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a16z Podcast | Cryptonetworks as Emerging Economies (Done Right?)
40 segments available
with Chris Burniske (@cburniske), Joel Monegro (@jmonegro), Denis Nazarov (@Iiterature), and Jesse Walden (@jessewldn) When designing cryptonetworks -- really, emerging economies -- how do we avoid some of the monetary and fiscal policy failings of "real-world" economies? Like not separating currency and capital, which accelerated and spread economic growth through the former... but also concentrated the latter into the hands of a few? Yet how can we empower users to access capital while also managing risk? If the promise of cryptonetworks is to better align incentives and value capture, then we can't make the same mistakes as we did in traditional economies. We also have the chance to do novel things not possible in the physical world, through software. So this episode of the a16z Podcast -- featuring voices from Placeholder VC and a16z Crypto -- goes deep into the nuances and mechanisms of cryptonetworks, tokens, and decentralized applications at every layer of the "stack". Chris Burniske (who has written a lot about financial modeling-influenced frameworks for analyzing crypto) and Joel Monegro (who has written about "fat protocols", and once managed the Digital Economy Department at the Ministry of Industry and Commerce of the Dominican Republic) of Placeholder VC discuss and debate all of the above -- and more! -- with a16z crypto's Denis Nazarov and Jesse Walden (co-founders of Mediachain, which was acquired by Spotify). Throughout the history of information technology, we've gone from hardware to software, and software to data. So what's next, what's the layer above data? The answer is governance -- which gives more people a way to participate in decision making around a given network -- but the answer for how to implement the best governance isn't so clear. --- The views expressed herein are those of the individual personnel quoted herein. This presentation is provided solely for informational purposes and should not be relied upon when making any investment decision. References to any securities or digital assets are for illustrative purposes only and do not constitute a recommendation to invest in any instrument nor do they constitute an offer to provide investment advisory services. This content should not be relied upon as legal, business, investment or tax advice. You should consult your own advisers as to legal, business, tax and other related matters concerning any investment. Furthermore, this content is not directed at nor intended for use by any investor or prospective investor, and may not under any circumstances be relied upon when making a decision to invest in any fund. Past performance is not indicative of future results. Please see https://a16zcrypto.com/disclosures for additional important information.
Segments Timeline
Introduction to Cryptonetworks
In this segment, the hosts introduce the podcast episode focused on cryptonetworks as emerging economies. They discuss the importance of structuring these networks to avoid the pitfalls of traditional monetary and fiscal policies, emphasizing user empowerment and value distribution.
"hi everyone welcome to day 6 and Z podcast I'm sonal today we have another one of our podcast on the road episodes with guests from New York City on the topic of crypto but more broadly on crypto netw..."
Meet the Experts
The hosts introduce the guests for the episode: Chris Burniske and Joel Monegro from Placeholder VC, along with Jesse Walden and Denis Nazarov from a16z Crypto. They provide background on the guests' expertise in crypto assets and governance, setting the stage for a deep dive into cryptonetworks.
"this conversation we have two guests our friends at placeholder VC Chris Byrne iski who formerly led arc and best crypto efforts has written a lot about financially modeling influence frameworks for a..."
Understanding Layers in Cryptonetworks
The discussion begins with the fundamental concept of layers in cryptonetworks. Joel Monegro explains the distinction between layer one and layer two, highlighting the differences in machine work versus human work and the implications for economic models in decentralized applications.
"into what it takes to design such crypto economic systems at scale from value captured to risk to governance they first quickly begin with the fundamental concept of layers in a stack of protocols and..."
The Challenge of Human Work
Joel elaborates on the complexities of quantifying human work in cryptonetworks. He discusses how the transition from layer one to layer two introduces challenges in modeling costs and values, emphasizing the need for innovative approaches to incentivize human contributions.
"you can think about it from an engineering point of view and how different kinds of software are layered on top of each other you can think about it also from a more social point of view layer one is ..."
