Unchained - Unconfirmed's First Episode: Olaf Carlson-Wee of Polychain Capital on Governance

Episode Date: February 18, 2018

Check out the first episode of Unconfirmed, in which Olaf Carlson-Wee, CEO and founder of Polychain Capital, discusses why an issue facing the Ethereum community right now has him thinking about on-chain governance. If you enjoy the episode, subscribe to Unconfirmed today! Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. As you know, I have a new crypto podcast called Unconfirmed. I'll be dropping the first episodes here into the Unchained Feed so you can check it out. This week, I discussed some news highlights with Olaf Carlson Wee of Crypto Hedge Fund Polychain Capital. If you enjoy the show, be sure to subscribe to the podcast. The full name is Unconfirmed. Insights and Analysis from the Top Mines in Crypto. Subscribe today. Hi, everyone. Welcome to the inaugural episode of Unconfirmed. The podcast that reveals how the marquee names and crypto are reacting to the week's top headlines and gets the inside scoop on what they see on the horizon. I'm your host, Laura Shin. This episode is brought to you by OnRamp. Your brand-hand website are the first things your users will see. And in the current Wild West of ICOs and blockchain startups, you need to stand out from the pack. OnRamp is a full-service creative and design agency that will help amplify your brand with a perfect website, logo, or custom design project. Get big results in no time by visiting thinkonramp.com.

My first guest for Unconfirmed is Olaf Carlson Wee, the CEO and founder of Crypto Hedge Fund, Polly Chain Capital. Welcome, Olaf. Thanks for having me, Laura. So what did you think was some of the more interesting news in crypto this week? So something I thought was pretty fascinating that emerged over the last couple days was a discussion around the Ethereum, improvement proposal process, whereby, you know, there was a bit of a debate about what the process should be, if any, for recovering lost ether in the Ethereum blockchain. The most pertinent example here is the parity multi-sig deletion, whereby a user going by the moniker DevOps 199 accidentally deleted over $100 million worth of ether stored in this

certain type of contract. So there's been a bit of a debate about, you know, should we fix this contract bug and put that ether, you know, back in the hands and in control of those people that were using that contract. So this is, you know, a very interesting debate because it comes back to something that's very, I think, important, which is the governance of blockchains and how decisions like these are made. I think this is a really critical question. And, you know, As part of this debate, it got heated enough such that one of the Ethereum core devs, Yochi Hurai, actually stepped down from the Ethereum improvement proposal or EEP editing process.

So I think that was a really, that one made me think a lot about this topic. Just made me think a lot about philosophically how you should best run blockchain governance and it made me think a lot about how this would have been handled differently if there were on-chain governance systems like we expect to see in protocols like Tezos and Definity that will launch in 2018. So what are the arguments on either side right now for recovering the funds or not? So, you know, these funds weren't stolen. They were just deleted.

So I think there's a pretty reasonable argument in my mind that these funds should just be returned to the original owners, given that it was really, These funds were really lost due to a contract bug, and it would be very easy, in a sense, technically speaking, to return these funds. On the flip side, though, it's controversial any time you're going to do a hard fork in order to alter the ledger, right? And this is, for example, what Ethereum did after the Dow hack in 2016 was alter, you know, the ledger in order to return the lost funds.

I think at that time there was a much larger percentage of ether tied up in the Dow. I also think that Ethereum was a more immature protocol and immature community and an ecosystem at that stage. So the decision, I think, had a lot more consensus. I think this decision is tricky because it's a smaller percentage of ether, you know, fewer parties, I think, are affected. And the ecosystem is more mature. So it's trickier to come to community consensus around a decision like this. And so if there was a hard fork, then does that mean that more recent transactions would be erased essentially? No. So these funds, the ether is really stored in these contracts right now.

