Launching compliant tokens | Miles Jennings

Transcript

[Music] thank you a lot of companies are issuing tokens in the space it's a good thing to be familiar with kind of who's doing it right who's doing it wrong what what kind of is out there that is noise versus you know what is is legit um so hopefully this will give you a better sense of that um so we've we've covered decentralization um now we're gonna we're gonna go right into tokens um so four things we're going to cover myth busting and fundamentals we're going to cover the basics of launching a token I'm going to give you some hard and fast rules for token launches and then we'll talk about some additional considerations

all right mythbusting fundamentals so uh there's a lot of noise about tokens right the SEC the chair of the SEC um basically says that all tokens are securities uh and that the rules are clear but if the rules were clear right why are there thousands of outstanding Circ you know circulating tokens right and the SEC has only successfully brought a handful of of successful enforcement actions right fundamentally that doesn't make sense uh his what he is saying cannot possibly be true unless they're just deliberately not enforcing the law so in reality you know the rules are anything or not all tokens are securities and the rules are anything but clear and you know he's in front of

the uh house Financial Service committee today uh answering to a lot of Congressional members about kind of the way that he's approached the industry um so it's it's a challenging kind of environment right many tokens actually probably should be subject to Securities laws uh in a lot of instances right people are dependent on a management team to drive the value of those tokens uh and as a result of that um you know you do see a lot of instances where uh you know people are harmed from investing in tokens uh you know in 2017 which is when I started getting involved in this industry um icos were all of the the rage and people were kind of conducting fundraisings um selling tokens with promises that their you know company was going to do X

Y and Z and and those are our situations where you know Securities laws probably shouldn't apply even though you know you don't have all the contractual protections of equity right at the end of the day people were buying these tokens with the expectation that the management team was going to deliver something but that's very different from what the world looks like today right people don't really sell tokens to us persons anymore and you know most often you see uh tokenization happen at a step where people are really trying to decentralize and they're using tokens as a vehicle to do so so it's inherently necessary to have tokens if we're going to have decentralized systems right ethereum would not work without eth Bitcoin wouldn't work without without Bitcoin but Drawing the Line is very difficult right the SEC has said uh that even the chair has said that Bitcoin is

not a security um and then he's you know said that other tokens are and when pressed on trying to find out what the line is between what is a security and what's not a security uh you know he says well there's no people in the middle which obviously is not a very uh defined test but ultimately right there is a line there and and you know the SEC blast provided guidance on where that line was in 2019 and obviously the industry has changed a significant amount since that time but our job here is is to try and help our Founders kind of figure out where the line is and to take steps to kind of get across it now a lot of questions you know one question that a lot of people that are not familiar with the space often ask is well why don't

you know the SEC the chair of the SEC obviously says you know coming and register and so why don't kind of projects go in and register well the reason is is that the way that Securities laws work right is that if a token was registered as a security you couldn't transact in that token on chain right and so if you know for an instance for a protocol like filecoin where you use filecoin to actually buy storage right it would be impossible you can't actually do that under Securities laws and so as a result of that registration even though you know the chair of the SEC likes to offer it up it's actually a death sentence for any any project right so it's not an option and fundamentally it's unnecessary as I was saying in the last presentation right decentralization obviates the risks associated with with

some digital assets and as a result of that if you don't have the risks associated with managerial efforts information asymmetries then you shouldn't need to apply a legal regime that addresses risks that aren't aren't present right that is just applying regulation for regulation's sake which is is generally something that um you know shouldn't be done so all of this is very frustrating right and and I think that that generally speaking this is is the biggest kind of frustration that people have in the space is dealing with um the the laws that apply to tokens it's very unclear it's very difficult to kind of navigate and it's hard to know kind of what you can do and what you can't do and so that's kind of what we're here to help with um now I'll start with kind of just a

the general premise and I and I mentioned this in the last presentation right tokens are not equity and they should not be thought of as Equity they should not be thought of as a proxy for Equity or an analogy for Equity right fundamentally tokens are very very different from Equity um they do not have any contractual or statutory rights right if you are a stockholder of a company then the board of directors and the officers of that company are legally bound right to maximize shareholder value you do not have that right as a token holder you literally just own a token right so as a result of that it's very different your your your relationship with the team that issued that token your relationship with kind of the underlying technology is very different from equity Protocols are not companies right

Protocols are autonomous software that functions on chain and and generally if there is any Revenue that accrues to a token it should come to the functioning of that protocol right a protocol is very different from a company a company operates in the real world has officers as director says all of these things that are operating to to kind of make sure that it functions and generates Revenue that is very different from a protocol voting rights are also very limited right in a company the voting rights that are associated with the Sheriff's stock allow you to choose the board of directors which and the board of directors then kind of chooses uh who are the officers of the company kind of driving force for the overall economic value that accrues to it to uh share uh that is not the case with tokens obvi you know in a lot of cases uh you know

you people practice governance minimization which means that you only have votes with respect to a small number of parameters uh and you know there are Grant programs and other things associated with the treasury but fundamentally right the voting rights that you get as a token holder are very different so again cannot stress this enough your your frame of reference the place where you start from should not be that tokens are equity and that's a hard concept because there's a lot of noise around this right the Twitter influencers uh uh constantly kind of like basically categorize tokens as though their Equity talk about them like their equity and really frame them as though their equity and value them as though their equity and that is a fundamental problem because ultimately and and it really limits the design space for what tokens make possible so as a result of that I really want you

