Unchained - Is There a Better Way to Launch Tokens in Crypto? - Ep. 730

Episode Date: November 5, 2024

Crypto networks are meant to be decentralized, community owned systems. But they’re turned out to be dominated by whales and to have more mercenaries who are just interested in getting free tokens to dump them, rather than having long-term believers who want to build the ecosystem. How can tokens be launched in a way that gets token holders aligned with long-term success?  Today’s guests, Mike Dudas, founding partner of 6th Man Ventures, and Matt O’Connor, co-founder of Legion, believe there’s room for improvement. In this episode, they share how Legion aims to reshape the process, focusing on fair distribution, incentivizing organic user growth, and building loyal communities. They explore Legion’s approach to token sales, its compatibility with regulatory frameworks, and why it might be the key to bringing new people into crypto. Show highlights: How Legion was born and what its main goal is The problems with how token launches currently work  Why projects don’t want to return to the ICO model Whether the criteria to earn a better reputation on Legion is gameable  How Legion actually works and what the role of KYC is What type of regulatory framework Legion is leveraging How MiCA’s rules for token offerings allowed for this type of project to emerge Whether the U.S. should follow Europe in establishing a crypto framework like MiCA What the business model of Legion is What the difference is between Legion and other similar platforms such as Cobie’s Echo Whether token sales is a better distribution mechanism than airdrops Visit our website for breaking news, analysis, op-eds, articles to learn about crypto, and much more: unchainedcrypto.com Thank you to our sponsors! Polkadot Mantle Robinhood & Arbitrum Guests: Mike Dudas, Founding partner of 6th Man Ventures Matt O’Connor, Co-Founder of Legion Matt’s open source publication: Tokenomics for Builders Links Unchained: Legion Launches New Tool to Identify Best Contributors in Crypto Fundraises Legion Whitepaper Timestamps: 00:00 Intro 01:49 How Legion was born and its main goal 05:33 What’s wrong with current token launches? 11:13 Why projects avoid the ICO model 13:37 Can Legion’s reputation system be gamed? 26:18 How Legion works and the role of KYC 35:23 The regulatory framework behind Legion 39:06 How MiCA enabled this type of project 44:09 Should the U.S. adopt a framework like MiCA? 46:32 What is Legion’s business model? 50:28 How Legion differs from Cobie’s Echo 53:18 Are token sales better than airdrops for distribution? Learn more about your ad choices. Visit megaphone.fm/adchoices

And I do believe that selling high quality assets to the general public is a fantastic way, just as it was in 2017 and 2018, to bring new entrants, people who are excited and who use their imagination. But if they keep buying these things at peak prices and it goes down, they're going to rush right back out like they did in 2022. So I do believe that this has the potential to be additives. Hi, everyone. Welcome to Unchained. You're no hype resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto nine years ago, and as the senior editor Forbes was the first mainstream reader reporter to cover cryptocurrency full-time.

This is the November 5th, 2024 episode of Unchained. Mantle's M-Eath is now the fourth largest LST with $1.3 billion in TVL. M-Eath offers holders cumulative incentives and airdrops, in addition to native ETH POS yields. This includes exclusive rewards like Eichen and Cook. Check it out at M-Eath.mantle. XYZ slash campaigns. Robin Hood wallet, Robin Hood's Defy mobile app, takes no fees on same chain and cross-chain swaps. Use Arbitrum's Layer 2 to swap with low network fees in just a few taps.

Other fees may apply. Download on iOS or Android today. Pocodot is the original and leading Layer Zero blockchain with over 2,000 plus developers, and the Pocodot 2.0 upgrade will be a massive accelerator for the ecosystem, making it faster, more secure, and adaptable. Perfect for GameFi and Defy to build, grow, and scale. Join the community at pocadot.network slash ecosystem slash community. Today's guests are Matt O'Connor, co-founder of Legion and Mike Dudus, an investor in Legion. Welcome Matt and Mike.

Thanks, how do you, Mark? According to its white paper, Legion, quote, aims to revive initial coin offerings while fixing their most significant flaws. Can, why don't we start with Matt? Can you explain what you mean by that? Yeah, I appreciate the question. So we see there are limited options for projects in the market today, where if you're trying to get your token into the hands of value ad supporters,

real users, people that contribute to the decentralization of the project, people can evangelize the project, push it forward. There's not so many great options. You can do an airdrop, but time after time, right, if you look at the data of anyirdrop, it shows that air drops are actually a terrible tool for user retention or loyal holding of the token. Or you can raise from institutional investors, right?

And certainly there are investors like Mike that add a lot of value. But if that's kind of your only option, you end up with very few people holding your token, you know, that have a big portion of the supply. And so what we're doing is providing teams a credible third option where you can get tokens into the hands of the right investors for your project with regulatory clarity and with investor screening on a reputation. which I'm sure we'll get into.

And how did you come up with this idea and then also come together to work on this problem? Yeah. So for myself, I mean, I've been working in Web3 in kind of token design roles for the past few years. I worked for the Stacks Foundation, Bitcoin Layer 2, worked for Status, one of the first and earliest, the first and largest Ethereum ICOs. And so I've written a whole book even called tokenomics for builders about designing tokens and optimizing your tokenomics.

One of the biggest gaps remaining was projects actually getting their token into the hands of the right people. And so starting thinking about this problem at the same time, Delphi Labs, which incubated us, was thinking about, hey, Mika, this new regulation that provides clarity is coming down the pipe. We should be exploring this. And so teamed up with my co-founder, incubated by Delphi Labs, and then pitched Mike. I'd done some work with Six-Man Ventures before. So kind of had a warm introduction there. And it seems, I mean, Mike, you could speak to your thesis, but it seems like we had very, you know, same, same ideas in common. Yeah, so we met Matt, you know, via my role at Sixman Ventures, you know, we're an early stage crypto VC firm.

