lot of the the mining there and so there has been this migration towards some level of centralization decentralized consensus mechanisms do not necessarily mean radically decentralized consensus mechanisms. They're sort of a happy medium towards efficiency and evolution. And then on the other side, sort of massive decentralization, I think the more that you, that you have participation and the more that you that you incentivize nodes to be positive contributors to a network, the more that, you know, other people will start to onboard into that network and then

over time again in this grandfathering process, it will decentralize and you'll have say closer to democracy than plutocracy. But at the same time, because some of the early tests in governance have been total blowups, mostly because they haven't been able to get to quorum for even very obvious decisions, I do think that kind of having this grandfathering process in governance makes sense at the juncture that we're in. And it's better than just throwing our hands up and saying, well, governance is hard, so let's not do it. Let's just trust the dictator. And when you say that there have been these blowups, what examples are you thinking of? Well, the Dow is obviously the big one, right? Like to not have voted in favor of the moratorium,

obviously was, you know, that was such an obvious decision. But we couldn't get to the threshold to push that decision through because not enough token holders had voted in that moment, even though at the time it was a frankly obvious decision. That was because we didn't have the right tools to make it easy for token holders to vote. There were obviously a certain threshold that were speculative asset holders and not active participants of that network. And that network in that moment would have benefited from, say, minimum quorum of, you know, well-capitalized benevolent actors that, you know, that could push a reasonably non-controversial measure like the moratorium at that time through, right?

I guess, yeah. I mean, I definitely see what you're saying. And this actually leads us to another question I was going to ask you, which was whether or not you, for on-chain governance, whether or not we really should be trusting people who are busy, you know, with their work and their families and everything to make a decision on probably stuff that they haven't done research. And, you know, if I look at even just what governance is like here in the U.S. and I see how, you know, I live in California where we're supposed to vote on all these referendums all the time. And every time I'm like, oh my God, I have no idea about these issues and I'm supposed to make this decision. So I definitely see it, you know, I see what you're talking about, but I also do think that, yeah, it's like a tightrope.

You know, you don't want to go too far one way or the other. Well, this is the beauty of crypto economics, though, right? Because when you add incentivization in, then people get very interested very quickly. And I would argue that if you were paid a reasonable amount for, you know, for your votes and you were also tracked and measured. upon, you know, based on your contribution to your voting in California over the long term, you would probably, or maybe not you, but a threshold number of people would be very active and, you know, given the metrics of the wisdom of the crowd and the strong academic research in favor of that, I would argue that you would, that the crowd would arrive at, you know,

good decisions, you know, probably more often than, you know, the benevolent dictator situation or or another, you know, political, political model. Adding in that economic incentivization matters a lot. And why wasn't the economic incentive there with the Dow? Because wouldn't they have had that incentive, you know, in order to preserve the value of their tokens? So there was an incentive there and yet people still didn't do it. So not, well, not necessarily, right? You need a couple of different things. You need the access and the information, right? And so there wasn't the access. and there wasn't, and I, you know, for some people, there wasn't the information. And then you also need the

incentive to do the action, right? So people, you know, there is this sort of Nash equilibrium that went the wrong way where people are like, oh, well, other people who, you know, can run command line will, will just do the voting and the quorum will go through. It's almost like Brexit, right? And then, like, it happened. And then you're like, whoa, wait a second. That's, that's actually not what I wanted. kind of thing, but like people were sort of lazy because they didn't receive direct benefit for that action. So if you receive direct benefit for taking action, then that's where, again, a crypto-economic model can adequately incentivize very strong governance. Well, and what we're getting is a larger issue around voting really being something that when you

think about it from a game theoretical perspective in, say, the U.S. elections, it's really quite rational to not vote at all because the probability that your individual vote will swing, even to say a local election, is extremely low. And so, you know, it leads to a sort of tragedy of the commons, just our normal democratic system. And it's why, in part, you see such low voter turnout even in very important elections. So to me, one of the things that's so fascinating about this is that we move from designing democratic and voting systems. using governments and nation states with extremely high stakes to using open source software systems and blockchains, which I think everyone can agree, iterates at about a 1,000x speed

to the development of nation state systems, right? So now you have open source developers all around the world actually designing the tip of the spear on what governance, voting, and incentive systems look like. And so to me, the fact that we can move this, this to an offline world that's often a bit lower stakes and much, much more experimental and open to experimentation is something that will have long-lasting effects. And I think we're going to see this in other ways with blockchains, right? So, you know, we're seeing this early, say, new financial instruments that are on chain. So things using the zero X protocol, which is sort of like a trade execution protocol in a smart contract. On top of that, we're seeing Dharma, which is a period

