Unchained - Compound Finance Governance, Strategic Bitcoin Reserves, & BitClout's Legal Woes- The Chopping Block - Ep. 682

Episode Date: August 1, 2024

Welcome to The Chopping Block – where crypto insiders Haseeb Qureshi, Tom Schmidt, Robert Leshner, and Tarun Chitra explore the latest trends in the crypto world. In this episode, we dive into topics like the potential U.S. strategic Bitcoin reserve proposed by Trump and political figures, and its implications for the institutional adoption of Bitcoin. The episode explores the recent turmoil in DAO governance through the example of Compound's voting mishap with a controversial proposal, analyzing the role of activist investors. The squad also reflects on the legal challenges faced by the founder of BitClout, Nader Al-Naji, who was charged with misappropriation of funds, offering insights into the importance of transparent and ethical governance in the crypto industry. Listen to the episode on Apple Podcasts, Spotify, Overcast, Podcast Addict, Pocket Casts, Pandora, Castbox, Google Podcasts, TuneIn, Amazon Music, or on your favorite podcast platform. Show highlights 🔹 Analysis of the potential implications of U.S. strategic Bitcoin reserves as discussed by presidential candidates, focusing on how this could affect global crypto policies and market reactions. 🔹 Exploration of the influence of regulatory environments on DAO participation, particularly how U.S. funds are hesitant to vote due to potential legal liabilities. 🔹 Examination of the controversial proposal by the 'Golden Boys' on Compound Finance and the role of activist investors in DAO governance.  🔹 Discussion on the complexity and innovation in crypto governance models, with examples of Compound and the challenges faced by DAOs in managing proposals.  🔹 Debate on the role of governance structures and how they can evolve to prevent malicious actions by large stakeholders.  🔹 Review of the SEC and DOJ charges against BitClout founder Nader Al-Naji for misappropriation of funds and misleading investors.  🔹 Overall reflection on the responsibility of crypto project leaders in maintaining transparency and ethical financial practices. Hosts ⭐️Haseeb Qureshi, Managing Partner at Dragonfly  ⭐️Tom Schmidt, General Partner at Dragonfly ⭐️Robert Leshner, CEO & Co-founder of Superstate ⭐️Tarun Chitra, Managing Partner at Robot Ventures Disclosures Links DOJ - Founder Of “BitClout” Digital Asset Charged With Fraud In Connection With Sale Of “BitClout” Tokens: https://www.justice.gov/usao-sdny/pr/founder-bitclout-digital-asset-charged-fraud-connection-sale-bitclout-tokens  Learn more about your ad choices. Visit megaphone.fm/adchoices

I think it's always good to have a pessimistic view on governance because people love hating on collective decision making. It's like a very easy thing to hate on. But I think the optimistic view is that there's a lot of innovation in these types of ways. And crypto is the only place I see in the world that bothers experimenting with this. The rest of the world is instead fighting over whether Nicholas Maduro rig the election or not. Not a dividend. It's a tale of two quond. Now, your losses are on someone else's balance.

Generally speaking, air drops are kind of pointless anyways. I'm in the trading firms who are very involved. D5.8 is the ultimate DFI protocol is part of the antidote to this problem. Hello, everybody.

Welcome to the chopping block. Every couple weeks, the four of us get together and give the industry insider's respective on the crypto topics of the day. So quick intros for us to got Tom, the DFI Maven and Master of Memes. Hello, everyone.

Next, we've got Robert, the cryptoconassur and Tsar of Superstate. GM, everybody. And we've got Tarun, the Gigabrain and Grand Puba and Gauntlet. Yo, happy to be back. It's been a while. And finally, I'm Sib,

and hype man at Dry and Fly. So we're early stage investors in crypto, but I want to caveat that nothing we say here is investment advice, legal advice, or even life advice. Please see Chopin Block. That XYZ for more disclosures. All right, so it's been a little bit.

We've been kind of off and on for the last few weeks. A lot of us have been quite busy. Crypto world has been equivalently busy as has the world of politics. So let's check back in with our friends buying for the White House over in 2024.

And it turns out that very recently, we had a blockbuster appearance by Trump, as well as RFK, the guy who's running as an independent for the upcoming election. And everybody now seems to be making speeches about the idea of the United States buying a strategic Bitcoin Reserve.

So now, what is a strategic Bitcoin Reserve? I don't quite know what is strategic about the Strategic Bitcoin Reserve, but what is contemplated, and this was a given first one, speech by Trump and then also echoed by another speech by RFK, as well as a bill that was proposed by Senator Cynthia Loomis is the United States government basically going in and buying a bunch of Bitcoin on the open market until they have a big pile of Bitcoin. Numbers have been floated.

RFK said 4 million Bitcoin out of the 21 million, which is a massive amount. Senator Loomis proposed 5% of the total Bitcoin supply. Trump, I don't know, just I don't know if he said anything very specific. I think you just kind of alluded to it. I think you just said no selling. He's like, we're not going to sell the Bitcoin that we have. We're not going to sell the, okay. So basically the Bitcoin is on the balance sheet. It just doesn't get sold. I guess that's Bitcoin that we seize from the Silk Road and that becomes a strategic Bitcoin reserve. Which is funny because this week, they started moving some of the Silk Road Bitcoin to start selling it. So it's, I don't know if it was intentional. I'm sure it was already scheduled,

but funny timing. Right. Okay. So, boys, is this finally it? Have we hit the point of institutional adoption. Is this what we meant? Yes, this is what we meant. I don't think anyone a few years ago would have envisioned a 50-50 probability based on a coin flip of an election, which is going to be a very tight election, a coin flip that the largest economy in the world would declare that Bitcoin is strategically important to the balance sheet of the largest economy on Earth and that it must respect the asset. I mean, that's like the biggest sovereign adoption that's possible. The U.S. is without question at the top of the stack.

And so, you know, that would be the largest domino if the U.S. actually implements such a thing. I think many other countries would follow, not in any particular order or timeframe, but it would give a massive amount of legitimacy to the asset as a global asset. I don't think, you know, Bitcoin is necessary. necessarily a strategic asset in the way that oil is a strategic asset where it must be stockpiled so that your country can physically go to war or fuel its transportation. I see it as a financial asset and countries do make financial investments all the time. Central banks have a diverse array of policies on what assets they put onto their balance sheet. Treasuries do as well.