all to to be encouraged to kind of go away from from that model in your mind now one of the things that tokens enable that I think is very exciting right and we talked about this in the last presentation is is this idea of kind of stakeholder capitalism the ability to basically accrue benefits to actors within an ecosystem on a more Equitable basis than what happens in equity right with equity and and with shares right a again a company is is mandated by law to basically maximize shareholder value right as a result of that everything that they do all of the benefits of the things that they do accrue to the um to the shareholders right now within the equity world there's a this this idea of stakeholder capitalism has come up and

this and this notion of of directly accruing all benefit all value to stockholders right has has kind of morphed a little bit into allow companies to have other goals right and these are most often called public benefit corporations and so what those corporations can do is they can basically say hey in addition to maximizing shareholder value what we're going to do is we have this other goal and we're going to try and Achieve that as well this most often comes up in the context of ESG initiatives right so a company will say well we want to be carbon neutral and we're going to let that goal kind of offset the goal of maximizing shareholder value now generally speaking I would say that that stakeholder capitalism within uh within uh the equity world has has failed by and large right it doesn't really kind

of work as well as it should and and the result of that is is one of the big complications there right is that it's fundamentally very difficult to overcome the Legacy debt of always kind of maximizing things for shareholders now tokens offer us a new way forward right tokens do not have kind of all of the restrictions that shares have and as a result of that the design space is much broader right you can actually use tokens to accrue value to people that are participating in your ecosystem right you can use it to incentivize different activities that are going to be beneficial for for the um for the ecosystem and you can Empower individuals much more significantly than you can within a a share-based regime these Concepts right of stakeholder capitalism can

basically be applied to a lot of different um you know types of models so for instance safety modules are a concept where basically you create an insurance pool um that uh you know then like pays out to the extent that there is any harm suffered by users of the protocol so so basically you're creating an insurance fund and you can reward people for staking their governance tokens into a safety module that they then use to underwrite the kind of insurance risk of the protocol and as a result you pay stakeholders for or token holders for staking those assets so again it's a benefit that the protocol gets then it's a benefit that it then distributes to People by rewarding them for having contributed other things that we can see right

you can incentivize voting you reward people for actually participating in governance you can report them for Content creation token curated Registries was an idea that came around pretty early in the life cycle of blockchain but it's starting to come back around now so for instance let's say that you had a platform where there was a lot of content being generated actually rewarding for people for curating that content for others to then visit or use right is is a a way that you can then reward people for contributing to the ecosystem all of this can be done with governance tokens and drive an economic model to those governance tokens without falling trap to the equity type distributions that we see in in the shareholder world so dividends and token repurchase

okay so we'll go through the basics of launching a token three things to focus on decentralization incentivization and security now again on crypto Twitter you'll see a lot of people like breakdown token launches and try to explain what you know teams did wrong there's a lot of people that have a lot of different opinions about what token launches should look like for the most part all of those people are playing in the casino and not people that are playing in the tech and they're focused on the tech ultimately when you launch a token what you're not trying to do like referring to it as an IPO like it's just it's crazy and it's not where you should be focused ultimately those are your goals that should be in place when you launch a token you should not

be focused on kind of in creating an investable opportunity for the general public right that's not what you care about and it's not what matters at all what matters is these three things so let's look at them as we talked about in the last presentation tokens enable you to decentralize your ecosystem right they enable you to turn on decentralized governance and they allow you to basically turn a closed Network into an open network they make it make it so that you can turn your protocol into something that is credibly neutral as a result of that it can then be built on top of by other people so it's fundamental component of decentralization it also allows you to to build out incentivization right if you want other people to build on top of your ecosystem

if you want to turn your your closed Network to an open network you have to fundamentally use tokens to do that and then it allows you to build in security right fundamentally the token price is going to be relevant for whether or not the system is secure and and that is a key component of of the overall decentralization so when are you ready to launch a token the simple answer is the Bahamas test um this test basically asks okay well if the management team was to disappear tomorrow what would happen and if the answer is nothing would happen then you pass the Bahamas test so the idea here is fundamentally right that the

management team is not driving the value of the token so if a management team disappeared it shouldn't be relevant to the price of the token now this test is obviously pretty simplistic and the answer is that it's actually a lot more complicated as I've said right you want to have product Market fit before you launch a token it's critical to do this because fundamentally post launching a token anything that you do to work on a did like work on the protocol right could be misconstrued by the SEC as evidence of centralization right and so anything if the if as we talked about in the last presentation if token holders are dependent on the management company or the management team right to drive value to make sure that the you

know more features are being added right then fundamentally you're you're kind of uh impeding the decentralization of the system so you want to make sure that you have product Market fit before you you know you launch your definite you want a sustainable token model right this is something that a lot of protocols ignore is that fundamentally right tokens are not magic beans right they have unit economics applied to them and as a result of that if a protocol is spending far more than it is earning in terms of Revenue over time that protocol will go into insolvency right there there is no kind of way to escape the fact that unit economics do ultimately apply to tokens um and then you want to look at your

