How to Launch a Token (Legally) Featuring Miles Jennings & Eddy Lazzarin Of a16z Crypto

And so we're working with a lot of founders to try and like, you know, form those like perfect use cases that really, you know, show that these paths are now available, how to hit control-based decentralization, how to turn value accrual on, right, how to use these entity structures in a more, you know, in a more transparent way that doesn't kind of increase opacity. So I think those are all of the things that we're working on. And I think that, you know, this year is going to be very exciting because there's going to be some launches that are are really going to knock that out of the park.

This episode is brought to you by SKALE, the next evolution in Layer 1 blockchains. Explore the gas-free ecosystem at scale.space/ecosystem and follow their journey on X @skale_network. Thanks to SKALE for making today's episode possible. Nothing said on Empire is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only, and the views expressed by anyone on the show are solely their opinions. Not financial advice or necessarily the views of Blockworks. Our hosts, guests, and the Blockworks team may hold positions in the companies, funds, or projects discussed. All right everyone, welcome back to Empire. Uh, very excited about this one. We've got, uh, Miles Jennings, who's the head of policy and the GC at a16z Crypto. We also have Eddie Lazarin, who is the CTO of a16z Crypto. Eddie, Miles, welcome to Empire.

Great to be here.

Thanks for having us.

Yeah, excited to have you guys. Okay, a little context before I jump in with the questions. So after most episodes, I usually get a few DMs or people drop questions in the Empire Telegram channel, and usually it's from founders and they say something along the lines of, hey, I heard you and Santiago mentioned this, can I do this? And then I say something along the lines of maybe, maybe I don't really know. Probably you could do it, but probably not. And you should really talk to someone smarter than me. And then this kind of came to a head earlier this year when I started posting about companies launching tokens. I got a very friendly DM from Eddie who said something along the lines of, do you really think all these centralized companies can just start launching tokens? Do you really think that that's legal? And I said, I have no idea, Eddie. This company did it. Why can't others? And we ended up having a very nice conversation. Eddie was very kind, kind of showed me maybe why I was wrong. Um, but I still get DMs all the time from different founders saying, hey, uh, can I do this? And so I wanted to bring two of the smartest people I know onto Empire to talk about the intersection of technology, uh, legal policy, um, and just how to build good businesses. So, um, Miles, you are a lawyer. Eddie, you are more on the—

I'm not a lawyer.

Not a lawyer, but probably sat with Miles long enough to understand how to actually implement this side. this stuff into, into companies. Uh, so there are really a couple big topics on my mind for this episode. One is, uh, you guys posted this, uh, blog post saying, uh, the, the end of the foundation era in crypto. So I want to talk about foundations and how to really structure and build companies. Uh, second is token design and classification. The third is just general crypto policy and what's happening in DC. And the fourth is, uh, really just founder mistakes that you see people making, maybe that thing, things that founders don't know that they can do today or mistakes they're making. So I think the best place would just be very macro, DC. You guys have spent a lot of time in DC. Your portfolio companies like Uniswap and Coinbase have spent a lot of time in DC. Miles, can you just give us a lay of the land? You know, it's August 2025. What's happening? Maybe what's happening and what's been happening in DC for the last several months?

Yeah, I mean, I will say it's been a whirlwind of a year, right? I think if you were, you know, looking at where we were a year ago, the sentiment was incredibly negative, and now we're at the complete opposite end of the spectrum. I think on the legislative front, right, we have a ton of progress has been made in Congress. We've gotten multiple bills passed. The Genius Act has actually become law, and so that's provided clarity for how stablecoins are going to be regulated. Market structure legislation, which handles the regulation of intermediaries like the exchanges like Coinbase, Kraken, and those, as well as token classification. How do we deal with you know, a digital asset, is it a security, is it a commodity? So that's, you know, a bill already passed the House there called Clarity Act. Senate is now taking up a version and working on that. And, you know, the president has called for that law to be on his desk by the end of September. So, you know, I mean, we are knocking down kind of all of the, you know, areas of regulatory uncertainty that have kind of persisted and really slowed innovation down in the space over the course of the last, you know, 4, 8 years, however long you want to look back. And then at the same time, right, there's a ton of progress on the regulatory front. I think the SEC is the greatest example of what, you know, the turn that you can kind of do when you're actually willing to engage constructively with industry. You know, just last week they announced a Project Crypto, which acknowledges that, you know, the blockchain technology and digital assets are gonna revolutionize our capital markets. And this, you know, they're gonna be working on kind of providing the pathway for moving more and more assets on-chain. Right, and they see all the efficiencies there. So it's kind of an aha moment, right, where, you know, I think it's clear now that people in government finally are recognizing the benefits of this technology that everyone in industry has long kind of, you know, been focused on and believed in. So it's just been incredible. I think I'm more optimistic now than I've ever been with respect to the regulatory and legislative picture. And yeah, there's a lot of work still to do, but I'm incredibly optimistic.