It would just give the original owners access. So it wouldn't alter any historical transactions or create new transactions of any kind. It would just sort of amend the rules of these specific kinds. contracts that are storing this ether. Oh, interesting. Okay, so then what are the arguments against? Just, you know, there's a pretty strong ideology among many in the community for good reason that blockchains should be immutable ledgers, right? And they should never be changed. And that, to an extent, at least, code is the law of the land, so to speak.

So I think there's a pretty reasonable argument on the other side as well that, you know, we can't, quote, bail out, you know, missing or lost funds in these various one-off cases. Because suppose I, you know, had a different bug in a contract that I personally wrote and just lost $10,000, right? But nobody else was affected. Like there's this line somewhere where it, you know, you have the Dow where it was something like 5% of all ether was wrapped up in that. and there was a massive community push to unlock those funds. And then you have cases that are one-off losses that obviously it's very hard to get to global community consensus around fixing every broken contract.

So I think that it creates a really complicated issue around, you know, just governance and how these decisions are made. And what's more interesting to me is not this particular case, but rather just, you know, philosophically how we think about blockchain governance. Because I think if you could push this to a vote where people could actually use their ethers to vote yay or nay on each individual instance, I actually think that might scale pretty well, especially if individual holders didn't have to actually vote on each individual case, but actually could sort of bond their voting rights to some participant

in the community. So, for example, if there was a particular developer who you felt was well aligned philosophically with your personal beliefs, you could actually bond your coins and kind of vote based on how they vote. So it's sort of like delegating your vote. Yeah, exactly right. And it's coin voting, right? So one coin is one vote effectively.

Now, this has its own complications. I do think that many of the core Ethereum developers view speculators or holders in sort of a different category than users of smart contracts. You know, I personally think both of these groups are first-class citizens because in order to have a usable blockchain that can execute smart contracts, you actually need substantial speculation in order to make sure that that value of new block rewards being created is sufficient to actually secure that, that secure environment in which those smart contracts are being executed. What I mean by that is if the Ethereum blockchain was only worth, say, a couple million dollars, there would be significantly reduced security

guarantees around the execution of smart contracts. So to me, actually, the speculators and users of smart contracts have a very symbiotic relationship, and in my mind are both first-class citizens. But I do think that many in the Ethereum developer community are against this sort of on-chain voting because it does give a lot of power to the veritable whales, right, who are speculating on large, large portions of the underlying network. With Amex Platinum, almost every purchase made with your card can be covered with points, including new tastes, new fits, and virtually everything in between.

That's the powerful backing of Amex. Conditions apply. Interesting. Well, one other thing that I've been wondering about, because I know that you, like some of the different ways that some of these blockchains that do incorporate on-chain governance. I know you like the way that they're going about it. But I did wonder to myself, you know, for instance, like I'm a little bit more familiar with Tezos than some of these other ones like DFINITY. So in Tezos, I think there's a certain rhythm to the votes where it's

like, you know, there's one every month or one every, you know, a certain time period. But then I just sort of thought to myself, you know, if you're constantly having these votes, then I feel like there will be certain issues where people get entrenched in their views. And so are all these votes just going to create a whole bunch of forks? You know what I'm saying? Like if you feel really strongly about one particular vote and it doesn't go your way, then maybe all the people on your side will be like, hey, we're going to fork off. And then you might end up with a whole bunch of them. Like, do you think that that's a possibility? So I actually actually, think that on-chain voting and governance will lead to fewer forks. And so this is the reason.

