S6. Ep. 8 - Legal Considerations for Grant Programs W/ Gabe Shapiro

Transcript

welcome to the green pill. network podcast in September green pill will be hosted by the cartographers a high context community of individuals and teams dedicated to advancing the web 3 grants ecosystem they'll explore the web3 grants ecosystem with topics ranging from novel funding mechanisms Grant councils and governance to emerging trends like Ai and direct to contract incentives this series seeks to bridge theory and practice by examining real world examples and featuring discussions with those who are closest to the action the next voice you hear will be Sav who contributes at getcoin and founded the cartographers sa will be hosting this entire season and I think that it's going to be a great season because Sav brings deep experience in web 3 grants

and capital allocation I'm excited for you to hear some of the perspectives from him and his guests without further Ado the next voice you'll hear is Sav [Music] enjoy up coordination we are back with another episode of the Great pill I'm super excited about this one it's all about legal considerations legal rappers of Grant programs in Dallas um I've got with me on the Pod today Gabriel Shapiro who many of you may know by following him on CT I know I do I have for some time really like his thoughts and so uh this episode really came as a result of like just a random DM that I sent him and he answered and like here we are so I'm excited to to jump in a little bit we're going to talk about just kind of

legal structures for Grant giving organizations in web 3 some of the stuff that Gabe's doing around board Works compliance considerations risk management all that fun stuff and then pick his brain a little bit on future Trends and where we see things going that way in web 3 so first Gabe I'll turn it over to you maybe give us a little intro give us your background and what you're doing these days with metalx uh yeah my name is Gabriel Shapiro I'm Lex node on Twitter and I've been a lawyer for about 14 years crypto lawyer for about seven years um and I have a company called metalex which specializes in creating hybrid crypto and legal solution so combining uh legal agreements with smart contracts basically and um tailoring the legal

arrangements and governance Arrangements accordingly nice and so maybe just like jumping in right there um what kind of prompted you to start the organization I know I've been following your work since I think the original Borg you know paper that you put out with I think it was Deli you've got some recent work with Lio and a few others um what really prompted this what were the problems you saw in the industry that you looking to solve yeah I mean I've been advising mostly defi teams for years and so you know became familiar with a lot of their regulatory issues and their their governance and product issues and how all of those things interrelate and I think one of the things that's very interesting is like a lot of lawyers especially us lawyers are are some of the biggest decentralization Maxis in

the space um and immutability Maxis because they realize that creates the best regulatory story for projects right like obviously the greatest regulatory story in crypto is Bitcoin because it had a quote unquote Fair launch and it wasn't VC funded and you know it's sort of like close to immutable it has this idea of a hard Cap supply and all these things right and and so lawyers try to get every project to be like that but the more that I engaged with Builders you know the more I found that agility is necessary for a lot of these projects mutability is needed for a lot of these projects and that there are a lot of social elements to these projects and so

what was happening with Dows uh and protocols was like you know they're like well Dows move too slow um it's too big of a coordination problem we like the Dow but we basically want a small Nimble committee um which which takes the form of being on a so-called multi- a smart contract with you know that requires multiple signatures of different private key holders in order to execute each action you know they're forming these committees and so I started say okay all right I get it you want the Committees you don't want everything to be decided on a fully decentralized basis let's talk about these committees you know what can they do uh what are the potential liabilities they're holding money are they holding that money can

they do whatever they want with that money um or does the do they have to do only certain things and the more that I worked on these issues the more I realized the solutions that people were using kind of fell into two categories both of which I would describe as kind of like the worst of Both Worlds right one is just like throw a bunch of people onto this multisig there's no rules about what they have to do really um there's no legal structures around it they're just on a multisig they get some money they get some smart contract admin powers and their High reputation so we hope it goes well right um uh but but but nevertheless it would be described as if it's much more specific like if it's a a multisig that had the power to freeze the protocol in an attack well

they would say oh it's a security uh multi but I would say well is there anything that's stopping them from freezing the protocol just because they feel like it no there's nothing stopping them actually right but we still describe it as they can only stop it in the event of a hack right so there there's kind of that and then there was this kind of other structure of like let's just give lots and lots and lots of money like like millions of dollars like many years of budget to a a foundation um and say it's for the purpose of this community and hope they do good things right and so those are kind of like the two opposite extremes and my idea was basically to combine them right so it's kind of the worst of Both Worlds because it's like you get no legal protection but you also get like