Security vs. Incentivization
The conversation shifts to the importance of security in layer one protocols. Chris Burniske discusses how security is prioritized in foundational layers like Bitcoin and Ethereum, while layer two focuses on incentivizing economic actors to provide services effectively.
"the invisible hand in a way and that's helping us figure out what human work is worth I think the infatuation with layer 1 comes from it being much easier to understand the cost and value relationship..."
Access Tokens and Scarcity
Chris introduces the concept of access tokens, explaining their role in connecting supply and demand in cryptonetworks. He discusses how these tokens can create scarcity and drive value, contrasting them with traditional models of token utility.
"you've promised to provide and the only way that that ends up being a service that the end user uses is either if it's cheaper than existing services that you can get from the centralized model but on..."
The Dual Token System Dilemma
The discussion delves into the implications of dual token systems in cryptonetworks. Chris warns that separating access tokens from payment tokens could replicate the issues seen in traditional economies, leading to capital concentration and inequality.
"organizes the supply side and induces a competition around being able to provide that service so in the model you described Chris we call the taxi medallion model what's interesting about it is there'..."
Combining Currency and Capital
Chris argues for the potential of cryptonetworks to merge currency and capital into a single asset, which could mitigate income inequality. He highlights the risks of separating these elements and the importance of maintaining user access to value.
"which is that we separated currency and capital the moment that we moved into a fiat currency model in modern capitalism we have two major kind of asset types we have capital and and we have that and ..."
Active Participation in Crypto
The conversation shifts to the nature of participation in cryptonetworks. Chris and Joel discuss how users must actively engage with their tokens to benefit, contrasting this with traditional passive capital accumulation models.
"more and more concentrated because it's transaction velocity is so low and the problem with that is that we end up with a lot of people living their lives in in currency and very few people living the..."
The Simplicity of Single Token Models
The hosts explore the simplicity of using a single token for both supply and payment in cryptonetworks. They discuss how this model aligns user interests and reduces risk, making it easier for participants to engage without worrying about market fluctuations.
"medallion world where we've separated capital and currency again at least within those networks the one one reassuring thing is that you can't be a passive accumulator of capital you you have to be mo..."
Rethinking Risk in Crypto
The episode concludes with a discussion on the nature of risk in economic systems. Chris emphasizes the need to rethink how risk is perceived and managed in cryptonetworks, advocating for systems that allow users to capture value while participating actively.
"is this sort of simplicity in in the taxing now in versus currency model that I think you know is it's hard to get away from just because of human nature I argue that risk is good because you can't cr..."
User Engagement and Network Value
Burniske explores the relationship between users and network value, arguing that as cryptonetworks grow, the demand side will likely not need to understand the complexities of the underlying technology. He posits that users should be able to engage with networks seamlessly while still benefiting from the value generated by their participation.
"values concentrated amongst those who took the greatest risks now obviously it can go really badly if you have a whole bunch of risk right a whole a whole bunch of people and then everything comes cra..."
The Role of Governance in Cryptonetworks
The conversation delves into governance structures within cryptonetworks. Burniske compares the governance of a network to that of a country, suggesting that effective governance is crucial for the success of these emerging economies. He highlights the need for specialized governance as networks become more complex.
"investors because there's a cognitive overhead yeah that is associated with that you know you're asking your users to be sophisticated about the under the the underlying infrastructure you know poweri..."
Emerging Economies in Crypto
Burniske draws parallels between cryptonetworks and traditional economies, discussing how both have supply and demand sides. He emphasizes the importance of aligning incentives between users and developers, suggesting that a well-constructed network can function similarly to a small economy, with its own currency and governance.
"this model to you know the entire world or you know is is it limited to a subset of users who are you know sophisticated enough and want to take on that risk and so just to push back a little bit on o..."