I mean, you know, making financial investments is not new. Gold has always been a financial investment for economic security. So I think it's a little bit of a misnomer and weird marketing to call it like a strategic reserve. Because that makes me. Like when do you release the strategic reserves? Right. Correct. And so I think that's a little bit awkward.

But, you know, as a Bitcoin holder, most people who are listeners are likely Bitcoin holds in some way. the idea of the U.S. government becoming a Bitcoin holder and or purchaser is massive. So I agree with you in the long run, you know, if you can get other government. So obviously, if Trump is elected, he is not proposing that the U.S. government becomes a marginal buyer of Bitcoin, but rather that it just doesn't sell the Bitcoin that it currently owns. Maybe that is the gateway drug to getting more Bitcoin at some point or diversifying into Bitcoin. But at least for the moment, it seems like markets are.

are, they reacted a little bit to Trump kind of just, you know, kind of build a little bit of red meat, but they didn't, it wasn't like, oh my God, there's now 50% chance that Bitcoin is going on the balance sheet of like every sovereign in the world. I kind of see it more as like the gateway drug thing is that it's legitimation. At the same time, of course, many, many people around the world see this as like kind of ridiculous and like, okay, well, first of all, how much ability does Trump have unilaterally? to create a strategic Bitcoin reserve? Like maybe if it's like, okay, can you get Treasury to like not sell their Bitcoin?

I guess, you know, Treasury's under control of the executive. But can you do anything more than that, really? That I just don't know. But, you know, if you look at like what Cynthia Loomis is proposing, which I believe is proposing that the Fed do this, right, to buy 4% of the Bitcoin supply, or sorry, 5% of the Bitcoin supply, that is absolutely insane. but is potentially possible if the stuff that Trump has been,

that has been leaked in the New York Times and so on about Trump considering some kind of takeover of the Fed, in principle would be possible. I think insane, and I think very unlikely that he would even do it, because, you know, whatever, he's already elected. So what does he care now? But that would be absolutely earth-shattering relative to, okay, they don't sell the Bitcoin, and we call that a strategic Bitcoin reserve. Yeah, it's also interesting because, you know,

The Strategic Petroleum Reserve was created through an act of Congress. It was, you know, essentially U.S. policy to stockpile oil. You know, it's a question for the policy people who listen to show about whether, you know, the executive branch can just do something similar. Or, you know, he would have to convince lawmakers to, you know, make it a U.S. policy to stockpile Bitcoin in some way. But, you know, for a comparison sake, you know, the strategic petroleum, Reserve was created by Congress. Yeah. I mean, it's the power of the purse is controlled by Congress, right?

So they can't spend net new money to go buy stuff and just put it on the government balance sheet without Congress, pretty much for sure, right? You can maybe dig around some weird executive orders somewhere. Yes, you know. Like the Federal Reserve is able to put new assets on a balance sheet without acts of Congress. The Federal Reserve is, right? But that's not under control of the executive branch, right?

Correct. So the executive branch explicitly controls Treasury. So Treasury, like, it's not independent, right? Although I will say, and like I'm not saying this is likely, but you know, during COVID when there was a crazy, all the crazy like central bank buying every possible asset, there was a lot of coordination between the central bank and the executive orders to kind of do that type of stuff. So in a situation where they're both aligned, I feel like they can help each other do that. Now, of course, you need a crisis. You need a crisis. Yeah, I feel like you need a crisis for that.

But, like, you know, I think Trump doesn't let crises go to waste themes so far. But what kind of crisis would make appropriate buying a bunch of Bitcoin? No, no. The pandemic was buying Bitcoin. That was also a great time to have done that. To buy Bitcoin? Well, I mean, if you have countries increasing their gold reserves during that time, I don't see why they would not necessarily consider it,

especially if they already have, I think it's like a zero or one. thing. Like once they start, they can't stop. It's like, sure, even if they go. It just strike me as, um, it's kind of like, um, school elections and, you know, one candidate promises, you know, chocolate milk from the water fountains and the others, you know, it's free recess. And then it's, it's just like, you know, kind of making up claims and everyone's like, trying to like out, out Bitcoin each other. But I think, um, the other parts of Trump's speech were actually kind of more interesting. And it feels like somebody is, somebody well informed is kind of feeding him crypto policy. I mean, you talk about, like, like, um,

like, you know, firing Gary Gensler and commuting Ross's sentence. And you said, you know, ending Operation Choke Point 2.0, which is like Nick Carter's whole thing. And so it's like very kind of crypto-shibolethy coded. And that I think was actually more interesting to me. That's not just, oh, I say Bitcoin and people cheer and thumbs up. And, you know, that's kind of the end of the speech. But it's like, okay, maybe it's like a little bit more nuance to kind of the crypto policy and perspective. There's kind of a funny like I am Satoshi type of thing happened. here where like at least three different people have told me that they or their boss is the one who told him to this fed him this and it's like funny like everyone wants to take credit for doing

it so like I find that also kind of this like very funny thing of course they do yeah like this is the transformation of you know a major party candidate into being pro crypto you know how could you not want to take credit for that if you were adjacent I it's just funny because like there's DDoS effect where like Sybil attack where like everyone is saying I did. Totally. But it's now officially a part of the Republican Party platform to be pro-crypto. Yeah. That has been a real transformation.

So interestingly, you know, along the same weekend, so obviously there was a Bitcoin, this gigantic Bitcoin conference in Nashville where two presidential candidates attended. There were supposed to be a third, which was Kamala Harris. So Kamala Harris, of course, is now the presumptive Democratic nominee. me and Kamala Harris supposedly was in talks with the Bitcoin conference organizers to also appear at the Bitcoin conference, but ended up deciding against ultimately attending. But so it sounded like from the noises that I'm hearing from some of the folks who are, you know, kind of more politically active in the U.S., that the Kamala team is interested in crypto.

They're trying to wrap their head around it. They're trying to get more input from the industry to see, hey, what's going on here? this seems really important, and it seems like so far our policy stance has maybe been not constructive. We want to hear from you guys and we want to get an idea of what we can be doing differently. But it sounds like they're still undecided. But they're open to conversation and they're willing to like, you know, take meetings in a way that the Biden administration was just really not open to. So it also seems good that both parties seem to be moving toward something closer to the middle ground. But Republicans clearly have fully embraced the crypto platform at this point.