all of the trust that's typically involved in legal arrangements and you have no shareholders or accountability like you would in a normal company right so I said actually let's just take the best of each of the things right you can get limited liability for the people who are on these things things you can get uh all the good smart contract rules like let's actually write these these multi so that they can only do what the Dow expects or like you know enforce that as much as possible and um let's also put put those rules in the legal agreements as well right and then you kind of cover all your bases so then I was like okay well what do we call this right it's basically like a multi- that's wrapped by a foundation entity or some sort of other legal entity don't want to call it a dow because it's only

like run by six people that's not very decentralized so I was like oh let's call it it's kind of like cybernetic it involves law and smart contracts so we'll call it cybernetic organizations or boards right and so we started with that Meme and basically people became very interested in it um saw a lot of demand for it so I started metalx as a project to focus on that both tailoring the legal arrangements for it and actually building out a new smart contract stack that that is specific to this use case fascinating no I mean all those those things that you described definitely ring true to me I can definitely see the trade-offs between you know getting all the signatures you need can be slow getting the approvals

that you need can be slow um we want to be able to move fast and break things as they say maybe not break things so much but at least you know have some some speed to the work that we do and then there's also you know I've seen it from um you know the the side that I'm on with a few Dows where because we want to have those controls in place maybe we force like budgeting to be like a quarterly process right where like you're creating this budget and you're only asking for quarterly budgets from the time block and you've got to go get all these votes to do that and by the time that you get those Bud like all that process done budget's allocated a week later you're back into that process of creating budgets again and you spend a lot of your time just in kind of like

planning and spreadsheets and like all these things and you're not really you're not really driving impact you know you're just like moving numbers around on The Ledger to get the time lock to unlock so that you can do it again a week later you know and so you're really taking that and and moving some of that responsibility Downstream but doing that in a way that it's wrapped it's understood you know it's well documented you you get the benefits of kind of like the speed and precision all in once and so that is borgs and congratulations you have like one of the coolest names in crypto in terms of like your product right um so maybe walk us through you know what is metal xos what are the components of that like what does that really enable if I'm someone that's working in a dow or you know in a

grant giving organization yeah so we start with uh nosis safe right um it's battle tested that's what everyone uses for Dow adjacent multisig anyway or almost any at least on ethereum and we don't change the code of that at all it's very good it's very secure um it has built into it you know something like hooks for uh other smart contracts to come in and modify the functionality right so these are basically um one type is called a guard which can constrain what the multisig can do so you know a classic example would be we only want this multisig to be inter able to interact with like three Unis swap pools and we don't want to be able to do any

other transactions its only job is to basically like rebalance liquidity among these three pools or something like that right so so you could use a guard to whitelist those contracts and basically it can't do anything else it can't steal the money because it can't send it to EAS right all that sort of thing the other function that it has is called modules right um and modules are basically opportunities for other smart contracts to come in and do something with the multisig assets without the signers approving so you know you could have like like an oracle that's just monitoring I don't know the price of some token and when that price Target is hit the smart contract causes that multi- sake to release some funds to

someone who who bet that that that price Target would be hit within some certain time right and a module can do that so altogether we call these you know these these metalx guards and implants for safes we call them guards and modules we call them implants going with the cybernetics theme right and the main ones we use in the grant context you know since you're focused on that you know are ones that basically a good example would be rate limiting right so let's just say that the Dow had authorized a um like they really wanted a grants program that's oriented around the idea of Fire Starter right like give lots and lots of small grants to lots and lots of teams over three years and see what comes of it right okay well I

mean you can certainly put that in the legal documents that wrap the multisig you could say it's a fire starter grants program to benefit this particular Community don't you know each Grant should be somewhere between $25,000 and $50,000 and the money that you got should last you three years right but think we can do better because you know if it's just legal agreements that imposes what in governance we call monitoring costs right which is that someone has to it's fine to have the agreement but someone has to actually monitor that it's being complied with and then if it's not complied with they have to take some legal action to set things right the beauty of smart contracts is you can dramatically reduce monitoring costs why

because you could actually put that rate limitation into the smart contract right using these implants you could you could basically say you can't do a grant of more than 25k or 50k right um you could do and you can't do more than four of them a month and things like this and you can build in flexibility where if for some reason they want to do a larger Grant okay you can do it but then through the implant the Dow has to co- approve it so then both the signers and the Dow have to proove that particular Grant right so it's a check and balance type of dynamic now they could endr run this right they could do three 50k grants to the same person but then that's why you have the legal rules because like to show that that would

still clearly be a violation even though it kind of did an end run around the onchain comps so this is an example of how we can pull from the legal world and the onchain world to get something that's more trust minimized and efficient and less costly then then either could achieve by itself gotcha yeah so in that case um it sounds like the uh the Dow through like their normal you know governance processes would be the ones that would set these policies right like configure the implants that would be pushed Downstream you know into the borgs and then if material changes need to occur to those implants then that goes through the traditional process of governance right and so

