Here are my notes from Week 3 of a16z Crypto's CSX. This week, which focused on tokens, included talks on protocol design, security, compliance, and more.
Talk: Eddy Lazzarin on Tokencraft
Token = balance in a crypto program
Four types of tokens
Memecoins
Stablecoin
Arcade token
Network token
Memecoins
Explicitly no purpose
If purpose, then more interesting than a memecoin
Gambling and purely speculative
Could be decentralized, could be a scam
Scam = deep asymetry of info in the memecoin
Memecoins have been around for a while
#40: Memecoin with $5,709 market cap
Stablecoins
Prixe fixed to a target asset
Backed by collateral
Regulation likely
Arcade tokens
Price dampened
Limited transferability and use
Continuous issuance and redemption
Wouldnt be reasonable to buy them and expect price appreciation
Not a security because price dampened and issuance
Example: SLP from Axie
Network tokens
Integral to decentralized protocol
Potentially high volatility
Complete economic model
The most interesting: You don't design a token; you design a protocol
Faucets and Sinks
Fundamental power = issuance
Always consider the sink
Protocol as a Marketplace
Supply = parties creating good
Network capacity, blockspace
Demand = people pay to consume that
People pay for compute
Bad reasons for tokens
Incentives
Pay for this is terrible; printing money and throwing it somewhere
The infinite ad budget you didn't pay for is not protocol design
goal = pmf
make a product people want
Voting
who wants to vote?
voting is a last resort
Payments
Talking about network tokens
Evidence
People do not want to pay in protocol tokens
People don't like paying with a volatile asset
Payment is not a direct sink
Good reasons for tokens
Align the network
Support network effects
Pay for network effects - Incentivize things that lead to network effects
Solve cord start - token issuance can help
Securing a protocol
Pay for security
ETH proof of stake pays for security
People should be paid to take risk
What is your protocol for selling?
Is this good and high quality = verified
Pay to ensure quality
Incentives changing over time
What about the thing you want to change over time?
Manual programs
You want to be able to walk away from the system and it still works
Initially, use manual token allocations aggressively.
You're trying to find PMF
Path to decentralization
“Decentralization is the regulator strategy”
End users don't care about decentralization
They don't care about monetary policy
They care about banks don't steal money, hold value, high-quality products
High-quality products
Built on the most solid foundation
if network token, needs to be decentralized
Where to start?
Centralized but functional
Points
Blackbird doing a great job
$Fly = offchain (good idea)
Nobody is going around buying fly
People are excited about it
What about testnet?
“If transfer entire balance, was it just mainnet all along?”
people can still be burnt
markets can still happen
How does it look?
Did people lose money
Avoid risk
Tweet bad, and the price goes to 0?
A simple test
if the team disappears, what happens to the token price?
if goes to 0, you’re not decentralized
Memecoin decentralization
Bottom left - decentralized but no functionality
Why not go right?
Legal risk
The minute you benefit, you are moving way back up the decentralized path
You can become a security again
If totally decentralized, how are you going to find PMF?
Easier when centralized because you’re in control and you can feel pull of the market
When to consider token design?
The earlier, the better
Design a protocol first, then see where a token's role is necessary—it may not work without one.
Design: Centralized app over here, Decentralized protocol over here
Imagine if Coinbase made Bitcoin
Separately, they have a business with a client of that protocol
Compliments together - “I have a protocol I like but I can think of a company i want to be a client or vice versa
Does value go to equity or token?
When we invest, we prefer both to preserve alignment
How to distribute tokens?
Automatic programs
Manual programs
Wish people thought more about them
Airdrop
We think of it as something to give to users
Uniswap example
Anyone that swapped
Those were primarily developers
Discount to regular people
Think more about long-term stakeholders who are going to build on it
Those are the people who are most valuable
Retros
Grants
Prizes
Partnerships
Talk: Matt Gleason on Security Best Practices
Note: this was one of the most dense and actionable talks. I recommend watching it when it hits YouTube.
Security in crypto
Who are the parties that want your crypto
What are they doing to try and get it
How can you address it
Types of threats
Independent actors
Criminal organizations
Lazarus - mid-level nation states
Sand Eagle - The scary one
Criminal orgs and Lazarus are the ones to care about
Motivations
Hacktivism = defacing websites, leaking tools and emaik
Financial crimes = steal crypto
Espionage = ip theft, steal secrets
Targets = anyone that has crypto
You
Your org
Your customers
Attacks against accounts
Mostly
Sim swap
Password guessing
TTP - people
phishing and bribery
TTPs - dependencies
find someone the target depends on, hack them
In order of likelihood
someone gets phished
someone gets sim swapped
someone password guessed
smart contract exploit
disgruntled employee
highly motivated
How to avoid?