And we had worked with Matt, you know, obviously read his book, got to know him and recommended him to, you know, a handful of our teams that were planning token generation events. And, you know, as has Matt highlighted, the kind of prevailing method since, you know, the sort of 20, 17, 18, ICO boom. So post that for token distribution has been, you know, early private venture capital rounds combined later with a mixture of, you know, with networks that have a large amount of users or have users, you know, an air drop to those folks for, you know, providing liquidity in the network. If it's defy or for, you know, downloading extension in the case of a deep end or,

doing some work, as well as you know, some amount of token allocation that would go sort of through centralized exchanges. And that portion has sort of been growing over time, right, from just a couple percentage points a few years ago to now you're hearing some of the larger centralized exchange, which is asked for high single digits to even double digits for some projects to list on their launch pad. So it was getting out of control. So in a personal capacity, you know, when Matt came to me and said, hey, I'm incubating this interesting idea that will give sort of maybe a third or fourth way and perhaps a better way to augment existing distribution methods for tokens. And by the way, it's a better version of the ICOs that used to exist. It certainly

piqued my interest, and that's why I invested personally. All right. So before we get into all the details, why don't we just dive into like how tokens are typically launched nowadays because, you know, I'm not sure if every listener of the show is super aware of that. So why don't we just kind of give like some, I mean, I know there's like multiple ways, but why don't we do. just talk about sort of the broad outlines, and then we can dive into like what you'd like to do differently. Yeah, that'd be super helpful to frame that. So walking through it kind of chronologically, right, you as a project, you're getting set up. This is years potentially pre-token. You usually do some kind of fundraising, right, to pay the bills, to assemble a team, to build out the project. And

that's going to be a raise, a private raise from angels and VCs most often. And maybe there's, you know, Maybe there's token warrants attached to that. Maybe it's a SAF, you know, some kind of thing that alludes to there being a token in the future, but the token doesn't yet exist. The product is built out over the next couple years, right? You approach a TGE. You maybe do several more additional private rounds. And at some point, you're getting close to, okay, now we're ready. The product is ready, stands on its own. It's time to also launch our token do a TGE, right? A token generation event. Most of what that looks like today is, as Mike was talking about, pairing an airdrop with a sex listing, with a centralized exchange listing, right? And so what that looks like is you're going out and generating some kind of metrics, you know, basically points programs have become very popular for this, of saying, we want to reward people for providing liquidity in our DAP, right, or doing a certain behavior. And so that we're going to quantify that, generate some points, and the points leaderboard is going to determine who gets the biggest allocation of the

air drop. At the same time, you're having conversations with market makers of all these sexes of saying, will you list our token on your exchange, right? And those, as I referred to, some of those conversations can be taking quite a hefty chunk of your token supply just to get listed on the exchange. And so at some point, pretty much coinciding those major events, you have an air drop as the TGE event coinciding with a sex listing and market makers that are agreeing to help, whether you're engaging them on a retainer basis or a loan and call option model basis, right, that are providing liquidity and introducing more trading volume for your token. Now the token's out there. It's still kind of not over with the life cycle because we also have

this term, right, that you've probably heard, low float, high FDV. Right. And so like in most recent launches, even once we have the TGE, it's still a very small, sometimes less than literally three percent, of the total token supply that's actually out there. And so even after TGE for the months and years ahead, you have a bunch more tokens coming on to the market that's unlocking for these private investors that's being omitted to new users, that's unlocking for insiders and the team,

all different sources. And that plays out for several more years, it could be tens of years depending on the emission schedule. Yeah, and just for people to make sure, since we're a large portion of the audience is on audio, when he says sex, he's talking about centralized exchange. Yes. Exactly.

And the one thing I'll add to what Matt just said is that the result of the structure that he just defined with all of those sort of stakeholders coming in prior to the public sale is that the general public, the person who might be interested in that specific project, in their token and having ownership, you know, similar to the person who might want to buy, a share of a newly IPO company or a shared apple is typically not getting access to that product and that network until after many, many, many layers of call it markups. And by the time they're getting access to the token, it's part of this kind of like token industrial machine that Matt described that involves the centralized exchanges, market makers,

you know, specific pricing. And the result of that has been, it usually means that the public is getting exposure to the token, And at least over the past 12 months, if you look at most centrally listed tokens of this model, they've actually declined significantly in price from the moment that the public first had access to them. And that's a problem. Nobody actually wants that in the value chain. And that will lead to an unsustainable crypto ecosystem. And nobody's going to be buying this stuff in a couple of years if that keeps happening.

Yeah. I can't remember which token it was. But super recently there was some token where it became public, how much they, What percentage of tokens finance had taken? Which one was that? It was scroll. And I think the number quoted was something like 10%. Now, when you think about the last private valuation of that, and again, this is rumor and hearsay, I believe, but let's just say it is roughly 10%. Their last private valuation was $1.6 billion. So that's $160 million in token value being transferred to finance. you know, you can basically say, hey, it's them and their customers because, you know, by being a customer or by ANS you do get access to these launch pools. But in most cases, the exchanges themselves do actually retain a portion of the token supply. And it's not very clear, transparent,

you know, how they use that. Yeah. And, you know, if you just kind of go back to crypto's roots, then like the way that Bitcoin launched, the way the Ethereum launched, like obviously this is quite a different universe. So talk now about what you guys are proposing under Legion. Yeah. So what we're proposing is essentially a return to those roots or an evolution of those routes you just referred to. We're not suggesting just copy pasting the 2017 ICO model because there were drawbacks to that. And there's reasons you see teams kind of not doing that today. The two biggest reasons are regulatory risk and then investor quality risk. So what I mean by that is if you're a project, you largely speaking, don't really want to sell tokens to the public

if it puts a target on your back and you have to risk just spending all the money raised on a bunch of lawyers defending yourself for the next few years, right? Yeah. And by the way, I went out a third reason, which is as we saw as the ICO thing went on, is then just so many scams started doing it. So it's, yeah, definitely. Yeah. I think that's also obviously a big drawback on the investor side of why would I invest? in these projects. So you're absolutely correct. So from a project lens, there's the regulatory risk they have to worry about. And then there's also the investor quality risk, right? If you're not raising from a VC, not raising for an angel and you're selling to a bunch of addresses, how do you