you're kind of abstracting that away where like you're only leaving up change management the most important decisions like those things at that higher layer and then like the it's Downstream to the boards where they have they have more span of control they can have speed and efficiency they have some guard rails in place is that kind of like accurate exactly and it's very it kind of tracks with just like the evolution of blockchain in general right we've gone from this model of like monolithic blockchains to this much more modular approach right of like having a date availability layer having having the L1 provide like the most fundamental layer of security but then there's a higher layer of the L2 where it's more discretionary um there are like more kind of like offchain dependencies and stuff but at the end of the day people

have that confidence that there's an exit route to this more decentralized layer it's the same exact philosophy just transposed onto more of this governance context you know and and some of these legal mechanisms got it and so with metal X is it is it primarily kind of like the technology stack that you have that you're building out driving adoption of or does metalx offer you know kind of like Consultation Services these types of things on top of that stack to help Implement guide you know Etc we have both a law firm and a tech company right so yeah we basically do both we draft the legal documents and form the entities for people and we also uh deploy the you know parameterize and and deploy the software that goes with

it and we have a web app that kind of is an easy interface for you know interacting with those smart contracts and keeping track of the legal agreements so yeah it aims to be kind of like end to end for these um for the borgs and it even gives you know the Dow way to like if there's a veto power over the Borg the Dow will be able to do it directly from our web app and stuff like that it's sort of non-exclusive right because obviously every Dow still has its core governance app that it can still use for the same purposes if it wants and you could still use the standard nosis safe UI but our interface will be opinionated to this purpose and that will make it probably faster and

more legible and that sort of thing right on right on um would would you be able to talk us through kind of like the the most well-known implementation of it today I know it's like Lio that you've been working with a lot of that's in public forums but um for their Alliance um is is that something you kind of walk us through what that looks like in in practice Yeah I think there are two there are kind of like two big ones that announced last month one was Lido's Alliance Borg and another one was um the ZK sync uh ecosystem the LI one is probably easiest to understand you know it's basically a a dow adjacent entity that exists just to kind of facilitate um alliances between the Lido community and other communities and as part of

that uh those Allied communities will be donating tokens from their projects to this entity someone might reasonably say like okay why don't you just like the Dow should just get all those tokens like just put them directly in the Dow make this a partnership between two Dows um like the issue with that is that it's ba would basically turn Lido Dow into like a giant onchain hedge fund or or Venture Venture Capital fund right like a lot of times these these alliances will be made before the projects token even exists so you're talking about taking some kind of like Saft or safe or other security um you know from these things and Dows just aren't equipped to

do that Dows are basically smart contracts right so this entity exists to basically say hey we're an entity that um is in the business of uh facilitating collaboration between these two communities we own these assets we will manage these Assets in a way that um you know is is likely going to be beneficial to the Lio Community but it's not like ldo tokens or like prata claims to these assets right because that would make them into Securities so but at the same time you want to have some checks and balances on this so it's like you know Li OD Dow has to approve um you know any new uh directors of this entity um and it has to approve who the Allied

communities will be right that's kind of the whole point is that the communities like each other so you need a li to approval for that and the rules of the entity kind of set all this forth um so that's the way that one works um in the case of ZK sync I think there's there's kind of even more cybernetic elements to it uh because basically the the borgs that they have are integrally involved in their process for of doing uh protocol upgrades right so the way that they're and doing token mints right so the way they set up their their thing is that there's a security Borg uh which is a cayman's foundation wrapping a multisig and there is a Guardians Borg which is another Cayman

Foundation wrapping another multisig and their proposal for doing protocol upgrades is that basically first the um they don't actually call it a dow they call it a token assembly uh first first a token assembly or uh they have another contract called a govops uh uh module but whatever it's some smart contract through a token voting process first approves it right and then the security boorg evaluates it like okay is this secure will this break anything and basically has like a veto power right if it thinks it's insecure it will veto it and the rules of the entity really help here because they kind of Define what's going to be the evaluation process what are the criteria

by which you would regard something as non-secure right and and and how will you communicate about that and things like that right and then if the the security board um you know sort of approves it or doesn't veto it uh then there's also this Guardian entity which is more about looking at the values of the community and making sure this is not some sort of governance attack in light of those values and and it has a veto power so it basically ends up meaning that like you know you need two of three to do anything right you need either the Dow plus the security thing um or the Dow plus the guardians or the Guardians plus the security board and it's a it's a check and balance Dynamic

