Governance and Cryptoeconomics – Token Summit III NYC 2018

so Chris we had you here last year the first token summit and you talked about variations of tokens and cryptocurrencies actually the focus was more on currencies and it was one of the most popular presentations and now we are you've evolved your your thinking and your work into crypto economics and token engineering and token economics so tell us how you evolved and and what are you let's talk about now talking economics and token engineering I think the important thing to realize with the investigation of valuation is it really began as a way to better understand how value was moving through these networks and therefore how the token will behave and so it really began from the perspective of design of these tokens I think that given the speculative frenzy that 2017 or at least the back half of 2017 represented people started to focus more on using it as an investment framework which ultimately there will be use there it's just right now the markets are irrational enough that there may not be used and so what we're seeing currently is a lot of focus on this idea of token engineering so there was a inaugural token engineering summit on Sunday just a small event with people thinking about okay what are the tools we need bottom-up to design these systems and then crypto economics being the science of studying how those systems perform what was the outcome of lis can you give us any insights from that I think the number one takeaway is none of this exists yet there's there are no well-defined tools for bottom-up creating a crypto asset monetary policy that clearly maps to the use case and I think over time we will have more of that you know historically what we've seen is there's a lot of behavioral inertia right if you go to when Bitcoin first launched a lot of the initial altcoins also had a logarithmic supply curve that converges on some fixed amount and there was a lot of inertia around that and then things came out that started to burn Bitcoin right to create a new asset base and so then people experimented with that and then aetherium came about which did a crowd sale mixed with a long-term inflation rate and so people started to experiment with that so it's kind of like there are these epochs of behavioral inertia around monetary policies that appear to work without a first principles exploration of what maps to what use-case and I think that's where we're getting to now but we're really just beginning that journey but how can you model something that we don't understand very well that's been my criticism of all these models this is such an evolving stage here we are at and when I see all these spreadsheets and token modeling it's it's really we're trying too hard here to to model something that we still are not completely understanding well this is where we go to ok are we creating models to design the token upfront in which case you can actually boil down to some pretty simple primitives the precise behavior that you're trying to incentivize and so Michaels our Gann from block science or Trent from ocean have been doing good good work in that realm then in the valuation realm you know you can go down the relative valuation paths which are things like network value to transactions ratio NBT or any number of ratios and I think there we're starting to see or we're definitely seeing patterns emerge and this is where I would argue the theory will follow the fact of the market and those are probably where there's most utility in the valuation conversation and then with the fundamental or intrinsic valuation conversation you know it has taken us decades to get equities right and equities are continually evolving so I think we'll continue to see you know complexity attempts back-testing and hopefully converge upon something that makes sense okay so Joel you've been talk you've been thinking about governance so what's the proper way to think about governance and and how are you thinking about governance now so if you think of blockchain sort crypto networks as these kinds of games as some people have described them especially within the realm of game theory and so on I think of the cryptic anomic of the game as the rules of the game and then the governance function of these tokens as the power to change the rules of the game and the thinking around the intrinsic quality of governance comes from understanding that if these networks are going to become the fabric of the economy over time of these information networks as they become more valuable as more economic activity flows through crypto networks then the value of governing those networks in changing the rules having the power to change the rules of those networks becomes very valuable and the thinking is that over time as especially on the supply side of these networks but also in the user side as we have more to ride on these networks as we have more at risk on the rules of these games then the power to change those rules is going to become more important so we're talking earlier and you told me now we are seeing more and more governance tokens as opposed to transactional tokens so is this the equivalent of the a new use case where today the talk is about utility tokens so is the governance token a type of utility token or is it another class of its own that is different and can you give examples I'm actually most excited about tokens that combine both functions so tokens that serve both as a transactional token and a governance token the reason I think that's quite significant is when you look at how modern capitalism works we've separated the the the transactional function into fiat currencies or just currency in general and or into a different asset class and we've changed the power function into capital so shares in a company really represent the power to change the rules of that company for example and the the devil is and how those two asset classes of all over time power tends to accrue over time while transactional functions tend to decrease in value over time as more people come into the system and tokens that serve vote the function of both transaction and power in transaction and capital have I think an opportunity to distribute power more evenly across the network because everyone is sharing at the same asset unlike in modern capitalism where most people live their life in currency which loses value