per loan system, D-YD-X, which is a peer-to-peer options and derivative system. Over time, you know, these are projects which are mimicking financial instruments from the offline world. Once these are all created in that blockchain smart contract environment, we'll actually start to see the tip of the spear of novel financial instruments occurring in an open-source software development environment on blockchains. Instead of that occurring in the sort of traditional financialization that's kind of a complex intertwining of Wall Street and the government and various regulatory bodies. We're going to see it evolve in a global open source software environment. So to me, the fact that we're pushing a lot of these very hard questions that actually are unsolved, you know,

to this open source software development speed and iterative ability, is one of the things that's so fascinating to me about this whole ecosystem. So I actually want to go back to what we were discussing earlier, where you were talking about how you could govern your way into a black hole. How do you design a system to prevent that kind of thing from happening? Like if you are just, you know, as you mentioned, there is just so many ways that these could blow up and everything's an experiment. But obviously, I'm sure as these teams are going about trying to design these projects,

they're trying their best to account for all the, different, I guess, like failure scenarios. So how do you guys think about that when you're trying to help these teams develop their systems? So as Ryan said, I think it's important for things to start gradually. You don't want to codify, you know, something that you're not sure if it actually works and kind of vote yourself into a black hole. But there are all sorts of things you can do. So, you know, Ryan mentioned not reaching quorum. If you don't reach quorum, you can reduce the threshold, which is required to get to a vote, right, programmatically. So it's the type of thing where if you can, you know, see the problems before they happen, you can continually iterate

and codify around them. The other thing is that voters can actually, you know, change the voting system, right? This, again, is kind of tricky and almost paradoxical because you have the people participating in that voting system voting to change the rules and thus their rights within that. voting system, which can again create like mixed incentives for certain participants and everything. The main thing for me is that there be a number of experiments run and that we encourage kind of experimentation in this area and that over a long enough time horizon, we will see what works and continue to build on those core things that work and continue to experiment and iterate. I don't think anyone today, you know, even those of us that spend

a lot of our day thinking about this, can really determine what is the exact best mechanism right now. I think this will be an iterative process that takes a long time to determine. But I also think that when it is figured out, you know, I would say that ICOs to date have been the most efficient form of capital coordination we've seen since the development of capitalism itself, you know, $30 million in 30 seconds is kind of unprecedented, right? And I think that if we can move to these systems of on-chain voting and governance in an effective manner, we'll actually see an even more efficient and a large-scale form of capital coordination beyond anything we've ever seen in the world. Well, I wanted to also ask you about a couple

of the governance mechanisms that get talked about a lot, like Futarchy and Liquid Democracy. Can you define those and also describe what you think of them? Yeah, I mean, what a lot of these come down to is on a very high level, putting the vote to the market. So, you know, in a system where you have token-based voting, those largest token holders, you know, it's literally kind of one token equals one vote, which is a very different system than we have in, say, the U.S. offline democracy. That's one person, one vote. And the blockchains, though, you don't really have this sense of personhood yet. So to me, you know, I am very excited about experiments like Futarki where actually markets and effectively prediction markets can determine

outcomes. And so people have to sort of put their money where the mouth is, so to speak. And I think that you get much more honest assessments of positions, you know, a much more honest, you know, reveal of kind of my preferences when you ask me to actually bet on the outcomes that I want. So I very much am looking forward to kind of larger scale experiments of these systems. And I think that there really is no clear answer, though, today about what is going to work the best. And are there any projects that are trying Futurkey? I think very wisely there are not any projects that I can think of off the top of my head that are going to implement Futurkey in their first iteration. of governance. However, it's often a footnote that you'll see in many white papers that

governance will eventually move towards a future key model. That specifically, you know, having essentially a prediction market be that the governance mechanism is something that needs a thorough amount of research and experimentation because it can create essentially a self-fulfilling prophecy, where if you like rally enough people around a specific concept and they're sort of like all betting towards that concept, then you can kind of, in some certain decisions and in some instances, you can kind of like bring it into being and that could go the wrong way. And, you know, because we don't have a lot of, a lot of experimentation around prediction markets to date, but we're on the cusp of seeing a number of different prediction markets.

