Unchained - The Chopping Block: Will Warren of 0x on Its Settlement With the CFTC - Ep. 546

Episode Date: September 21, 2023

Welcome to The Chopping Block – where crypto insiders chop it up about the latest news. This week, Haseeb Qureshi and Tom Schmidt speak to Will Warren, cofounder of 0x Labs, to discuss why the CFTC issued them a Wells Notice, how they responded to regulatory scrutiny, and how other countries may offer a blueprint for crypto regulation. Listen to the episode on Apple Podcasts, Spotify, Overcast, Podcast Addict, Pocket Casts, Stitcher, Castbox, Google Podcasts, TuneIn, Amazon Music, or on your favorite podcast platform. Show highlights:  why the CFTC issued a Wells Notice to 0x how a decentralized application addresses the issue of geolocalization of users how the team at 0x worked together with the CFTC to avoid violating the Commodity Exchange Act (CEA) again what are the implications of the settlement and who's liable for offering services  why it's so hard for crypto projects to follow the rules without clear regulatory guidance why Haseeb says that the SEC wants this industry to “not exist” how lack of regulatory clarity may be stunting US innovation whether there's a conflict of interest between the companies building protocols and the protocols themselves Hosts Haseeb Qureshi, managing partner at Dragonfly  Tom Schmidt, general partner at Dragonfly  Guest Will Warren, cofounder of 0x Labs  Disclosures Links Unchained:  UniswapX Launches With MEV Protection and Gas Free Swaps CFTC Charges Three DeFi Protocols With Violating AML Rules, Operating Without Licenses Learn more about your ad choices. Visit megaphone.fm/adchoices

I think there's basically been no agency that has offered really complete clarity about how crypto ought to be regulated. And it's not as though this is an impossible task. If you look around the world at other first world countries that have robust regulatory regimes, there's a lot of clarity in different places, which shows that it can be done. Not a dividend. It's a tale of two-quant. Now, your losses are on someone else's balance. Generally speaking, air drops are kind of pointless anyways.

I'm named trading firms who are very involved. D5.Eight is the ultimate topic. D5 protocols are the antidone to this problem. Hello, everybody. Welcome to the chopping block. Every couple weeks, we get together and give the industry insider perspective on the crypto topics of the day.

This week, we're running a little bit short. I think it's actually, because it's conference season, people are getting sick. You might be able to hear my voice is a little bit sickly right now, so we've got a skeleton crew today, but we've got a very interesting guest that's going to keep things very lively.

So, quick intro is first. So you got Tom, the Defy Maven, and Master of Memes. Joining us, special guests, we have Will Warren, Lord of Liquidity at ZeroX Labs. And you've got myself, I'm a seed, the head hype man at Dragonfly. So we are 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 Chopinblock.com, for more disclosures. So, Will, it's great to have you on the show. For those of you who don't know, Tom and Will actually have, there's a lot of backstory here in the relationship between Macha, the Zero-X settlement.

that we're going to be talking about today. And Tom, Tom, do you want to go into that a little bit? What the origin story is here? I feel like that sounded somewhat nefarious or something like that. There's a whole backstory. It might be. I was an early employee at ZeroX and I was a product lead there for two years, worked on two different versions of the protocol and worked on the aggregator product, which turned into Xerox API and later, Masha. So Will and I have known each other for a while. We actually just catching up about some of the zero-x mafia and the other zero-x employees who are not doing cool stuff in crypto. So I'm excited to have him on today.

So actually, Will, why don't you quickly explain what is zero-x for those people who are sort of coming in who only really know NFTs or whatever it is, who are not from the 2017 era? Explain to us, what is zero-x? Yeah, absolutely. So zero-x is a protocol for exchanging ERC-20 tokens in a period of place. peer way. It was, you know, one of the kind of first systems designed on top of Ethereum, where there was kind of an off-chain component and an on-chain component. ZeroX protocol specifically specifies in order format or swapping one ERC20 token for another and all of the kind of parameters associated with that trade. And this order can then be, you know, ingested within

a smart contract on the Ethereum blockchain to settle a trade atomically between two parties. Got it. And tell us as well about matcha and how that fits into the suite of products under X. Yeah, absolutely. So a lot has changed over the years. So yeah, we've been around for, you know, seven years at this point. My co-founder, Amir and I started working on zero X back in late 2016. And in the early years, and, you know, this was a really exciting time. This was when Tom was was leading product, we were really focused on building a protocol. So an open protocol that anyone can build on top of, anyone can create their own ERC20 token marketplace on top of the protocol, build like a front-end user experience on top of it. And over the years, we got closer and closer

to end users and building the things that they need. And we started shifting our focus from building this unopinionated piece of public infrastructure for swapping tokens, to also building a hosted service on top of it called ZeroX swap API. And the swap API is basically giving developers exactly what they wanted and needed. They wanted to focus on building their consumer product. They wanted a simple way to support swapping between different assets within that product. And they didn't want to have to deal with smart contracts and all the complete. complexity that comes with it. So our swap API is just a way to very easily kind of plug in an API that kind of looks and behaves similar to others they've worked with in the past.

Developers have worked with in the past and it aggregates liquidity across, you know, 100 different decentralized exchanges. Both of them probably familiar with and ultimately as we kind of worked our way up the stack and got closer and closer to the end user, we started building, MACHA, which is a consumer product and front-end interface at MataxyZ. And this is essentially a front-end that sits on top of our APIs. And you can think of it as like a search engine for tokens and liquidity. So it's a it's a decks aggregator. You know, I think people who are familiar with one inch or, you know, I guess UnoswapX is soon to be also a decks aggregator of some kind.

It's funny, actually, when I, when I first go. got into crypto in when I first came into space full time in 2017. The first meetup I ever went to was an SF meetup. I think it was like off meetup.com. I was like literally I just like Googled crypto meetups in San Francisco. It was a presentation by zero X. And I remember there was this big, you know, I think it was you. And there was a slide deck that was like, everything is going to be tokenized.

