How to Launch a Token (Legally)

Transcript

And so we're working with a lot of founders to try and like you know form those like perfect use cases that really you know show that these paths are now available. How to hit control-based decentralization how to turn value acrruel on right how to use these entity structures in a more you know in a more transparent way that doesn't kind of increase opacity. So, I think those are all of the things that we're working on and I think that, you know, this year is going to be very exciting because there's going to be some launches that are are really going to knock that out of the park. This episode is brought to you by Scale, the next evolution in layer 1 blockchains. Explore the gas-free ecosystem at scale.space/ecosystem and follow their journey on X atcale network. Thanks to Scale for making today's episode possible. Nothing said

on Empire is a recommendation to buy or sell any investments or products. This podcast is forformational purposes only and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests, and the Block Works team may hold positions in the companies, funds, or projects discussed. All right, everyone. Welcome back to Empire. Uh very excited about this one. We've got Miles Jennings who's the head of policy and the GC of A16Z Crypto. We also have Eddie Lazarin who is the CTO of A16Z Crypto. Eddie Miles, welcome to Empire.

Great to be here. Thanks for having us. Yeah, excited to have you guys. Okay, a little context before I jump in with the questions. Um, so after most episodes, I usually get a few DMs or people drop questions in the Empire Telegram channel. Uh, and usually it's from founders. Um, and they say something along the lines of, "Hey, I heard you and Santiago mention this. Uh, can I do this?" And then I say something along the lines of uh may maybe I I don't really know. Uh probably you could do it but probably not and you should really talk to someone smarter than me. Uh and then this kind of came to a head earlier this year when I started posting about companies launching tokens. I got a very friendly DM from Eddie who said something along the lines of uh do you really think all these centralized

companies can just start launching tokens? Do you really think that that's legal? And I said I have no idea Eddie. Uh you know this company did it. why can't others? Um, and we ended up having a very nice conversation. Eddie was very kind. Uh, kind of showed me maybe why I was wrong. Um, but I still get DMs all the time from different founders saying, "Hey, uh, c can I do this?" And so I wanted to bring two of the smartest people I know on to Empire to talk about the intersection of technology, uh, legal policy, um, and just how to build good businesses. So, um, Miles, you are a lawyer. Eddie, you are more on the internet side. not a lawyer, but probably sat with Miles long enough to understand how to actually implement this side uh this stuff into into companies. Uh so there are really a

couple big topics on my mind for this episode. One is uh you guys posted this uh blog post saying uh the the end of the foundation era in crypto. So I want to talk about foundations and how to really structure and build companies. Uh second is token design and classification. The third is just general crypto policy and what's happening in DC. And the fourth is uh really just founder mistakes that you see people making maybe that thing things that founders don't know that they can do today or mistakes they're making. So I think the best place would just be very macro DC. You guys have spent a lot of time in DC. Your portfolio companies like Uniswap and Coinbase have spent a lot of time in DC.

Um Miles, can you just give us a lay of the land? You know, it's it's it's August 2025. what's happening uh maybe maybe what's happening and what's been happening uh in DC for the last several months. Yeah, I mean I will say it's it's been a whirlwind of a year, right? I think if you were you know looking at where we were a year ago um you know the sentiment was incredibly negative and and now we're at the complete opposite end of the spectrum. Um I think you know on the legislative front right we have uh you know a ton of progress has been made in Congress. We've gotten, you know, multiple bills passed. Uh the Genius Act has has actually become law and so that's provided, you know, clarity for how uh stable coins are

going to be regulated. Uh market structure legislation which handles the regulation of intermediaries like the exchanges like Coinbase, Kraken, and those uh as well as token classification. How do we deal with you know a digital asset? Is it a security? Is it commodity? So that's that you know a bill already passed the house there called Clarity Act. uh Senate is now taking up a version and working on that and and you know the president has called for that law to be on his desk by the end of September. Uh so you know I mean we are are knocking down kind of all of the you know areas of regulatory uncertainty uh that have kind of persisted and and really slowed innovation down in the space over the course of the last uh you know four eight years however however long you long you want to look back and then at

the same time right there's a ton of progress on the on the regulatory front um I think the SEC is the greatest example of of what uh you know the turn that you can kind of do when you're actually willing to engage constructively with industry. uh you know just last week they announced a project crypto um which acknowledges that you know tech the blockchain technology and digital assets are going to revolutionize our capital markets uh and this you know they're going to be working on kind of providing the pathway for moving more and more assets on chain right and they see all the efficiencies there so it's it's kind of an an aha moment right where you know I think it's it's clear now that people in government finally are recognizing the benefits of this technology that everyone in industry has long uh kind of um you know

been focused on and believed in. So it's it's just been incredible. I think I'm I'm more optimistic now than I've ever been with respect to the regulatory and legislative picture. Uh and yeah, there's there's a lot of work still to do, but but um I'm incredibly optimistic. Nice. Um there are a few big buckets of things happening in DC. There's obviously Paul I mean Paul Atkins's piece if for anyone who hasn't read it yet, I'd highly recommend going and reading it. I mean he basically says capital markets are coming on chain. It's a pretty it's a pretty amazing piece. Um there's also Clarity Act. So, um and then there's a bunch of other like I'd say smaller things happening like liquid staking. There's some great statements on liquid staking that came out this week. Um let's let's talk about uh Paul Atkins's piece and just the the

se the I mean it's pretty for me it was a pretty remarkable um statement to read just talking about kind of moving financial markets on chain. um and who's really like, you know, going from Gensler who's saying like onchain shouldn't be a thing to this SEC saying onchain is is really the future. Um yeah, what do you make of the SEC statements? You know, I would say look the you often see policy statements come out from orgs and everything like that and it's it's you know, you can read into them what you will. This was not just a run-of-the-mill policy statement, right?

this was a a kind of you know the starting gun for revolutionizing our financial markets and and as a result of that I think it it is incredibly bullish uh for the industry uh and you know it it shows that they are thinking very constructively about how do we you know modernize securities laws how do we use the powers that they currently have right to facilitate bringing assets on chain right modernizing our markets we've never had that kind of of of support a recognition of the benefits of this technology at such a high level of government. Um you know the that that kind of launch of project crypto followed um on the back of of the white house report on uh you know the industry

which was also you know very similar in the vein of just kind of setting out all of these things that the technology can do and how government can enable it. So, you know, what I would say is it's probably one of the most significant things that's happened to date. Um, you know, from the from a regulatory perspective with respect to the industry, uh, and entrepreneurs should just be, you know, incredibly thorough about this because there's going to be a wonderful amount of opportunity here to build systems that help facilitate this, you know, modernization of our financial system. Yeah. Eddie, were there any more on the builder side? Were there any is there anything that you uh like came to mind when you read the the Atkins piece saying like, "Oh, here's maybe like a potential second order impact of this."

I mean, those are complex to disentangle legally, but I'd say that I was just I personally was struck by the idea that, you know, just the headline that commercial viability is true north. How often do you hear that, right? And commercial viability, by the way, is a nuanced concept because it doesn't mean uh it doesn't mean total anarchy in the capital markets. It also means the opposite of what we had before, which was uh anarchy via uh inappropriate enforcement of vague rule, you know, vague rules. It meant something in the middle, commercial and viable, right?

commercial. It's it's supposed to be value ad, constructive, wealth creation, new technology, new innovation, right? And viable as in like uh can be secured, can be trustworthy, can be something that actually succeeds when defined appropriately. That's what it's supposed to be to me. It's supposed to be that beautiful space in the middle between like just enough rules to prevent a highwaymen from intercepting the wagon on the way to the market, but not so many rules that the market is a complete uh completely stagnant, you know, uh wasteland of nothing because no one would wants to do business there, right?