decentralization progress right this really speaks to the Bahamas test portion of it where like ultimately um are you going to be uh decentralized are you know are you pursuing Progressive decentralization uh how are you fundamentally positioning your protocol with respect to its overall decentralization and and really what you want to be I mean you want to be as decentralized as possible when you are kind of ready to to issue your token okay so there are several drawbacks to uh issuing a token first of all they're a massive distraction all right um you know the second that you launch a token everyone becomes focused on token price including the market and including your own employees right

so all of a sudden it doesn't even matter if your team is doing very well right and you're and you're and you're doing everything that you want to be doing if for some reason the market goes down and the token price is it under water right people are not going to be happy so all of the sudden you know by launching a token you introduce this layer of complexity with respect to motivation and and kind of running your own business that otherwise you know you wouldn't have to deal with decentralization is hard right well it has many benefits it is slow it's inefficient and it can make it extremely difficult for companies to operate right as I said earlier any type of activity that you undertake is going to be pointed to by the SEC as evidence that you're centralized right

and that you're and that people are relying on your efforts and so as a result of that right you have to be very careful about the activity that you engage in you fundamentally want to be decentralized and and that is very hard right and then finally token launches are inherently risky right you're adding a lot of layers of complexity to your ecosystem and potentially right um that could be regulatory risk right if if you've launched a token and you are not decentralized um then it is very possible that the SEC will come after you and obviously that's very hard because at the end of the day the SEC has not clearly identified what layer or what level of decentralization you need to achieve in order for you not to have regulatory risk

um but you know again that's kind of the thing that we're here to help with so here are some hard and fast rules for uh for token launches first we'll start with three truths regulatory uncertainty in the U.S helps Bad actors okay this is is something that that a lot of regulators and a lot of policy makers don't understand but at the end of the day the only thing that regulatory uncertainty does is it helps people that want to be bad actors and it hurts people that want to be good actors right what do I mean by that so if there's no certainty around who can issue a token and who can't issue a token right but we do have some general guidance around what it should be well then a lot of companies will in good faith try to meet that criteria and try

to operate within the bounds of it right and so if a company isn't necessarily decentralized right they'll wait and to build their to issue their token and they'll continue to try and you know work on the decentralization component which as I said is very hard it's inefficient and it's slow and it and it ultimately can you know it makes it more difficult to obtain but Bad actors don't care about any of that right and as a result of that if you want to make a quick profit by selling a token and launching a product and you want to get the you know the commercial benefits that come with issuing a token which is that you get more users right then ultimately you're going to cut Corners to basically launch your token decentralization as a concept is very very difficult to tell from the

outside whether or not something is actually decentralized and as a result of that if you want to go quickly to Market and be a bad actor you just obfuscate whether or not you're decentralized you play the game of decentralization theater and so what the lack of regulatory Clarity in the United States is really done right is it has meant that people that are actually trying to decentralize and build decentralized systems right are at a significant disadvantage compared to people that are just trying to pretend that decentralization that they are decentralized and as a result of that you have a significant imbalance of the competitive playing field right another hard piece of this is that government inaction is not consent this is one of the hardest conversations that

I have with founders is that fundamentally right if you go out and you see your competitor doing XYZ right and the government not kind of doing anything about it that does not mean that you can go do XYZ and that is fundamentally very difficult right because assuredly what X Y and Z is is going to be something that is helping that protocol versus your protocol and so you're going to be at a competitive disadvantage because you're not willing to engage in the regulatory Arbitrage that your competitors are engaged in but fundamentally right despite all of that it is it is critical right that you do not then engage in in those types of games Building decentralized Systems that are going to you know stand the test of time is incredibly difficult and

something that has to be taken undertaken with a lot of deliberate thought and effort right and cutting Corners to get to a token launch is not the way that we want our companies to be working and it's not the way that you should be wanting to build your company fundamentally all of the companies that kind of rush out and launch tokens are are ones that that are most likely to fail so the biggest mistake that companies make in this space is to launch tokens too early right it's incredibly difficult to watch your competitors go out there and take advantage of launching tokens right but at the end of the day you shouldn't do it until you are actually decentralized and you have a credible plan of further decentralization so I said I would give you some some

rules and here they are number one do not sell tokens to U.S persons okay I think and we'll get into that more do not hype up your token as an investment opportunity right be very wary about secondary listings decentralization matters and Communications matter okay number one right is the sales of tokens to U.S persons right in 2017 in 2018 people were selling tons of tokens to us persons and they were all calling these fundraisings and so as a result of that right it became very odd like it's very clear that people were buying tokens with the expectation that people were then going to develop a product and despite the fact that there wasn't you know there wasn't kind of contractual kind of promises of that

they were going to develop XYZ people disclaimed that they were going to do whatever they wanted with the money fundamentally you have to look at the economic reality of those transactions people were expecting right uh the the founders of these companies to build stuff with the money that they were giving them and so as a result of that the SEC came down pretty hard on it now the system has evolved or the the ecosystem has evolved quite a bit since 2017 and 2018. no one really sells tokens to us persons anymore um for the most part they airdrop them to U.S persons and people are rewarded for participating in those ecosystems and any tokens that are sold right are typically sold in private placement transactions relating to kind of equity and token sales and so the problem that was kind of addressed in 2017 and 18 has

really been solved but fundamentally right there's still a lot of pressures for people to kind of you know engage in sales in the United States and as a result right you do see that still happen every once in a while there is just no fact pattern that is more likely to get you in front of the SEC than selling tokens to us persons it is it is the thing that looks most like a Securities transaction and is therefore the thing that they kind of clamp down on the hardest so that is the first that is the first rule the second rule is not to Hype your tokens as an investment opportunity right so this is this is a challenging kind of subject right if you are a founder and you've launched a token then you're going to be out there and and people are going to be