It pains me to say this as someone who's born in Delaware and hates California. But, you know, I would obviously think that California Democrat is much more crypto than someone from Delaware. And I might, me and Ansel might be the most crypto people from Delaware possible. Everyone else is not going to make it. Fair enough. I haven't even known anyone else from Delaware. So you automatically win. Yeah, I mean, yeah, the only first person I ever met in Crypto is from Delaware is Anson.

So I will say it's like, wow. I didn't know they allowed non-white people in Delaware. That's, that's very interesting. You know that this, that's funny, but you say that because the third most popular religion in Delaware, most common religion is Hinduism. It has, it's like, yeah, they're all going for the tax, saving tax money. I just, I just remember, do you all remember Wayne's world, the original, where, um, they have a fake backdrop and they're like pretending to visit different states and they visit Delaware and they go like Delaware.

Okay, not sure what we're doing here. All right. Next state. You know. Yeah, they incorporated Delaware and they move on. Delaware also has a great slight tangent scam in that it has one of the shortest amounts of federal interstate highway, but it has the highest toll to number of miles you drive ratio.

It's only like 15 or 20 miles, but the toll is like six bucks. Like not counting a bridge. There's it. Thank you, Teruio, for the Delaware trivia that keeps all our viewers tuned in. It should be a recurring segment, I think. Delaware likes with Turin. You would run out very quickly. It's like, it's kind of a shit state.

It's kind of a shit state. Okay, all right, all right. Well, hold on. We're going to lose all our Delaware viewers, Turin. You got to slow down. Okay. All right, all right, all right. So let's move on.

So very interesting week this week in on-chain governance. this is one that I think has got a few sort of twists and turns in the story. So let me set this up. So compound, of course, governance protocol. Some of the people on the show may have some prior affiliation with compound. So compound is a lending protocol. It exists on chain. It's fully decentralized.

So it is governed purely through on-chain votes of people who own the comp token. So there is a gentleman by the name of Humpey, who turned out over the last, the previous weekend, voted on a proposal that was going to allocate 500,000 comp, which was worth at that time about $25 million, from the protocol treasury to a new yield-bearing protocol that was designed by this group called the Golden Boys. And this group, the Golden Boys, was going to establish this wrapped comp token called Gold Comp,

which would do some kind of mining yield thing. Don't quite totally understand what the idea was. And so originally they made this proposal with, like, I think, 100,000 comp, and it was defeated in governance. And then they came back a few weeks later and then made another proposal in which they five-xed the amount of comp that they were requesting.

And this proposal, I guess it went to a vote over the weekend and people in governance just kind of didn't see it or didn't get around to voting on it or the alarm didn't get raised. And this proposal passed. And this proposal passed in large part due to a large amount of comp

that was purchased on the open market, presumably, by Humpey, in between the time of the first proposal and the second proposal. Now, this guy, Humpey, is not a, this is not his first rodeo. Okay. So Humphi has a history of going after Dow governance and pushing them as a quote unquote activist investor for his own or, you know, his or their personal gain. First was Balancer in 2022 where Humpty cornered like the cream wet pool and then used his battle tokens to get a bunch of emissions to the cream wet pool and then fought with, there was like a detont at some point and it was

like a whole thing, and then did the same thing most recently with Sushi Swap in 2024. And so he's basically like a kind of known actor in activist governance stuff. So there was a bunch of people on Twitter being like, oh my God, how could this happen? There was this, you know, kind of thing that just went on and nobody paid attention. And now, you know, all this comp is owned by the Golden Boys. Well, so in the end, there was some kind of, let's say, midnight negotiating. with Humpey and, you know, broad community backlash. And they decided instead to withdraw the proposal,

which had already passed governance. The proposal was withdrawn and canceled and replaced by a new proposal, which is basically everybody's happy now. We're doing some kind of compound staking, and 30% of token reserves go to stake compound holders. So basically, no now weird thing and no more golden boys involved in this.

And everybody kind of counts it as a win. So it seems like all as well. You know, whatever was, whatever bad thing people thought was going to happen has not happened. But it's caused a lot of consternation and a lot of activists or a lot of discussion about, one, the role of activist investors in Daos, two, the role of active governance and whether this is an indictment against Dao's or whether, you know, there's something wrong with Dow governance, such as something like this, could happen in an OG Dow such as compound. And what it means for thinking about Dow governance going forward.

So let's go around the horn and take people's perspectives on this whole compound governance Humpy episode. Robert, why do you kick it off? I'll kick it off. In full disclosure, I've been quite removed from the project for over a year. So most of my views were just as an outsider. But as also someone that was involved early on in helping to design the governance system

that has become one of the standards. So as background for folks, the compound governance contracts and frameworks are the most widely used in CryptoDut today. They're copy-pasted repeatedly. Open Zeppelin has standardized them, and it's basically a library that a huge number of projects are using for on-chain governance.

This is done because the contracts are relatively simple, easy to understand, easy to reason through, and they don't have complex parameters. It really comes down to one token can be delegated, whoever is entrusted to vote that token, it's one vote, one token. So it's a very simple system that's easy to understand. And when it was designed originally, you know, it was done not knowing what to expand. Because, you know, governance on-chain circa 2020 was incredibly new.