over time and a very small group of people live their life in capital which appreciates in value at time I see tokens that combine both as the combination of currency and capital into a single asset without some examples are we talking like us going or what else I think a pretty good example out there is actually 0 X so 0 X serves both functions you have the transactional function of the 0x token for paying transaction fees to relays for facilitating the service provided by the network but it also gives you power to change the to vote on the changes through the rules to the 0x protocol and so what ends up happening is this interesting effect where over time as more transaction as more activity flows through that network you're distributing the power to change the network more evenly across the people who who have more at stake so if you have a real layer that's processing 30% of all the transactions in the network and they're going to accumulate a larger a proportional share of the tokens and so they will accumulate a proportional share of the power to change the network if a second real layer comes to market and offers a superior service and transaction volume moves to that second real layer then that real layer is going to accumulate more voting power over time and so as the as that network grows then you get a distribution of power based on how everyone is contributing to the network as opposed to concentration of power when you separate both functions and we we also recently announced our involvement with decrypt which has a strong governance component to it and I think these stats because the network has been around for 2 years give a few examples of what we're looking for in a governance token and really target this idea that governance can be a store of value and if you think about say the coveted nature of governing the United States over time that is something that has gotten more and more expensive over over time even though the number of seats have remained the same and we're actually seeing that with deke red where the ticket so you can think of a ticket with indie cred is very similar to gas within aetherium so with ether within aetherium you use ether basically to purchase gas to run a smart contract and within deke red you stake deke red to get a ticket to participate in the governance process the price of those tickets have gone from to deke red at the launch of the network to currently 90 deke red the percent of the asset based staked to participate in the governance process has gone from roughly 20% to overly over 45% so you have increased rate of participation in governance and you have increased value or increased coveted nough cepe ting governance which show the increasing value of this network so it's literally the states to govern the network grow with the size of the network which is a trend that we would expect to see going forward so is there such a thing as as the right monetary policy that would balance and capture the supply and demand sides does it enter the equation and how I think we're at a very early stage of experimenting with monetary policies within crypto I think one of the most important things though is that your supply side so in the case of Bitcoin the miners your supply side earned the token contribute work to the network to earn the token because that is what actually creates the utility of the network something that that scares me with icos is you really bring in capital from elsewhere that you then have to centrally manage and you have to centrally manage that capital to hopefully get people to build out your network as opposed to just having an asset that has a market price and then having a monetary policy that says okay all of these economic agents if you contribute to our network you will earn this token and in that way the network actually grows its utility and so that is a much more decentralized model where you don't have to essentially coordinate anything you just set the monetary policy in place and let the economic agents come to you and contribute to the network and then that scales over time as the price of the asset goes up you can actually purchase more utility power as opposed to having sold all of it upfront in an IC o—- okay are there any examples of tokens or marketplaces that are doing a good job or getting in the right direction well we can see start to see these metrics and say well this is what it means quantitatively well I think a really interesting one that just launched is live pier right and live pier so historically within crypto we have said okay we will target an inflation rate and hopefully get some kind of behavior out of that and if you think about mechanism design as a reverse game theory really you should start with as a goal your your desired outcome and then modulate the the inputs to hit that desired outcome and one of those inputs is the monetary policy and so with the case of live pier they said okay the behavior we want is roughly 40 percent of these tokens States and we will modulate the inflation rate to meet that goal so if 50 percent are staked we will bring down the inflation rate we'll bring down the reward or if 30% is sake we will ratchet up the inflation rate ratchet up ratchet up the reward and of course there's a balance to this but I really like the idea of laying out first and foremost what is the behavior we're trying to get and therefore what is the monetary policy that will incentivize that behavior great so let's talk more about governance I like to think of governance as having different layers did you agree and and what would be the different layers that that we have to think about in terms of governance well actually going back to D critique R it's a good example of that layering so decreed started out with a very at the bare metal of the consensus protocol instead of where as Bitcoin is just proof of work decree and implement that a hybrid proof of work proof of state system where the proof-of-work layer is producing blocks very much in the same way that bitcoin is except each block has to be approved by the proof of stake layer people who stake either approve or veto blocks and that is the first but the bottom most layer that introduces checks and balances to the relationship between users and miners and then from that base they have expanded and created new layers of governance on top so for example one layer