talking about your token pretty regularly but you want to be extremely careful about what you say about your token because anything that you say right is going to be misconstrued as you trying to get people to invest in your token now let me give you an example of this right having in your white paper right that your token will go up in value over time as people use the protocol has been used by the SEC as evidence right that that they were marketing that the company was marketing the token as an investable asset and as a result of that event that the people relying on their efforts and that the tokens should therefore be treated like Securities so you want to be very very careful right around the idea of of like what what

does this asset represent right how are you talking about it fundamentally if it was up to me our Founders would never talk about their tokens whatsoever because anything is so easy to misconstrue you take it out of context you you just and you frame it in the light of like this is what they were trying to do they had bad intentions right and it's just very easy to misconstrue so as a result of that it's very dangerous third issue is is secondary markets right now as we said one of the key things about a token launch is that you're increasing the security of the the system right and the security that comes with launching a token right directly relates to the price of that token if a token price

declined in value to you know fractions of a cent then someone might be able to buy enough of it that they would able to launch a governance attack so let's say that that happened you launch your token the price is very volatile um you know short sellers piling on the price goes down someone comes in and buys up a substantial portion sufficient to you know put a proposal in front of governance um to liquidate the treasury to give it to themselves obviously that is a fundamental problem with with kind of how you've launched your token and so as a result of that secondary listings are a way to combat that because they basically mean that you can have more um uh you know more tokens out there and as a result like you can basically help to uh clamp down on volatility but fundamentally the SEC has kind of said

any talking about secondary listings um is something that they're going to Target because fundamentally the way that they view the world right is that if you're talking about secondary listings what you're really trying to do is encourage people to invest in that asset so as a result of that right you want to be very careful in the way that you talk about secondary listings also secondary listings right if we've seen over time right listings have have typically led to increases in token prices and so if you were out there as a Founder saying oh we're going to get listed on X Y and Z platforms right then the the idea that you're you're planning in people's heads is that you're going to do some work that's going to lead to an increase in the token price and fundamentally that's kind of the managerial efforts point they were

talking about in the last presentation so you want to avoid that type of activity um the fourth one is decentralization matters so if we go back to the Ico phase in 2017 or 18 and we still see this somewhat now there are really two arguments that people were making as to why tokens shouldn't be deemed to be Securities the first was What's called the utility token argument right and this is the idea that essentially people are acquiring these tokens not because they have an expectation of profits based on managerial efforts but because they intend to use them right and and so the idea like if you think about file coin or something like that where you're going to actually take this asset consume it or even eth right you're going to use it in transactions that are occurring on the ethereum blockchain

the SEC at in 2017 and 18 right and subsequently has been like now that argument's pretty much we don't we don't agree if if you have a speculative asset that is out there even if you can use it that is not going to be sufficient to kind of overcome the Securities analysis and the most recent case that came out on this was was really um that agreed with the SEC was the library case the library was a protocol that was kind of very similar to filecoin and since it had like decentralized storage and ultimately you could buy Library coins and you could use them as part of the services that the protocol was offering and they did a token sale back in 2017 or 18 I think and the judge recently ruled uh in that case that the SEC had brought against them was that you know

fundamentally it did not matter um that you could use those tokens in the protocol uh it was still going to be a security so what that leaves us with is one argument as to why tokens shouldn't be treated as Securities and that argument is that the asset is decentralized right and so that's kind of what we went through in the last presentation where we talked about the technical decentralization economic decentralization and legal decentralization the legal test is really looking at right whether or not you can eliminate the risk of significant or significant information asymmetry is arising and whether or not you can eliminate the Reliance on managerial efforts of others right so if you can take out those two components and that's really like the decentralization piece that we're

focused on with respect to tokens if you can assure that both of those things are correct or or true then your token shouldn't be treated like a security again eliminating those two things eliminates the risk that Securities laws are meant to uh to curtail right and so if you can eliminate the risk that Securities laws are meant to address then you eliminate the need to apply Securities laws the final piece is that Communications really matter talked about this a little bit in the hype context but you can see a bunch of examples here of you know Founders basically talking about their project and setting expectations for the general public so when you talk about a road map and you talk about things that you're developing if you refer to your team as the core

development team as you refer to the protocol as your protocol all of these things right that would be very natural for how you would deal with a centralized actor right a business CEO of a company that's talking about their company is going to talk about it as their company right but when you are a decentralized ecosystem fundam there's a fundamental difference right you are no longer in control you are no longer responsible you are no longer the one that is is kind of dictating everything that's going to happen and you don't want to be setting expectations of value that you're going to drive to the protocol fundamentally what you need to be doing right is you are a single actor in this ecosystem and you are not responsible for anything right and so so Communications on that front really

matters the lowest hanging fruit in this regard are two things right naming your company the same as your protocol is inherently problematic right because what are people going to expect they're going to expect that the company that's named after the protocol that's named after the token is going to drive value for that thing and so as a result of that a very simple low-hanging fruit that you can do is just to change the name of your company as compared to the protocol and the underlying digital asset the other thing is ensuring that when you do engage in a token launch right that you set up your protocol with separate communication channels from the company itself right so as a result of that what the protocol is is tweeting about is very different and how it's tweeting about stuff is