There was very few working examples at that time to use as prior art. since early 20 to 2020, sorry, early 2020, there's been, in a lot of ways, huge advances. It's been four and a half years since the system was designed in on-chain governance. And so, you know, my first thought is, you know, this is one of the oldest on-chain governance systems that exist. Like, so many improvements have been designed in the year since. This was almost like chapter one or chapter, you know, one and a half of on-chain governance systems. government systems, you know, one token. What do you think has gotten better in on-chain governance since, like, the Concha

Bravo days? Yeah, there's a few things. One is, you know, I like some of the models out there that have time-based voting. I actually like curves governance contracts in a lot of ways. I like that the longer you commit to being a stakeholder, the more your vote counts, so to speak. I think that actually prevents, you know, certain types of negative behavior. I like systems that do have some like external safeguards in place. You know, the compound governance system is very few like checks and balances and intermediaries. It was designed that way,

you know, deliberately, but there's very few things that allow people to cancel proposals. You know, back when these were first created, the idea that a multi-sig was going to have to approve each, you know, governance proposal seems crazy. Now it's almost the norm where it's like, oh, a trusted counsel, you know, can prevent bad actors from being involved in the protocol. Well, at the time, you know, from the crypto, you know, philosophy, that was considered absurd, right? And so there's very few safeguards or very few checks and balances that are in place that allow a council, or whatever, to cancel proposals or screen them or censor them. It's really a censorship, you know, censorship not allowing process for the creation of proposals. And so, you know, this was always a theoretical possibility that somebody would just become an extremely

large stakeholder and, you know, push through their will, right? it's hard to say, you know, in this particular situation, like, you know, is the system working? Is it not working? I don't know. I mean, this is one of the most widely debated things on crypto Twitter. But, you know, it's interesting that someone was able to accumulate just like so much of a governance vote very quietly and very discreet. And really putting a major system like this to its test in one of the, you know, for the first time in a lot of ways. So, Darun, I know Gauntlet has been very deeply involved in compound governance, and you guys were also a participant in the, or not a particular, I don't know exactly what the role was of Gauntlet, but Gauntlet was like sort of in the governance forums advocating for the eventual resolution that Humpey or Humpey's emissary is proposed to bring the whole thing to arrest with this new staking proposal.

So I'm sure there are things you can't say, can't say, whatever, but like give us, what is your take on this whole drama and how did you guys view it? So I would say this wasn't a thing out of nowhere. There had been two prior attempts. And, you know, I think in all these attempts, we had spent a lot of time trying to explain to voters, you know, what this proposal was trying to do and claim to do and try to encourage people to participate. I think we were able in the first vote to corral sufficient support. I think there's sort of a combination of factors that led to the second one. First, obviously the increase in size certainly helped. Second, a lot of the largest holders are still U.S. funds,

and U.S. funds are extremely afraid. made due to some regulatory actions have taken place against Dow's to vote in Dow governance votes. And so, you know, I think you're in this very weird predicament where, hey, to reach quorum, it's extremely hard to do it without one of the U.S. funds who owns X percent and, you know, sufficient to have the vote go through, who doesn't really want to take over, but they're afraid of their own liability and so they won't vote and so then it becomes a kind of corraling work of trying to get the group of active participants you know as a kind of kind of

this maybe not disclaimer or disclosure but just like you know we've made like the most proposals in the last few years like we're making proposals like weekly or every other week so I think we are quite deep in the weeds there. And I think we've definitely observed this chilling effect from each of the actions against DOWs where, like, funds slowly stop voting. And I think if funds own a large percentage of the float, but then don't vote, it actually makes them susceptible to this. So I can understand the funds perspective.

There's a kind of, you know, unbounded legal liability thing. in participating. On the other hand, if an attack successful and, you know, there's funds lost by users in some indirect way,

then the funds are also probably liable to other types of lawsuits. So, it's kind of a weird situation, and I would partially blame the regulatory uncertainty for U.S. entities. So DAOs that have a lot of U.S.

participants are very different than Dows that don't have many U.S. participants. So what you're saying, it's all Gensler's fault, no matter what happens. I mean, I think it's partially gendler's fault.

I also think it's the fact that these funds own these stakes and, you know, I haven't quite figured out the correct way to participate in these networks, whereas, like, you know, much more foreign participant DAOs have much higher participation rates. So I would say that. I would say the second thing is, and this is something we spent a lot of time trying to advocate for,

but sometimes it's a little bit hard in Dow governance, which is if a Dow is earning a lot of fees or has a lot of accrued fees, I think those fees should be either delivered to the suppliers, the participants in the protocol, where they should be used as insurance or something, but they shouldn't just kind of collect and not get used in some way, right?

And I think in this case, there were quite a large amount of accrued fees, which made it a sort of natural reason for someone to want to do this. Now, other lending protocols, other perpetual protocols have added fee switches. And again, this gets back to this U.S. entity thing where, like, you look at the uniswap fee switch thing. It was U.S. fund, large U.S. funds, who sort of blocked the vote, even though, like, most of the community was very pro turning on the fee switch. So there's some combination of large U.S. funds and Gensler, who I think are in a lot of ways. the culprits of this.

I do think there is value, though, that in, you know, again, like, people bringing this type of stuff to attention, I think it's just sometimes it had been done a little more carefully or gingerly. But, you know, it's crypto, so I think you're always dealing with Cowboys.

Tom, with your take? Yeah, I mean, I think it's this classic, like, people want to have their cake and eat it too where they, you know, don't like, the dead weight on in governance of these large funds who might not want to vote for various reasons. But then, you know, obviously they also don't like the idea that, hey, you know, one large actor can basically, you know, dictate, you know, the direction of the protocol. And so it's sort of like, you know, you close one eye and you see Humphi and you close the other eye and you

see Andresen. And, you know, in some ways, it's like that is the nature of on-chain, you know, asset-weighted voting. And there's ways, as Robert was saying, to, you know, deter. mitigate that actors, but it is ultimately like kind of, it comes with the territory. I think kind of the workaround obviously has been more delegation, delegation to university blockchain clubs, university or delegation to paid delegates. And I don't quite know kind of how that system is working. Obviously in some ecosystems and some dows, they're very vibrant and there's always new proposals and there's good treasury management. And then in others, it just feels like, you know, everyone is asleep at the wheel. And,

And this is sort of a very egregious example of somebody who, you know, maybe didn't have the best intentions, kind of trying to, you know, pilfer the Dow for its riches. But I think it was minor examples, you know, people have, you know, talked about, hey, like, this is a ridiculous budget for this big item or, you know, some contractors billing the Dow, you know, hundreds of thousands or millions of dollars are very simple work. And I think that stuff probably goes on more frequently, but doesn't get the attention that, you know, someone like Compi does. Well, I think, yeah, I think at the end of day, DAOs that earn fees that don't redistribute the fees to different stakeholders will always be kind of faced this type of dilemma. I think the, yeah, if I look at something like Rook Dow where there was a real hostile takeover, that was much crazier. I think it's just that this because it was kind of one of the more, is much more well-known was, you know, kind of in this thing.

