On The Other Side ep 87 - Maximize ownership, minimize governance w/ Jesse Walden
Primer: Generally, governance participation is abysmal across crypto projects. In response, Jesse Walden of Variant Fund suggests maximizing ownership? What does he mean by this? Let’s find out in this episode of On The Other Side.
Background
Got into crypto 10 years ago as a founder. Co-founded a startup called Mediachain
Wanted to make every piece of media on the internet ownable
In 2014, Ethereum did not exist yet, so they were building on their own network
Spotify acquired Mediachain Labs
Worked as an investor and on a crypto education program at Andreessen Horowitz
Co-Founder of Variant
“A lot of the ideas being pushed forward today through NFTs are some similar ideas to what we were thinking about back then.”
- Jesse Walden
Building On-Chain
He made a tweet about building on-chain is more like hardware engineering than software engineering
Over the last 20 years, the dominant mantra in Silicon Valley has been to move fast, break things, and ship software iteratively
There is trouble in applying that mantra to crypto since you are shipping it to a global computer that is operable 24/7. It is more akin to hardware
When you ship software in Web3, you need to be extremely good at making sure that it’s kind of correct by construction
This is not a hard and fast rule. There are exceptions where it makes sense to retain control and update iteratively
Building On-Chain And Maximizing PMF
Teams in crypto can maximize their shots at the goal by minimizing the surface area of what is managed by their smart contracts
Teams could outsource a lot of parameterization or fine-tuning
For example, having the on-chain portion refer to something that is off-chain or controlled by their team or third-party operators
This framework of more modular protocols is coming to fruition in DeFi
Specific Projects In DeFi Using A Modular Approach
Uniswap V4 is a good example
In the history of Uniswap, Uniswap V1 and V2 use the XYK formula and all tokens had to adhere to those parameters
The simplicity of the formula was a great thing, but was also risky
Uniswap V3 can have other kinds of curves instead of XYK
V4 takes it to the extreme where every dynamic component of the marketplace can be customized
V4 gives consumers more options through free market competition to parameterize the marketplace
It’s companies like Gauntlet who are specialized experts in risk parameterization in these protocols
As protocols are permissionless, there will be more competition for Gauntlet as experts enter the market
Would A More Modular Approach At The Start Work?
Thinks that simplicity is a virtue at the early stage
In hindsight, Uniswap going with XYK was the right move at that time
Will We Move Beyond Speculation/The Financial Element?
Variant’s thesis is that digital ownership is the new thing that blockchains enable
Applications that succeed will lean into ownership as a keystone of new user experiences
Think that the most powerful applications will lean into the financial aspect but also enable other kinds of deeper experiences that are not speculative (e.g. memorabilia, etc.)
Friend.tech is experimenting along these lines (trading value of the shares and access to private group chatting)
“In the history of technology, speculation is what drives technological progress. Like that's the story of venture capital. That's the story of what the industrial revolution is. You need speculative capital to come in and fund recommendations that led to technological progress.”
- Jesse Walden
Maximizing Ownership And Minimizing Governance
There are lots of governance tokens in crypto today
His theory is that the teams building the protocols want to incentivize users to grow the protocol
We have not figured out the best practices of how ownership is to be distributed
Has observed that governance participation after ownership is distributed is pretty low
Corporate governance is even worse
The reason for this is that people want economic alignment with the incorporation. Control or governance is something secondary
When thinking about governance in Web3, you probably want to limit expectations on who is going to participate
One of their portfolio companies, Mirror, had a governance feature early on where bloggers could vote on who else could get access to the platform
It’s a good example of narrowing governance to a limited set of participants with a cadence that is not exhausting
Free Market Or Governance?
It’s not a binary choice
It’s probably a combination of both where you create a module or component that the free market can fill in
Teams In Crypto Villainized For Taking An Outsized Role
This phenomenon is not a thing in Web2
In Web3, decentralization is highly valued as sort of a virtue
Decentralization of the underlying blockchain enables all kinds of new applications. However, this does not imply that every app should also be decentralized
There is a bill in the US House right now that creates a sandbox framework for products that are not sufficiently decentralized
Sufficient Adoption And Rugging Users
Does Sufficient Adoption Change The Equation Where You Could Rug Users?
In the majority of centralized systems today, as long as the product is producing sufficient value, people are okay with that
The new thing is that one can become an owner in the systems and benefit from their growth in a meritocratic fashion based on your contributions
For consumer apps, he thinks that control is a secondary concern for the vast majority of users
Only a limited set of the user base like prosumers and developers would care about using the product in an advanced way
In the short term, if the focus is growth, he thinks that control is less important
It’s a shame that projects that have succeeded at any meaningful scale end up losing their founders and core contributors because they do not want to be perceived as still having control over the project
Is not against decentralization. Decentralization has its place
In the low-level infrastructure, tokens and governance do not make any sense
At the app layer, there are new primitives of effectuating governance that will benefit from the decentralization of the underlying system
For example, MolochDAO’s ragequit mechanism allows people to pull out all of their assets
The best analog here is Vanguard, a mutual fund that is owned by its users
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