very different from what the the development team that started the protocol is again what you're trying to do is you're not you're trying to prevent people that are operating or playing within that ecosystem from developing an expectation that they're reliant on you for the token price to change in value and you know increase in value okay so we'll now talk about some additional considerations so token allocations um this is a uh I would say a pretty uh important topic it's one that there are a lot of um you know consulting firms out there that will basically do a token plan for you where they'll put together you know a chart

like this and they'll charge you like one percent of your tokens for for this and like I'm pretty sure you can get chat GPT to to do most of of this work for you but if we break this down into groups right we can say okay well we have an airdrop we have an amount that goes to insiders so that's employees and investors and then you have in a map that goes to the community right generally speaking like I put some um you know some uh uh ranges that these these fall within but fundamentally right I think that the the thing that you'll like deal with most up front right is the allocation to your in you know to employees and to uh your investors typically um you have a you'll set it up where

people get tokens based on their respective Equity ownership within the company and so you'll use equity ownership as a proxy for that um and typically it's then just a matter of figuring out okay well how much are you going to actually distribute to the cap table now historically that level of what you've given to the cap table has been kind of around between 40 and 50 um I do think that that's going to change over time you know particularly with respect to the decentralization models that I talked about earlier where you're going to need to start incentivizing more third parties to develop within ecosystems and as a result of that you can imagine that you're going to need more tokens preserved for kind of those players um airdrops are are a pretty common mechanism that people use I'll talk about those a little bit more in a

minute generally you see those range from about five to twenty percent um and then you see 40 to 60 being set aside for the community for treasury for future incentivization and then another component of this is that when you have a you know layer one blockchain that is is let's say um you know producing block rewards that are going to um you know miners or validators you'll often have a inflation schedule where the overall token Supply kind of increases the time so these um you know this breakdown would really be what it is at the outset not kind of what it is in in you know 10 years after um in the the protocol has been running okay so a few issues that come up with respect to token launches the first one is the the token liquidity dilemma right

I talked about this a little earlier in the context of secondary listings but one of the fundamental problems that people have when they launch a token right is ensuring that there is a there's sufficient liquidity to not cause a lot of volatility the reason you want there not to be volatility is that you fundamentally a you don't want people um that are buying the token for some reason um not at your you know not at your encouragement you don't want them to be hurt right you don't want them to lose their money um and then at the same time you also don't want you know people to be able to manipulate the market price of the token particularly to drive it down and then make it easy for someone to acquire a bunch uh and and potentially then attack governance same thing on the upside right you don't

want the token price to Skyrocket in value because then it's going to be more likely that people get hurt so there's this fundamental problem where okay well how do you actually get enough liquidity out there when U.S Securities laws make it fundamentally challenging to get tokens into the hands of of um U.S persons now one of the ways that people do this and if you've been paying attention to arbitrans recent uh launching of their token right um one of the ways that people deal with this liquidity challenge is they use market makers now uh crypto Twitter and the influencers are on there right see this is quite scandalous because at the end of the day they kind of looked and saw that Arbitron was using a market maker and they thought well look arboretum's actually just dumping tokens

on retail because they're using this Market maker to go out and sell them they've sold these tokens to market makers what the influencers don't really understand is that that's not actually what's happening right fundamentally the use of market makers around token launches is designed to prevent there from being volatility you're not actually trying to make money or the the company is not actually trying to make money through the use of these relationships what they're trying to do is overall dampen the potential volatility that comes with a low amount of liquidity and so what you're trying to do right is is basically smooth around the edges and and reduce overall risk to the ecosystem and so you know what what a lot of the people that were criticizing arbitrant for was like well we want the exact details of that market

making relationship but if you were to disclose the exact details of the market making relationship the market making wouldn't work and as a result of that the relationship and the whole point of it would be useless so as a result of that there's a lot of consternation there's a lot of noise on Twitter about oh what you should have done and how these things should be structured ultimately like you should just ignore that right focus on the tech not the casino all of those Twitter influencers are just playing in the casino and and that's the game that they're playing and ultimately it's not something that you should be concerned about all right air drops um airdrops have a lot of benefits right they they help you decentralize the protocol by Distributing the token far and wide right they reward ecosystem participants because you basically um you know you're

you're incentivizing the people um that participated early right you can establish a baseline for decentralized governance right decentralized governance doesn't work if you don't have decentralized token holders so as a result of that you can basically kind of foster an ecosystem where decentralized governance is even possible and then you can incentivize ongoing good behavior one of the things that we saw with optimism's um token or drop right is that they indicated that they were going to do a second one and as a result of that people were all of a sudden speculating what type of like good activity on the part of individuals um was going to you know lead that to them qualifying for the second airdrop and so as a result of that I think you know their their kind of token launch has been a bit stickier and you've seen people kind of that and the total value

locked on optimism um you know kind of continue to grow rather than uh you know people kind of farming the air drop and then and then leaving um now there are a lot of costs um as I said earlier right any token model has to have you know unit economics do apply to it and as a result of that right there is real Capital cost to issuing your governance token um to you know individuals and so this isn't kind of a an unending Supply you're also diluting your own self and and your investors um and so you do want to kind of right size it uh they're also subject to civil attacks right so that means that you know people basically creating thousands of of uh wallets to then kind of engage with the the protocol to then make them eligible to receive uh an airdrop