And in the future, there's going to be a billion tokens and a laundromat's going to have a token. And, you know, this country is going to have a token. And I was like, wow, we're fucking. and going places. This industry is amazing. And it was a very different time, obviously. There was a, you know, a, there was a, there was a degree of bullishness that has wax and waned over time with respect to the tokenization story. But I want to shift gears a little bit and talk about, not just broadly about DFI, but specifically about what happened over the last couple weeks when the CFTC announced a string of settlements. So there were three settlements that were

announced. One of them was with, one of them was with you guys with Zerox Labs. The other one was with Open, the on-chain options protocol. The third was with some kind of, some protocol called Deridex, which I'm not familiar with. And they were all very small settlements, so all in the range of like 200K to 150K, something along those lines. And as far as I understand, all three of them were for offering, basically not being registered as an FCM or a futures clearing merchant, I think, is what it is, and offering derivatives that should otherwise be under the supervision of the CFTC. What I'd love to get from you, Will, is just give me the narrative of, you guys are out there building Macha, you've been doing this for years. How did the CFTC get in touch with you?

What happened as you were going back and forth? Tell us the story of how all of this took place. Yeah, it isn't a very dramatic story. We essentially received an email from the CFTC. And as you can imagine, that's always scary as an entrepreneur when you, you know, receive any sort of contact from one of these agencies. But essentially the CFDC Enforcement Division reached out to us, and they had issued a Wells notice, basically alleging that Zero X or Macha was violating the Commodity Exchange Act. And this is really the meat of it. by facilitating margin trading for retail traders. And so to be clear, the specific claim they were making was that you guys allowed the trading of this 2x levered Bitcoin and 2x levered ETH asset, which was, who is the issuer

of this thing? I'm not sure. Okay. So there's just some token out there. Yeah, I'm actually not sure. There's some token that's 2X levered Bitcoin or 2x levered Eats, some EARC20. And this was tradable through Machas front end, right? And it seemed like there were two tokens that were issued by the same issuer, and they tracked down these two tokens.

They're like, aha, these are derivatives. And you are allowing the trading of derivatives, therefore you're in violation of the Commodity Exchange Act. And so, okay, so they contact you. They say, hey, you're in trouble. What happened next? Yeah. So interestingly, they actually didn't identify any specific tokens when they first reached out. It was a somewhat ambiguous message we received from them.

They said, hey, we think you're violating them. that's the CEA, and we need a talk. A Wells notice, essentially we had, you know, kind of two weeks to put together a letter to kind of respond to their allegations. If we were able to kind of swatch their concerns, you know, perhaps they wouldn't recommend moving forward with an enforcement action. But typically a Wells notice is, you know, putting you on notice that we're thinking about recommending an enforcement action against you. We weren't exactly sure why at the time.

You know, next step, we started to work with an external legal counsel, Wilkie, and they really facilitated all of the direct communication between the CFDC and ourselves. But, yeah, there, you know, there was quite a bit of back and forth. This process began in February of this year, and it only resolved with kind of the public announcement earlier this month. I see. So when they reached out to you, this was basically like FDX had just collapsed a couple months ago. All the fraud stuff was coming out. Kind of sounds like this lines up with when the enforcement from the White House really started getting aggressive, both on this SECC side, and it sounds like as well on the CFTC side. So they sent you vague letter, not exactly saying

what it is that they're mad at you about. Did you get a sense of how they decided? that you guys were violating the CEA? Was it sort of like, okay, give us everything you got and then we'll tell you what you're in violation of? Was it kind of, was it sort of, did it feel like they were sort of fishing for something to get you with? So actually, we just really weren't sure what it was about.

We had no idea. And so, you know, when we engaged with Wilkie, you know, kind of the first task was, okay, let's talk to them. Let's, let's find out, you know, what they're concerned about. And so Wilkie, you know, they contacted the CFTC to kind of understand

the nature of the request, kind of explain what we're building and what our business is focused on. You know, it became clear at that point that there were a few things they were kind of interested in learning more about. But in particular, the primary concern was, you know, access to leverage tokens in Macha. And so when we reached out to them, you know, it did sound like we had perhaps gotten caught up in, you know, maybe another investigation that had been going on. And, you know, they had some questions for us ultimately kind of resolved and didn't really lead anywhere. But the thing that, you know, they really did focus in on was, you know, this allowing of, you know, trading these leverage tokens within retail kind of consumer product. Part of the, you know,

the concern of the investigation is all around like serving U.S. users, right? And there was a lot of sort of back and forth. And the announcement that came out around, you know, what is good enough for how do you know if you're serving U.S. users? What is good enough when it comes to, you know, IP blocking or detecting IPs or detecting geo? I mean, how do you guys think about that, given that, you know, it's like zero X protocols on Ethereum and you have this UI,

like, like walk us through how you guys think about sort of the U.S. bit to this and specifically, you know, how, what were their concerns around serving U.S. users based in? You know, this piece, how do we address this issue of U.S.-based people accessing these things and, you know, people outside of the U.S., you know, being okay to access these things? Well, it's worth noting, too, that, you know, a majority of MAPHA users aren't based inside the U.S. And so, you know, it is kind of a minority that, kind of of our customers that this could potentially apply to. We didn't really have a clear answer around. how to proceed once they reached out.