Like it's supposed to be uh balanced and it felt very balanced to me. Yeah. Miles, why was this the um uh why was this the statement that you highlighted of all of all of the statements? Why was this why did this stand out to you? I think yeah, one of the things that we talk about here, right, is that is is kind of how far the industry, right, has had to contort itself in order to deal with the regulatory challenges over the course of the last, you know, four, six years, right? And and so one of the the kind of consequences of this, we talk a lot about it internally is like lawyer design products, right? And that is a lawyer designing your product is is not probably the way to get widespread commercial adoption, right? And and so one of the things if you if you take a

step back and look at how far the industry has contorted itself, I think one of the biggest problems that we see is all of the offshoring, right? And the the structures that have been put in place with respect to foundations and all of this stuff to, you know, move projects offshore. And this was all done, you know, in a reasonable basis to kind of combat the the kind of regulatory hostility that was was facing the industry in the United States. Um, but when you when you look at it, right, these these kind of setups and these arrangements are incredibly opaque, right? In a lot of cases, they ended up resulting in centralized control being held by a couple, you know, professional directors in an offshore, you know, island somewhere. um where those directors are the directors of hundreds

of different you know different foundations and it's like what what are we actually setting up in in terms of of how this system works and how it supports the space and then on top of that right you're layering just an enormous amount of complexity uh in in the you know in the operations of of startups and and that's not what you want to do if you're trying to iterate quickly and build products right you don't want to have to be dealing with a bunch of legal um you know requirements around independence and all of this stuff in order to to kind of innovate. So from our perspective, we think, you know, one of the the quickest ways we can help accelerate, you know, innovation in this space is to try and do away with a lot of the convoluted structures that lawyers have have been,

you know, putting in place over the course of the last several years. Fundamentally, that that one of our primary targets there is all of the offshoring that's been done. And so I think um you know to see this in the SEC's release I think that they see you know the offshoring that's happened over the last four years is also a significant mistake and and one that they would like to rectify and and what does that take? It means clear rules at home and I think that that's what they're working towards. Yeah. And for anyone who didn't Oh yeah. Go ahead go ahead. Well I want I want to put it in like like dummy engineer words because that's kind of how I understand it. Right. Is like when uh when the system underneath is defined improperly, right? When in other words when the key considerations like

are are rooted in legalisms like well how many entities are doing this thing and like who technically owns this thing which technically owns that and are they working whatever. What h what ends up happening is to paste over to smooth over all of this you need to these lumpy abstractions that are leaping through leaking through you create huge convolutions. That's what ends up happening. If instead the laws are defined appropriately around what we actually should be concerned about, like who has control of what actually, who can rug, actually, who has asymmetric information, who can, you know, turn this thing off when you need it most,

right? If those are actually at the root of the legislation, then the structures that come out legally are less convoluted because they're nicely mapped to the underlying reality. So a lot of the challenges that builders have faced until now uh around their legalisms that have resulted in like three ent you have to launch like three entities just when you start a company. Like that's not solving a real problem like a technical network product problem. That's solving legal problems that are created by laws that are not of the right fit for the market. Once the laws are the right fit, all of a sudden the legalistic solution is clean and clear and we actually solve

the real problem which is who owns what the trust all these things which are at the core of the spirit of crypto. Like is is that like who who to trust, who's in control of what, uh how do things actually operate at the network level? That's like what every engineer thinks about, right? And if those things are in some sense represented in the legislation, the result is simpler. Yes. Okay. I I love that you guys are going here. This was one of the big topics I want to bring up is uh Miles wrote a fantastic piece um back in I think it was early June saying the the end of the foundation era in crypto. So that's kind of what you guys are getting at here. Um here I'll pull up pull up this piece. So maybe um Miles Netty I think maybe half the audience will be

very familiar with the uh just I I the word that comes to mind is ridiculousness. that is uh the two structure sometimes three structure uh setup that it takes to build a crypto protocol. Um but maybe half the audience is not familiar. Can can one of you guys just walk through like what has been happening the last couple of years to build if you want to build an L1 or an L2 or any sort of crypto protocol like what is the kind of structure that's been happening and honestly the amount of maybe you could talk about the the amount of waste that goes on behind the scenes.

Yeah, sure. And I think there's Eddie's explanation was kind of perfect and right on point here, right? So what I would say is is there is a a form of a a foundation and kind of that that that works and is aligned with kind of the ethos of the space, right? Uh fundamentally the the you know blockchain systems that are being created by entrepreneurs are are supposed to be credibly neutral, right? They're not supposed to, you know, favor or discriminate against uh individual actors operating on that network. So in one conception, foundations were thought of as a way to enforce credible neutrality, right? Create a a nonprofit entity that basically is looking after the health of that ecosystem. In that idea, right, is a is a good one. And there are examples of foundations that

fulfill that purpose and do it well, right? But the problem is is that that structure kind of got latched on to as a way to solve some of the legalistic problems that Eddie was talking about, right? where where the legal framework applicable to the space is not appropriately tailored and as a result you have to jump through all of these loopholes and do all of these weird things um to to to kind of you know deal with the legal framework. So in in that sense right foundations over time have really been contorted to fulfill this other purpose right which then when you take a step back and look at it in totality makes no sense because it kind of goes against the ethos of the space. So in a lot of projects right they will launch uh and

you know as part of that process they will you know create a foundation in the Cayman Islands or what have you uh and move some intellectual property to that entity. That entity will be the issuer of the tokens um and that issuer will then have or that foundation will then have you know almost complete control of the underlying blockchain system. So they can, you know, make upgrades. Maybe they control the entire treasury, right? And you're handing the power of the system to a couple of professional directors, right, who have no background in blockchains. They they aren't engineers. They don't understand how these systems work. They're just there to sit on a board and make decisions.

that fundamentally is at odds with what the technology is supposed to be providing, which is like, you know, networks that are are not capable of being controlled, that can't just be turned off by someone, right? And and that are credibly neutral. You know, handing a guys, you know, a bunch of money in in the Cayman Islands to kind of oversee these things doesn't really make sense. the the the the one like nice red flag that shows how kind of absurd this situation is is that it's become harder and harder to find lawyers in the Cayman Islands to you know actually help you set up these structures because so many of them have left their jobs to go sit on these boards because it is financially very uh you know promising for them. So like like that that is just a layer of extraction that these things were never

intended to create. It's resulted in all sorts of of obuscation in terms of where are the control, where is all of this stuff happening. And as a result of that, that's really what we were calling an inform, right? Is that is that you know when when you talk to our founders every day, they hate having to go through all of these convoluted steps just to build products. So can we remove those things, right, and address actually the root issues of of what we're trying to solve. And then that's what we're trying to get at. And that's what the basis of this piece was. Yeah. Yeah, I mean it seems like foundations were actually created for the right reason. Um, which was with decentralization in mind and then they basically became decentralization theater and a and and a and kind of this weird janky way to like kind of skirt

bad regulation, which was bad regulation, right? But founders were like, look, I'm a founder. I still need to build this thing that I want to build. So, I'm going to go to the Cayman's. I'm going to get these lawyers who used to be lawyers and now they're really just professional board of director sitters on bunch of different L1 boards. And uh yeah, it's really um yeah, it it's really one one way to put I'll also put it in my stupid engineer way, which is I like yours. I like your your simplified ways are how I think any so keep doing that. Yeah. Well, it's it's that uh you know, one way to achieve a quick and easy decentralization on the legal or social level if you don't yet have decentralization at a technical level is you just split up the thing into multiple entities with people

that have different paychecks and you know have different uh rules around their employment, right? And uh that is a great way to accelerate the process of being decentralized if like you need to be decentralized right now because the laws are putting a boot on your neck. Right? That's a great stop gap solution. But what quickly we learned this in engineering very early. What what starts as a stop gap solution quickly becomes a permanent solution because it's easy to get to and you park it there. And so it ends up being the case that splitting things into multiple entities can sometimes almost block technical decentralization because they feel they've met the legal threshold and now this is the answer and when something