Nice. There are a few big buckets of things happening in DC. There's obviously Paul— I mean, Paul Atkins's piece. If for anyone who hasn't read it yet, I'd highly recommend going and reading it. I mean, he basically says capital markets are coming on-chain. It's a pretty, it's a pretty amazing piece. There's also Clarity Act. So and then there's a bunch of other, like I'd say, smaller things happening, like liquid staking. There's some great statements on liquid staking that came out this week. Let's, let's talk about Paul Atkins's piece and just the, the siege, the— I mean, it's pretty— for me, it was a pretty remarkable statement to read, just talking about kind of moving financial markets on-chain. And it was really like going from Gensler, who's saying like on-chain shouldn't be a thing, to this SEC saying on-chain is really the future. Yeah. What do you make of the SEC statements?

You know, I would say, look, the— you often see policy statements come out from orgs and everything like that. And it's, it's, you know, you can read into them what you will. This was not just a run-of-the-mill policy statement, right? This was a kind of, you know, the starting gun for revolutionizing our financial markets. And as a result of that, I think it is incredibly bullish for the industry. And, you know, it shows that they are thinking very constructively about how do we, you know, modernize securities laws, how do we use the powers that they currently have, right, to facilitate bringing assets on-chain, right, modernizing our markets. We've never had that kind of support or recognition of the benefits of this technology at such a high level of government. You know, the— that kind of launch of Project Crypto followed on the back of the White House report on, you know, the industry, which was also, you know, very similar in the vein of just kind of setting out all of these things that the technology can do and how government can enable it. So, you know, what I would say is it's probably one of the most significant things that's happened to date. You know, from the, from a regulatory perspective with respect to the industry. And entrepreneurs should just be, you know, incredibly thrilled about this because there's going to be a wonderful amount of opportunity here to build systems that help facilitate this, you know, modernization of our financial system.

Yeah. Eddie, were there any more on the builder side? Were there any— is there anything that you like came to mind when you read the Atkins piece saying like, oh, here's maybe like a potential second-order impact of this?

I mean, those are complex to disentangle legally, but I'd say that I was just— I personally was struck by the idea that, you know, just the headline that commercial viability is true north. Often do you hear that, right? And commercial viability, by the way, is a nuanced concept because it doesn't mean, uh, it doesn't mean total anarchy in the capital markets. It also means the opposite of what we had before. Which was, uh, anarchy via inappropriate enforcement of vague rule, you know, vague rules. It meant something in the middle, commercial and viable, right? Commercial is— it's supposed to be value-add, constructive wealth creation, new technology, new innovation, right? And viable, as in like, uh, can be secured, can be trustworthy, can be something that actually succeeds when defined appropriately. That's what it's supposed to be to me. It's supposed to be that beautiful space in the middle between like just enough rules to prevent a highwayman from intercepting the wagon on the way to the market, but not so many rules that the market is a complete, uh, completely stagnant, you know, uh, wasteland of nothing because no one would want to do business there, right? Like it's supposed to be balanced, and it felt very balanced to me.

Yeah. Miles, why was this the, um, uh, why was this the statement that you highlighted of all, of all of the statements? Why was this— why did this stand out to you?