For you
avoid using sms for auth
use uniqu passwords
harden account recovery
MFA = most important
For your biz
MFA
SSO to force auth across services
Keep track of dependencies and due diligence
For your customer
How do you make sure the password isn't guessed
Forced OTP
Notify user on new logins
Audits in crypto
Almost everyone who gets hacked thinks they cant be
You need your system reviewed
How?
Find someone good
Reserve some of their time
Get the report and fix the issues
Crowdsource audits
Dont have as many examples of code getting hacked
If the code isn't up to snuff, you will get 100s of comments
After you do it, you need to get another audit
Talk: Hilmar Pétursson (EVE Online)
Hilmar
Student of history
Expert on economic primitives
Talked to oil industry - “omg that is well game-designed”
Eve Online
Players work on projects that take 100s of people … for a year not months
Mission: Make virtual worlds more meaningful than real life
How is crypto like virtual worlds
Tokens equally not real
Jobs aren't real
The economy is equally not real
What is meaningful?
Kant on rules for happiness
Something to do
The game
Someone to love
Friendships in the game
Real-life friends have never been tested
Something to hope for
The next expansion
Real life has failed people
7B people, only 200m people like what they do
Can we solve that?
Give people agency
Give people meaningful social networks
Why decentralization
Today: user agreement
Nothing belongs to you
You must adhere to the rules of CCP
Eve is like Bitcoin
Derives its value from social consensus
Lindy trust properties
Layers
is there a way to replicate it in a game simulation?
is there a way to design it so that it's better than real life?
On collective suffering
Eve = Where nobody dies, but great loss can be experienced
Something magical about the collective suffering
Underestimated part of biology
People seek this out
adventures together
marathons
Crypto is similar
Winters = collective suffering
Such bonds → What winter did you join?
Building in crypto
Very similar to when we said were going to make a database game
People were like, “Weird.” .. “elves in Iceland are going to use a database to make a game”
Comparison
Slow: databases 20 years ago were slow
Transferability: happening already, claim they don't want it, but people are already buying/selling
Financial: People have more money in Even than in a bank account
Average Eve savings = $1300 vs America savings = $500
Should be able to pull on that in case of an emergency
“Why would I disallow that?”
What is the moral principle of making that wrong?
Challenges
Secrets
You need to be able to have secrets → ZK
As soon as we announced (ZK) all the people working on this came out because they needed to test their ideas
Agency
You need to limit agency (i.e., moving from one solar system to another) → Every action has a cost
Blockspace
“There is a fight for blockspace anywhere and anything”
What hits in block matters a lot if a spaceship does or doesn't survive
Theres a queue to get into the frame
the queue is unpredictable - “When is my message going to get in”
never-ending warfare
similar to crypto
Time dilation
Similar to real-life
If a lot going on, time dilates
Time dilation = allows you to strategize more
Real-time, only so much you can do
In some ways, crypto is a big MMO (Solona vs. ETH)
If you were starting as an entrepreneur today?
Find people who love what you are doing
Better than millions that just like what you’re doing
“We like it, and if you like it, come join”
Avoid ambivalence
Start there and then diffuse into mainstream
main things started as niches: metalica, apple
On getting inspiration
Iceland is small
People in your social network are weird
You can’t specialize in anything
the initial team were artists, i wasn't a game dev
Deconstruct history and evolution
economists = good at analyzing the economy
physics = good at emergent behavior
Scaling large groups
Getting 10k people to do anything is very hard
sporting events, concerts, protests
Concert = single player replicated 10k times - eddy
Burning Man took a long time to scale up
Military takes decades
Doctrine → Train people
Takes 100s of years to train military
Eve took a decade to get to 10k
On design
I like to think of design as in “de-sign”
Take everything away
Figure out what is essential
Links that came up
What’s Blackbird and $Fly?
What’s the difference?
Computer: build new networks
Casino: speculation and money-making
Tokens’ true purpose?
Tools that enable community-owned networks.
Community ownership doesn’t work unless communities have a way to own.
All things tokens from a16z
On tokens as a new digital primitive By Chris Dixon
On designing internet-native economies: a guide to crypto tokens by Patrick Rivera
On token design mental models, capabilities, and emerging design spaces by Eddy Lazzarin [watch time: 32 minutes]
On a novel framework for reputation-based systems by Jad Esber and Scott Kominers
Launcher Labs Progress
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