becomes a cheap shortcut answer it pathizes very fast and convolutions happen and overhead goes up and uh you end up missing the point which is technical decentralization where you don't need to do you know Satoshi did not set up a foundation right like Satoshi didn't have to do all this ridiculous stuff because the design allowed for it out the gate and although it's not perfect we've learned a lot since then and now we should be able to do it faster without fake legalism. So anyway yeah even just the operational Yeah. Go ahead go ahead Moss. Yeah, I was going to say that it's a great point Eddie Eddie makes, right? Because like it's it's basically a lawyer based solution as opposed to an engineerbased solution, right? And that means we end up with systems that are, you know, from

a lawyer's perspective, okay? Right. But they fundamentally don't work with what the engineers are trying to do and actually put roadblocks in place from from like to prevent the engineers from actually achieving what they're trying to do. So, so what we want to do is remove those legalistic um roadblocks. Uh on top of that, right, you know, it's not it's not going to be easy, right? At the end of the day, um you know, lawyers are are creatures of habit, right? They like going down paths that are well trodden. And so, you know, you have an entire industry that has ballooned over creating these very complex structures, which, you know, you're talking about accountants, right? Law firms, international law firms, all sorts of of people that are involved, tax lawyers, right? And that's this is a a big money winner for them, right? These structures

cost hundreds of thousands of dollars to put in place. So, you know, moving the cruise ship from this direction that it has been going for a very long time is difficult and that's one of the things that we're, you know, we're really hoping to do. Yeah. I mean, for people who haven't seen the silliness of these foundations as you know, Blockwork sells into a lot of these uh protocols that, you know, you get you get on the even on like a sales call, right? We we'll have one sales call with foundation. They're like, "Oh, I got to bring labs on." I'm like, "Great, bring labs on the call." They're like, "Oh, no, we have to have a separate call because we can't be on a call with labs." or you know post sale we'll create a slack channel with the company or with the protocol whatever

you want to call it and uh you know some of these things some of them are so strict they won't let foundation people and labs people in the same slack channel so it's anyways it's completely absurd and yeah that's my best anecdote on that is like if I get asked one more time whether or not a foundation employee and a a labs company employee can be in the same Slack channel like I'm going to lose my mind like this should not matter. Yeah. And it's funny how they're solving a legal problem, right? They're doing they're they're obviously not they're not doing this by choice, right? They want to solve the problem. They want to remain compliant with the rules.

But think about it. If your thing is so fragile that two employees being in the same slack compromise the decentralization of the system, what did you make? Okay, you did not make a decentralized thing, right? It's like a completely it's a farce. Whereas what we really need now that doesn't mean that every protocol needs to be perfectly decentralized from day one, right? That's not technically feasible either, right? But what the implication is is that there should be a grace period and conditions and guard rails where at the beginning stages while things are more centralized they can continue to collaborate on the road to true decentralization where once we've reached specific technical milestones

then they can be in a slack together because there's nothing to compromise by doing so. And this is what they're proposing, right? Is some something around maturity, uh, like a mature blockchain. Is that right? Yeah, that's right. So, in the in the Clarity Act, right, it it seeks to do exactly what what Eddie was just saying, right? I think one of the taking a step back, right, the maturity concept in clarity is focused on, you know, whether or not someone has control over the system, right? And this control is is a concept that is, you know, much more well understood in in parlance of the law, right? There's there's controlbased kind of um frameworks within securities laws already. Um you know, money transmission depends on control. Tax law often depends on control. So it's it's

kind of a better a better starting point, right? And that starting point is is juxtaposed against where we currently are, which is, you know, effortsbased decentralization, which is looking at okay, um if and this is why we have all these convoluted things about, you know, not being in the same slack channel. The idea is right is if you're engaged in material you know ongoing efforts on behalf of the protocol that uh you know then it's more likely that that asset is going to be regulated like a security. So we've designed all these systems to to downplay right the level of of efforts that people are engaged in or the importance of an individual's efforts with respect to a given system.

Now this is a horrible framework right for an innovative sector right why would you want entrepreneurs to not engage in efforts right that that is the opposite of the incentive that you should be creating right and and it's led to a lot of this stuff like you mentioned decentralization theater now when you switch to a control-based framework right you end up with something that is much more objective right and object you know they that can be measured right that can be even verified based on the code right to look at who has potential control over the system. This provides a much better basis for for kind of analyzing decentralization or maturity, whatever you want to call it and and that's really the approach that was adopted in clarity. So it looks at right whether or not these systems are

controlled at the same time right it does provide as as Eddie was talking about you don't want to start your system off without having any control over it. that is may might not be technically feasible but it also might not be very smart because you might be introducing security risks by you know decentralizing too early. So what what clarity tries to do is balance that need for progressive decentralization right with the you know the ultimate goal of of reducing risk to users by having people you know relinquish control. And so it has this whole maturity framework in there and it and it it balances you know who has access to the market while people are in control. Um, most importantly, right, it it keeps VCs, entrepreneurs, those that are most

likely to have insider information about the system um, from being able to participate in secondary markets while the system is still controlled. Obviously, right, if you know, if you're an insider, you have control over the the network, right? Then you can use that control to exploit information asymmetries and take advantage of retail, right? That helps, you know, that facilitates get-rich quick schemes, all sorts of stuff, all the bad stuff, right? So what what clarity does is basically say hey we're going to keep those that might have information asymmetry out of the market right while you try to achieve maturity relinquish control then once you've relinquished control then everyone can participate the asset is very much like a commodity at that point uh and and that's really the basis

why is this all happening why or why so is the end of the foundation happening because of clarity or those are not directly linked. Um I would say that they are definitely related, right? Because um so under the current law, the current law is still this efforts-based framework, right? So all of the convoluted and opaque structures that we currently live with, right, are are kind of the reaction to that efforts-based framework, right? Once we remove the effortsbased framework, which is what clarity does, um then you you no longer have a need for those for those frameworks. So, you know, it's a little bit uh outside of of

the SEC's current authority to kind of solve this problem, but obviously they are very much aligned in also trying to to kind of do so. But really, we do need market structure legislation, the Clarity Act passed in order to to be able to to move on from this this kind of period of of of foundations. This episode is brought to you by Scale, the next evolution in layer 1 blockchains. With a gas-free, invisible user experience, instant finality, and robust security, Scale allows for limitless scalability, and has already saved its $50 million users over 11 billion in gas fees. scales, high throughput, zero transaction costs, and powerful web 3 infrastructure make it

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campaign is live. bridge and deposit directly into vaults in one simple click and start earning immediately on your Ether, Bitcoin, USDC, and more. Follow the link in today's show notes to get started. As always, investments in blockchain technology involve risk terms and conditions apply. Okay, so you guys have proposed uh two things. Dunas, I think it's Dunas and Borgs, right? Can can you walk through these two? Aduna is like an emerging structure and then Borg basically says, "Hey, like a lot of the things that we're doing, I think you can basically automate it and move it onchain." That's my Eddie was dumbing it down. I'm I'm triple dumbing it down. Uh but maybe you

guys can walk through uh your proposed Duna Dunas and Borgs solutions. Yeah. So I think um just quickly right I think you know if what Eddie was speaking about in terms of control right in a lot of systems it's going to be impossible to remove any type of uh you know discretion on the part of individuals to influence the system over time. So for instance right if you want to upgrade a protocol right you need some way way to come up with consensus in order to make those decisions. If you have a treasury for your system, you need to have some way to form consensus around how to make you know those decisions about all the treasury. Um if you you know in a lot of cases it makes

sense to maintain pause functionality and have some type of security council to um you know to to ensure or protect against um you know exploits and and and bad actors. So as a result of that right it is it is very difficult to end up in a situation where you know the like where there isn't any influence possible by humans dunas and borgs basically create an alternative pathway to foundations to um you know remove a lot of the opacity of off-chain structures right and and basically move decision-m onchain dunas are are a legal entity that essentially just wrap you know tokenbased governance so in in essence it is what you do onchain, right,

creates, you know, legal uh implications offchain and the Duna is just the the mechanism for facilitating that. But fundamentally, you know, it's not going to have, you know, employees. It's not going to have like a hierarchal structure. It's it's literally just a wrapper for for onchain governance. Um, Borgs, right, similarly, you know, remove a lot of the opacity of off-chain decision- making, move it onchain, so it's very transparently done. And you know we think that in combination these two things will you know overall uh increase transparency and make it more effective to to kind of govern these systems uh as you pursue you know the elimination of control uh with a with a Duna. So Duna's