I think, yeah, one of the things that we talk about here, right, is that is, is kind of how far the industry, right, has had to contort itself in order to deal with the regulatory challenges over the course of the last, you know, 4 or 6 years, right? And, and so one of the, the kind of consequences of this— we talk a lot about it internally— is like lawyer design products, right? And that is, a lawyer designing your product is, is not probably the way to get widespread commercial adoption, right? And so one of the things, if you, if you take a step back and look at how far the industry has contorted itself, I think one of the biggest problems that we see is all of the offshoring, right? And the, the structures that have been put in place with respect to foundations and all of this stuff to, you know, move projects offshore. And this was all done, you know, in a reasonable basis to kind of combat the, the kind of regulatory hostility that was facing the industry in the United States. But when you look at it, right, these kind of setups and these arrangements are incredibly opaque, right? In a lot of cases, they ended up resulting in centralized control being held by a couple professional directors in an offshore island somewhere where those directors are the directors of hundreds of different foundations. And it's like, what are we actually setting up in terms of how this system works and how it supports the space? And then on top of that, right, you're layering just an enormous amount of complexity in the, you know, in the operations of startups. And that's not what you want to do if you're trying to iterate quickly and build products, right? You don't want to have to be dealing with a bunch of legal requirements around independence and all of this stuff in order to kind of innovate. So from our perspective, we think, you know, one of the quickest ways we can help accelerate innovation in this space is to try and do away with a lot of the convoluted structures that lawyers have been, you know, putting in place over the course of the last several years. Fundamentally, that one of our primary targets there is all of the offshoring that's been done. And so I think, you know, to see this in the SEC's release, I think that they see, you know, the offshoring that's happened over the last 4 years is also a significant mistake and one that they would like to rectify. And what does that take? It means clear rules at home. And I think that that's what they're working towards.

Yeah. And for anyone who didn't read— oh yeah, go ahead.

Well, I want to put it in like dummy engineer Yeah, yeah. Words, because that's kind of how I understand it, right? Is like when, when the system underneath is defined improperly, right? When in other words, when the key considerations like are rooted in legalisms, like, well, how many entities are doing this thing? And like, who technically owns this thing, which technically owns that? And are they working? Whatever. What, what ends up happening is to paste over, to smooth over all of this, you need to— these lumpy abstractions that are leaking through, you create huge convolutions. That's what ends up happening. If instead the laws are defined appropriately around what we actually should be concerned about, like who has control of what actually, who can rug who actually, who has asymmetric information, who can, you know, turn this thing off when you need it most, right? If those are actually at the root of the legislation, then the structures that come out legally are less convoluted because they're nicely mapped to the underlying reality. So a lot of the challenges that builders have faced until now, uh, around their legalisms that have resulted in like 3 entities— you have to launch like 3 entities just when you start a company— like, that's not solving a real problem. Like a technical network product problem. That's solving legal problems that are created by laws that are not of the right fit for the market. Once the laws are the right fit, all of a sudden the legalistic solution is clean and clear, and we actually solve the real problem, which is who owns what, the trust, all these things which are at the core of the spirit of crypto. Like, is that like who, who to trust? Who's in control of what? How do things actually operate at the network level? That's like what every engineer thinks about, right? And if those things are in some sense represented in the legislation, the result is simpler.

Yes. Okay. I love that you guys are going here. This was one of the big topics I wanted to bring up is Miles wrote a fantastic piece back in, I think it was early June, saying the end of the foundation era in crypto. So that's kind of what you guys are getting at here. Here, I'll pull up pull up this piece. So maybe Miles and I think maybe half the audience will be very familiar with the— just the word that comes to mind is ridiculousness. That is the two-structure, sometimes three-structure setup that it takes to build a crypto protocol. But maybe half the audience is not familiar. Can one of you guys just walk through like what has been happening the last couple of years to build— if you want to build an L1 or an L2 or any sort of crypto protocol, like What is the kind of structure that's been happening? And honestly, the amount of— maybe you could talk about the amount of waste that goes on behind the scenes.