above theirs they have a system now called politeia which is a mechanism that allows end-users or regular users to submit proposals to the de cred network and have the proof of work the proof of State layer vote on those proposals and then on top of that they can build more and more tools and it does get us into a conversation of which functionality or what functionality do you can you program into the consensus protocol in the form of on chain governance and which are more human problems that you need to build more user-facing interfaces for people to participate in that what do you think of on Shan governance it's it's a debate I agree that it's difficult to encode a governance is such a complex problem and it's difficult to come up with a set of rules that you can encode from the beginning I do like howdy cred set it up because it starts from a very elegant simple perspective and then you can build it up as needed now there is also the question or the debate around is it the right time to invest in governance or when do you do you end up designing or when's the right time to implement these features and the way we think about it it's never too early to invest in governance and by the time you realize you need good governance it's usually too late and so we we like to invest in teams that are thinking about these problems early on and particularly as investors in tokens when you're holding a token the question of what are your investor protections and what are your rights as a holder of that token that is a governance question and so we like to see teams implement these features early on and evolve them over time they don't have to be perfect from the beginning but it has to start from a solid foundation I want to ask you a question about investments because both of you had largely an analyst role last year and now you are investor with a with a very serious fun so how are you looking at what you are interested in what are you looking at in the next six months to 12 months what what piques your interest well I would say the broad framework with how we approach things is technology first and technology as table stakes but you have to clearly have solid technology to begin with but it's table stakes and it's not defensible because everything is open-source here and then building a layer up it's the token engineering encrypted economics perspective of what are the unit economics for the supply side versus the unit economics for the demand side if the supply side has to bring hardware that's very different from just installing us a client on my existing computer or contributing works say like Steam it or whatever it may be and then on top of those two layers which both have to be robust you need good governance and the thinking here being governance is a protection against being forked to death if you don't have good governance if you a lien eight your token holders then your network will continually fork and it will have a hard time capturing value and so this is really where governance becomes very defensible I think that in the things that we're focused on right now I would I would oil it down to human facing infrastructure so I personally have some concerns around how commoditized machine infrastructure may get and actually humans are stickier as as users and humans become attached to things and we currently are in the developer era of crypto it's largely too early to expect mainstream applications in mainstream use but there are a lot of developers coming to the space facing a lot of problems and so what are the protocols out there that will make these developers lives easier and that will capture value over the long run as opposed to being commoditized at a base layer so is there a list of criteria list that you is there a criteria list that you like to check off when you look at companies in terms of their crypto economics so you like the technology and now you can argue that what's your what are your test points for the soundness of the token functionality or roll or well I would say on the supply side is doesn't make sense right how much money can a person can the supply side expect to make in a given period for the work they're contributing and would I if if if I were considering the supply side find that to be an appealing scenario and so for example where diligence in a distributed computing protocol right now and there's this concept of core hours and it's one hundred eighty dollars per core hour and my over a year and my computer may have four cores so I'm I would make say roughly eight hundred dollars from providing my computer to this network those are some meaningful unit economics to the supply side and then if you can get the supply side on the board there is an argument that supply can create its own demand so it really starts I would say for us with investigating the supply side and then if a good enough service is created that is where the demand side comes on there's another side of that which is that the monetary policy in the group the economics of the network designing those it's very difficult and it takes a lot of trial and error to get there and the first version of any of these systems is probably not going to be what it ends up looking like two years in the future three years in the future so these economic models have to evolve with the network as more data comes in when you're into the science stage before you release the network you're operating on assumptions when you go live those assumptions changed with observation and then becomes a question of changing the rules which brings us back to governance if you don't have the right mechanisms for changing the rules in a way that includes the community and how you change those policies then you're going to have a hard time evolving the network over time which is why we focus so much on both aspects of it we need to define the rules of the game early on in a way that's advantageous to the network but also have mechanisms to change the rules over time I agree with that I think the it's an evil it's an evolving pattern in terms of governance it has to evolve and and that's really how we get there on that note I know we could have talked to another 20 minutes but unfortunately we are running out of time and but thank you very much was a great thank you for having us thank you

Maurice Vega

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