decentralized unincorporated nonprofit association. This is basically legitimizing a DAO as a legal entity. Is that right? Yeah. Okay. Yeah. And and then things that can't I mean this is again this is my silly explanation but things that can't be automated fully like appointing an administrator to pay tax or or like like paying taxes. Paying taxes cannot be done purely automatically by a machine right there's and there's paperwork and consideration that needs to happen. uh that needs you need to appoint an administrator to do that who is not an executive basically someone who can act on behalf of this distributed group. So the Duna provides a toolkit of solutions

to those kinds of problems where a wide array of people who are loosely speaking part of an aligned group, right? Because they participate in this protocol in some way, token holders, they can have those things done offchain without compromising their legal status. I see. Why even this might be a Oh, go ahead, Mos. Go ahead. No, I was just going to say and so like one of you know there there are a lot of benefits here, right? including you know bringing things um back into the US right the the Dunas allow for you know payment of taxes if you you know if you want to do treasury diversification if you want to have protocol revenue that's going to token holders all of these things are made possible uh by the Dun in a way that's compliant with US law so

reduces the need to do a lot of the offshoring shenanigans on top of that it offers you you know all sorts of legal protections you know limited liability so we do think that it will lead to increased you know Dowo partic participation which generally we think is is good. You know decentralized governance is not a cure all. You should not punt everything to governance but there are some mechanisms that cannot be automated as Eddie was talking about and in those cases it's it makes sense to give people legal protections to participate. Okay, that's actually kind of what I was about to get at with my next question which is why did you focus on setting up making it so that the DAO is the legal entity? Like there's a different approach here where you could basically just say hey just go run this as a

company like hey go like I don't know optimism or unis swap like if you were just well they they can you can people can have a company then so so then what's the point of a dow like why what is the as we're f you know seven years into dows almost 10 years actually like why why DAO well because not everyone who participates in a DAO or wants to do something or hold a token right and like help in a small way or a big way wants to join a company as a prerequisite to their doing that right maybe they want to post on the forum, vote on some stuff, suggest a PR on the codebase and walk like they want.

Was it a good is it a good experiment though where like was do you think that uh it's driven value or taken away value like all like on all the onchain governance and and the Dow setup. Yeah. I mean look I think that there's a there's a a lot of good examples and there's a lot of bad examples like there there's going to be with everything in this space. I think fundamentally right if you look at the control-based framework that necessitates right that some individual or company doesn't have control over the system and so if if that is the the prerequisite right then you are going to need to where there is discretion being exercised right you you need to kind of disperse that as opposed

to having it housed in a single company. The other idea here, right, is and and maybe this we can we can talk about this next, but is is you have to have a model for why, you know, Ethereum is different or ETH is different from a share of stock, right? And if if there was just a company that sat at the middle of Ethereum and controlled the entire thing and ETH gave you an interest in that company, well, that's just a share of stock, right? And and so the the conception is is that, you know, fundamentally ETH is very different from that, right? and it relates to this this network and deres its value from the network which operates without human intervention and control. And that's fundamentally very different from a share of stock. And so so as a result of that, you don't want to kind of taint

that system or or that that construct by just saying, well, actually this token gives you an interest in the company itself that controls this entire system because that then puts us squarely in the bounds of securities laws. Got it. Okay, Eddie, I saw you give me and I'd also say par a parallel idea is is that the the theory of the Duna is not that every crypto project should be governed by a DAO totally and that only Dows are the way to influence and participate in a the functioning of a protocol right in fact I've argued many times and will continue to argue probably forever that as little governance as possible is best right like more voting more politicking all

this is like a nightmare it's totally negative and it's that but in some settings it is unavoidable. You have to have some in those settings like where there's a treasury or you just have to have votes you should have a structure for understanding it legally and giving participation to the people who want to participate in it. Right? So I'd say like the ideal future way of running a protocol is as little governance as possible but to whatever extent there are people involved there are companies for-profit entities individuals whatever it's a whole array of things and that the protocol can accept the support and stewardship of anybody.

Got it. So, I I saw this tweet by this f I don't know if this is a firm or what, Cal Cowry. Um, they said lot of amazing Duna projects announcing over the next few months. Um, we're very much looking forward to those communities sharing their stories on building in the United States. So, who So, it sounds like there's a lot of Dunas launching and that's great. Who, if you're a founder listening to this, who should who is right to do a Duna? Is it if you're like at the L1 L2, but if you're building an app, you don't need to Duna. Is it pro is it size of treasury? Is it like how how do you is there a framework there?

Yeah, I mean I think it it it's suitable for a lot of projects, right? I would say that that as Eddie said, you know, decentralized governance should not be viewed as like a shortcut to decentralization. You shouldn't just kind of, you know, not have any decentralization, but just turn everything over to token holders to make a decision. I think that that that has proven to be pretty disastrous. Um but at the same time right where you are going to rely on token holders to make certain decisions uh on a go forward basis um the the Duna is a a good solution. So you know with L1's um it is not really you know they have another mechanism for consensus right they have validators and as a result of that and

node operators and everyone like that so there's there's other vehicles for kind of establishing consensus in kind of the you know functioning of the underlying protocol and upgrades with respect there too. So, you know, in in the case of L1's, we really only ever see, you know, people interested in in Dunas where they are going to have some tokenbased governance. Usually, that that kind of relates to a treasury. Um, but again, in a lot of cases, uh, you know, L1's don't even have treasuries. And so, as a result of that, um, it's not, you know, not unusual to see L1's not go forward with it. Um, L2s there's a good use case for, but again, it kind of depends on whether or not you're using, you know, tokenbased governance there. you know with L2s you don't have the same kind of consensus mechanism around having a

bunch of validators stuff like that at least not in in most cases um so it can be useful there in terms of protocol upgrades stuff like that uh and then but I think smart contract protocols themselves are probably the the best case right those almost always have treasuries uh and and and typically have you know upgrade uh ability kind of uh you know uh governance um for token holders and so so for those key mechanisms I think the Duna makes a lot of sense and and actually you know Duna for for one of our big um projects just launched yesterday. Towns um uh launched this week and and they launched with Aduna. So um you know we're pretty excited to see that and we do think that there's going to be you know several that are rolling out over the coming uh months.

Nice. Maybe last question on this and then Oh yeah, go ahead Eddie. Well well I well maybe I can do after but I I want just want to make sure that we talk because we've talked about like foundations all this stuff. What are we really talking about? We're talking about things related to tokens. Right. Right. that that's like a key piece of this story. And so I want to make sure we cover a little bit about what type of token we're talking about and how to think about that type of token versus, you know, you kind of open the podcast talking about like companies issuing tokens like drawing the contrast perhaps between these categories.

Okay, great segue, Eddie. Thank you. Let's get into you guys had a actually a fantastic piece that our our actually most people at Blockworks read and we were talking about it and we've got this thing called the token transparency framework and we were thinking about this in relationship to that and um yeah you guys had this piece called defining tokens and you lay out I think it was seven different types of tokens. So Eddie take me into um take me into this piece. Yeah, so we could spend a long time just breaking through breaking down every type. It's actually not that complicated. It's more like roughing, you know, uh polishing the edge cases in your mind like as you as you think through this.

The the the maybe two that we're really talking about that we've talked about in this conversation. We've really been talking about network tokens. That's what we're talking about. That's what this conversation has been about. Dunas around network tokens foundations for people who want to issue network tokens. Right. This is network tokens like a a protocol token like Uniswap's token or Ethereum's token right? Yeah. UniS swap's token. Ethereum's token for sure, right? And I just there's a lot you can say about this category. We've written like a little bit more about it and talked about it in some podcasts, but the way to the way the real way to put it that I think is best, okay, the simplest way to put it is that when there is some sort of decentralized marketplace on a network, if there is a

token that is integrated into that, right, in some critical economic or functional way, that is the network token. And there that is the network, right? That can be an L1. It could also be an app layer thing. It could be like a unis swap. There can be a lot of things that have this. If you think about what it means to be a marketplace, you can blur that idea and and generalize it to many things. An exchange is a marketplace. A lending protocol is a marketplace, right? A DEX is a marketplace. uh a uh a system that sells IPs that allows people to list and buy IPs can be a marketplace, right?