be live in that scale, I think, you know, in very short order, we will see a lot of projects move their governance towards a futurearchy model. I know a lot of people are excited about it. I also wanted to discuss ICOs, which OLAF had mentioned. Obviously, there have been a number of kind of maybe less than savory outcomes we've seen in the ICO space, and maybe incentives aren't always aligned in such a way as people might like to see, you know, to incentivize the developers to actually build the network once they've raised all this money. So what kinds of governance do you think you can bake in or crypto economics can you bake in to the way ICOs are being done now in order to improve the incentives there? Well, I think one of the things I mentioned

earlier is just sort of favoring a block reward that incentivizes the network over time. That's certainly one. So having an ICO that's only a minority of the tokens and not a very significant component of the tokens and then raising only enough to get the network live so that the distributed network will have enough sort of tokens left over to incentivize resource allocation by individuals over the long term. That's sort of one easy one. Yeah, I think there's also just some basic stuff that exists in a pre-blockchain world for a reason, like, for example, vesting, which is just, you know, the creators of these blockchains should kind of dedicate to a lockup so that they're in it for the long term. I think that makes a lot of sense. Though, you know, I think a lot of

kind of wild west we see in the ICO markets is a result of the fact that in blockchains, you know, you really give financial sovereignty to everyone. And I think that not everyone is totally used to that kind of, you know, power. And so I think that when you give financial sovereignty to everyone, there's like a flip side to that coin, which is that we see a lot of fundraising and contributions and investments that as an outsider don't make a lot of sense. Yeah. So I think that there's a flip side to everything, when you know, to everything, when you give everyone free speech, say, you know, people say unsavory things. One other thing I was wondering about, because you guys haven't raised this, but obviously you are investors. And I know the way that you invest is a little bit more of a venture style where you really work with the teams to try to ensure their success.

But I've seen a lot of different analyses that look at how you can design a crypto economic system to keep the value of the token from plummeting towards zero as the velocity or the usage and therefore the turnover. the tokens rises. So is that something that you guys think about? And if so, what do you think are some good designs to keep the value of the token rising along with usage of the network? So I think what you're referring to is the MV equals PQ kind of monetary equation. Yeah. Well, I think that can maybe usefully inform a way to think about token values. I think we're dealing with a totally new asset class and it is in complete. complete to use that sort of valuation model that, again, is, you know, I think it's struggling to take an old system of thinking and attach it to the current things and innovations we're seeing in cryptocurrencies, and I don't think it's the full picture. So every kind of valuation model that I've seen, I really applaud those that are working towards coming up with something that makes sense.

But I also think you need to think about this from a kind of first principles perspective without being too caught looking in the rearview mirror at equations that have worked for historical movements, historical assets, and apply them too aggressively to this new area, which is frankly just a completely new asset class. So for example, some people are of the opinion that lowering the velocity of money on these networks, thus increases the value of the token, and so you don't coming with longer staking lockups and things like that. But in reality, in the nature of our space and these networks, you could think of it totally counterintuitively as well

and say increasing the value of tokens means that you're increasing transaction throughput, which is actually network effects, which means that the network itself is, is increasing in usefulness. And so, again, you know, just exemplifying Ola's point and further to that, I'm not sure that we have arrived at a simple and true in all senses equation for valuing tokens or valuing these networks. And again, you know, we support experimentation and continue to be open-minded about how to approach

these networks. Well, I mean, when you're helping teams design these systems, do you guys think at all about how to inflate the money supply or whether to cap it or things like that? And if so, how do you make those decisions? So for, I mean, it really depends on, it's a case-by-case basis. So when we bring in projects and jam on crypto-economics, it's important to note and to remember that a good crypto economic model requires, you know, computer scientists and economists and behavioral psychologists and, you know, math and game theory experts. And it's really this amazing field because it's the combination of so many different fields. And so depending on the resource in question that's being traded on the network, depending on the nature of that network, depending on whether, say, velocity,

is a desirable thing on that network or whether or whether you're you're trying to say maximize psychological ownership of the of the token or that network and so locking it up makes makes more sense you know we'll design or will help design a system that that sort of makes sense for that specific network i mean the capping or uncapping will usually be the result of a number of different variables that there are very particular to what you're trying to achieve, whether it's trust or whether it's exchange of value or whether it's exchange of a resource. You know, again, how you approach each one of those would be different and the crypto economic model there would also be different and needs input from all these

disparate fields. And we're running out of time, but one other thing I wanted to ask you about, and Olaf knows that this is something I have been curious about. I feel like every time we've seen sort of a really big decision that needed to be made and people had entrenched views on either side, there's been a fork. And so I just wonder for all the talk of on-chain governance, how do you prevent there just being a ton of forks all the time? Like I feel like if you end up with some system where there's kind of a lot of voting going on about a lot of different changes and there's a few every so often where people just feel super passionate about it and they just decide a fork, then we're just going to end up with all these split coins. But Olaf didn't agree with