know those addresses aren't bots, not civils, right? How do you know there are people that you want to work with? And so that's where the reputation system of Legion comes into play, the Legion score. We have this quantitative and qualitative scoring of every investor who signs up on the platform, achievements. And the purpose of that is it lets teams really deeply customize their sale. They can give customized discounts, customized allocation, customized whitelisting to users that do certain activities on chain or developers from certain ecosystems, right, or people with certain social followings. And again, about quality, not necessarily quantity. And so those are kind of the two biggest hurdles for the projects were overcome. And then, yes, you're absolutely right to touch on the prevalence of scams as well,

which is why on the project side, we are not a fully permissionless system by design, right? We're kind of unapologetic about that. We are curating the projects that come on. We take as a percentage of the launch the actual token being sold, so we have an incentive ourselves to work with high-quality projects. And so that's kind of the intention is have this slightly more permissioned, but higher quality, higher signal place for projects to launch. to high signal, high value ad retail investors.

So I do have a couple of questions about this because some of the different variables that, you know, you are tweaking to try to find the ideal users, it does still feel like some of those could be gamable. Absolutely. Yeah. So how can you like, how can you address some of those things? Because, I mean, I understand there's just a number of different metrics. So I guess, like, people would have to be really dedicated and game, you know, a number of them.

But still, you know, a lot of these could still be game for, I think you saw it with layer zero. They found situations where it was like 70,000 civil addresses that were all associated with each other. So clearly, there are some people who are motivated to do this in kind of a, you know, super professionalized way. For sure, for sure. Yeah. So I think you're absolutely right. like anything that can be gameed will be game to some extent. And so this isn't going to remove 100% of abuse,

but it's about making the abuse much more difficult, much more costly, and just reducing that as much as possible. And so without getting two in the weeds of how the reputation system works, it's largely drawn inspiration from an open source algorithm called eigentrust, not to be confused with eigenlayer, there's no relation, just similar name.

And eigentrust basically does a lot of techniques that normalize and prevent, prevent kind of exploit abuse. And so without getting two in the weeds again, there's, it works as kind of transitive trust. Like, Laura, if I know you and you know Mike, but I've never met Mike before, if you come to me and you say, hey, Matt, I have a friend Mike that would be really, you know, useful for you to chat with. I trust him. He's a great investor. I recommend him to you. In human relationships, like, I'm going to trust him some function of how much I trust you and how much you kind of recommend him, right? And so a similar principle applies to what we're doing, where it's not about like the number of followers you have. It's not about how many transactions

you do on chain. It's not about some spammable event. It's more about the shape of your social graph, the shape of your interactions, who you're enacting with. And so you get this kind of exploit-resistant aspect to all these scores. And then if you think about it in the big picture, instead of a platform where maybe you could only, you know, just sible your on-chain wallet and then you can get access to a bunch of airdrops, now you have to maintain or at least try to fake a high-quality social following, a high-quality developer activity, a high-quality on-chain, you have to complete K-UIC, right? So it just becomes much more difficult and not much higher signal where you're getting actual true users instead of these kind of industrial farms.

Yeah. A couple of things I find interesting. are this interaction score because that, I guess, would take into account any users who are just like farming something where they're in it for the air drop, then they leave. You know, you could eliminate people like that. And then the other one that I thought interesting was this endorsement score, which is sort of like reviews. Yeah, exactly. Can you talk a little bit, yeah, more about that? Sure. Yeah. So, I mean, there's all these quantitative aspects, but there's also kind of the qualitative side, because I think is super, super valuable. And so what projects you have funded or their team, their community managers say about you also goes into it. And so you can actually

now have not just reputation, but for the first time ever, you really have accountability. And so I as an investor knowing that, hey, if I kind of promise that I'm going to support this project, you know, I put my reputation on the line in order to get allocation. And then all I do is just show up in the Discord server, you know, ask when token. And then dump it as soon as I get it, I know that the founder can leave me a negative review, right? And the knowledge even of that already makes the incentive different. It already means that I'm incentivized to maybe not invest in projects that I don't really care about and just want to dump. I'm incentivized to invest in projects that I legitimately want to support longer term. And so that it's not just about

the quantitative scoring. It's also about the qualitative and the holding people accountable that really shifts the dynamic and changes the incentive structure. Because if you look at like, additional ICOs, you know, one of the problems was there was no accountability between sales. Each sale is kind of its own separate one-round game where you just buy the token and immediately flip it. Now it's this continuous repeated game. And so the incentive structure kind of like what's the best behaviors actually changes, which I think is the most fascinating part of it. Yeah. And this actually models out to how, you know, investing happens at the professional level, how it models out in traditional equity as well. I mean, Angel

list has moved in this direction over the years with, you know, hey, like on your angelist profile, there's, you know, what companies you've previously invested in, your resume will typically be on there. And founders and others can leave comments, you know, about endorsements they'd like. You can link your LinkedIn, which has, you know, is even more, you know, sort of social signal. That has not existed in the crypto world other than through very, very informal and fluid channel. You know, basically, like, I'll look at what telegram channels people are in and share with me if I don't know them. But, you know, there's a wide, wide delta between kind of called the traditional equity investing world and the crypto world. And I think this brings, has a potential to bring some of the, what I would call social rigor, which is really, really important.