There's actually a lot of things that have a marketplace structure, multiple participants having exchange facilitated uh of some good or service, right? That's what a that is what a marketplace is. When that marketplace has a token, that's a network token. And if that uh that marketplace is decentralized, that's that's that's the way to go, right? That is a that is a serious network token. If the marketplace is centralized, it's totally under the control of a single corporate entity. Then maybe it is not a network token because it's not a decentralized network marketplace. Maybe it is a companybacked token because the if the marketplace is under the control of a single company, then the thing that gives a token's

value is the company behind it, not the decentralized network. The whole thing that makes Ethereum what it is and other things in Salana and so on what they are is that there's no company that controls it. There's just the network. That's a mind-blowing idea. You go talk to a normie today even today they'll say like well who's the CEO of Ethereum or whatever, right? And there there is no such person because there's no company. The fact that only that there is only a network is itself the cool thing which makes this category of asset fundamentally new and distinct.

And I think it it it might help there to give a just an example. So So as Eddie said, right, Ethereum is a great example of of a network token. Uh you have people that are are you know you have a marketplace people are trying to get transactions through and you have a token that relates to it. No one controls that system. The value of of ETH is is dependent on the transactions that are happening on the the chain, right? Which because of 1559 results in a portion of ETH getting burned with every transaction that drives value to ETH. So that that kind of value acrruel to the token is completely independent of any individual company. Now compare that to FTX's exchange token FTT, right?

FTT was was held by a lot of people and um you know if you held it, you got kind of discounts on the exchange. But the reason that it was valuable, right, was that that Sam, you know, promised to the market that he would take FTX's profits, its centralized marketplace, you know, it's centralized exchange, right? And take a portion of those profits, go out and buy FTT from the market and burn it, thereby driving up the price. That's a perfect example of a company back token, right? At any point, uh, Sam could have turned off FTX and the price of FTT would have collapsed. And that's exactly what happened when FTX got shut down. So we can see right that there is a a company in the middle there right that is not uh you know that is not kind of uh it's not a disintermediated system at

the same time um you know FTT wasn't a you know traditional security because it didn't have enumerated rights associated with it you had no rights to claim right assets from FTX so it didn't it didn't wasn't a security token right but we call it this you know company back token because it essentially is the same thing there's a company in the middle and and you know the the value of it is dependent on that company's ongoing activities. One thing I found interesting from this, maybe getting away from the company tokens for a sec because I I do want to go there, is on the network tokens, um the historical way I think if you ask people in crypto how to differentiate this would have been like L1's and L2s or basically like the blockchain or like

the protocol versus applications and they would have maybe said that like th those two types of tokens were different. So like Ethereum and Salana and Bitcoin's token were different than I don't know if like Poly Market launched a token or Uniswap's token or something like that. Why did you not? Yeah, but that's that's but that's that's just wrong. That's just wrong, right? I totally I mean I I know the history of it. It's just totally incorrect. That's a good I mean that's a fair conceptual split if you bundle in your mind various features of the token together and see where they are coincident, right? So, for example, if you think of what makes an L1 token as distinct is that it's spent for gas.

Okay. Well, then it's a separate category. You know, we're spending it, we're using it for the specific purpose. There's gas tokens, there's non- gas tokens. Okay. Like, that's that's one fair way to split it. I'm not saying that that split isn't useful at for any setting, but from a legalistic perspective, from a and I would even say from an investment perspective, from an economic analysis perspective, from a technical perspective, that is maybe not the best way to split. The difference is that uh and you can have an L2 token that is a network token. You can have an app layer token that is a network token.

What you need is a totally autonomous decentralized network marketplace type structure next to the token that automatically drives value to the token as the network is used. As long as that's the case, you are a network token. And so whether it's an L1 itself or some application layer structure is sort of irrelevant. Okay. Yeah. So just to to give an example, so if you had a you know decentralized exchange that had a fee switch, right, that resulted in economic value flowing back into the token, right? How is that any different than Ethereum? The more transactions that occur on the exchange,

right, the more value is going to be driven by the token and no company intermediates that, right? And and as a result, the network effects of the protocol, right, acrew to um to token holders as opposed to any company. No company controls that system. Value accrs directly to token holders. The network effects acrewed directly to token holders. So it's the exact same as you know ETH and Ethereum. Um I mean like let me ask you like what makes what makes what makes a token uh you know what if the value is accumulating to the thing that has the network effect and you are getting exposure to it and it is totally autonomous. No company controls it.

There a wide array of people can influence it through a variety of means as peers. What does it matter whether it strictly speaking has its own form of consensus or not? Yeah. Yeah. I agree in other words that it is an L1 or something. No, I agree with you. I I like this framing especially because um uh my problem with kind of like the old framing was that things evolve so much in crypto too. like things um like uh let's say unis swap starts as like an app where you can like uh you know swap swap anything but now it's a now it's like now I would define it as a protocol or a platform where you build things on top of it and like especially with hooks and v4 and stuff like that so yeah um or I was going through a uh a actually has

really clean nice docs out if anyone is a likes nerding through docs um and it's it just shows like how much a has become a platform and really a protocol for lending and borrowing in and of itself and and isn't just like a you know a front end application. So I I yeah I like your guys's thing. the one of Yeah, I was just gonna say one one of the things that we tried to do too here with this approach, right, was to define tokens by both by what they are and what they aren't, right? So like the framing that you're talking about now one token, right? Like people have always talked about utility tokens and all of this stuff and it's like okay well all of those characteristics right are just like a characteristic that any token can have, right? Any token can have utility.

A stable coin has utility, right? So so that could be a utility token. So, so those those kind of definitions don't really work. What you really need to look at is is kind of what what are these tokens, right? What are the economic rights that they come with? What are the trust dependencies, you know, that come with them, right? How do they function? And and then also define how they're not doing those like what what do they not do, right? And and that's what we tried to do with with with these categorizations, which I think makes it a little bit more effective in terms of of of drawing clear lines of how to delineate between these things.

Got it. Okay. Um, let's talk about company tokens. Uh, what if a company launches a token and then Okay, here. What did you guys use? You guys used um like the exchanges, right? BNB as an example. Uh, okay, never mind. You actually put it here. This answers my question. I was going to say, what if you what if you start as a company? Can you evolve from a company token into a network token basically? And I think you would say yes. Yeah, I think I think you can if if you remove the company from from intermediating. I would say that that that is um you know not a very common pathway and I would say that the the

probably not very advisable right ultimately I think um you know tokens should relate to network tokens should relate to the the underlying network and you know juicing their value through activities that the company is ga engaged in at the outset is is kind of doesn't make a ton of sense right in from the perspective of like well why why are you kind of intermediating this at the outset if you're designing a network right and so like you know the direction that we try to push and and and work with our a lot of entrepreneurs on is is designing these systems that so from the very start you know their te their tokens are network tokens got it um can we I'm going to pull up this example um where I was just grossly

wrong um which is about Kaito um so so Kaito is a company in Singapore They started as like a research and data platform and then they became like YAPS and social sentiment and all that kind of stuff. Um they launched the Kaito token and I posted I was like this is very interesting like every C if you're the founder of a centralized company especially those that raised at you know overvalued 2021 equity you're looking at this saying oh my god maybe this is my saving grace. So what I said is you have a lot of centralized companies looking at uh looking at launching a token and I said people should be considering this.