And so, you know, naturally we engaged with them and kind of over the next couple of months, we cooperated with the CFTC, kind of explained how macho works and, you know, all of kind of pieces of the technology stack. And around May, the CFTC kind of came back and offered a settlement and a $200,000 fine if we agreed to prevent violations of the CA in the future. So at this point, it's like, okay, how do we prevent violations of the CEA in the future? This isn't something that there's necessarily like an instruction manual for. What we did is we work with our legal team and with Wilkie, and we put together, you know,

basically a proposal on how we could, you know, automate token screening and essentially screen out leverage tokens from being accessible to folks in the US. And we shared it with the CFTC for feedback. They got back to us and they offered constructive criticism. We kind of adapted our process in response to it. And ultimately, we arrived at a policy or a procedure that we felt comfortable moving forward with. And we obviously didn't get any sort of kind of official blessing from the CISO,

They couldn't say, now that you have put this procedure in place and you're preventing U.S. folks from accessing leverage tokens, you know, we're never going to bother you again. Definitely not that. But it was overall like a very constructive conversation. And we arrived at a solution that we felt, I think, satisfied both parties. When you were doing this outreach to the CFTC and sort of putting into this explainer of how Macha, X API, Zero X, X work, did you get the sense there was a sophisticated understanding? from them ahead of time, or were you doing education as part of this and maybe clearing up misunderstandings or clarifying things that they did or did not understand? Yeah. So they certainly, yeah, over time as we continued engaging with them and really dug deep into our products and the technology, their understanding went from probably not very deep to they definitely understand exactly, you know, the kind of constraints that we're running up against. And yeah, so I, you know, for Macha, I guess kind of the big, the big constraint here,

Mata really is kind of like a block explorer. So in the same way that, you know, a search engine like Google kind of crawls and indexes, all the different websites that exist out there on the internet and make it really easy for you to find them, but they don't necessarily know the content of every single website from the get-go. It's kind of a similar process. So Masha is like a search engine for tokens and liquidity. So every single ERC20 token that exists on the different networks we support, you know, we have scraped and indexed that token and you can search for it through Macho. Do we know what every single one of these, you know, four million plus tokens represents? We don't. And so, you know, coming up with a way to screen for leverage tokens and to make sure

that they're not available for U.S. folks. That was something that we had to work through. At the end of the process, we felt like they had a very good understanding of kind of the practical constraints and how macho works. And overall, it felt like it was a pretty constructive conversation. So if you zoom out a bit, I think the way a lot of people took this, the announcement of these settlements was that, hey, you know, we were all very excited about getting the CFTC as a regulator instead of the SEC. But turns out the CFTC is just as bad and everything sucks and it's

all going to hell and blah, blah, blah. And to be honest, what I'm hearing from you is that actually the CFTC sounded reasonable to a first approximation in that, one, they didn't go after you for having zero X protocol interact with leverage tokens, right? Obviously, zero X protocol itself is permissionless and lives on chain. And, you know, there's no front end that's being maintained that's like making decisions about which tokens to list. And so they were, they were, they were, they were, were sophisticated enough to make the distinction between macha, which is a sort of managed service that has back-end servers that, like, does stuff as opposed to Zero X protocol itself. It's a little bit of a tick-e-tack foul to be like, oh, hey, you had these two tokens that didn't do much volume

and that nobody really cared about, but they were accessible through the front end, and therefore your violation of CEA. And obviously, the settlement is pretty de minimis. And so it does look like they were looking to make a statement, and they made the statement effectively. But it sounds like they were sophisticated enough to understand, first of all, how it all worked, how it all plugged together. And second, to be able to relatively constrain the enforcement action to a part that allowed you guys to continue running MHA and also let Xerox protocol itself basically continue on unperturbed. In your interactions with the CFTC, did they feel constructive? Because it sounds like they were giving you guys feedback on a proposal to avoid future CEEA violations. It sounds also like

they were open to hearing, like, why, you know, this, this wasn't as big of a deal as it might have otherwise been, the settlement itself. Like, they didn't tell you, hey, shut down, like, that you guys are obviously, you know, don't deserve to exist. It doesn't sound that bad. And I think the way a lot of this was being heard by crypto Twitter was like, oh, my God, the CFDC is after us as well. Yeah. I mean, so, you know, when, when they initially kind of reached out to us, they did issue a Wells notice. And that, that is like a fairly aggressive stance. And, but But, you know, I think we, you know, engaged with them a good faith from the outset. We wanted to explain, you know, some of the realities that were facing by offering, you know, a product like macha.

And, you know, it did feel like the conversations were positive and constructive. It didn't feel hostile. And I think a big part of it of that was that we went into the conversation looking to educate, looking to proactively, address any of these issues that were really important for them. Being a good actor and trying to engage with them in good faith, I do think that made a big difference in terms of the tone. Yeah, it feels like, I mean, so here is the speculation part. So obviously, okay, you've laid out what happened kind of step by step.

My speculation is that it must have been that basically like Janfab after FTX was collapsing and, you know, all this stuff was happening. I mean, this is just before the banking crisis, if I recall. there is probably a very broad mandate from the White House to say, go, you know, go scalp some people. Like, let's make a statement to show that we're being tough on crime. Crypto is Wild West. And everybody, whether it's SEC, CFTC, FDIC, OCC, everybody just go start, you know, knocking people around and taking bodies. And the CFTC sounds like this was their idea of like, okay, well, what can we, you know, what can we do?

exactly can we, you know, shake down and say, ah, you were, you were in violation of the CA. Like, all these violations that they rounded up for this thing, they seems pretty small. The settlements are small. Like, these are not exactly, these are not exactly industry-shaking outcomes of, okay, well, we have to delist, you know, these two levered tokens or whatever. But it, my guess would be that's where it came from. That's probably what the impetus was. But as time drug on, you know, it was about six months, it sounds like end-to-end for this whole

thing to get to a settlement to get announced. It sounds like maybe the level of aggression probably moderated over that period of time where they were like, okay, well, look, here's what we got. You know, we can jack them up on having, you know, a couple vials of derivatives on them. But other than that, you know, there's really, there's really nothing that egregious here. That's my speculation. I don't know if you feel comfortable speculating on what you think was happening at the CFTC. Honestly, I don't know. Yeah, like, I really don't know.