And one of Canada, the only ways to defeat, you know, the machines that are sibling and leading to other unhealthy distribution mechanisms. in the token world. I just wanted to quickly point out, like, we're in V1, right? We just launched, we're live. Like, this is the worst that the reputation system is ever going to be. It's only going to get better as we get more data rounded out, right? So, like, longer term, Legion becomes this aggregator of multiple different inputs across all different aspects of people where projects can come and just all that work

is already done for them, all that intelligence is already gathered. Yeah, like, the more that I kind of put it all together, I feel like because, you know, as we just mentioned, sibling this kind of system would just take so much effort between that and the reputation piece. I can see how it does flip the incentive to like, okay, if I'm going to put in work on this, actually the work should be to be a good citizen of all these different token projects and to help grow with the community. That's how I will benefit. I'm not going to put it past any crypto people to figure out some work around to just enrich themselves and not actually have to put in the work. But

at least, you know, just in this incipient stage, I can see how this would lead people to do that. So, you know, just to zoom out a little bit, like, I did want to just talk about, like, you know, why is it that you want to bring back the ICO? Like, I know we kind of touched on it a little bit, but, like, you know, what do you think is so important about doing that? Because as we talked about, like, there have been so many scams perpetrated with crypto and, you know, V, The VC model works really well for the startup era of the internet. So what is it that makes you want this particular type of fundraising to work? Yeah.

It's interesting you refer to like the VC funding of the internet projects. I think we have to recognize that we're talking about decentralized applications at the end of the day here. And you can't decentralize if you only have three, four, five massive holders of your token. If anything, it's more important, it's the most important in this industry to spread your token, get a good distribution, get a wide base of real organic users, adopters, loyal supporters. And so I think that was the superpower of ICOs. Far beyond just raising funds, what ICOs did was actually bootstrap really passionate, you know, incentive aligned communities that were die hard, right? Like Link Marines, Thorchads, ETH Maxis, or like all these sorts of communities. came, you could trace their roots directly back to the ICO. And so that's what we see is the major benefit of unlocking this and giving retail people access to those early rounds that Mike

was talking about that only private investors currently have access to. And so we're not suggesting that everyone should have equal access, right? We're not saying like bots and people who just show up short term must get equal access, but we are saying anyone deserves to get access, right? And that goes back again to this reputation system. Anyone who hustles, anyone who grinds, anyone who proves themselves over time, you know, maybe they only get a certain small allocation in the beginning when they first get started, but they build out their profile, their reputation. And then the next biggest projects that are coming down the pipe, they're getting a proper

seat at the table. I think that's best for everyone. Exactly. Yeah, I liken it to, yeah, it is different than, you know, tokens are different than equity, as Matt mentioned, where you, basically, they have a function in the network. You can imagine actually a world where it's not, hey, who gets to participate in the ICO. Oh, it's people who did X prior to this. But it could be, in addition to that, you know, people commit to do Y after this moment, right?

Hey, they agree to, you know, stake a token, you know, put capital at risk, participate in governance. Any number of things contribute to the community, contribute work. And, you know, by committing to those things, they then get an allocation because these, as we said, you know, this isn't equity. It's a token which can provide a number of different ways to interact with a decentralized network far more than the equity instrument can in a traditional company structure. Yeah, I mean, you know, if we just look at Ethereum, then there's a difference between the people who participate in the Ethereum ICO versus people who participated in, you know, name any one of the recent airdrops. So I do think that there is something to this notion that when you get the community really invested, then, And that's kind of like the ideal. It's sort of what the crypto community has been saying, like, could be built.

Like, Bitcoin is the obvious, you know, original answer to this. And then Ethereum has become the second. But, you know, having a feeling of, like, ownership stake in this system is really key to helping grow it. One thing I did want to ask about was, you know, the dev score. Obviously, there are a lot of people who participate in these networks who aren't dev. So how does, how do you handle that? Yeah, it's one piece of the podcast. right? Like everyone's going to have their different strengths. And so you can still get a very high

Legion score, overall score, even if you have a zero dev score. We've kind of configured the score to be reward T-shaped people, right? If you're an expert in one field and maybe don't do anything in others, still get a high score. We think a T-shaped expert is more valuable than someone who's just kind of okay at everything, right? And so we've configured the score to reflect those aspects for for teams, but ultimately in the end of the day, teams have the power to customize also who they want to give tokens to. They could say to reward people with on-chain activity, you know, as a priority over everything else, right? Or devs as a priority, customize it to allocation, customize it on-chain activities, to achievements. So it's also up to the project at the end of

the day, which is one of the nice aspects of the reputation system. And then for the chain score, it seems like this is designed to not give whales an outsized influence over any particular protocol. But because I do feel like this is one of the areas that could more easily be gameed, do you imagine that you'll just keep tweaking it or like how will you prevent that gamification? Or yeah, gamifying it. Yeah, it's always going to keep evolving. We are definitely not attempting to reward just whales and thoughts, right? We're looking at what actually matters to projects as things like consistency, right?

Like, are you using, are you a blockchain user only in the good times, only in the bull markets, or kind of are you here, you know, slogging through when all of us are here and the bear? So all sorts of things go into it. It will continue to evolve. People will try to game it. We will learn. We can use machine learning to back that up. Like my personal background, algorithmic trading and Web 2 machine learning startup.

So we're building out, you know, resources internally. to keep evolving these scores. Similar to cyber security, right, it's always a give and take with the exploits. And so walk us through how it works. So a token project comes to you and says, we want to use this system, and then how do they roll it out?

Yeah, so a project comes to us, says, hey, we're interested in working with Legion to launch our token or raise before their liquid token. So they don't have to do a liquid token, TGE, ICO, right? This could be a fundraise before the. ready to do their token launch. And so we sit down with them. We have a conversation. As I mentioned, we're not a permissionless system. So we do have an aspect of reviewing the project, looking at, is this the right team? Is the project sound? Does the token have a role in this project? Does it

fit in with what this project is doing? And is it a reasonable valuation, right, for this project? All those aspects are what we consider. Assuming that looks good. Then we agree with the team. we start planning out the lead up to their launch. Maybe they want to do a auction mechanism to do some sort of price discovery. Maybe they know there's a certain fixed price they want to target. So we work out those kind of aspects with them, work out who would be best for them to bring on as value-end investors. And so start to customize, okay, you're going to white list people with these sorts of attributes,

these sorts of behaviors based on their reputation. And then we go into the actual sale itself, which is all happening on chain. So users are sending funds, let's say USDC, for example, on chain into our smart contract. We have audited smart contracts for both EVM and SVM for fixed price sales and for clearing price auctions and more to come soon. This sale kind of resolves based on the logic. And if you have one allocation, then you can claim the tokens out of that contract and the funds are released to the project.