This is very interesting. And then Miles posted on Twitter and said uh I Miles you screenshotted one of my tweets that said one of my predictions at the beginning of the year was that centralized crypto companies start launching tokens. Tokens as a fundraising mechanis mechanism instead of tokens as the tech will become obvious. This is the start of this happening. Miles said no. this is called an unregistered securities offering and the rules are actually quite clear. Um, so Miles, tell me more about this. Yeah, so look, I mean, I think I think fundamentally, right, I I don't think that the the world has changed in terms of of of where you know what tokens can do, right? And and so um if you're launching

a token, right, that is basically just a proxy for equity in your company, then then that should be regulated like a security. And it's really hard to argue that it shouldn't be. And you know, because ultimately the risks associated with that asset are now very different or are very similar to an ordinary security. And so, you know, one conception of the world is that like, okay, look, I'm going to I'm going to go out to the world. I'm an entrepreneur. I'm raising capital. I'm gonna I'm going to launch a token that that is, you know, that I'm going to give you all of the promises that I'm going to treat it exactly like equity in my company, right? But I'm not going to give you any of the legal rights. Well, should we be treating that any differently than how we treat a share of stock?

Fundamentally, right, the person that is investing in that asset is subject to all the same risks that someone that would be investing in the share of stock would be, right? All of the risks of information asymmetry. The founder knows more than I do about the system. right? They're still dependent on the founders's efforts to make that asset valuable. Um and but even you know but but then you end up in actual worse situation because you don't have any actual legal rights. So we don't really want to create a regulatory framework that incentivizes you know entrepreneurs to to to to basically put investors in a worse position. Now in the short term maybe that is helpful right? But in the long term, what that leads to is a lot of scam and a lot of scams and a lot of frauds, right? And so, fundamentally, I

think it's it's kind of unworkable. Securities laws, you know, there there are a lot of problems with them, but they have been an enormous, you know, wealth creator in the United States and have facilitated, you know, the growth of our startup ecosystem. So, while they, you know, at the edges need some improvements, um, I don't think that we want to create, you know, giant loopholes in them that change how our capital markets work. And that was really, you know, what I was uneloquently getting at in my post was that, you know, to the extent companies are just launching tokens as as a, you know, as a proxy for equity, right, that is fundamentally very clear where the law stands on those things. And that's just an unregistered securities offer.

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blockchain technology involve risk terms and conditions apply. Okay, if I'm Kaiito, couldn't I just say this isn't my equity? I have equity. I raised a series B and a series C and Dragon Dragonfly led my round at a billion dollar valuation and I'm going to go public one day and yeah, I launched a token, but it's really just like this side thing over here. It's not my equity. I've got I I do have equity. Yeah. So this is going to be boring from a legal perspective, right? But it but essentially the answer is is that like you look at there's a concept called substance over form under securities laws, right? And that means you're looking at what is the actual nature of of this transaction as opposed to what are the formalistic um uh criteria that

it that it falls into. So if I if I come to you and I tell you, hey, do you want to invest in my company? I'll sell you this asset. like here's the econ, you know, I'm gonna I'm gonna spend x percentage of my proceeds to buy back this asset in the future just like what Sam Bankman free did, right? You're creating an economic reality, right? That is the exact same as me investing in a profit's interest in your company. You may not be giving me the legal rights, the formalistic rights that that that are exactly the same as what a profit's interest in your company are, but you're creating an economic expectation on my part, right, that that is exactly what I'm getting. And as a result of that, we regulate those things like securities. Um to not do so, right, would be to incentivize um you know,

individuals to raise capital by just not giving legal rights. You can imagine an entrepreneur coming to the public markets and saying, "Look, I'm going to issue this token to all of you. I promise I'm going to buy back this token and deliver economic value to it, but I can't actually give you a legal right to those things because if I did, this would be a securities transaction." Well, well, that's just a very convoluted approach and doesn't really make sense, right? So, so formalistic requirements should not trump substantive ones, right? And and the substance requires you to actually wrestle with what is the economic reality going on here. Got it. For anyone who didn't follow that, um Eddie has a tweet that is basically just a diagram that says uh that is a very clear uh you know, yes, no um diagram. So,

yes. Yes. Yes. And and for what it's worth, right? All this is about is if you're buying a token, what are you buying? Yeah, that's right. Right. That is the question. What are you That's what we were that's what we we token transparency framework. That is what we're trying to solve too, which is basically just like you don't invest. Most of these tokens are largely uninvestable right now in our opinion because you don't know what you're getting. Are you getting a claim on the cash flows? Are you not? Are you getting are the founders going to rug? Exactly. Exactly. And we can use this magical software called blockchains to enshrine in some of these systems rules around who is getting what

when. And so you can know what you're buying, not just because you relied on someone to report it, but because you can look at the software and know whether it is even mutable. That's right. That's right. I think I think that there's a there's a really good point there, too. Right. I I think your transparency framework is is fantastic, right? And I think I think it's in it's important to highlight right how did we get here? Why do so many tokens right have obuscated value right and and why um you know why has this been an issue that the industry has struggled with? Well, it's it's because of the convoluted regulatory structure that we had in place, right? So, under the prior administration, um, you know, the SEC basically said, hey, if you have

value acrewing to your token, we're going to regulate it like a security. So, the reaction of, you know, lawyer designed coins was, hey, well, we just won't have value acrew to these tokens, right? Gotcha. And, and as a result of that, we end up in this situation where everything is very convoluted and no one really knows, are these assets investable? Where is the value acrewing from? Is it from a company? Is it from a network? Right, what have you. And that also, right, meant, you know, led to arguments that, hey, you know, that governance token over there that relates to a network that doesn't have a fee switch on is really no different than a memecoin. And then you end up with the propagation of these memecoin markets, right? So from from our perspective, you know, we we just really want to focus on where we think that the real unique

value opportunity here is, which is to have network tokens that acrue value from from, you know, functional networks that are not controlled by anyone. And and that's what network tokens do. And I think your transparency framework is great because that people should understand, right, where the value acrruel is coming from. That that is fundamental. Yeah. Yeah. 100 totally agree. The transparency framework is very good, right? Because there are ver it even just the existence of it implies that there are various levels of transparency, right? And that, you know, there's like the least transparent is like people have secret facts that you have no access to and didn't share them, right? And then there's like steps up to that. They shared the facts regularly and a third party checked them. Then

there's like the max level, right, which is like there's no one to share anything because the code's just there. Take a look yourself, right? and the the existence of that spectrum is very very exciting and interesting. So the fact that you put it in a report is spectacular. Yeah. What about when a company says um that we launched a token it's for this but really the market thinks it's different and actually just to get specific I'm sure you guys can't comment on specific things but like I'm thinking about Zora here. Um so Zora launched their token and Zora said you know the Zora token is for fun only and not for investment purposes but obviously the market doesn't think that and actually someone commented this guy nar said if

it's for just fun why does it have voting rights? Um so how do you how do you yeah how do you think through this? Well you look I I I don't know I haven't talked with the Zoro team about it. We're not investors in Zoro, right? So I don't have any I have about as much information as everybody else, right? But I'd say this imply this screams to me like lawyer design, right? Is that lawyers said something like you need to say that it's for fun and create a sort of convoluted explanation and that that maybe is not what's really happening. I feel I don't say that in a disparaging way. I I'm just saying like it's kind of a shame that everybody has been until recently painted into various kind of convoluted

corners and I wish entrepreneurs could be much much more down the middle about what they're trying to do because I think everybody benefits from that. Yeah. Yeah, I think if you if you go back to 2017 18, right, when the ICO stuff was happening, there were lawyers that were providing, you know, you know, advice to their their companies saying, "Hey, look, like you can do this ICO. Just put a bunch of disclaimers on the website that says that, you know, you're not going to engage in ongoing efforts and that, you know, the token is, you know, not going to be, you know, not going to have any value from your ongoing efforts." And that's your get out of jail free card. And this again kind of like speaks to the form over substance versus substance over form point I was talking about like that that

shouldn't matter right what should matter is what the economic reality is and and the re the result of these like you know lawyer design mechanisms that are all kind of obvious like all of it right just means that we don't have transparency and stuff people aren't building what they want to build and that's that's a problem we need regulatory clarity right so that we can talk stop with the gamesmanship right and we and people can just get back to building things that consumers want. Got it. I agree. Preach. Um, can we use uh can we use one of your guys' portfolio companies to maybe expand on I'm trying I I think I've got my head wrapped around this, but one one company comes to mind, which is Uniswap. So, UniS swap has a token, which is a network token, but you also have Uniswap