It could very well be that, you know, all of the chaos that ensued with, with, FTCS, kind of, you know, decaying over time. But yeah, I really don't know. Like, it's, it's pretty hard to speculate, you know, how, you know, these kind of large regulatory bodies function internally. They're quite large. You know, the CFTC has teams in different parts of the U.S. We were specifically engaging with, like, the New York enforcement team, I believe. And so, you know, I, you know, it very well could have followed from, you know, the FTCX. and Luna craziness, but yeah, I really don't know. Did you at all consider fighting this and maybe taking it to court instead of settling?

I know it was not, you know, these two tokens did basically no volume for Macha, but, you know, it seems in some ways on face value, you know, ridiculous. Like you said, like Macha as a block explorer, you allow people to make transactions, but you yourselves are not cussying it. You're not swapping it. You're not really, you know, it is like, you know, ether scan in some ways. Yeah, I think ultimately, you know, we're a small team, you know, we ultimately, we kind of felt like the outcome of, of the entire kind of experience was something that like we could live with. We aren't kind of a coin base where we're kind of a public hearing company.

We have massive amounts of revenue coming in. Like, we, you know, we aren't default alive. We are getting to the point where we're building a sustainable business. And for us, it's super critical that we remain focused on our customers. And getting kind of pulled into what could be like a multi-year and extremely expensive lawsuit where ultimately, like, I don't think we, you know, I don't know that, you know, what the CFTC was asserting, their jurisdiction over leverage tokens, you know, I don't think we, you know, we don't contest that. And for us, we're not building, you know, a business around leverage trading or derivatives.

That's not our focus. We're focused on offering the widest coverage of tokens. And really, that's what we were focused, you know, working hard to continue offering on Macha, kind of throughout that entire process with the CFTC. How can we offer access to all the different tokens that exist out there in the world to the degree that we can do it in a compliant way? Actually, Will, can I ask you? So working with your counsel, how much did it cost you over those six months, just ballpark? Was it like a million, 500K? How much did that end up costing you just dealing with this whole thing?

Minus the settlement itself? I honestly don't know. But yeah, probably, yeah, it was probably relatively expensive for us. Okay. Yeah, on the order. So I mean, I would assume if you guys, yeah, if you guys actually went to court, it would likely be in like, you know, between five and ten million dollars, I would guess, to fight this thing and to end with the SEC.

Or sorry, with the CFTC. Yeah, I can understand why you guys would not fight this, especially given that it's not core to your business and it's, you know, it doesn't really make a lot of sense to expend a huge amount of money over it. It is unfortunate that, you know, all the agencies essentially are mostly focused on startups, right? because startups, it's very easy to get them to roll over. They can kind of carve out little pieces of their business and say,

aha, this is the bad part. We're going to cut this off and you settle and then you never touch this thing again. And startups, of course, don't have the resources to be able to defend themselves against, you know, government agencies that have basically unlimited resources. I heard actually that, so if you recall, I think it was, I want to say it was early last year or maybe it was 2021, that UNISWOP ended up removing leverage tokens from their front end. And I heard that what happened was that

they also got a visit from the CFTC. And the CFTC basically said like, hey, you guys are giving access to these lever tokens on your front end. If you do not remove them, we are going to sue you or something along those lines. And Univ swap was like, oh, well, I think they more or less had the same reaction you did.

We don't care about this. Cool, we're gonna remove them. And you might remember the news announcement a little while back that Uniswap had removed these leveraged tokens from the front end. And my understanding was, that the CFTC never moved forward with a lawsuit against UNSWP, presumably because it just wasn't, you know, they weren't being demanded to like, hey, go take some names and go, you know,

go get some headlines. And I guess now they are. So it's a little bit unfortunate and, you know, obviously kind of capricious for if that's in fact what happened. And I'm speculating, or at least, you know, relaying rumors that I've heard, that if that's what happened to UNISWAP back in the day, that then kind of switching their story. and saying, actually, well, if you have a tiny violation by having a couple of tokens on the Friday, we're not going to politely come to you and say, hey, can you please remove these and we believe this is in violation?

But obviously, it's not willful. Like, you guys are not getting much of your volume from this thing. You're just doing, as you mentioned, a Block Explorer. You know, you would think like, okay, well, be friendly. Just tell them, hey, take this off. And then you guys are not in violation anymore. So it does seem like this is optimized around making headlines, which is, you know, it is what it is. They're under pressure themselves as an agency.

but it makes one think, and we talked about this, Tom, I remember during the tornado cache story, is, you know, EtherScan, ether scan, obviously, it allows you to see any block, any token, any, you know, anything on Ethereum, right? And if you connect your Metamass to EtherScan or, you know, any Web3 wallet to EtherScan, it allows you to interact with any EURC20 token, right?

And so, in American, could go on EtherScan, interact, you know, connect their Web3 wallet, and then go and buy a leverage token on EtherScan. They could also go and interact with tornado cash on EtherScan, which is sanctioned, which is not even just to Americans. It's sanctioned, I mean, from the U.S. perspective, it's sanctioned for anybody. It does seem that in order to be fully consistent, you would need to say the same thing is true for EtherScan.

Is that like either scan is in violation of the CEA, ether scan is in violation of sanctions. It's a little bit of a far-fetched argument perhaps, but insofar as either-scan does allow you to connect to your, web through wallet to interact with any contract. I don't know. I'd love to get you guys reactions to that. I mean, it's a little bit of like a, you know, taking something kind of, uh, reducto out of absurdum, right? Like it's, it feels like we're just agreeing on the arbitrariness of what abstraction should be liable, right? Like, oh, is is Chrome liable because Metamask is on,

you know, an extension? Is your ISP liable because they relay the packets? Like, you know, it's, we, we agree that's absurd, but somehow, you know, the, uh, settling. with macha is, you know, fine. I just feel like, you know, overall, it's, you know, ignorance of the law is not an excuse, but, you know, at will, as you were sort of describing, there isn't even really clear how to be in compliance. Like, you guys basically made up your own sort of compliance proposal and went back and forth with the CFTC on it until they said it looks okay.