If you, let's say it's an auction, you didn't win the allocation. then you can claim your refund right back from the smart contract. So that's kind of how it works for the whole lifecycle. And if there's vesting associated with the tokens you've won, that's also incorporated. So maybe your tokens aren't immediately liquid that you just want. All right. So in a moment, we're going to talk a little bit more about how Legion works. But first, a quick word from the sponsors who make the show possible.

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Yeah, this is a great question because obviously there's a segment of the industry that is always anti-KYC and max decentralization, right? Max censorship resistance. The cold kind of truth, though, the pragmatic truth is that, Teams largely, for the most part, don't want to take on the regulatory risk associated with selling tokens to unknown wallet addresses, right? You can very quickly get in a lot of hot water, not even just with securities rules, but more importantly, with anti-money laundering rules, right? Like, if you accidentally sell tokens to North Korea, right, or Iran or terrorist organizations, that can get you literally arrested, let alone shutting down your property. project. And so most teams, it's just to be able to practically unlock selling tokens to retail investors, you must do KYC and AML. If we said, hey, you don't have to do KYC AML, we wouldn't

have projects working with us that investors would get access to. And so it's just really, it's just, that's just the cold hard kind of pragmatism of it. Yeah, well, how does that affect kind of like the lifetime of the project in terms of, you know, once they get out of the initial phase and more into a Dow situation, then is it that like basically all wallets or all the identities are always known of those wallets? No. So the thing Legion does for teams is we're a licensed entity. We do KYC on our users. And then users are investing in these projects with peace of mind that they're, you know, know, they've been KYC, they've been AML, they're not one of these, you know, prohibited entities or prohibited kind of jurisdictions. And so all the users on Legion, their data, they have control over if their data is displayed to other users. Wallets, they connect for reputation or salted and hash, so those are never shared or even access, we couldn't even access them

we wanted to. Your investment wallets, obviously there's a record of that on chain, of this wallet, you know, participated in this sale, but that isn't publicly tied to, anything else you're connecting on Legion isn't publicly tied to your KYC documents. Once you have participated in the sale from a project's point of view, they don't necessarily even know that you are this particular offshane identity. Okay, right, but Legion and the project will know who you are. Yes, and that's just, again, that's a trade-off, right? That's, you're saying you can get access to a bunch of more projects that you would be able

to without this at the trade-off of some people need access to this information. And candidly, that gets to, you know, what's different about the 2017-18 ICO era, you know, when basically it was like anybody send money to this address and, you know, outcomes, tokens in many cases. And I think that's what led to, you know, a large proportion of percentage of people feeling scanned. There was no relationship between the issuer and the end user. And so basically this moves towards fixing that and making it much more like how all the private sales happens. So when a venture around happens, you know, obviously we're KYC and we provide documentation and representations to the startups that we invest in, the projects we invested, as do all the other individual angel investors, you know, all the way down to address and things of that nature. And to your point, Lord, some people do actually opt out and then don't want to share. and therefore don't angel on projects.

And I would imagine there will be some segment of the crypto population who this won't appeal to. I think for the projects and for a large segment of folks who don't have access right now to networks, they care about, reasonable valuations, it's going to be pretty attractive. Yeah, honestly, like hearing you talk, I feel like it's that moment when people went from Napster and Limewire to like Apple and Spotify kind of thing.

just that, yeah, like, as the technology matures, we will probably see more of these. You know, this isn't even regulated, but presuming the U.S. goes in that direction. Like, I could imagine this type of thing being sanctioned. So one thing that I did also want to ask is we have had other projects that have done, I don't know how similar, but, you know, like Stacks famously did their reg A-plus crowdfunding. So how is this different? Yeah. So I previously worked for the Stacks Foundation, actually.

Oh, that's right. Yes, I have a little bit of familiarity with it, not while they did their offering, to be clear. But they operated under an SEC exemption, you know, similar to how like all fundraising, even Web 2 startups, right, operate under Reg D offerings, if you've heard that term. It's basically a rule the SEC has that says, hey, if you follow these steps. And in Reg D's case, it's selling tokens to only accredited investors, for example, then you don't need to register with the SEC. Reg A is slightly different.

It's actually a process to explicitly register with the SEC and they kind of qualify. They have to literally stamp it given the qualification. In practice, we haven't seen many teams do that because it's really expensive. It's really time consuming. And depending on who you ask, the SEC kind of just isn't going to do that anymore.

They don't have an official policy that they're not going to stamp anything, but they haven't really been proactive about, you know. Not only did they not stamp, but they made it extremely difficult for that first generation of projects like, you know, kick, kin, and stats that, you know, tried to comply to the point where you would basically have to share, think, your forward-looking roadmap and how you planned to, you know, develop your product with the SEC and then, like, disclose it to token holders, which it just doesn't work

with any normal technology or product development cycle. It was utterly unmanageable for projects attempted to do it. It's actually a testament to Stax, and honestly, to the kin team that they did fuck neck way through and survive. Yeah, it was very tough. I mean, Stacks even doing that, they were still investigated for three years, right, and just recently cleared by the SEC. And so that approach of explicitly going to the SEC and getting a stamp is not what we're doing, to be clear. We are operating under these exemptions like Reg D. What we're operating under is reg S and reg D. These are rules that basically the SEC has said, if you follow these certain steps, you do not need to come in and register your offering

with the OCC. So we're operating under MECA that's markets and crypto assets, abbreviated MICA, this new regulation coming out of the EU that among other things allows for teams to sell, you know, do public offerings essentially of tokens to what they call non-qualified investors, which is equivalent of non-accredited or the analogous, the analogy of not accredited. And so you can include a bunch of retail investors, make an offer to the. them, they can buy into your token and you don't need to like apply to some regulator, like especially not the SEC and get a stamp. And did you talk to the SEC about your project?