So it seems like the views here are. are between sort of Robert kind of pointing out, okay, you know, governance has grown up, and this is kind of a very, this is sort of a more primitive governance system that could probably improve some from some mechanism improvements. Turun, I think, kind of saying, like, well, you know, if you keep a bunch of assets on the balance sheet, you're a honeypot, you're going to track this kind of behavior. That's no good. People should pay more attention.

And Tom just saying, well, you know, whatever, it's Wild West, like, what do you know, I also do place some of the blame on the U.S. funds, right? like that. Yes, yes, yes. And I think that is, that is definitely absolutely right. And, you know, full disclosure, Dragonfly is an investor in comp and we own some comp. We did not vote. In that vote, we didn't know the vote was going on. There was a weekend, which is obviously a lame excuse, but is true. But also to your point, Tarun, you know, we try not to vote directly on things because of the exact same reason that you mentioned, which is that, you know, there's been case law within the U.S. that claims that when, you know, funds participate in Dow, so you remember

very famously, the Uki-Dao case in which a judge, actually, there's not actually Gensler, this is like a district judge, who said that if you voted your tokens, you are basically liable for the actions of the Dow. And what effectively that says, I mean, maybe there's some rationale to that theory, but of course what it incentivizes is don't vote if you don't want liability. And that has created this really messed up equilibrium where the overwhelming incentive for investors, whether they're retail investors or institutional investors, is don't vote your tokens if you don't want to take on liability for what happens afterwards.

And of course, nobody wants liability for what happens afterwards when some crazy guy creates a vote about gold coin, you know, golden boys, whatever the hell is going on. And the interesting thing I think is a few. Now, I should also note that we're very small investors in comp, right? So we're not even in like the top 20 owners of comp. So relative to some of the other funds that people were yelling at, you know, I think we're pretty de minimis relative to those guys.

But the general point, I think, is correct. And I don't know what is a good answer to that besides just more delegation and paying delegates, right? I think the answer is that you need to make sure that there's a healthy ecosystem of delegates that, you know, big players like ourselves or other investors can delegate to and that they're compensated for doing good work. And I think also to Robert's point, this is nowadays a best practice to have some kind of council of trusted community members that can't just, just, wholesale do things, but can at least veto bad actions, right? The reality is that in corporate law, and we sometimes analogize Dow's to corporations in a kind of loose way, in corporate law, you cannot just pass anything that you want that goes through a shareholder vote, right? There are certain things that are not allowed, such as something that, for example,

benefits certain people in a class of shareholders over others. You're not allowed to do that. You can't say, you know, well, we are the preferred shareholders. and the common stock shareholders don't own as much. So we're going to vote the preferred shareholders to get a giant dividend that the common doesn't get, right? Can't do that. Because obviously that would incentivize essentially kind of corporate rating or stripping or tunneling,

which is basically, you know, you buy a company and you strip out the assets and sell it or give it to certain people over others, right? If you do that, that basically is an incentive to just go, as Tom said, just raid the piggy bank. But Dow's don't have this mechanism by default. There is no way programmatically. to say this is unfair to a certain class of token holders, you know, such as this proposal for

the Golden Boys. Like, it's actually pretty unclear what the Golden Boys were going to do once they had this gold comp thing, right? Like they sort of claimed and ostensibly in the governance form, they were like, no, no, no, we have really genuine reasons to believe that what we're doing is for the good of the protocol. And for all I know, maybe they did have genuinely honest incentives that maybe just looked kind of weird on paper, but maybe they were really trying to do the right thing and they're just weirdos.

At the end of the day, the cleanest way to avoid that is to just say, look, whatever it is you're proposing has to be able to get by a council. And that council is, you know, it's not, it's not unilaterally competent, but it can at least say in the worst case, hey, your job is to stop weird stuff from happening in the, in the worst case that somebody does end up getting this 51% of governance votes. And it ultimately acts mostly as a disincentive to even try, right? It's not that there's a bunch of proposals going through any of these DAOs of people trying to, you know, vote themselves all the, all the money in the Dow. But just in case it does.

That has happened, though. That has happened, though. Right, but it's very rare, right? My point is that that's very rare. There's also cases where, like, take all the money has happened. Like, Beanstalk was one of the examples. There was a voting contract and somebody won a vote and took all of the assets backing the beanstalk or, you know, whatever. Yeah, yeah, yeah.

Yeah. So to be clear, obviously that has happened before, but these things are rare. If you have this kind of veto mechanism, it basically becomes just not even worth trying, you know. So it does feel like it's a teachable moment for Defi and for governance generally. I don't know if it, like, I think there's been a lot of sentiment lately of like, hey, Dow governance kind of sucks. And like maybe we should just move away. we should just move to these governance light systems or just like embrace the multi-sig, you know,

and just say like, bucket, right? Like if it's going to be multi-sigs, just make multi-sigs all the way down. I don't know. What's your, what's your view on the people who are sort of anti-Dao governance? I mean, I think Dow's can work if they have active. In general, I think it's like active teams

and founding teams. It seems quite crucial to their success. Just mainly because it's like the vote distribution is not, it's like hard to take pure community members and get the vote distribution to be real, you know, sufficient for such a Dow. I think there is some version of the world. I think in Solana, there's a lot of examples of people trying to do more why. wilder governance mechanisms. Actually, I think I would actually put Solana as much further out.

I saw a lot of people talking about how dual token voting will solve everything. And I don't know about that. We've seen just as many problems with the dual token votes. And like, that to me is like what problems have we seen with dual token votes? You're talking about OPE or Lido? Yeah, no, Lido. Lido is actually fine. It's just OPE.

I mean, I think the way the like grant distribution. worked and stuff was like quite unfavorable there's like you know they have like an anti uh you know they had some sort of i would say liability issue you know the type of stuff tom was talking about where like people found ways to abuse the system and get paid a lot it's sort of like a very it actually makes the dual token thing i think actually makes it more opaque as to when such a thing is happening versus the single token so i i'm not sold on that. I think the Salana experiments are far more interesting, to be totally honest, because people are trying futarchy again there in governance. People are trying a lot of different...