and it's all on chain through these multisig like it's not some kind of social process like literally an upgrade to the system can't happen unless you know one of these multisig approvals plus one of these Dow approvals you know is is issued on chain H interesting I can't hear but help B here you talk and kind of think about some of the potential for AI llms right where could you create a borg that is driven completely by an artificial intelligence you put those guard rails around it it can serve that function but you know you you kind of create those boundaries on what it can and can't do I'm guessing like those are things you're probably already thinking of and maybe even starting to explore right it's only a matter of time like in our white paper

we talk about the Golem you know like how like it's it's like a clay monster and you put code in it and it becomes alive right I mean we already have artificial persons in the world they're like corporations are legal persons right they're nonhuman persons so this is something we already understand so I mean to me I think you could wrap up you know um like an arrangement of they're calling them AI agents but basically you know AIS combined with blockchain Bots and smart contracts if you add those three things together they basically are autonomous and now if you basically say Okay a legal entity owns these things now suddenly that thing has person right uh so this is an

inevitability that we will be creating artificial persons that are that are AI plus blockchain I mean I I think that could happen any day I think people if people really wanted to do it they probably could do it today honestly yeah I'm already seeing some some teams out there starting to put together I think it's the block team you know that I've worked with a little bit um on uh trustful and some other things that they've developed but starting to create kind of like an AI agent that can participate in governance you know and you're delegating tokens to truly an AI That's making those decisions and so I think there's lots of all you know all sorts of kind of like interesting applications of AI and how is the uh and how is the legal system going to deal with this I mean it's a very interesting

question right because you know the whole purpose of a legal entity is it's supposed to confer limited liability that is like only the assets that are owned by The Entity are supposed to be at stake if if that entity does something wrong right not the shareholders not the people who set it up in fact me as a lawyer I've been the sole incorporator of many many Delaware entities and the reason why I'm comfortable doing that is because there's quite clear law that I can be released that I have no liability for what that entity does in the future right um so that is that is the law currently but now you're talking I I somehow have a feeling once you start you know putting AIS into these entities that suddenly people are going to be

saying ah we got we got to sue the person who set this up even though they had no ongoing control we got to find some way you know to hold them responsible right because they decided their rules and so it's going to open up very interesting questions and challenges yeah no it's a great segue kind of like the next um questions I had for you is like where do you see like obviously right now it feels like we're starting to make some strides around kind of like better like having at least a positive intent to better Define regulatory guidelines like these types of things but I think we're still a long way off from Clarity you know um do you anticipate you know that changing do you see things changing that way from your purview or is it something where that's

just going to be kind of a stalemate and that's why Solutions like borgs really make a lot of sense right I think in Europe there now is Clarity right we have this this huge uh law called MAA that really treats crypto as for the most part a separate asset class and gives it its own rules and processes and licensing requirements and things like that right so we have that in the EU uh in the US we we have St there's there's nothing like that and I you know I think the the problem in the US is these regulatory turf wars between agencies right that mean anything that we get in the US that

isar here is likely to be a whole lot more complex nonetheless because you kind of have to give a piece of the market to each of these Regulators that's just part of the political compromise of it all right and so like there was an act called fit 21 that had gotten some traction I I believe it's mainly being pushed by coinbase um and and their proxies but you know it kind of basically creates like a dual regulatory regime between the SEC and the cftc where like tokens are initially Securities or covered by the Securities laws and then there are certain ways that they can become Commodities and you know would be it' be

very very complex that's all I can say but that that's the type of solution that I guess is most likely to occur in the US just because of the political realities and you know people say it will create Clarity I think it will create a lot of new like battlefronts and confusions as well right so I don't think uh like I think there will be like a long time of like gray areas in crypto probably our entire lifetimes honestly will have like be full of many legal battles and ambiguities um and things around crypto even if one of these acts are passed because it's just too complicated too new too different from existing paradigms where everything just sits on an intermediaries Ledger

and so it's just very easy to regulate that intermediary and then you just by virtue of doing that you regulate the entire market right that's just not crypto and it's never going to be crypto and nothing Paradigm Shift of that is no matter what no matter what bills you pass whatever it's going to take still like decades I think to play out yeah and so for borgs you know there's different ways um yes like if things remain gray you know I think it's a good good approach to kind of like mitigating risk but even if things become more clear you know there's still still going to be very multi-jurisdictional um and and relatively decentralized and so people like I was saying earlier with like the modular approach to blockchains