We have spoken to people who've worked with the SEC lawyers, but we haven't explicitly spoken to the SEC. Okay. Yeah, I'd be so curious to hear kind of what their thoughts are on this because at least according to the SEC's stated mission, it feels like it would hit some of the the marks there, but... Yeah, well, so they have an exemption called reg S, which is for offerings that are foreign, that are abroad, and so that's what we're operating under.

We're saying we're MECA compliant outside the U.S., and then within the U.S. we're abiding by reg S, which is an SEC rule. Okay. Yeah, so I'm so interested to talk about Mika. For people who, you know, listen to most of my shows, you might know, we have not actually covered this. So here's our opportunity for people to learn, because I know this is very significant for crypto, you know, across the globe. And, you know, sadly, the U.S. is not leading in this situation.

But, you know, what is it about the Mika rules that allows you to do this? Or, you know, what about that was like a good setup for your company to follow? Yeah. So I think people have so many different ideas of Mika, partially because it's a giant document is a giant regulation that covers many different aspects of crypto. A lot of it has to do with governing stable coins. And that's great, not super relevant for Legion. And so you can have differing opinions about if it's too lenient, too strict for stable coins, again, not really not really what we get into. The relevant piece for us is Mika also stipulates rules about token offerings, public token offerings. They call them crypto-eastern.

asset offerings, right, crypto assets, markets and crypto assets, again, is what Mika is called, its full name. And so there are rules around how to conduct a public token offering. We will be licensed, or we're in the process of getting licensed as a CASP is the term, a crypto asset service provider. And so we'll be this product that teams can work with without needing to necessarily get a license themselves. And so we have a couple of rules we need to follow in order to enable teams to do a public token offering or a crypto asset offering. One is that there's only certain kinds of tokens we can work with. Mika breaks it down into like three categories. There's stable coins, largely speaking, there's asset referenced tokens, which are kind of like anything pegged to a basket.

And then there's governance utility, kind of other tokens, right? That's what we deal with. Project launching on a Legion are not like launching a new stable coin and selling that on Legion, They're selling their native governance token, their utility token, their protocol token, their gas assets, depending on the project. And so we help them do that. We have to follow a few rules. One is, as we mentioned, KYC AMLing people. The second is the team needs to publish a white paper. There's certain requirements for the white paper.

We're actually partnered with a company called Blueprint that helps teams generate a white paper automatically or very quickly. And then there are some exemptions to that. Like, you don't necessarily need a full-fledged white paper if you meet certain exemptions, such as offering the investment to less than about 4,000 people. But setting those exemptions aside, you need a white paper. And then the third thing is there's this kind of 14-day refund period where this is the regulator's attempt to prevent people from kind of phomowing in and instantly regretting it. And so it says, hey, if you've gone and just purchased this token, you have up to 14,

days to say, I cancel it. I cancel my transaction. I want everything back. It's not a like, ooh, I change my mind. I only want to buy 50%. It's all or nothing. Refund. So we help team, we automatically, you know, that's part of our smart contracts, facilitate that. Teams don't need to worry about that. In practice, we don't expect many people to use that for multiple reasons. But yeah, those are some of the high level kind of requirements of MECA when it comes to public token offerings. And then there's, largely speaking, it's quite favorable. There's no limits on, you know, the number of non-qualified investors that can be involved, the amount a given qualified investor can invest. So it's quite favorable for this type of application of getting your token into

the hands of a lot of actual users and people. And as you mentioned, you work with Blueprint, which is Chris Brummer's startup. And we reported recently that, so people might know him because he's testified in front of Congress a lot about crypto. I forget, he's like a professor. church at geor at georgetown yeah right georgetown law and we had reported here that he's apparently one of the people that the harris campaign is vetting as a potential replacement to s c c chair gary gensler um but you know you said it allows groups to create a white white paper kind of quickly and easily just could you tell us a little bit more about that yeah so chris great guy love him and so he's the founder of blueprint which is a separate platform from legion but we have a partnership

Blueprint spelled B-L-U-P-R-Y-N-T. It helps teams very quick. It's a software platform that helps teams generate a MECA compliant white paper because there are certain aspects that are kind of stipulated to be required, to be included in the white paper. Like certain risk disclosures, details about the team, details about the project, the utility of the token, etc.

It just helps you standardize, like a format and generate all those things that Mika says, we want your white paper to kind of include these things or look like this about these certain topics. Oh, I see. Okay. So now that you've worked with Mika a little bit, I was curious if you had any thoughts on how you'd like to see U.S. laws, you know, change to accommodate crypto. Like, I don't know if it's given you any inspiration on what might work. I know you're actually now based in London, but obviously you're American from your accent. Yes, yeah. But you're born and raised in New York living in London. I mean, I'm bullish.

I've had a few very positive conversations with people in Chris's Circle, for example, other lawyers. I'm not speaking for Chris personally, just to be clear by any means, but very optimistic conversations about the U.S. kind of taking a less aggressive stance in the future, especially for teams and projects that are Mika compliant, right, that are going out of their way to abide by these rules of another jurisdiction. and Mika's kind of setting a standard that most jurisdiction don't yet have. And so, yeah, bullish and optimistic that the U.S. will, at the very least, be less kind of aggressive in enforcement and actually might even take some proactive steps to adopt something approaching Mika or not come after teams that have gone the Mika route. Yeah, I'd go one step further and say, you know, I would hope that there's also some sort of a, reconciliation or safe harbor for the folks who have, you know, who have launched projects

called over the last three, four years, called like post-ICO or during the ICO era. And done, they're very best, you know, to basically, in a market of very, very uncertain regulations and certainly very few laws, you know, tried their best to work with good legal representation. Many people walked through the front door of the SEC and did try to have good faith discussions. And then later, you know, things ended up in litigation and Wells notices and things of that nature. I do hope that regardless of what administration is in place, you know, starting in January, that there is not only a go-forward framework for how, you know, companies and protocols can operate, but a recognition that there's five, six years of projects that, you know, are still

carrying that burden and almost the scarlet letter of being under investigation, as well as investors themselves. So we have to basically look back and look forward and try and reconcile those two things. And so what is the business model for Legion? Yeah, so the business model is we take a percentage of the total raise size. And so we do that actually split a portion of the asset being raised, so like USDC, for example, keep the lights on, pay the bills, and a portion of the projects, that are being sold. So we have, you know, incentive to work with the right projects, that we have, you know, skin in the game with those projects. It's in our best interest to support them longer term, to make sure that the best people on our platform are getting access. That's how it breaks down.