It's not like you, you know, drive on the highway until you feel like there's an appropriate speed. And the cops says, oh, it was a little too fast. It was a little too slow. And you just sort of feel it out. Like, there aren't rules in place. And so everyone just feels like they're kind of making stuff up until we get to a good spot. So I love the ether scan example. I think it's such a good example.

I mean, because it's true. Like you can read and write to any smart contract through ether scan. And it is really kind of like the most generalized interface for interacting with things in the blockchain. I really think that, you know, what the CFTC takes issue with is facilitating margin trading to retail traders, right? Is EtherScan a product that is designed to allow retail traders to come in late, you know, trade leverage products? Absolutely not. Like, could you do that? Yeah, like, maybe you could. I don't know, it'd be kind of funky and the user experience would

not be the greatest. But yeah, I think it really comes down to, you know, what is the intent here? Are you making these things accessible and easy for retail traders to access? And, you know, we actually don't, you know, we don't take issue with the conclusion of, you know, the settlement with the CFTC. Like, you know, these leverage tokens are probably within their, you know, like probably within their jurisdiction. And they probably do have, you know, some degree of authority over these things. So, yeah, I think like, you know, it feels like they're, it feels like they are trying to protect everyday traders from going in and doing something that they shouldn't be or that they, you know, perhaps the CFTC things are not sophisticated enough to do. Yeah, I mean, look, I'm going to push on this thought experiment a little bit further because I can tell you, like, who uses EtherScan to interact with smart contracts? you said, okay, well, EtherScan is not designed for retail.

It's not designed for institutions either. Like who is using EtherScan, people who are technically sophisticated, maybe even marginally technically, you know, to be that sophisticated to use EtherScan. But people who are technically sophisticated are not institutions. They're like people who know it code or just know some basics of interacting with smart contracts or interacting with EVM. These are also retail, right?

These are not institutions or, you know, sophisticated CFTC-registered folks, you know. So I don't know of any hedge funds that use EtherScan, but I know a lot of people who use EtherScan to interact with contracts. Anyway, the point is not so much that, like, hey, there's this one weird example that will break your brain. The point, I think, is closer to what Tom was alluding to, which is that it's very hard to build stuff when there aren't a clear set of rules.

And now, you know, they can argue, like, well, look, now you know the rules. Now that we've done these three settlements, if you list the, these tokens that are leveraged tokens, then you're in trouble and you're violating the CEA. Fine. I think one can acknowledge that that's a reasonable stance for them to take when it comes to what touches U.S. customers. That said, it took them basically until 2023 and these three settlements for that to happen. Like my understanding, whatever it is that took place with Uniswap happened behind closed doors. It was not announced to the public like, hey, here's the rules. Now, again, these settlements are

small. They did not try to get an arm and a leg from the three companies that they settled with. But it feels still part and parcel of the same story, which is a lack of regulatory clarity and regulation by enforcement. It's like the exact same thing that we've been complaining about from the SEC that we're now seeing from the CFTC. Now, at least the CFTC is more consistent. And their arguments are clearer and they don't imply the wholesale destruction of the industry, right? The SEC basically wants to see this industry not exist. I think the CFTC wants to say, look, leverage tokens, that's our shit. You're not allowed to touch that. Everything else, you know, go have fun. Which I can, I can, you know, I can be down with that. I just wish that

there was more clarity of communication beyond, hey, here are three settlements, you know, go figure out what this means for yourself. Yeah, I think that's fair. What I will say, too, though, is, you know, the lack of clarity that we're all feeling is, you know, kind of enthusiasts and active participants in this space, I think they're, you know, within these regulatory agencies, they're kind of struggling with the same lack of clarity, right? Like, they also don't have a rulebook for, or an instruction manual for like, how do you deal with a disruptive new technology that flips your entire model of financial transactions on its head? And I, you know, I think there are probably a lot of people in these agencies that are excited about crypto and, you know, probably participate in crypto.

We're all kind of trying to converge on something that makes sense, but it is hard. And I think, you know, regulators and holders. But rulemaking is in their purview, right? If you're at the SEC or CFTC, you can make rules and say, hey, here's how it works. We have front end. You list leverage tokens. You're in trouble. Right?

That violates CEA. They can, they can do that. You know, obviously, I think there's basically been no agency that is offered really complete clarity about how crypto ought to be regulated. And it's not as though this is an impossible task. If you look around the world at other first world countries that have robust regulatory regimes, there's a lot of clarity in different places, which shows that it can be done. It's not as though this is some gargantuan.

It's not as though this technology is so impenetrable and so complex. I mean, it's been like six years since you guys started operating. Clearly, there are ways that you can look at what's going on in the space and say, aha, here's how this ought to work. Here are the investor protections we should put into place. as long as you stay within these bounds, you're fine. If the UK can do it, if the EU can do it, if the Middle East can do it. I have no doubt that American regulators can also do it.

They're choosing not to. And again, I'm sure that there are complex incentives that are playing into why it is that the agencies are not willing to do rulemaking and give more clarity to the industry. But they're doing so in a way that's really harming the innovation in the U.S. Anyway, all right, I'll stop soapboxing. So I wanted to move on a little bit. So first of all, Will, thanks for sharing your story. story about what happened with the CFTC, and I'm glad that you guys are able to move on with,

you know, building out Macha and the X, X, X, ecosystem and not getting bonged down with everything that's happened here. I wanted to talk a little bit about this phenomenon that we've seen that you guys are, in many ways, a part of, of these protocols that also have companies attached to them, where there's kind of two things happening at the same time. There's a, there's a company that has revenues, has investors, has, you know, a set of equity holders on the cap table. And then there's a protocol that has, that of course has a token. And the two things might initially be aligned. They might initially be basically more or less the same. And they diverge over time. So the most obvious example of this that was in the news recently is Unoswap.