um there are securities laws risks right while you know there the SEC would like to misconstrue right that that what an airdrop is doing is you're basically creating the liquid market for you to then sell your token into but that doesn't what actually happens right um you know nine times out of ten or or in all of the the token launches that we work on right the the founding team and all the employees all the investors are locked up for a period of years post token much so there's no liquid market for them to be selling in to really the sole goal again as I said earlier right is decentralization incentivization and security it's not to kind of create a liquid market for you to sell into nevertheless right the SEC will will construe things the way that they want to construe them and as a result of that

there are securities loss risks associated with air drops um and then as a you know result of any token months right you're going to end up with potential secondary Market activity um where uh you know no matter what you do for instance if you launch an erc20 coin um someone can go and list it on uniswap the next day and as a result of that you can end up with a market that you didn't intend to create and so as a result of that right there there you know that just kind of increases the overall risk it's not just risk from the SEC right there's risk that someone's going to go out speculate in your token and then sue you because the token price didn't go up and we see we've been seeing a lot more of kind of the class action lawsuits being brought by token

holders that are feel aggrieved over their their kind of gambling um all right so then some risk mitigation strategies right so I think there's a lot of different ways and I talked about this in the high context of progressive decentralization right there are ways that you can help to mitigate the risks associated with kind of launching a token and give yourself a little bit more time to kind of decentralize the first option is not an option that I like but it is an option right is just excluding the United States right at the end of the day the US has has created an environment where there is a significant lack of clarity uh and the SEC has clearly identified it as someone that is an enemy of innovation uh and and is is trying to kind of Target token issuers and as a

result of that the simple answer is to just say well screw it we're not going to go to the U.S now this option doesn't really work right if you if your Market if your Market is in the United States and you fundamentally need U.S persons that are customers uh and people that are interacting with your protocol but right what it does allow you to do is it essentially allows you to kind of get some of the benefits of having a token right help you decentralize more while limiting the amount of risk that you're taking in the US because of Securities lost so for instance if you at the outset you know launched a token outside the United States only air dropped it to non-us persons use market makers on secondary on exchanges outside the

United States to try and deal with volatility then what you'd be able to do is get your token to be distributed quite broadly right and you would be able to do that without taking on necessarily Securities Law risk there are things that you have to do to to kind of ensure that you you don't kind of become a target of an SEC investigation as a result of of those types of issuance so you know for instance you don't want to be marketing on Twitter that you've launched this token um I think that you know one protocol right had anyone claiming an airdrop they excluded us persons but then they had anyone that was claiming an airdrop basically post on Twitter about claiming the airdrop and as a result of that it's like pretty obvious what they're trying to do right they're basically kind of drum up U.S interest uh in their in

their token and as a result of that right that that stuff is inherently risky um but so if you're going to be outside the US right that is is a thing that you can do to Stage um your overall kind of token issue and strategy another option that we've been pursuing a lot with a lot of our protocols um and that we like is transfer restricted tokens so what transfer restricted tokens basically means right is that you would limit the ability of people to a transacting them to sell them to one another right or to just send them to one other wallets right but then you would also kind of limit the ability to interact with smart contracts other than smart contracts that are in your ecosystem so what that would limit people from being able to do right is create secondary markets that they can then speculate in those assets

so you know no one would be able to go list this token on muniswap for example um despite you know if you if while you have these restrictions in place now the inherent problem with with this right is that fundamentally in order as we've talked about in order for a network to be open and not closed tokens need to be fully transferable right and So eventually right the transferability of these tokens needs to be turned on otherwise right the network effects that you've created accrue to whoever is controlling that decision and controlling the network as opposed to token holders um but right because you limit the ability for secondary markets to be created and can limit the overall speculation nation that would take place as a result right you do decrease the amount of Securities laws risk that

you're taking on by issuing tokens in this fashion in addition right you get the benefit of being able to use tokens as an incentivization mechanism by issuing them to people and rewarding them for the activity that you want to incentivize and so as a result of that right we think that this is kind of a good happy medium um you know it allows you to kind of include us persons and it allows you to kind of get a lot of the benefits of the tokens but it has reduced risk that risk isn't zero right there is a a chance that that the SEC will Target this type of activity but fundamentally we think that a lot of the potential harm is reduced and that there are you know there are any number of Pathways that people take that are are much more kind of objectionable from the sec's

perspective so we think that this is a pretty good option uh and I think that's it thanks um I have two questions one is like when you say like um to launch your token outside the US yeah like what type of information are we expected to collect just to determine that the recipients wouldn't be in the US for example yeah I mean there's a bunch of different ways to do it right I think that the um you know there are pro like and again I think it really depends on the totality of your circumstances and how you want to kind of um you know assess the risk right but let's just say for um like you always got to be the willingness to kind of use these

risk mitigation strategies really like depends on kind of how much risk you have on the decentralization side if you're really decentralized right then you probably don't need to be like and but you still want to take some of the risk off the table then you probably don't need to be astringent as you would right if you and as compared if you were not decentralized at all but still wanted to issue a token right in that scenario you would want to be very strict about how you are restricting people from getting the token so for instance like any like IP address that's ever logged using your your application right you would want to exclude from you know you would associate it with an address and then exclude it from the list right and then you can also block um uh you could also block the you know