And then we would, you know, as an institutional investor, retrocapolis, who, you know, in some cases, may have actually invested in some of these projects prior to the offering, that signal and the success that, you know, Legion has with distribution to key folks, it will be keeping, I'll be keeping a keen eye on that, you know, the first six, 12 months. The platform exists, looking for feedback from the founders, because I can see that as part of a robust toolkit of, you know, after we invest, hey, maybe venture capitalists start investing less, right? And unless the protocol and gives more to a broader to the population, because, hey, we see this being extremely effective and growing the total value of the network and, you know, we're all better off.

Yeah. I like to say there's a lot of projects these days that are capital rich but community poor. And the smartest investors like Mike are kind of noticing like this isn't good for anyone, including myself. I want to invest in projects that have this organic community built in. Exactly. I think the stats, somebody I just saw tweeted, you know, four of the most recent L2 launches are down, you know, EVM L2 launches, the biggest name ones. And I won't name them. But they're down, you know, 40, 50% from their offering price. And I think that's an example of where having, you know, a Legion qualified community of folks who perhaps commits to, you know, certain behavior and participation post-token launch would be extremely valuable and would bring real organic long-term value to those, you know, tokens and networks, you know, versus short-term farming and, you know, straight down post-launch.

And are you trying to do anything with launches on Central. exchanges and market makers and that kind of thing or not? So partner with another great platform called Forged, which helps teams kind of do RFQs to market makers and holds them honest, holds them accountable, get the best deals with market makers. So we have that aspect that we kind of have value add to projects. I think partnerships with centralized exchanges and sexes will come. We certainly are mindful that teams, you know, one of the biggest aspects is liquidity for

your token after you launch it. We ourselves are not a platform for second. hand trading, but maybe in the distant future that will change. But certainly these conversations were having to just have a natural place for, okay, you've raised funds on Legion, your token's launching, here's the place you go for trading it. Yeah. And by the way, that's normal in any market, right? I mean, you know that lower. It's like in equity markets, commodities markets. I mean, there's market makers for effectively every asset to ensure that, you know, when somebody wants to transact, there's both buy and sell depth. The challenge in the crypto space is,

is this market makers or folks who aren't doing this in an upstanding way, who immediately sell the tokens, don't provide debt through liquidity, or actually use fraudulent means to change your prices. The folks that Legion of work with and that most of these top projects work with are true market makers who provide liquidity on either side, depending on whether you want to buy or sell and their business model is via those spreads versus price manipulation. So it's very similar to traditional asset classes.

Yeah, yeah. It feels to me like Legion is a little bit more focused on the on-chain aspect. And then that's kind of, you know, somebody else would pick up the ball for that part. But I did also want to ask because it looks like there are a number of other startups that are trying to tackle a similar problem. They're all going about it in slightly different ways. There's Echo, launched by Kobe. There's another one called Pocaster. Kane Warwick is also doing Infinex.

How would you kind of like position Legion within that landscape? Yeah, so the two biggest differences, I would say, is one, we're operating under MECA, so regulatory clarity via that scheme. That doesn't, you know, certain platforms, maybe not ones you listed, but certain platforms are going the non-regulated route. And that's always going to exist as market, but not what we're doing. The other aspect is syndicate models, which is some of these projects out there, you as the project are kind of saying, hey, syndicate lead, I'm outsourcing to you to decide who's in my round. And what we're saying is with Legion Score, with the reputation tools that we have built

out, the project is in control, down to the last token, down to literally everyone who gets in, if they want, of who has access to the round and how, right? Who gets what discounts, who gets what max allocation? That's all up to the project. You can customize it as much or as little as you want. Okay. So who are you starting with as some of your initial customers or projects? Yeah. I don't think I can name any specific names, but people who signed up on the platform will find out soon. Stay tuned. There's some exciting projects, some that have done launches on or done sales on similar platforms that you just mentioned that are also raising on Legion, some that are warm introductions from some of our great investor sets like Mike. And a lot of these

projects are intentionally, you know, literally giving a discount to their VC rounds in order to get truly kind of aligned, bought in community members, right? So this isn't just a case of teams that have raised VC and now are trying to dump their token. They're actually making a meaningful appeal, if you will, to finding the right retail investors to be supporters. And so a lot to, a lot of news to come in the near future. So please do. Stay tuned. And actually, I just realized, So you're only starting with projects that have not yet launched and you're launching them. But would you ever, you know, the way that there is these like points programs with seasons and stuff, like would you ever take an existing project that wanted to do a new distribution?

Yeah. So I should clarify, so we're doing pre-launch rounds as well. So maybe you don't have a token yet. You can still raise funds with kind of like a sold-down, you know, pre-token, if you will, that eventually converts into your token or launches of tokens. that's what we have already today. And then, yes, in the future, we are looking at kind of secondary offerings, right? You already have a liquid traded token, but there's some portion that you are looking to sell as a secondary offering.

That's also something we're looking at facilitating for sure. Yeah, we've clearly seen this past year that the Airdrop meta is not working out well for a lot of these different projects. And I wondered what you thought Legion could do to help that space become more efficient and effective. Yeah, I mean, I think that's a question every team is asking themselves, right, of how do we become more efficient at retaining users, attracting the right users, right? Token emissions in a general sense are roughly analogous to your cost of user acquisition, right? Your CAQ. And you need to be kind of strategic about how you're spending these resources to acquire users.