So Uniswap, obviously the UniToken corresponds to Uniswap, the Onchame Protocol. Uniswap recently recently, I don't know, a month and a half ago or something, two months ago. They announced Uniswap X, which is their aggregator RFQ system, whatever it is that is not. not live yet, but is supposed to be coming live in the near future. And Uniswap X is going to be taking fees, but the fees do not go to the Unitokin holders. They go to Uniswop Labs, the company. And Uniswap Labs, the company did a fundraise. They raised like $100 million or something led by, I think it was polychain and a bunch of other investors.

And so you would now have this divergence in Uniswap, the on-chain protocol, and Uniswap Labs, the company that is in some way. way, in some way, not totally, but in some way, in competition with Uniswap itself to try to accrue more fees on their front end rather than having the fees accrued to the protocol. Of course, Uniswap is weird. There are no protocol fees. It's kind of a, I don't know, it's maybe a bad example in that regard. But this is, this phenomenon, which also, my understanding is that that's how Zerox works

as well, where you have Macha, Macha, you know, it's under the purview of Zerox Labs, the company, which did a separate fundraise. And then there's a zero X token, which is, more tied directly to the protocol that's on chain. Now, I personally have had a lot of criticisms of this structure. I mean, you've seen the structure now arrives many times and among many different protocols. I want to get your thoughts on how you think about this structure where you have a company, you have a protocol, and the two have differing assets and differing incentives. Yeah, that's, it's a good question. And it's an interesting one too, because it's, I don't know, if you asked,

if you asked six years ago, would we be here in this kind of current setup? And would this kind of be the kind of the playbook for a lot of companies or kind of influential entities in the crypto space? I don't know that we would have thought this would be the outcome. I think this is the result of some tension between public goods, building things that are intended to be infrastructure that anyone can use and anyone can benefit from. and other projects, incentives to either build on that existing infrastructure or to build their own, essentially and create their own infrastructure with their own token, perhaps. This is something that we kind of experienced ourselves in 2018 and kind of found out the hard way, the downsides of not having a direct relationship with the end customer.

So we were building zero X protocol. All we're building is open source developer tools, go build whatever you want with it, or not charging you any fees. This thing just exists for you to use. And really, like, if the thing is engineered well, there really isn't that much incentive to fork it and go kind of create your own version of the infrastructure. But that's when you start to add in, you know, lots of, you know, investment and funding available, and, you know, kind of the model of success is creating a piece of public infrastructure with, like, a token associated with it, like a governance token.

There's a lot stronger incentive for, like, newcomers in the space to kind of compete and introduce their own infrastructure versus building on existing infrastructure. And this is something that, you know, we, yeah, we saw in 2018, like this product, D-Dex was the kind of most popular marketplace built on top of, zero X, they did an excellent job. They built a really great consumer product. They had some decent traction, a large user base in Asia, and we were thrilled. Like, you know, this is why zero X exists. Like, we wanted to help people build cool products and innovate and use this infrastructure. And, you know, ultimately, you know, we invested so much of our time and effort into trying to, you know, help them. And ultimately, you know, I think, think they decided to kind of create their own infrastructure.

And some of their reasoning was, you know, they wanted to be able to build for their customers more quickly and effectively versus relying on, you know, a platform that sits underneath them or a protocol that sits underneath them. So I think like a lot of the big projects in the space, like the uniswops too, for example, come in with like the best of intentions, hey, let's create this piece of technology that everyone can use. And, you know, yes, protocol fees exist. It's a way to kind of fund the public good.

It's like taxes. So, you know, everyone benefits from the services provided by the government, but the government needs to pay for the roads, pay for the firefighters, pay for the police, et cetera. And so you need, you need to have some revenue. But, you know, if you can just kind of create a new nation, like a new government and, you know, start bringing in, you know, your kind of like your tax revenues without paying them to someone else,

there's a pretty strong incentive to, yeah, kind of fork and do your own thing. Uniswold versus sushi swan. Great example. Yeah. So if I'm hearing you, you know, so back in the day,

and I remember a lot of this playing out back in 2017, 2018. Zero X once upon a time was super dominant in the deck space. You guys really tried to be a platform. And this is something that nowadays as a VC, I strongly discourage people from trying to be platforms. and zero X is actually one of the,

it's one of the examples I give that I think is quite instructive of why that tends not to work because you guys were trying really, really hard to attract relayers, which were basically these, you know, people who built exchanges on top of the zero X protocol.

And the problem is that either one, the relayers that were, you were attracting to build on top of zero X sucked so they just weren't very good. Or the ones that were good, they were so good that they were like, wait, why are we paying zero X, why are we allowing their thing to be the back end?

Why do we just fork it and have our own back in and have our own token and do our own thing? And like, you know, middle finger to zero X. And it felt like that was probably the teachable moment for the zero X team of like, hey, this is no good. We cannot attract, we cannot try to get other people to build on our rails. We need to build on our own rails and start moving up the stack to directly own the consumer. Instead of attracting relays, we're so much better than any, like, we're so much better at building products than anybody else who were attracting to build on top of us, we should just build the products. We should just build the ecosystem.