Complexity and User Experience
The discussion continues on the complexity of user experiences in cryptonetworks. Burniske argues that as networks scale, the demand side will require simplification of processes to engage effectively. He stresses the importance of making participation accessible to all users, regardless of their expertise.
"should let people choose you can argue both sides of the table and so what that tells me is you know let the people make the choice but then that becomes a question of what's the default so you know w..."
Value Accrual in Decentralized Networks
Burniske explains how value accrual in decentralized networks differs from traditional asset models. He highlights that in well-constructed networks, value does not solely depend on management decisions but rather on the overall health and participation of the network, which can lead to a more equitable distribution of value.
"thing that's going on here is that the way these assets accrue value is very different to the way that other previous kinds of assets accrue value previously in in a more traditional world when we hav..."
The Supply Side and Risk Tolerance
The conversation shifts to the supply side of cryptonetworks, where early adopters are often more sophisticated and willing to take risks. Burniske discusses the implications of this dynamic as crypto becomes mainstream, emphasizing the need for a balance between risk and accessibility for everyday users.
"really necessarily depend on the actions of a management team but rather on the overall network yeah you know we were talking about the the consumer perspective and then them being a shareholder and t..."
Governance and Economic Structures
Burniske concludes by discussing the governance structures within cryptonetworks and how they mirror traditional economic systems. He emphasizes the importance of understanding these structures to evaluate the effectiveness of a network, drawing comparisons to the governance of countries and corporations.
"their understanding of the network than the demand side at least as we scale out over the long term I think that's that's an assumption we can make and so that supply side can tolerate that earlier ri..."
Complexity of Stable Points in Cryptonetworks
In this segment, the discussion revolves around the complexities of creating stable points within cryptonetworks. The speakers emphasize that while everyday users may not need to understand the intricate workings of consensus mechanisms, the tuning of parameters for stability requires expert knowledge. This highlights the need for a separation between management and users in governance structures.
"once you get into those types of applications I think it becomes a little bit harder for everyday users to be sophisticated about the work that's going on behind the scenes people probably don't need ..."
Crypto Networks as Emerging Economies
The conversation shifts to comparing cryptonetworks to emerging economies, drawing parallels between the structure of a network and a country. The speakers discuss the roles of currency, governance, and the importance of sound monetary policies, suggesting that understanding these similarities can help evaluate the construction of crypto networks.
"think you do want this separation between sort of the management and the users because it requires expertise and that brings us to governance right maybe an analogy is the bass player is sort of like ..."
Governance's Role in Economic Success
This segment delves into the critical role governance plays in the success of both national economies and cryptonetworks. The speakers explore how governance structures can influence economic outcomes, emphasizing the need for effective governance in crypto to avoid the pitfalls seen in traditional economies.
"that is that if you if you compare a network to a country you start to see a number of similarities there our currency that's exchanged between buyers and sellers there's if you think of the executiv..."
The Evolution of Information Technology
The discussion transitions to the historical evolution of information technology, from hardware to software to data. The speakers highlight how each stage has shifted value capture and how blockchain technology represents the next evolution, challenging existing proprietary models and introducing new governance questions.
"governance because one of the things that can determine the success of a national economy or not is how that economy is governed there's a broader conversation about where is the value of governance i..."
Governance as the Next Layer Above Data
In this segment, the speakers propose that governance is the next layer above data in the evolution of technology. They discuss the importance of managing and controlling data within cryptonetworks and how governance systems are designed to establish a shared understanding of data in an open environment.
"computer manufacturer to dozens of PC manufacturers and so on but then what happened is that value moved one layer up to the software layer so we have Microsoft and and the PC software boom of the 70s..."
Value Capture in Crypto Networks
The conversation focuses on how value capture in crypto networks may evolve, with an emphasis on the role of developers and consumer-facing protocols. The speakers argue that while developer protocols are currently valuable, there may be a shift towards consumer-facing applications in the future, reflecting an ongoing evolution in the crypto space.