the website that people use to claim their tokens you could also put you know IP blockers in place to restrict people from the United States now if you wanted to go a layer deeper than that right you could also start to block vpns and say okay well we know that there's a list of like known VPN IP addresses and we're going to block those as well so like it basically just depends on how stringent you want to be based on how much risk that you otherwise are taking on with respect to the decentralization if you're really decentralized like I would ultimately say that it's not necessary to exclude the us at all right but if you aren't if you're if it's you know you're worried about this Progressive decentralization and the chicken and egg problem of tokens and and decentralization then you know you might

want to engage in some limited um uh uh risk mitigation uh on the token issuance awesome and then my last question is um since there's no clear regulation like how assertive should like the law firm that we're working with be like what is the type of feedback that we need to get from them and yeah what I would say is that uh law firms are generally like good about okay we have a defined pathway we know how to walk it like we know how to guide companies down it and what they're not good about doing is they're not good about like coming up with Creative Solutions of okay the unique facts and circumstances of your case mean that you should do this there

also tend to be like fairly risk-averse right because ultimately like they don't want to be the ones that you come back to and say well what I thought you said this was okay so you're very unlikely to get an opinion from a law firm right that's going to say this is fine right what you want is you want a good partner that's basically helping you kind of view the totality of the circumstances and saying okay well you can take on some risk here right your de-risked here and and really kind of look at it from a wholesale View and that's one of the things that we help our companies with right our we obviously see a lot of companies go through this process and and one of the things that we then try and encourage everyone is to basically stay you know with the herd right and

basically do what what others are doing where we think it's generally safe um and not go you know very far afield and engage in activities that are going to you know make you an outlier thank you hey miles so um follow up on my previous question um so by selling tokens to a US person does that count uh County nft and also the zaconian secondary sales so nfts are are um a good kind of um example of like how it is more challenging how the laws apply right so generally speaking right um an nft sale is different from a fungible token sale because what you say

when you sell someone at nft right is that there's implicit value in that nft right it's they are like most likely the artwork that's associated with that nft it's very different from a fungible token right where the implicit value is not just the fungible token that the implicit value is either okay maybe you need to use it for something or right you're just speculating it and hoping that it will profit the problem that that creates within the ecosystem right is that like with nfts right you can start to venture into Securities Law world right if you're issuing those nfts with a lot of promises so I think like one of the most ridiculous examples um was Pixelmon right where they said they sold a bunch of nfts that were all

um masks right you didn't know what they were and they made all of these promises we're going to build the like you know a Pokemon type video game that and you're gonna be able to use these nfts and it's going to be awesome it's going to be like and they showed all of these ridiculous images and everything like that and then so everyone bought and and life I think they sold over like 60 million dollars worth of nfts people piled into this game in these nfts and then the developer was supposed to develop you know the the game and then they like actually unmasked the nfts and it was like all just absolute but the so clearly what happened there right is that people had an expectation and and were trusting the people that sold those nfts to develop a product around those nfts so in that case I would say

there wasn't implicit value and with those nfts and that looked much more like a Securities transaction and so as a result I would I like we would never recommend our companies to kind of uh engage in sales of nfts that were that looked like that that looked as like a fundraising um but it is a much more difficult question than with fungible tokens because nfts do have this implicit value that makes them less likely to be Securities you know unless you do all of these other things that make him look like Securities yep that's very helpful and then um another question I have is say like the foundation um so so the protocol value like because we were talking about like how the protocol can distribute value to application also the foundation so that the foundation can keep operating right

um so say like the protocol distribute value to foundation and then the foundation has a voting structure that's based on nft so like the money that goes into the foundation so the foundation almost tackling work as a company and then the revenue from the company is from the protocol so how do you think of that so we'll talk about it more tomorrow during the corporate structure and stuff right but generally speaking um foundations are not a like magical tool that you can use to um like basically recreate a centralized corporate structure um but just everything is then rounded routed through the foundation and so um you know I think that there there's a

bunch of different approaches and we'll kind of walk through them tomorrow but like fundamentally the foundation like shouldn't have a board that is direct that is appointed by token holders that then makes you know decisions about kind of future development efforts like you we should really be thinking about foundations more as like people that are supporting the ecosystem not a centralized force that is like running the entire thing and so like that dichotomy is an important one um but it also means that like so I don't think that like the foundation shouldn't be making you know decisions around like distributions to token holders and stuff like that you should really kind of be having all of that programmed into the like architecture of the the smart contract protocol so that

all of that is happening autonomously and then is voted on directly by token holders yeah so we're thinking I don't know if you're familiar with noun style so essentially the protocol uh sorry the foundation just managed the pool of money that's a portion of the protocol Revenue yeah um and then so I'm just wondering if and then that's of course is not governing the protocol of any form but it's just um they have the governance of the foundation has full control of how to use those money so I don't know if that's or how to distribute that those so so what I would say in that case right is that like ideally you would have um foreign you would have a foundation that has

less power within an ecosystem right because if you if a foundation is controlling all of the monetary value generated by not like of ten percent oh ten percent so yeah in that case like I think that that's generally fine right like fundamentally what they do with that money is not going to be the like driving force your economic value now nouns now doesn't have a token right yeah and so if they did right then and and let's say if they did in let's say 90 of the revenue that came in or 80 right went straight to the Token right that would be very different and and it would mean that the what the foundation is doing is not actually kind of uh uh material to the overall like token price yeah yeah and then my last question is actually