And I think that is, in general, the correct insight from entrepreneurs is that, okay, it's fine to build infrastructure, but probably you are the best person who is positioned to actually be able to build something that is consumer-facing, that is retail-facing. And it seems like that's where X X eventually arrived at with X-A-I-I-I-I-I-I-P-I-A-T as the primary way in which people were going to end up consuming zero-X liquidity. Now, all that being said, well, so first of all, let me pause there. as somebody who was working on product at that time and making a lot of these, thinking through a lot of this strategically, what do you think of that story? Yeah, I think that is pretty accurate. You need to kind of be in control of your own destiny. And I think overwhelmingly, you know, having, it's sort of this, this, you know, bimodal distribution where either you are a true protocol network that has, you know, this nice flat distribution of millions of applications that serve you sort of like an Ethereum almost.

or you are sort of true, almost vertically integrated in some ways of having that sort of experience with the user. And the in between is where you kind of get caught and you're sort of the worst of both worlds. I think in some ways it's also sort of a testament to some of the sometimes perverse incentives in the industry around launching a token. I think some of the forks or derivatives of zero X that I saw were not meaningfully different or even better in any way. But it's a great story around we have our own protocol that, you know, compliments our thing and we can have a token around it. I think, frankly, you know, the D-Dex fork was kind of in this bucket where it wasn't as if, oh, zero-x is too general. We need something more optimized for our use case. It was, we get this app and we may as well have a token and have our own protocol and, you know, kind of kind of do it ourselves.

But I think going back to your question around equity versus the protocol, I kind of see I'm of two minds of this. One, right, is, hey, zero X the protocol massively more successful as a result of, you know, Masha, then it would be otherwise, right? Macha is driving volume through the protocol and striving, it's bringing on liquidity. And, like, that all flows through the protocol. And so it's sort of like, you know, you can go, you know, run an instance of Mago through MongoDB, the company and, you know, hey, that sort of supports the open source software. The other being, hey, like, you know, maybe this is in some ways a distraction.

and these people should be working for the protocol or, you know, other protocol in some way or the fee should be going to it. I cannot but think there's also, frankly, a byproduct of the regulatory environment that we're in. They were in. Wouldn't it be sweet if, you know, swaps from Uniswap X went into a Dow and a treasury and went back to the token holders and, hey, this whole thing sort of flowed nicely and we aligned incentives.

Unfortunately, that would most likely make Uni look like a security. And so instead, it's just way simpler to have this front end, take a fee. have it stay in the company. And so it's, I think, kind of unfortunate, but also just very understandable. If I were a founder, I'd be in the same boat as to why you would maybe not want to do that. Yeah, I mean, I'd buy that story that it's a response to the regulatory pressure of not wanting to make your token of security if it's tied to like some consumer facing front end thing that you're maintaining that as back-end servers and stuff. At the same time, it strikes me as not just, so one thing that I really don't like is it's sort of double-dipping in that you are

raising money twice and you're getting this valuation twice, one for the token and then again for the equity. And the equity almost by definition, I mean, perhaps not because if you can say, okay, well, it's creating more value net and it's helping the overall protocol and so actually it's just creating value. But take Uniswap as an example. Uniswap is probably the best example because it's so dominant in DFI. You know, it's not as though Uniswap, is likely to increase the overall market for crypto, right, or for defy trading. It's very likely to take market share from, you know, the one inches or the, you know, other aggregators or whatever or other RFQ systems.

If it's successful, maybe it's not, you know, the NFT platform obviously was not successful. But let's assume that it is. If it is successful, then, and let's assume that it's taking fees, those fees almost by definition must be coming at the expense of some fees that are being paid somewhere else. and given that most of liquidity in crypto is on uniswops uniswap itself, if more of that volume is going through their RFQ system directly to market makers and Uniswap is taking a fee for standing in between, then that's less volume going to uniswap the protocol, which means that uniswap the protocol, you need the token, is going to be capturing less value, right? Again, you can argue, well, but it's going to increase the market because it's so much more efficient, blah, blah, blah. Yeah, I was saying Uniswap X is maybe a weird example, too, just because of the whole RFQ off-chew, off-chance. component, which maybe maybe you've got to get into a little bit. I think of maybe more just like

Uniswop.org, but the interface, I think Uniswap is massively more successful and valuable. You need the token a result of having this amazing, you know, consumer product effectively. I think it would be great if consumer product development and protocol development could be more incentive aligned and more aligned in terms of where value captures. But I just don't see that today. I think it's very, very difficult to do that. I agree with you. I think it is very difficult. Again, I feel for founders who are kind of put in this regulatory pincer that, you know, no doubt they want everything to be aligned. But the other thing, of course, when you have an equity company and you have a token and the cap table of your equity diverges from the sort of token cap table, so to speak, that now all of a sudden you really do have two sets of stakeholders who are each vying for the same pie, right?

In some sense, you might want it to be that actually, you know what, let's lower the uniswap fees and let's increase the fees on Uniswap X. Now, literally they're as low as they can be right now on Uniswap, which is zero. But, you know, in principle, let's imagine Uniswap did introduce a fee, right? Well, Uniswop, the foundation, would kind of be like, well, look, we have some unitok tokens, but we have a lot more Uniswap equity or Uniswap Labs or whatever it is. And so we actually really want for Uniswap Labs to accrue more of that value, as opposed to Uniswop tokens, maybe we've already sold a bunch, maybe, you know, whatever, maybe we don't own as much as we

otherwise like to. And so you have these divergent stakeholders. And these divergent stakeholders, ultimately, just economically, you would expect there to be tension and competition for the same, sort of zero-sum competition for the same fees between these two entities. Now, not every single protocol that has an equity and protocol, or sorry, token component ends up in this kind of contest. But it seems like a very real risk to me that you'd expect to be. You'd expect to be. to arise that there's no longer alignment between the equity holders and the token holders. So, okay, Tom and I've been going back and forth. Will, what are your thoughts on this, given the state of the zero-x ecosystem and how the token versus zero-x labs interact with

each other? Yeah. I mean, there's absolutely tension. I mean, ultimately, if you're trying to build a public good infrastructure, you're not as close to the end customer. And I think, you know, the value, the opportunity to capture value is, is the closer you are to the end user, the, the easier it is to capture value. And if you look at Metamask as an example, you know, they're able to capture, you know, 80 something basis point fees on swap volume. Yeah, I mean, is Metamask, you know, are their incentives aligned with kind of the swap or decentralized exchange protocols that their users are kind of using through Metamask?