"live today we have the the big tech company so today Google Apple Facebook Amazon and so on their main asset their main capital asset is all the data that they've been able to accrue over time as peop..."
Marginal Benefit and Cost in Value Accrual
This segment introduces the economic principle of marginal benefit equaling marginal cost as a framework for understanding where value accrues in crypto networks. The speakers discuss how the cost of services impacts value capture and the implications for governance decisions within these ecosystems.
"that exists at a higher level and to us that's governance because it becomes a question of how do we manage how do we control how do we manipulate the data and how do we agree on a single source of tr..."
Governance and Economic Relationships
The speakers explore the relationship between governance and economic structures, using the analogy of the United States' governance system. They discuss how fixed supply governance tokens can reflect the increasing costs of governance as networks grow, suggesting a need for innovative funding mechanisms for core developers.
"start to move up the protocol stack right now we're focused a lot on developer protocols because we believe it's the developer era of crypto and that's those are the most valuable people and developer..."
Taxation Models in Cryptonetworks
In this segment, the discussion centers on the concept of taxation within cryptonetworks. The speakers examine how transaction fees can serve as a form of tax and explore various models for funding core development, highlighting the innovative approaches being tested in the crypto space.
"smart contract platform and decanters applications being built on top of it to general cloud computing infrastructure you know such as Azur or Google Cloud or Amazon AWS and all the applications all t..."
Governance Token Dynamics
In this segment, the discussion revolves around the analogy of governance in the United States and its implications for governance tokens in cryptonetworks. The speakers explore how a fixed supply of governance tokens can reflect the increasing costs of governing a network, drawing parallels to the economic relationships in traditional economies. This segment highlights the importance of understanding the value of governance tokens as networks grow.
"space and value accrual from the perspective of cost if you look at for example United States right the United States has a fixed supply of one president but the cost of being that president has grown..."
Taxation as a Value Bootstrapping Mechanism
The conversation shifts to the role of taxation in bootstrapping value within cryptonetworks. The speakers discuss how traditional taxation mechanisms can inform the design of crypto economies, including the idea of transaction fees as a form of tax. They examine existing networks like Zcash and Decred, which allocate portions of rewards to fund development, emphasizing the need for innovative funding models in the crypto space.
"useful analogy for thinking through it and just thinking about America being a substrate for businesses built on top of it the incentives there is that corporations that exist within America are taxed..."
Governance Through Taxation Models
This segment delves deeper into the concept of governance through taxation in cryptonetworks. The speakers propose that governance can be viewed through the lens of taxation, where the cost of governance increases with the growth of the network. They discuss how different networks implement taxation-like mechanisms to fund development and ensure sustainability, highlighting the importance of aligning incentives within the ecosystem.
"then this goes back to for example the Sharda listeria that the government has to spend the the currency first and get it in the circulation and then collect taxation and so that kick starts the the e..."
Rough Consensus in Governance Models
The discussion transitions to the governance models of major cryptonetworks like Bitcoin and Ethereum. The speakers emphasize the concept of 'rough consensus' as a governance mechanism, contrasting it with formal on-chain governance. They explore how this model allows for community-driven decision-making and the challenges that arise as networks scale, stressing the need for a balance between flexibility and structure in governance.
"thinking through what is the cost of governing a crypto network and the cost of maintaining an economic system over time and how does that change as that network grows or contracts over time so again ..."
The Role of Expertise in Governance
In this segment, the speakers discuss the importance of expertise in governance as cryptonetworks evolve. They argue that as applications built on top of base layer protocols require specialized knowledge, governance becomes more complex. The conversation highlights the need for dynamic governance structures that can adapt to the unique demands of different applications while maintaining a stable foundation.
"opinions and that's very much the governance model of Bitcoin and aetherium today other projects are taking a different approach with formal on chain governance I think our view is that the more gener..."