Labs, which has raised which has raised money. So could UniS swap Labs IPO and Uniswap the the protocol or the network could just have a token that's trading? Is that how you see that going? I'm not talking about unis swap specifically here by the way like because I know you guys can't talk about it too much. Yeah, look another another good example is is consensus, right? Um so so you have Ethereum obviously is is is a is a big valuable important network. uh and you have consensus that builds a ton of great products on top of the Ethereum network. Um there's no reason, right, that that that consensus shouldn't be able to operate a for-profit business that benefits or that utilizes the underlying credibly neutral

infrastructure that is the Ethereum network. Um I think you can look at unis swap very much the same way. Uh the unis swap protocol is credibly neutral decentralized infrastructure that anyone can build a business on top of. And what I would argue is that is that it is beneficial for that network for companies to be building on top of it, right? Uh at the end of the day, do do you want everyone to just go away and and disappear? No. You want someone that is is understands how the protocol works and that is out there convincing the Goldman Sachs of the world that dexes are the future and that they should be moving securities and other types of of investment products onto decentralized exchanges. there's a very valuable

business that could be run there. And and it makes no sense, right, that you would want to uh exclude the people that might have the best familiarity with a protocol from actually building a business on top of it because they're going to be the most effective at doing so. And and the thing to remember is that benefits the protocol because the more transaction flow that routes to a protocol, right, the better it's going to be for the underlying token if there is a a fee switch. And and as a result of that, right, it is in everyone's interest for for you know, everyone's efforts to be moving towards increasing transaction flow and value acrruel.

Yeah, they're these are complimentary but different efforts, right? You could have a DEX that benefits from transaction volume, from special integrations, all these things, has a fee switch on, is acrewing value to a token. And that token could be used to spend to uh, you know, reward specific companies for doing specific types of work or set up uh, you know, specific agreements to develop new software, things like that for the protocol. And then separately you could have a company that has a different but complimentary business model where it like provides a front end and uh discovery services and safety services for people who want to transact using

that using that protocol. They're just different. These are two different things. They have different sets of network effects, right? The DEX itself has some network effects. Uh as we've seen and wallets uh and services for discovering and you know facilitating exchange on those protocols, they have their own network effects and it's natural because of the means of controlling them are different that they could end up being distinct businesses with different uh core ways of making money but that are fundamentally complimentary. Yeah, I understand. Cool. Anything else on the token? Yeah, token classification. I there's there's a related subject that I want to get into, which is when you guys had a great blog post about a week ago

called when to flip the uh the fee switch. Maybe we could get into that. Um yeah, I mean, like I said, you guys just had this piece this by this guy Scott who's very smart. Um good follow. Yeah, this Yeah, this guy. This guy Scott. This guy Scott quite smart. Um people should follow him on Twitter. He's a good He's a good follow. Um yes, but Eddie and Miles uh Miles, you you put it very uh bluntly, which is tokens should have revenue. Um Eddie, you Eddie, you added a little more color. You said network tokens should earn revenue from their protocols. This is necessary to fuel growth, attract investment, and pay it incentives. One of the toughest questions is when do we turn on the fee switch? Scott considers this from an euh economist perspective linked next. And actually this guy, some random on commented on Miles's p uh

post, which I thought was a very spot-on uh reply to Miles. He said, "Every marketplace trying to hit revenue mode, but nobody want to be the first one to turn the lights on." So, how do you guys think about when is the right time to turn on the fee switch? Well, Scott's piece puts it pretty succinctly, actually. he kind of sets it up really nice and and puts it. But I'd say like my my sort of spin on the same idea is, you know, um there are many factors at play, but what you want to do really in the end, you want to turn it on when you're going to actually boost the amount of um you're going to collect enough fees that don't uh that

allow you to do something new and powerful and interesting, right? by like being able to spend it on new growth, new stuff, you know, boost the value of the token for future investment without subtracting from the source of revenue, which is you don't divert away users, you don't lose users such that you impede growth. I mean, a simp maybe a simpler way to frame it is just turn on the fee switch when it's worth it. Turn on the fee switch when you don't dampen growth, right? That's one way to put it. uh and and I'd say for it's a kind of a complicated question for protocols that are considering that today because they have to decide right do they want to take these legal risks those are being

answered those are being addressed in interesting ways the Duna being one tool that they now have do they want to be uh competing against protocols that don't have fee switches on how does that change the fundamental economics what do they want to spend the fee switch revenue on that's another question I personally think right now because fee switches have been off and fee switches have been off largely because of legal risks in doing so. I personally think that there's a lot of value in someone turning it on at a low very low rate.

And the purpose is not to extract as much as possible. In fact, I think it'd be a big mistake right now. The purpose is to show that it is possible and that protocols can get revenue and they can do good things that make their protocols better with that revenue. That to me is kind of the dividing line. So Scott is considering it kind of from an economist perspective and then there's arguments out there about from a legal perspective. Does that answer your question, Jason? Yeah, it does. Miles, do you want to comment on from the legal side? Because I think this was always for years this was like it was really it at least I feel like it was a legal question like if you flip if you flip this V switch you're a security is I think the thing that got tossed around. So

yeah look I think I think that that's right. So so you know I leave the the kind of timing question to to Eddie and Scott. I think from a legal perspective um the time is down. uh you know I think that the I think that we've got a an SEC that is finds the arguments for you know why fee switches are are good right they actually enhance decentralization just think about it if if you don't have the fee switch on then you're inherently reliant on that fee switch eventually being turned on right in order for the value to actually flow back to the token so that fundamentally creates greater reliance on you know some person to kind of you know make that happen. Um after

you've already done it, you remove that reliance and now you have a truly functioning network token where the value acrruel is happening from uh onchain activity. So from my perspective, I think it's a a massive step towards decentralization as the something that should as opposed to something that should be you know increasing your overall legal risk. So I think you know the SEC has found those those arguments compelling. Uh and I think you know that that the time you know in terms of legal restrictions that have been in place. You know the Duna also helps kind of um you know deal with some of the tax consequences. And as a result of that I think I think the time is now from from all I can do is is hope that we get rid of all of the legal barriers. And I think we're we're right

on the precipice of doing that. What about um the second the maybe the second question here which is there's turning on the fee switch and then there's passing those fees back to token holders. Is that part legal too? Yeah, I think so. I mean obviously it depends on on how you structure it but um you know there there can be complications with respect to to you know tax treatment of of those things but fundamentally um you know that pathway is available and and the DUNA is is one of the the kind of legal mechanisms um that can help projects that can help projects do that. I think I think it's it's you know acrewing revenue to a you know a DAO that then has control over those uh that that

value is actually I think more complicated um right from the perspective from a tax perspective than it is to just have your mechanism design uh autonomously result in some buyback and burn mechanism such as how Ethereum works right where there is no one that's taking kind of all of the poolled ETH that comes from transactions and then going out and buying ETH and burning it right it It just happens at the protocol level and the way that that Ethereum functions. Why do you think Unis swap hasn't turned on the fee switch or hasn't turned on the fee switched and started passing the revenue back to uni holders?