that. And I'm curious to just hear your opinion on how you disincentivize that and keep everything on one chain. Yeah. So, you know, I think that in a Democratic or voting system, people tend to accept that if the system is designed correctly, they will accept the outcomes, even if it was not their preference. So for example, if the president of the United States that is elected is not the candidate I voted for, it doesn't mean I leave the United States. It often just means I accept that in this case, I was in the minority of voters, and there really was a preference, you know, that wasn't mine that actually represented the most people. So to me, if you can, if you're, if you're buying a token on a blockchain that has on-chain voting and governance, you should

should also be buying into the fact that when you are the minority voter, that you accept the outcome of that vote as legitimate, even if it was not your preference. It's not to say that this will stop Forks, right? But I do think there's more of an understanding that you will not, you know, have the outcome that you always want, but you still accept the legitimacy of the, of the overarching system. Yeah, we'll see. I think the place where I disagree with you slightly, and maybe it's just that we're on different places on a spectrum, is that I feel like when an open source system, you can so much more easily leave, whereas obviously if you live in the U.S., like you kind of have to upend your life to protest the outcome of an election. So it's

quite a different thing. But I guess we'll find out what ends up happening. Is there anything else that I didn't ask you guys about crypto-organomics that you want to mention? One thing that I'm observing and we're starting to jam on here at the office and do some research on is really the power of the psychological effect in crypto economic systems. And this has come up very recently with respect to Maker and the die. So as Eiff went down quite precipitously over the last few months, there were some instances where one would have expected the die to become unpegged and adjust downward, at least moderately from the one U.S. dollar value that it is. And in fact, it has maintained stability remarkably well, even though it's still today

just the single collateral, which is ETH. And we're starting to kind of think around, you know, just the psychological effect there, that people have decided that die is a dollar. And even though, you know, the metrics in certain moments would have indicated that it should be adjusted down slightly because there is a certain black swan risk. Now, again, just a caveat, the black swan risk will be reduced when it's a basket of underlying collateral. Unfortunately, today, it's still not a basket of underlying collateral. but even in this incipient moment, we have stability, and we only have stability because of the psychological effect that the market has deemed it to be $1.

And I find that incredibly fascinating. And again, it calls into attention the fact that strong crypto economic models are a combination of economics, behavioral economics, behavioral psychology, computer science, security, gain. fury, math, and so on. This, for me, is what makes this field the most interesting on the planet, is this combination of these otherwise disparate fields in a new way that is so fascinating and has such an amazing effect on large groups of people who, you know, otherwise have no interest or no commonality amongst themselves globally. And it's just, it's happening at such an accelerated rate. I find myself often saying that we are innovating in the field of economics more in the next 24 months than have happened in the last 24 years. And that, for me, is just incredible.

I agree. Olaf, did you want to add anything? No, just thanks for having us in the podcast, Laura. Yeah. And congratulations on all the success with this new podcast, as expected. And we're, you know, we're just. so excited about all your success here. Thank you. Well, this has been such a great conversation, and I would like to have you back because I'm sure in just a few months' time, there will be much

more to discuss on this same topic. But before we go, where can people get in touch with you or learn about PollyChain? I think if you go to our website, you can get about as much information as we have out there, which is Pollychain.competal. Right. It's like three sentences or something. But we, you know, we are hiring for a variety of roles. So if you're interested and listening, feel free to reach out. Great. Okay. Yeah, there is one link to a jobs board. And you can also reach out to careers at polychane.capital.

We are hiring both for internal functions as well as a number of functions around our portfolio. So if you are active in any of the fields that I just mentioned, you know, and excited about what's happening in our space and in crypto economics, please feel free to reach out unanimously across our portfolio. Projects are looking for talented people to come and help them. And again, in a variety of fields, not just computer scientists. Great. And as I've said before, not on the podcast, but on the web,

this whole field is full of people who were doing something else before. So don't necessarily think that you don't have experience because basically none of us have experience. Okay, so thanks guys for coming on the show. Thanks so much for joining us today. To learn more about Olaf and Ryan, check out the show notes inside your podcast episode. New episodes of Unchained comma every Tuesday. If you haven't already, rate, review, and subscribe on Apple Podcasts.

If you liked this episode, share it with your friends on Facebook, Twitter, or LinkedIn. It's produced by me, Laura Shin, with help from Elaine Zelby and fractal recording. Thanks for listening. Thank you.