Who's trying futarchy? Drift. Drift governance is going to be... Drift is doing futarchy. Yeah. On governance? Yeah. Wait, didn't they just launch the prediction markets like a week ago? Yeah, yeah, but they're dog-futing their own protocol. I'm telling you, like, I think people in Ethereum land don't spend enough time looking at Solana. stuff because I think it's actually worth looking at because it is it is a huge community of people it's like definitely the second biggest by number of people and they are doing interesting things there too I think like their governance contracts look very different their multi-sig and governance

are more integrated um I think like you know if I look at no so safe it's sort of more isolated from say something like compound gardens to Aragon and you have to like glue them together in the right way uh the way the salonic code looks is quite a bit more integrated. So I think, I guess my long story short is like, I think people in Ethereum on L2s have been taking more aggressive steps than applications on governance.

And I think we'll see the fruits of that, hopefully. But I think there are people still doing experiments. I don't think there's reason to be totally negative. It just feels like, you know, it's like saying I hate politics because like everything sucks, but then what's the next best alternative? it's like equally bad, right? So I think if you take a slightly more optimistic view, there are people still innovating governance. They're just not where you think they are.

And I think it's really worth, really worth making sure those experiments happen. So Robert, let's say a founder comes to you. They're building a brand new Defy protocol, and they say, okay, what is the best practice today on governance? What should I be doing and when should I be doing it? Yeah, I mean, at a really high level, level, you know, in general, my view is, you know, there should only be governance in place once the system is relatively hardened on its own and doesn't need constant governance, right? Because, you know, the ability of pre-governance to make changes, to edit, to update, to, you know, modify, to tweak is vastly superior to that of a decentralized community. Right now, like, you probably cannot find an example of a decentralized community that's like quick and efficient and effective at decision. Right.

Like it's very. And so governance is almost an end of a process, not the beginning. And I think like one of the biggest mistakes I see is like people start off and they're like, day zero, there's governance. Sometimes even before there's a protocol. Right. It's like people are putting governance way too early in a process, not where I believe it belongs, switches at the end. And so I think it's the first, like, major mistake. The second, you know,

I do think that, you know, so much has changed over the last four years with governance. I think a lot of the, you know, philosophical perspectives that people have have evolved. I think at this point, you know, good governance is, you know, limited in how much you want or should have a very broad community, making decisions. I think it's great for certain decisions, ratifying something new, deciding, you know, A versus B, like a crowd is very good at that, you know, a very large dispersed community is not efficient at, you know, modifying the risk parameters of a protocol. We're not efficient at, you know, calibrating, you know, a lever, right? And so, you know, I think at this point, protocol should be designed. And this is both governance light and governance complex, but,

you know, to have specialists in place. It's like, okay, you know, this specific team, whether it's a multi-sig or, you know, some custody address or whatever, has powers to change X. This other thing has powers to change Y. This other thing has powers to change Z. And not, okay, it's a broad community. It does everything at all times for all this. Like, that's incredibly inefficient. It's almost like, you know, committeeification of control. And I think there's a lot of ways to do that natively in protocols, right? Like the only times you need like very broad token holder governance is for major decisions. And I will say there is a move in newer DFI protocols in Ethereum and a little bit in Solana,

but I think this is more of an Ethereum thing to having these kind of like layered protocols, where each layer is sort of governed differently, and some layers will be governed by a smaller group or even one person. Some layers are governed by the overall DAO, you know, like things like morpho, mellow, et cetera. And then they have, you know, competition between the different layers. Like, you might have multiple participants

who offer a different service at each layer. And I think we're going to start seeing innovation of that form, which is more like, you know, I think Dow governance in 2020 was like, here is an arbitrary function that you can execute on the state owned by the governance contract and people vote on it. And now it's much more like, here's access controls, here's certain types of users, certain types of groups. And I think in 2021 in the euphoria, there are a lot of people who are trying to build tools for DAOs around this kind of very basic primitive of like, we have a function that can be executed on the DAO's state and people vote on whether that function gets executed or not.

And I think the tooling was sort of, you're kind of in a rock and a hard place because it's like very hard to build that off such a basic primitive. Whereas what we're seeing now of like these like layers each having a more well-defined scope of what types of functions can be executed, when can they be executed, what level of granularity do you need. Those are actually providing a lot more efficiency. And so I think we, you know, I think it's always good to. to have a pessimistic view on governance because people love hating on collective decision-making. It's like a very easy thing hate on. But I think the optimistic view is that there's a lot of innovation in these types of ways. And, you know, crypto is the only place I see in the world that bothers experimenting with this. The rest of the world is instead fighting over whether Nicholas

Maduro rig the election or not. Well, I love seeing these examples of convergent evolution. And I feel I feel like in Daos, I was reading a little bit about the history of the SEC and the independent agencies that arose in the U.S. And these agencies, like these independent agencies were, part of the reason why they're independent, it means that they're not under the executive branch formally. The president can't fire the head of the SEC, per se, unless it's for cause. Like, they have to have done something wrong. A big part of the reason for that is that they were originally understood to be delegations by

Congress, right? The idea is that, okay, Congress slash Parliament, it's kind of too hard for a big, you know, group of like 200 people to agree on, you know, complex questions. They can't, they can't decide on every little thing. And so they're supposed to delegate the authority to, like, a smaller group of people who are outside the remit of the executive branch, but have almost like executive-like authority to make rules. And, you know, that's supposed to be what the he's doing is making rules, which is obviously what one of the things we're complaining about is they're not making rules about crypto. But that concept feels very similar in a way to what we're now arriving at for Dow. It's like, yeah, yeah, don't have every little decision go through all of Congress,

right? That's crazy. That's like a massively terrible way to make decisions as like a gigantic Ouija board that we're all, you know, pulling around collectively on every little decision. We need some degree of delegation, some degree of specialization, some degree of like, you know, let there be grandstanding and, you know, big arguments over big political questions of the day that really do require group input. But otherwise, like, yeah, let's agree to specialize and delegate effectively. Yeah, but at the end of the day, I still think there's just a lot more transparency in what is happening, even when you have the specialization, which is a, which I think is the clear difference between this. I think people just don't like, like, you know,

especially people who are like, pure traders within crypto and like, or pure, like, only think of the financial aspects of these and not how the code looks and like what actually goes on under the covers. You know, they, they have a kind of like, hey, like, everything should be as fast as me being able to make a dex trade. Right. And like, that's just not, that's just not the way software development works. Like, you no matter how you cut it.