Like, no, not really. They're kind of trying to achieve different goals. Like they kind of have different objectives. A couple of examples, I think, of like open ecosystems where there is a Dow and it is proactively deploying capital in a way that like grows and benefits the ecosystem. And there is an ecosystem. It's like Ethereum, you know, some of these layer two networks, like optimism is a great example. They have like a really, you know, a big Dow and.

very active and deploying lots of capital in ways that are probably beneficial for the ecosystem that's being built on top of optimism. You know, that seems to work quite well. And I don't know, it feels like some of that kind of ecosystem incentive alignment gets lost as you work your way up to stack maybe. That's fair. Kind of an interesting opposite examples like OpenC. So OpenC kind of did the opposite.

They started out as a, you know, traditional for-profit company. and, you know, ultimately kind of deployed their own protocol. Seaport, yes. Yeah, they deployed Seaport and, you know, with the intention of kind of allowing anyone to build on top of it and including like some of, the NFT space is very competitive. It's like fierce competition. And, uh, yeah, I don't know. I'm curious, like are their competitors using seaport? If I recall, Blur ended up using seaport in large part to evade the open C block lists. Wasn't that a big part of Blur's early strategy? Yeah, and they're ever seen aggregators, so they get it through there.

And there are some smaller marketplaces that also use Seaport. So, you know, I hear that example. I think it's a question of, hey, how is value capture represented externally, right? Seaport kind of looks in, it is a public good, but I don't think there's an assumption that people can invest into it or accrue value into it some way, just some software. that you can use if you want to. And I think that's kind of the tension is right now it seems like, and I think optimism is actually a great example.

It seems like there's sort of this, like I said, sort of bimodal outcome in terms of value capture of equity or token. Hard to see very many examples of sort of a nice, happy split. And that is sort of, you know, I think unresolved in the industry. And it's not clear how to resolve it. Yeah. Yeah. This is, so I don't think this is something we're going to be able to get to the bottom of in this conversation naturally. But it's a, it's a tension that I see again and again arise as protocols mature, you know, especially once the protocol has a sense that like, okay, we're in a good place from a regulatory perspective.

I don't think that anyone wants to come after us or like, you know, kind of break our door down, because maybe the SEC wants to break everyone's door down. But we still want to do more. We still want to create more things. We still want to, you know, be aggressive in building stuff that's retail facing and user-facing. But if we have, as Tom mentioned, if we have the profits or the revenue from that go back to the Dow, then it looks super centralized. Now it looks like, okay, efforts of others, blah, blah, blah. So let's just take a different structure.

Let's use a traditional equity structure and just make this a regular business. And in a way, it is cleaner from a legal perspective. but it does end up impoverishing token holders to at least some degree. In an ideal world, we would like it to be the case that a company could decide that, hey, we are just going to donate our revenue to the token holders. And you could have a company structure that continues to work on the protocol and create things that are built on top of the public goods. But all the value still flows back to the token holders without incurring any kind of regulatory concerns.

But we're not there. in that world. And so we're kind of stuck in the world we are in, which is that we're probably going to continue to see more of this, more of this thing where, like, you create this initial shell that is the token, that is the public good. You build the protocol out, and then you set it off to sea, and that, like, that is just floating out there, it's just floating out there in the ocean, and then you start building your company on the shore, you know? I don't love that model, but I think it might be a model that we're stuck with for the foreseeable future until there is significantly more clarity around how you can do these things without violating securities

laws. I'm not actually not sure that it's securities laws that are making it hard to kind of align incentives. I think it just has more to do with who's doing the hard work and who's getting paid for it. There's a lot of DAOs out there that are, they have capital to deploy and, you know, they do deploy it. Is it being deployed in a way?

that is beneficial for everyone that's potentially building on top of that platform or that that protocol. It takes a ton of work to build something that people want. And the people that are doing that hard work, ultimately, you know, the value should probably flow back to them. And in a lot of cases, the people that are doing that hard work are employees at a company. And I, you know, I don't know that there are too many examples of DAOs that can justify their existence long term. yet. I think there are a lot of DAOs that have, you know, a significant treasure trove of, of capital at their disposal. Are they going to be able to like bridge the gap to sustainability long term? Like their, their protocol, their platform is creating enough value. People are

paying to use it that this thing can kind of reach, yeah, kind of like get the flywheel spinning. I don't know. It's pretty hard. I don't think we've seen any examples. Maybe the closest thing is like, Yeah, I think layer two networks are probably the closest thing we've seen because they actually do have economics that seem to maybe be sustainable. Layer two networks, you know, generate decent revenue, and that can be reinvested into the ecosystem. And having an ecosystem actually makes sense for layer two networks if they support, you know, generalized smart contracts. And, but I don't know, the entire space has just been so flush with capital. and everyone has been operating at a loss for so long that I just don't know that like we've actually seen a steady state where like value creation and value capture are sustainable. Yeah.

Does that make sense? It does. It does. I don't know that I totally agree, but I see where you're coming from. And I agree with you that, you know, being able to align incentives, especially when, you know, a protocol has existed for a long time. and has a very divergent set of stakeholders can be challenging without creating a different structure for the company that's actually trying to accrue revenue and the product, I should say, that's trying to accrue revenue and really become profitable. That said, we're up on time, so we got a wrap.

But Will really wanted to thank you for being as candid as you've been with us and walking us through everything that took place at zero X. You guys are the OGs among OGs, and really hope you guys continue to crush it. and that we get another seven years out of you guys continuing to build in the space. Thank you, Haseeb. And thank you, Tom. Awesome, chatting with you. And, yeah, excited for the next seven years.

Always. All right. Take care, everybody.