And so I think Legion is an amazing platform for teams to do that more intelligently. We think the best approach is a token sale because there's a very different psychological difference of someone who opts in to buy a token versus someone who kind of gets it for free. At the same time, there is a place for air drops, right, as a marketing expense, right, to get general attention for kind of ongoing emissions. And so Legion plays this role of this reputation system, these tools that help teams optimize their token sale, and also optimize just in general sense, finding the right type of on-chain activities users, digging into that second level of analytics that we're continuing to build out so that you on a continuing basis can make sure that your tokens are getting to the right people. And you can even measure, you know, maybe in the future, what are these people doing? Is it worth it what they're doing to continue this initiative?

or maybe we should tweak this and put more tokens in this bucket over here. So that's definitely something we're thinking about and exciting because, yeah, it's been horrifically inefficient in the last few years, as we've seen. Teams just giving away a bunch of air drops and they get immediately dumped. Skin in the game matters. I mean, there's a reason. I know VC's get a rep for dumping at times, but we've sold very few tokens as a firm, and then we've been in business for four years out of a very small minority of the portfolio

companies that we've invested in. I know that's generally true across the tier one investors in the industry. It's true of teams, the better teams. And so I do believe that this move, you know, as we get the regulations in place, not only MECA, but hopefully in the U.S. and other regions where projects can sell. It's so awkward now that, you know, they have to basically like sell out of a labs entity, OTC to big whales with like weird vesting. When there's clearly demand, just as there is for public equity companies that issue equity to people who want to buy and become shareholders or, you know, folks who are contributing at public companies and get options. And they actually will pay some amount, you know, less, let's say, you know, than the price that is trading at to purchase those options. I think those mechanisms will come to the token world and should come to the token world and will lead people to be, you know, better long-term participants, more involved holders who care about what they're holding. And Mike, just a question for you, because if this works out well, then I could see it giving VCs less of a role. So why are you interested in supporting it?

Yeah, it's a good question. I think that it's the classic. It's like, hey, why is, actually I'm going to use an example. I don't believe that, damn it. I was just like, why does Ethereum support L2 for scaling? Hey, well, it's going to grow the EVM ecosystem by 100,000 X, and therefore the base layer wins, along with the LV. two's. We'll see how that plays out. But I actually am. I'm pessimistic if we stay in a world where I feel like we don't have many new net owners over the last three years, you know, or two and a half years since

FTCS and all of the 2022 blowups. We need something that brings new people in. And I do believe that selling high quality assets to the general public is a fantastic way, just as it was in 2017 and 2018 to bring new entrants, people who are excited and who use their imagination. But if they keep buying these things at peak prices and it goes down, they're going to rush right back out like they did in 2022. So I do believe that this has the potential to be additive. And I'm saying, hey, this is a grow the pie thing and that I benefit as an investor in the space and our portfolio companies benefit. Because again, at the size this ecosystem is right now, you know, we're not going to change a world. And so if this actually works or, you know, any of these other efforts that are kind of similar,

then like, how do you think it will change crypto or like what kind of vision do you see happening once, if this works correctly, you know, once it's like in full swing? Yeah. I mean, I think you'll see a lot more kind of like back in the 2017, 2018 days, like a lot more involved communities and projects, right? you see this somewhat with the meme coin super cycle right now right like people really passionate about these meme coins very cultish about it but that same energy but directed at building actual tech and building solutions right building things with utility i think is the is the if we've succeeded that's what excites me about seeing right like people really passionate about really aligned behind world changing ideas skin in the game definitely growing the pie as mike said but i think also like

pushing out a little bit of these lower quality investors and VCs, right, these so-called like KOLs who just all they care about is minimizing their, you know, vesting duration so they can dump the token. Like the future will be more tier one VCs and retail, building a team, founders meeting each other on Legion, right? Teams funding or investors funding people based on the founders' Legion score. So you get your first round with a strong community and then you go out and pitch VCs. I think that would be super powerful kind of change to the current model. Yeah, I think it gets to for me, the sort of A16 Z Christics and Reed Wright own model where, hey, you know, I think it's really exciting if the average person walking down the street

has ownership of, you know, 10, 12 of the networks that, you know, I'm participating in. That's been the promise since the days of, you know, Web3 being coined, of Dow's, and some of the first instantiations haven't worked, you know, quite as well as we've hoped. And I think with some of these skin-in-a-game, fair distribution methodologies, you know, we can make a nice second attempt to make them that happen. It's user ownership, not employee ownership, you know, not investor ownership, user ownership, yeah. Yeah, yeah. And then maybe those whole like VC coins versus fair launch coins would, the dichotomy wouldn't exist in a way. I think, yeah, right now it's really stark. It's like, you know, launch 25,000 pump coins a day, which is wildly interesting. And on the other side, what we've talked about, one of the high FTV, you know, low flow down only, we really need to bridge that gap. And I think Legion's taking a really nice step forward there.

All right. Well, where can people learn more about each of you and Legion? Yeah, to find more about Legion, they can check out our X account. It's Legion, DOTCC, Legion.C. That's also our website, Legion.C. You can find my personal X account at Maddie Tokonomics. I'm sure these will be in the show notes. And I'm Mike Dutis, and you can find me at MDUDAS on Twitter. I respond to, you know, the majority of my DMs and have a lot of fun there. Great. Well, it's been a pleasure having you both on Unchained. Thank you, Laura. Thank you, Laura.

Thanks so much for joining us today. To learn more about Matt and Mike and Legion, check out the show notes. Unchained is produced by me, Laura Shin, with help from Matt Pilchard, Wanner Manovich, Meckenkavis, Pamma Jimdar, and Margaret Curia. Thanks for listening. Unchained is now a part of the Coin Desk Podcast Network. For the latest in digital assets, check out markets daily, five days a week, with host Noelle Atchison. Follow the Coin Desk podcast network for some of the best shows in crypto.