Well, those are two two separate questions. I mean, I I'd be I think we'd be speculating on the first like you know, they're I'm sure they're thinking about it. You know, I don't know. I mean, we'll we'll we'll we'll find out. Um it, you know, that's up to them uh to the DAO. And I mean, so I feel like I think I mean, I had to double check. Don't quote me, but I think someone could just make that proposal today if they wanted. I think I mean, they'd probably want to set up various smart contracts and like a theory for how any fees that are collected are distributed. That'd be really important to iron out before you made such a proposal, but it's possible today. uh in terms of distributing fees to token holders. I mean, maybe I'm being too literal with your statement,

but you know, you can literally take the fees and give them to token holders or you could indirectly pass them through. I personally favor the indirect approach uh because I think it's a lot cleaner in addition to being potentially more tax efficient and simpler. Uh when I say indirect, I mean fees could be collected and then used in an auction to buy back UNI tokens or network tokens and to to destroy them. And this is a way to pass value back uh that's just as powerful and arguably more economically efficient than distributing them in the form of for example yields like staking yields which are much besides being much more complex you know they have significant

downsides. So, but in any case, it's not my decision to make. So, and also remember, right, we're we're only, you know, 6 months, 7 months into this administration, right? And and so the the administration's kind of continued constructive engagement with the industry is very important to see because fundamentally, you know, the law has not changed here yet, right? So, like like the law is still what it is. So, is there still some risk? Yeah, sure there's some risk. Is that risk different than what it was a year ago? Absolutely. And I think as people start to get more and more comfortable with the situation that we're in now, it makes it easier to kind of evaluate those decisions and potentially, you know, decide to go forward.

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Leedin offers proof of reserves reports verified by a top accounting firm every six months. Leedin is 100% focused on doing one thing better than anyone else, giving Bitcoin holders a secure, transparent way to unlock liquidity without selling. Click the link in the show notes to find out more. As always, investments in blockchain technology involve risk, terms, and conditions apply. How do you think about balancing the needs of different portfolio companies? Like we're talking about DC and I'm sure there's a lot of lobbying and stuff like that and token classification, but like I I imagine you guys are in a tough position sometimes with port coast like

okay I'm thinking of like okay you've got Coinbase uh unis swap and um like I don't know opt optimism right those are three companies all and port codes three very different needs and actually some of them work with each other and I'm sure negotiate contracts like the you know optimism enabled base to exist and never knows about that contract and stuff like that. Like how do you weigh the needs of your different port codes? Yeah, it's a it's a really good question and I think you know you can even take a make it even more complex by looking at it across you know the various sectors that that A16Z the broader group invests in right so we've got investments in the you know defense sector we've got biotech investments we've got AI

investments we've got crypto investments right all of their needs are not always going to be necessarily 100% aligned I think the perspective that we generally take right is that we're in DC to represent the interests of startups right so we call it the the little tech agenda, right? And and what we think that that means is is basically trying to guard against, you know, regulatory capture and ensuring that there are clear rules of the roads for for entrepreneurs to to be able to to innovate. Now, when it comes to crypto specifically, right, that means like again, you know, the both of those two goals are are exactly where we're we're focused and and it means that we're not so focused on, hey, what what lever could we pull that would would help one of our portfolio companies as opposed to

that we're looking at what what can we do to provide regulatory clarity, right? So that entrepreneurs can compete with one another on a level playing field. That's that's that's all we can hope for and that's the basis of what we want to do. Once you establish that level playing field, then may the best entrepreneur win, right? And that and that should be the foundation of of what we're going for. Uh and and and that's, you know, generally what we're pushing for the regulatory picture over the course of the last, you know, eight years because of the uncertainty that has actually favored the bad actors in the space, right? Because they end up not getting, you know, regulators don't go after all of them. they target the the more legitimate, the more upstanding um pieces in the space. You know, they

went after Coinbase, didn't go after FTX. That same type of dynamic applies all the way down to the, you know, to the twoperson startup level. So, the level playing field is really the thing that we want to establish and it's what we've we've been missing in this space and that has uniformly hurt our entrepreneurs, hurt all the good faith actors in this space. And if we can ameilate that kind of risk and and that problem, uh, then, you know, then then it's anyone's game. Yeah. Maybe as we think about rounding out this episode, I'd be curious to hear the most common questions that founders come to you guys. Um, Eddie, I don't know if they come to you for the legal, maybe they come to you for the the engineering and the come to me for the legal.

Yeah. Yeah. They come to you for the technical questions and miles for the legal. But um are there any topics that topics or concepts or ideas that come up over and over and over again and hopefully they're more complex than uh just saying hey can can this person it's evolved significantly over time and you know uh often what sounds like a technical question unfortunately ends up being a very legal question right that's just like that because those things intersect. Uh I don't know that there's like a specific most common question. You'd be surprised by the range I get, honestly. Like if I tried to take a random sample, you'd be it's it's pretty it's pretty wild. Uh I think today um today what they want to do is they they want to ship fast, right? They want to ship fast

and they want to make great deals with other companies and they want to make partnerships and they want to leave, you know, they want to release products and they want to hire people. Like that's that's what comes up today. a year or two years, three years ago, it was definitely how do I launch a token and how do I do so in a way without getting myself in big trouble, right? I want to do it in the right way and tell me like how I can do it while obtaining my technical vision, right? That came up all the time and that's actually part of what led to our becoming very interested and involved in the regulatory story is because of how often this question would come up.

You know, sometimes little themes pop up. Something I've been getting a lot about lately has been privacy, right? I feel like I'm I'm hoping for this, maybe I'm projecting a little bit, right? But I think that as crypto obtains a degree of um you know, product market fit in fintechy kind of like financial institution world, people are looking at it, grappling with it, thinking about it, imagining it in their product and they are visualizing privacy issues, right? Which I which is great. I think that they should think that think of that. Uh so people are thinking about not just the technical questions of how to bring privacy to their system but also how to do so in a compliant way right because there's obviously consequences to that as well.

Uh you know I used to get a lot of stuff about scaling we all know that like two years ago it was brutal like constantly people are trying to save gas everywhere. Now no one no one cares about that. Not because it's like unimportant or something, but because we kind of solved it, right? Like a lot of blockchains have added a lot of capacity over the last year and a half. Now I get more questions about UX and how to make things intuitive, wallet design, key management systems, permissioning system. That comes up a lot. No one is talking to me about gas golfing anymore, you know. So it it evolves. It evolves.

It's interesting. And I take most of those as signs of meaningful progress. Yeah. Miles, what about you? Yeah, I mean I think the the area where I'm most commonly having conversations right now is just like where are we going, right? What is what and how is the regulatory picture evolving and what is it what does it mean for the founders? And I think I think there right the the the critical things are right we're moving from this effortsbased you know decentralization framework to this controlbased decentralization framework. What does that mean for entrepreneurs in terms of of how they design their systems? I think it's just it makes the conversation a lot easier, right? No longer have to have the conversations around can this person be in the same slack as this person, right? Instead,

how do you actually focus on the more technical elements of designing incredibly neutral, you know, autonomous systems? Um, and and not, you know, dealing with all of the off-chain obuscation and nonsense. Um, so that's really exciting. I think the the value acrruel, right, story is is one that is is just starting to pick up steam and I'm I'm very uh excited about that because I think um you know it just brings a dose of reality to how these tokens function. Uh and I think that that's that's exciting. Uh and then I think um you know the other areas are just around kind of this foundation stuff and and the Duna and and all those and how do people kind of you know deal with the structuring around all of that.

um you know, we're making good progress there, but I think, you know, one of the things that we've we've come to see, right, is that this industry, um you need lighthouse projects. You need to to see someone do something that, you know, knocks it out of the park that works really well. And so, we're working with a lot of founders to try and like, you know, form those like perfect use cases that really, you know, show that these paths are now available, how to hit control-based decentralization, how to turn value acrruel on, right? how to use these entity structures in a more, you know, in a more transparent way that doesn't kind of increase opacity. So, I think those are all of the things that we're working on and I think that, you know, this year is going to be very exciting because there's going to be

some launches that are are really going to knock that out of the park. Nice. Eddie, Miles, this is uh yeah, great great wide ranging chat. Anything that we didn't cover that you guys want to make sure we hit on? There's tons of stuff we could talk about, trust me. But I know we can get you for a couple more hours here. Yeah. Awesome. No, this was great. Thank you so much. Yeah, this is great. Thank you. Cool. Well, appreciate the time, Miles. Thank you guys. All right. Good talking to you. [Music]