When we participate in democracy, so say here in the United States, there's this kind of voting system to decide the president. In general, people accept the outcome of that vote as legitimate, even if they disagree with the outcome. And people in general don't leave the country if the candidate they voted for didn't win the election. You sort of respect the outcome of that election, even if you disagree with it, right? Because, you know, hypothetically, the system is sound. Now, you know, the U.S. democratic system, you know, has its own problems we don't need to talk about now. But I think that as long as people can be comfortable with the system of the on-chain voting and governance, even if each individual vote and outcome isn't what they

would have liked. I think by buying into a system where they know that vote occurs every month, say, it actually ensures that, you know, people are aware these votes are happening and are okay with the outcome, even though they may disagree with any specific outcome. So to me, that may actually reduce the number of forks because you get a better empirical sense of how the community would like to proceed on each individual topic. Interesting. So before moving on to other topics, a quick word from our fabulous sponsor, OnRamp. If you're starting up a new project or need some design or branding help on an existing

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Gmail.com. That's L-A-S-H-I-N podcast at gmail.com. So one other, I just want to circle back, actually, to what we were talking about. So you were saying that this core developer is going to step down. Why exactly is that? So he had some specific concerns that he was perhaps breaking laws, you know, specific to Japan, I believe, was in his comment on GitHub, based on his, if he were to approve this, or be involved, rather, even passively in this Ethereum. improvement proposal process. But I think he also stepped down because he viewed himself as not an authority and doesn't want authorities in the Ethereum community deciding how to proceed on matters like this. So I do think there isn't a well-defined governance system in most blockchains today.

I think it's relatively ad hoc and I think it's usually a case-by-case matter. And so I think in this particular instance, this developer, Yocchi really felt that he didn't want to act as an authority, even passively in this process. Interesting. Yeah, I wonder how they're going to resolve it. Do you know how they're thinking about how to make this decision? Well, it's, you know, this is why it's interesting is I think that there's solid arguments on both sides. I think that, you know, it just depends on what your sort of attitude is, you know, towards. immutability of the ledger versus, you know, pragmatism and understanding that these are early stage networks and mistakes will happen. So to me, you know, it's a lot of it to me just

comes down again to this kind of philosophical argument about how do you govern decisions at the kind of meta protocol level either on the protocol or or off the protocol? Right. But what I'm saying is, like, is there a process? Is it just ultimately going to be kind of a totalic listing to the different communities and then making a decision? Or have they laid out kind of what metrics they'll use to make the decision? So actually, this debate stemmed from a proposal to actually put a process in place. Yeah. So it's, it's, yeah, exactly. It gets a little meta here. So it's, I think that, you know, today there isn't a clear process in this. proposal was actually to create one. Huh. Okay. So a couple other news items that I wanted to touch on were did you see that New York Times op-bed where someone said that they thought it might make sense to create a crypto-specific regulator? And even if you didn't, what do you think of that idea?

In general, I think that it's likely pretty possible for existing regulatory bodies to make coherent guidance and legislation regarding cryptocurrencies. So I, generally would think that a new governmental body specific for crypto is unnecessary. Now that said, I do think that in certain categories, we may need totally new legislation for cryptocurrencies and that some legal frameworks, you know, that apply to other asset classes maybe don't fit as nicely or apply as cleanly to the cryptocurrency ecosystem. And are there any particular areas that you have in mind right now where you think there should be new regulation or a new regulator? Well, so one very simple question for me is what asset class, you know, is a cryptocurrency?

Is this a commodity? Is this a currency? Is this a security? You know, and the reality is I don't think there's a clean answer. And I really don't think cryptocurrencies are any of those. I think that it genuinely is a new asset class. And so in that sense, you know, we may need to create legislation at some point that creates laws specific to this totally new asset class. Okay. But then maybe not necessarily a regulator just for that. Is that why you said that earlier? Yeah, exactly right. I don't think that a new regulatory body is necessary. I think that the existing regulators could just create a new guidance and legislation for cryptocurrencies. Okay. Yeah. So I'm totally not an expert in this area, but I was curious to know what some of the other experts

would think. And so I actually emailed Coin Center and the executive director, Jerry Brito, emails me a statement. And he agreed with you that cryptocurrency already fits into the respective jurisdictions of some existing agencies. I'll just read a little bit from his statement. He said, there are some regulatory concerns that the SEC and CFTC don't have authority to address. and the SEC is the Securities and Exchange Commission and the CFTC is the Commodities Futures Trading Commission. But the answer there is not to create a new agency but to give them proper authority. Where it might make sense to create a new officer bureau within an existing agency would be if Congress were to preempt state money transmission licensing and create a federal licensing scheme. But we'd have to think very carefully about how to do that.