um so like say we have a token that's um um that's like erc20 but it's not transferable yeah that's very different from a erc20 that's transferable right yeah yeah um so essentially what we're doing is like we periodically um distribute cash like revenue from the protocol to the erc20 um holders but that they they didn't buy the erc20 they earn it through building games so I'm not sure yeah so I mean the thing that I would say right is that the um it kind of goes to the point at the outset right around like designing systems with stakeholder capitalism rather than with with with kind of uh Equity type uh uh mechanism so I think the things that that we want to

prioritize and that we want our company to be building is rather than a distribution model where protocol Revenue just gets dividended out to token holders right is that that that protocol revenue is then used to incentivize people further to participate in or to govern its token holders to participate in the ecosystem so if if there are things that you are currently rewarding people for or that you want to reward people for right you can reward them the protocol Revenue if they're doing those things but also holding governance tokens right and that way you basically incentivize governance token holders to participate in the ecosystem thank you for the talk uh Jay from etherid uh so I'm curious there's a bright line for in-game currency or

platform currency so uh Rebel yeah has something called Rebel credits that allow people to run right so what I would say is is that like the so yeah this this question comes up a lot in in the context of in-game currencies right and I think that the um you know fundamentally what matters is is kind of what the economic model is behind that token so uh you know and people within the video game should have been a little bit creative around this stuff but like at the end of the day right is the digital asset you know uncapped in its total Supply amount is it is it not meant to uh appreciate in value right or is it meant to appreciate and value the more that people are using it and the more the ecosystem develops because if it has a chance if there's

any possibility of it appreciating in value then people are going to acquire it with an expectation that it's going to appreciate value so they're doing so to you know to expect a profit and as a result of that like there's more regulatory risk associated with any token that can basically appreciate in value can take that as composed as opposed to a stable fund right no one's acquiring you know a million dollars worth of ustc to profit from right thanks so much for the presentation um wanted to ask given that there's clearly a bunch of uncertainty around a lot of elements of of tokens and and launching them and even operating in this space do you have any any predictions or thoughts on how this kind of plays out in the next few years yeah I mean I think that

one of the really frustrating things in my mind right is that like um and what I hope doesn't happen is that like there's not really a good understanding at the policy maker and regulator level around decentralization and why that really like is something that we should be incentivizing right and so I think that the thing I'm worried about is that if we end up in an environment well first of all if if Gensler has his way currently right then like the industry is not going to exist because tokens fundamentally can't be Securities right so we need to have a pathway that basically provides for tokens to be permissibly like traded and all this stuff that that kind of recognizes the value of decentralization and

incentivizes people to move towards decentralization as I was saying earlier right one of the fundamental problems in the industry right now is that bad actors are incentivized to take shortcuts and launch tokens right and so what we need and and that's because you know for the SEC to be fair to them it's very hard to determine whether or not someone is decentralized or not right you're talking about look you know hours and hours and hours of resources um to kind of determine make that determination and so as a result of that right like the current framework that we have doesn't really work and we need one that basically does gives more objective criteria to what decentralization is incentivizes um Builders to move towards decentralization by giving them you know by having a less stringent regulatory

regime that applies to decentralized assets um as opposed to you know centralized ones where there's more risks and so like I hope that that's the direction that we're headed we you know you guys will hear I think next week or the week after from our Regulatory and policy people and that's like the direction that we're really pushing for and so hopefully that's where we end up but like I would say that no one you know no jurisdiction in the world right now has really gotten it right where like um you know you're you're tailoring the legal regime to kind of address the risks that actually exist rather than just kind of taking it as an analog for equity thanks so much uh this question kind of extends the earlier question about in-game tokens so yeah at blockers we work with a lot of game studios and they

all have interest in at some point launching a token so um earlier you were talking about you know not promoting that on secondary markets um how do you think of the difference between like primary primary Market secondary markets and something like like decentralized exchanges like uniswap does that count as a yeah Market so I guess what I would say is that like I think you know first off primary issuance is if you're issuing them for money right I think that you're you're going to be significantly at risk because if it looks like people are investing in the asset right but when they're buying the token so like the difference between an in-game currency that can appreciate and you're buying it literally digital gold so that you can go buy an asset in game right I think that looks different from

um you know a a token that you think is going to actually increase in value over time and so any kind of primary issuance of that for money I think is is very risky um the secondary markets I don't really think that there's much of a difference between a uniswap or a coinbase except the difference is right is that like If your asset's going to be listed on coinbase typically the way that that comes into fruition right is that the founders or the team like you know liaise with with coinbase particularly if you're like a layer one or Layer Two right they need to bridge into your network in order to actually be able to hold assets and and so as a result of that there's like you know involvement of the the management team and so so generally speaking there right like it's harder to

um avoid the idea that this is just something that materialized on its own whereas if you issue an erc20 right other than making it non-transferable you can't stop someone from going and listing on a secondary's change and so as a result of that you don't have like a fundamental legal obligation to restrict people from being able to to put it on those exchanges and so as a result of that like there's less regulatory risk associated with those tokens trading in on-chain venues but like you know I do expect the SEC is going to you know put decentralized exchanges under more scrutiny over time because generally the the exchanges are kind of where the choke points for the end industry are in terms of people's access thanks so much miles [Applause]

[Music] foreign