Power Tokens vs. Governance Tokens
The speakers introduce the concept of 'power tokens' as a more nuanced term for governance tokens, emphasizing their role in changing the rules of a crypto network. They discuss the implications of this distinction, arguing that as the value of a network increases, so does the importance of governance. This segment explores the balance between formal governance processes and the need for community engagement in decision-making.
"factors that go into kind of governance decision for processes that are informal so I think that I kind of like one factor is you know the original roadmap over the project like does this change fit w..."
Challenges of Governance by Consensus
This segment addresses the challenges of governance by consensus in large networks. The speakers discuss the potential pitfalls of informal governance processes, such as the risk of a small group dominating decision-making. They advocate for transparency and inclusivity in governance, stressing the importance of ensuring that all network participants have a voice in the decision-making process.
"really critical difference the base layer is very general users wanted to do this one thing and do it well you know compute things in a deterministic way but as you get further up the second becomes a..."
On-Chain Governance and Off-Chain Diplomacy
The conversation concludes with a discussion on the interplay between on-chain governance and off-chain diplomacy. The speakers highlight the importance of human interaction in governance processes, advocating for mechanisms that allow for community engagement and debate. They emphasize the need for clear rules and transparency to prevent governance by defection and ensure that all participants can contribute to the evolution of the network.
"sort of a different bodies of the government that developers proposed the code it has to be agreed upon by the miners to implement it so it's a more multifaceted multi-stakeholder operation as opposed..."
The Challenge of Consensus in Cryptonetworks
In this segment, the discussion revolves around the complexities of achieving consensus in cryptonetworks as they scale. The speakers highlight how early protocols thrived with small stakeholder groups, contrasting this with today's dynamic where governance is fluid and often dominated by a select few. They emphasize the importance of inclusive governance mechanisms to prevent power concentration and ensure all network participants can contribute to decision-making.
"code and my take on it is rough consensus works well when you're small and when the number of stakeholders is fairly small when the IETF was working through these protocol iterations you you didn't ha..."
Governance by Defection: Risks and Solutions
The conversation shifts to the risks of governance by defection in cryptonetworks, particularly in the absence of formal governance structures. The speakers argue for the necessity of transparency and clear rules to prevent a small group from monopolizing decision-making. They discuss the implications of governance structures on user participation and the potential for apathy among users, stressing the need for mechanisms that encourage active involvement.
"else let's make sure everyone has a fund of everyone in the network has a fundamental right to participate in that governance process and let's have mechanisms for people to get together and and and h..."
Ossification vs. Flexibility in Governance
This segment explores the balance between ossification and flexibility in governance structures of cryptonetworks. The speakers argue that while foundational protocols should be stable to foster trust, applications built on top must remain adaptable. They discuss the implications of governance processes on user experience and the importance of aligning incentives between token holders and end-users to create a dynamic and responsive governance model.
"and you end up with this very dynamic system where the end users don't necessary need to think about the complexity of the underlying mechanic of the thing and importantly there's explicit enforceabil..."
The Complexity of On-Chain Governance
The discussion delves into the intricacies of on-chain governance, highlighting the challenges of participant identification and engagement. The speakers point out that low participation rates can undermine governance effectiveness, leading to potential exploitation. They emphasize the need for innovative governance designs that account for user engagement and the distribution of power within the network.
"the problems with thinking about on chain governance as a sort of way for users to actively participate in the evolution of a network is that in practice if we look at the real world and how governanc..."
Designing Effective Governance Systems
In the final segment, the speakers discuss strategies for designing effective governance systems in cryptonetworks. They explore the potential for nuanced governance models that consider factors like account age and token acquisition methods to enhance participation and reduce trolling. The conversation wraps up with reflections on the evolution of the space and the future of governance in cryptonetworks.
"good governance say in like shareholder governance where shareholders are bound by fiduciary law there's a great post by a researcher at Cornell we recently had the Hat on the podcast named Phil Diane..."