Fair enough. Okay. And it's also like, crypto is filled with a lot of like, angsty 20-year-olds who like, I feel like have never had interpersonal conflict in their life and then turn out to have very crazy interpersonal conflict, you know, in their first ever encounter with it. There's also 15-year-olds, maybe 5-year-olds, you know. Yeah, right, right, right. Both sides, sorry, I shouldn't just discriminate against you. It's just there's no 85-year-old crypto users as far as I know. I think there's some for sure.

I'm sure they're out there. I'm sure they're out there. Yeah, it's hard to imagine Biden. It's hard to imagine Biden even being able to like, you know, when you buy a hardware wallet and they make you retype your, you're like, he's not going to, he's like, he's gone. You know what? That is not accessibility friendly. I will, yeah, that is true.

It is like, there's no way. That's what I'm saying. I feel like it's 85. I can barely do those. I'm sure. Yeah, anybody is in their 80s. I just, I, yeah. I mean, I mean real on chain.

Like you're self-custody and whatever. Okay, fine. You're doing it through Coinbase. There's 85-year-olds, I'm sure. Yeah, yeah. Okay. All right. Well, let's switch gears a little bit.

There's one more story that I want to get to. That's a little bit more somber. So there was a story that broke today that the SEC, as well as the DOJ, unveiled complaints against the founder of BitClout, Nodder Al-Nazi. So BitClout, so I should caveat that Nodder, I think, is somebody who, I'm pretty sure all of us know Nodder, and I've known Nodder for many, many years. we were not investors in BitClout, but we were investors into BASIS,

which was the previous project that he ran that he shut down in 2018. So this was many, many, many years ago. So, Nader, he is the founder, he was originally the founder of Basis, which was the original implementation of senior shares, which was a stable coin.

Kind of Luna-like. I mean, Luna is not really a perfect analogy for it, but it was sort of loosely adjacent to Luna. Yeah, it was Luna-like. Never end up launching because they thought that, regulatoryly. It couldn't make it, but they raised over $130 million for that token, but then gave all the money back. Then Nader emerged many years later to build something called BitClout,

which you can think of roughly as a predecessor to Frentec. So it was a social FI app, one of the first really big social FI apps. They raised something like 40 million, 30 million from A16 Z, Sequoia, a number of other funds that invested. And they basically allowed you. to speculate on the demand for a social token corresponding to somebody on Twitter. So you could buy an Elon token. You could buy a Hester Purse token, as we later learned. That apparently pissed some people off. And so made a lot of people mad in the way they went about what they were doing with BitClout.

But the charges that have now been filed against Notter were for a couple things specifically that they did. So first of all, Nodder through BitClout, which later rebranded to D.Sow. So if you don't know the name BitClout, you might know the name DECLod. So they were charged with one, having raised $257 million, which they claimed was purely going to be held on chain. So there was basically like a bonding curve where you could buy BitClout on chain using Bitcoin. And the wallet that you were sending this into was supposedly a decentralized wallet

owned by the network, Dow, something, something, something. This turned out not to be true. It was actually Nader who had unilateral control over this wallet. and he was taking money out of this wallet in contravention to what he was telling to investors as well as to the investing public that he was taking this money and spending it on influencers, personal expenses, he gave some money to his family. He apparently rented a mansion in Beverly Hills, as well as using it to just pay developers and do kind of normal kind of things that one does when one launches a crypto project.

And so he apparently all sorts of stuff that they found in messages, that he said to investors basically denying that he was doing this. And then, you know, when they went through all the money, they found out, yes, in fact, he was doing this. He was just arrested yesterday in California. And these charges were unveiled today. So curious to get responses from people, because I mean, I think this is one that, you know, although I'm not, I'm not close, with Notter, he literally one of the very, I think I met him the very first year that I came into crypto. And he's sort of been in circles that I think many of us know very well, being part of the New York Cryptocene, New York and then LA cryptocene.

So curious to get the responses to this, Tarun. I know that you know not very well. Yeah, I guess I met him in 2013 because I was... 2013? Oh, at D. Shaw. At Dushaw, yeah. And although he was only there for a month and then he left. So I was never really sure what happened.

but yeah he he went to this math and science high school that a lot of people I knew went to and you know I think he was very he's one of the few people I met at that time who was a good developer but also just like a good showman salesman and so it was kind of natural he ended up in this vein I think he obviously was very aggressive with how the protocol was launched. I think a lot of people were sort of unhappy about their Twitter likeness was automatically copied and stuff. I think the allegations in the filing by the DOJ and SEC seem very different than what I had portrayed to realize. I think he must have pitched all of us on investing and no one here invested. Despite knowing him and whatever, something was very weird about the

pitch also was very like aggressive. It was like you know closing this in closing in yeah. Yeah. But you know I think yeah it was it's it's the action that the like raising money than sending money to his family members is kind of the more egregious surprising thing I guess. I also didn't realize it raised that much money. The other weird thing is is a lot of the that money was just held in like a Bitcoin wallet that probably was controlled by one person because it was like a maybe I actually forget if it was a multi-sig or whether it was even just

like a single address never really understood why it needed its own chain uh because it was in some ways but uh yeah you know i you know people do things you know you don't expect from the outside That's like kind of my, that's my takeaway after eight hours of thinking about after reading the DOJ filing. Yeah, I read through everything this morning. And like I, I think the first crypto event I ever went to, like the first real crypto event was this IC3 boot camp in Cornell. And that was where I first met Nader. That was right after he just published the base coin white paper. And I remember he'd just raised the seat round.

from Naval and a bunch of other folks. And that was when I first met him. And he seemed like an impressive guy and obviously very smart. And I remember he was trying to hire me to join Basecoin. And he was like always. He was very aggressive. He's kind of a very charismatic guy. And I didn't want to join in my buddy, Yvonne, at the time.

