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

    • Look at CoinMarketCap in 2013

      • #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?

  • Blackbird is a crypto startup that connects restaurants and customers.

  • $FLY is like miles on your favorite airline, but instead of one airline to redeem from, the points are good at all the restaurants in the world.

• Computer vs. Casino

  • 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

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