And so what he's talking about there is, and I'm sure you know this from having worked at Coinbase, companies like Coinbase. need to get these state-by-state money, or it depends on which regulatory regime they go after, but if they do it via this route, then they have to go state-by-state to get these money transmissions, transmission licenses, which obviously it takes a lot of money in time to do that.

And so there are proposals for just creating one unified federal level scheme around that. One other thing I want to ask you about was, did you hear about how salon.com tells people who are using ad blockers that they might use some of your computer power, and then it turned out in the fine print that they were using it to mine Minero? Yeah. So this was also something that I believe Pirate Bay, the website, had experimented with to replace advertisements. So there are all sorts of, you know, sort of security questions here, open questions that I think are pretty serious around, you know,

Could this create a security problems for the end users who are seeing their computer being used to mine Minero? But that said, I do view it as pretty interesting and something that should be explored more thoroughly. So meaning that you think it's a good idea for media outlets to do that kind of thing? Well, so I think the jury is still out on whether this is safe and secure. If it can be done in a safe and secure way, and it's an alternative to, just banner ads, again, I think it should be explored more. Yeah. So I had to say, obviously, because I work in media, that this definitely caught my eye.

I have to admit, I was a little bit surprised that it wasn't, you know, because I guess like all along as I've, you know, been covering the space, I've heard a lot of things, a lot of suggestions for how media can take advantage of blockchain technology. And those have tended to be more around like the bat or brave model. where with basic attention token, I think you kind of like earn it from watching ads or something, and then you can use that to view articles or like a change tip model where it's these micropayments. So I was surprised that one of the first examples that we're seeing is actually mining. But in general, do you have other ideas for how you think crypto can help media?

So I think, unfortunately, Laura, I think my attitude here is a bit more that, you know, when you see, the mainstream media cover cryptocurrency, it's actually amazing in that most of the real content is coming from Twitter and the forums and telegram rooms and all those sorts of things. And then the mainstream media is actually reflecting those narratives on the news and in the newsprint and things like that. And I think that's actually really unique to cryptocurrency in that when the mainstream media covers companies, there's like an official source. There's like a centralized source of information that often the media then reflects on. In this case, the main narratives are created by the grassroots communities,

and the mainstream media just acts as a sort of reflector that's actually reframing or condensing those narratives for a more massive audience. So I think that the primary sources here of forum, and social media and things like that are in the cryptocurrency space actually, you know, kind of more important than the official media outlets. But what I mean is like for how can media basically get paid without doing ads? Do you think that there's some way to do it in crypto? Like I guess what I'm saying is like I would have thought that it would be

micropayments or something like basic attention token. So I'm surprised that Salon is turning to mining. Do you think that there's, do you think that that would be the best way? for media to make money if this advertising model is probably going to go by the wayside someday? Yeah, it's definitely promising. I think that once layer two networks are really up and running, like the Lightning Network, you know, perhaps micropayments is a viable option as well.

Okay. All right. Well, is there anything that's been top of mind for you these days when it comes to crypto? I'm still thinking a lot about on-chain voting and governance. Okay. All right. Well, I know you just invested in DFINITY. And so I guess we'll have to see what comes out of that team. And Tezos will be launching later this year. So we will check back with you in the future on that. It's been great having you on the show. Thanks for being the inaugural guest on Unconfirmed. Yeah, thanks for having me, Laura. Thanks so much for joining us today. To learn more about the topics we discussed, be sure to check out the links in the show notes of your podcast episode. Also be sure to follow me on Twitter at Laura Shin. Episodes of Unconfirmed cover every single Friday. If you haven't already, rate review and subscribe on Apple Podcasts.

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