He also was being very aggressively recruited to join Basecoin. And he's very close friends with Notter. And at that at that time, I was just very convinced that Basecoin didn't work, right? That the mechanism was broken and that this thing. would eventually break. And little as I know, that would end up mattering a lot more many years down the road. But he was always kind of in the loop. He was sort of in these circles of people who are just kind of early in crypto and very, very, I don't know, connected Silicon Valley types. And, you know, again, like, he obviously has not, these are the allegations made by the DOJ and by

the SEC. He has not obviously had the opportunity to make his, counter allegations. But these allegations also seem pretty strong. And they also, these were also things that I was kind of hearing privately that some of the investors who were in BitClout were very unhappy with the way that he was treating the reserves or the money that was raised. And it was also very clear, like what he was doing looked basically like an ICO, which I think at this point everybody knows is incredibly illegal to just raise money from retail and say, well, you know, buy the BitClout token and, you know, I'm this pseudonymous person. And like, that was very clearly at the very best playing extremely fast and loose with how these things are understood to be done.

So I don't know. On some level, it kind of doesn't surprise me that we got here. I'm kind of like, okay, this guy is kind of cutting way too many corners for this not to catch up with him, especially with how many people were initially pissed off by BitClout. And then you do this like ICU like thing. And then like, I hear the money is not like being used in a way that is totally, um, in line with what he said he was going to do. But it's just really sad to see shit like this, right? Because, I mean, not or by all indications, extremely smart, very talented guy.

So it's kind of like, why? Why would you fucking do this? It's so stupid. The one thing I'll say is I actually thought the way he handled basis was quite ethical. And I say that as a total outsider who wasn't involved in the... Yeah, 100%. In the closing of it. But I actually thought it was remarkable at the time.

time is one of those things that left an impression on me as an entrepreneur is that he raised one of the largest sums of money in crypto history for a project realized it wouldn't work and then returned all the capital investors most people would not do that most people a would pivot find something else to do with it throw crazy parties for like you know a hundred years whatever, right? And so it always like sat with me that he, as I think the first startup of his career raised such a monster amount of capital and then returned it. You know, burned through like, you know, one or two percent of it, you know, whatever. People got 98 percent of money back, or whatever it was. Like, I always thought that was remarkable. And so, you know, I, you know,

passed on what's now DESO, the cloud, whatever. you know but i didn't think that you know a project would go off the rails or would wind up in that direction that bit cloud did um after watching how he handled basis i thought basis was actually handled very well like it was extremely respectable in my opinion how he was handled and so you know i was i was taking a little bit of back you know in the early days of bit cloud when it was like the things the crypto founder finds a nerve in are different for everyone but for me it was like how they were managing private key security to interact with this blockchain. Yeah, I think the text-based private key stuff was like a little bit weird, right?

It was like horrifying to me as a founder where the way you interacted with, you know, Big Cloud was the most haphazard approach to like asset security and fund security on behalf of like pretty detailed users, which was like, you know, we like click here with your Google, we make like a text-based password for you and like upload it to your Google. like it was horrifying. And I was like, oh my God, like the biggest corners have been cut in ways that like no crypto founders should be cutting corners. Like a crypto founder should not be jeopardizing user assets like still brazenly so early on.

And, you know, I think he learned from it. The response and the feedback was pretty quick. And like, you know, I think at some point they changed, you know, the security mechanisms. But, you know, that was the second thing, you know, as an outsider that stuck out to me. Yeah, I think as Robert was saying, I think anyone or maybe all of us that looked at DeSoe, there were like so many yellow flags that just seemed very sus. Like even this, you know, bonding curve thing that they used to sell the tokens. There was like no accreditation checks, which is like you chucked Bitcoin and like the nodes for the network were like closed source

for the longest time. And it was like, why is it this thing? And even even the platform itself, as you mentioned, got in trouble for, you know, having basically like a token issue with its platform, using celebrities likenesses without them opting. So like, I feel like there are so many things about this that just put these flag, which is, but really most of those were not the basis of the complaint. They were mentioned and if they were more, you know, sort of as subheaders, really it was about this sort of, you know, misrepresentation to investors and misappropriation of funds. And like that is, you know, don't break the law while you're breaking the law kind of things.

And so, you know, I think you could, you know, do get out in court if, you know, Diso was sufficiently decentralized or if like, hey, you know, you are able to sell, you know, Elon Musk coin if, you know, you're not the one issuing it. But like, you know, the other stuff, it's like, yeah, it's like, obviously you can't do that. So, yeah, it was a bit surprising to see everything in the charts today. Yeah, I mean, look, every startup, like, you know, it's hard to get everything right, you know. And naturally the startup, you have a few resources and you just got to kind of make a run at it and do your best.

And people will usually assume good faith, you know. But like, if you're fucking with money, like, there is just so razor-thin a margin of error. And if you are appropriating money that is not supposed to be yours and you're spending it on stuff, like, that shit will come back at you. So it doesn't matter if you're a startup or a billion-dollar company. Just like don't even think about doing anything like that, no matter what size you are, no matter what industry you're in. So crypto is no exception to that.

And, you know, at the time, I was genuinely surprised. I mean, it's been like four years or something since BitCloud launched. So it took a while for this to eventually come back around. But it did. And eventually, yeah, I guess they clear the backlog cases. And they're like, man, we're going to, we're going to get deals on. From reading both cases, do you think it was like an investor who was pushing kind of, you know, clearly the DOJ case site it's kind of cited.

Yeah, the site investor one. Yeah. Yeah. Yeah. So somebody who invested $3 million. So if anybody wants to work backwards from that cap table and figure out, who's the snitch? I've never seen the cap table, but. Yeah.

No idea. It also could not be investor one. It could just be that they subpoenaed investor one, right? So we don't actually know. What's pretty clear is that they subpoenaed the records of Nodder and they have like almost everything. I mean, you just see all the messages. So they seem to have done a very, very good job reconstructing the timeline. So if you're a token founder and this is scaring you, good.

Like this, if you're fucking with other people's money, that is scary shit and you should take it very, very seriously. And to underscore this as much as we possibly can, absolutely no room for anything like that in this industry or in any industry. So, well, we'll see where this ends up. But for now, obviously, we will be waiting to see how this and the many other cases that are working their way to the courts play out. So I guess that's a wrap on a somewhat somber note. Until next time, see everybody. Ciao. Ciao.