generally people are going to need to keep to have like modularity like oh we want a certain entity to go and be be get become licensed as a Casp in Europe but we probably don't want to put all our eggs in that basket right um we maybe want to give it like two or three years of Runway but we also want to spin one up in Dubai right we want to spin one up in the UK and they're all going to require different licenses you could try to have one big monolithic entity that just gets all the licenses right but that's not very Dow friendly that I think you know I'm pretty confident that like not everyone wants to become the next coinbase they can do that sort of thing right and just have these all B subsidiaries but I think people are going to want this more modular agile

programmable entity approach and I think we're well positioned for that world as well nice nice so um maybe to kind of like in the episode out like a question for you is you know if I'm an existing grant program or maybe I'm contemplating launching a grant program right I think there's kind of like two different camps there as a grant manager as a stakeholder in that like what should I be thinking of right like what are the things that you would advise that you know people in those position kind of think through um as they design these types of programs specifically in kind of like your domain yeah well I mean I think that number one I'm I'll speak now I'll speak first from the perspective of like the people on the grants committee right um number one would be tax in my

mind right because if you just jump on a a naked multisig and you put a bunch of money in it and it's people from all different jurisdictions you may have just gotten a bunch of you may be an unincorporated partnership that just received a bunch of income right and but you don't intend to actually personally take that money but you could potentially be tax responsible for it anyway right so that's very bad and that's like kind of like your biggest risk probably right off the bat is that you have some like unknown tax risk there's also in the US like particularly if they're us people involved there's these incredibly complex rules about passive foreign income and uh controlled foreign corporations and how you have to report this um and and Reporting about

foreign accounts which which a multi- may be some sort of account all these things right so you're really stepping into a landmine right there um and so so right off the bat that suggests yeah no deliberately make it like a Cayman Foundation or something and some tax optimized jurisdiction think very carefully about the composition of who's on the multisig to make sure that only Cayman has Tax Claim to it you know as opposed to the US for example all those things that's number one number two is um you know what what what is the Mandate of this what are the rules right probably in the proposal that approves all this it probably uses some fairly imprecise language like grants that

benefit uh Lio or something okay well what does Lio mean is Lio the validators the ldo holders the Steep holders like like who is Lio and does it have to benefit all of them every time can it benefit some more than others right is there a rule of priority among how you're supposed to rank those different stakeholders interest right all those things so you know it's good to have in words more precise words what what constitutes a good Grant right and you could put that in some sort of legal document right um the other thing is like okay how are you GNA do member management over time right people may get bored of this they may leave um how are you g to manage those transitions

how are you gonna appoint new people right and so you know personally I think if the Dow is kind of funding this thing right it probably should have some ongoing input into that like if the Dow thinks that someone is doing a particularly horrible job it should probably have at least some ability to like if not so like unilaterally remove someone at least trigger a process that could lead to reviewing and and removing them right um or you know if uh thinks it wants new new blood it should have input into who the new blood is right and so you can do all these things you can do them legally or you can do them with smart contracts uh like just literally giving the Dow a right to like remove someone from a multisig and then

you say in the legal docs whoever's on the multi- is automatically a director right things like that um so so those are the things yeah I mean you kind of cover most of your bases with that right you have a legal entity that means you have limited liability um you have uh you put it in a good tax jurisdiction that means you're probably not going to have a huge tax problem and you have rules and some measure of accountability so you know what you're being measured against you know how not to do things that will like like if someone tries to sue you you be able to point at the specific rules and say you followed them um so that that's pretty good and yeah just right there I think you've like checked most of the boxes obviously you could get even more granular from there

like Grant you know like figuring out Grant sizes and monitoring that and all that sort of thing but those are the really big points and most people don't even get the really big points right definitely no um so I guess one last question is like how do people find out more information on the work that you're doing we check out the website you know what what does that look like yeah um so we a website metal x. te right now that the app is very close to being live we're just figuring out like which word will be first basically so right now it's just kind of a landing page with a wait list but if you're interested in using us you can certainly sign up for the wait list we have a telegram chat as well um which is linked to from that page so that's a pretty big Community

now I think like 350 people that's probably the best way just to like jump in chat ask questions check out the Articles we have linked um yeah I'd say that's probably like the number one way to interact with us right on well we definitely appreciate you being on the the show I learned a lot through this I think the audience definitely will as well um we'll make sure and putting the show notes where you can find you know Gabriel and and the work that he's doing with metalx um and we look forward to having uh one more episode of the green pill podcast with me hosting uh that will be focused on AI and llm I think will be the next episode um so looking forward to everyone joining in Gabriel thank you so much for your time thank you man really appreciate it [Music]

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