Yeah, sure. And I think there's— Eddie's explanation was kind of perfect and right on point here, right? So what I would say is, is there is a form of a foundation and kind of that works and is aligned with kind of the ethos of the space, right? Fundamentally, the blockchain systems that are being created by entrepreneurs are supposed to be credibly neutral, right? They're not supposed to, you know, favor or discriminate against individual actors operating on that network. So in one conception, foundations were thought of as a way to enforce credible neutrality, right? Create a nonprofit entity that basically is looking after the health of that ecosystem. And that idea, right, is a good one. And there are examples of foundations that fulfill that purpose and do it well. Right? But the problem is, is that that structure kind of got latched onto as a way to solve some of the legalistic problems that Eddie was talking about, right? Where, where the legal framework applicable to the space is not appropriately tailored, and as a result, you have to jump through all of these loopholes and do all of these weird things, um, to, to kind of, you know, deal with the legal framework. So in, in that sense, right, foundations over time have really been contorted to fulfill this other purpose right, which then when you take a step back and look at it in totality makes no sense because it kind of goes against the ethos of the space. So in a lot of projects, right, they will launch, uh, and, you know, as part of that process they will, you know, create a foundation in the Cayman Islands or what have you, uh, and move some intellectual property to that entity. That entity will be the issuer of the tokens, um, and that issuer will then have— or that foundation will then have almost complete control of the underlying blockchain system. They can make upgrades, maybe they control the entire treasury, and you're handing the power of the system to a couple of professional directors who have no background in blockchains. They aren't engineers. They don't understand how these systems work. They're just there to sit on a board and make decisions. That fundamentally is at odds with what the technology is supposed to be providing, which is networks that are not capable of being controlled, that can't can't just be turned off by someone, right? And, and that are credibly neutral. You know, handing guys, you know, a bunch of money in, in the Cayman Islands to kind of oversee these things doesn't really make sense. The, the, the one, like, nice red flag that shows how kind of absurd this situation is, is that it's become harder and harder to find lawyers in the Cayman Islands to, you know, actually help you set up these structures, because so many of them have left their jobs to go sit on these boards because it is financially very, uh, you know, promising for them. So like, like that, that is just a layer of extraction that these things were never intended to create. It's resulted in all sorts of obfuscation in terms of where the control, where is all of this stuff happening. And as a result of that, that's really what we were calling an inform, right? Is that, is that, you know, when, when you talk to our founders every day, they hate having to go through all of these convoluted steps just to build products. So can we remove those things, right? And address actually the root issues of what we're trying to solve. And then that's what we're trying to get at. And that's what the the basis of this piece was.

Yeah, I mean, it seems like foundations were actually created for the right reason, which was with decentralization in mind. And then they basically became decentralization theater and a— and kind of this weird, janky way to like kind of skirt regulation, which was bad regulation. Right. But founders were like, look, I'm a founder. I still need to build this thing that I want to build. So I'm going to go to the Caymans, I'm going to get these lawyers who used to be lawyers, now they're really just professional board of director sitters on a bunch of different L1 boards. And yeah, it's really—

yeah, it's really one way to put it. I'll also put it in my stupid engineer way, which is I like yours.

I like your— your simplified ways are how I think.

And so, yeah, well, it's, it's that, you know, one way to achieve a quick and easy decentralization on the legal or social level if you don't yet have decentralization at a technical level, is you just split up the thing into multiple entities with people that have different paychecks and, you know, have different rules around their employment. Right. And that is a great way to accelerate the process of being decentralized. If like you need to be decentralized right now because the laws are putting a boot on your neck. Right. That's a great stopgap solution. But what quickly— we learned this in engineering very early— what starts as a stopgap solution quickly becomes a permanent solution because it's easy to get to and you park it there. And so it ends up being the case that splitting things into multiple entities can sometimes almost block technical decentralization because they feel they've met the legal threshold and now this is the answer. And when something becomes a cheap shortcut answer, it pathologizes very fast and convolutions happen and overhead goes up and you end up missing the point, which is technical decentralization where you don't need to do— you know, Satoshi did not set up a foundation, right? Like Satoshi didn't have to do all this ridiculous stuff because the design allowed for it out the gate. And although it's not perfect, we've learned a lot since then and now we should be able to do it faster without fake legalism.

So yeah, even just the operational— yeah, go ahead, go ahead, Miles.

Yeah, I was gonna say that it's a great point Eddie makes, right? Because like, it's, it's basically a lawyer-based solution as opposed to an engineer-based solution, right? And that means we end up with systems that are, you know, from a lawyer's perspective, okay, right? But they fundamentally don't work with what the engineers are trying to do and actually put roadblocks in place from, from like to prevent the engineers from actually achieving what they're trying to do. So, so what we want to do is remove those legalistic roadblocks. On top of that, right, you know, it's not, it's not going to be easy, right? At the end of the day, um, you know, lawyers are, are creatures of habit, right? They like going down paths that are well-trodden. And so, you know, you have an entire industry that has ballooned over creating these very complex structures, which, you know, you're talking about accountants, right? Law firms, international law firms, all sorts of people that involve tax lawyers, right? And that's— this is a big money winner for them, right? These structures cost hundreds of thousands of dollars to put in place. So, you know, moving the cruise ship from this direction that it has been going for a very long time is difficult. And that's one of the things that we're, you know, we're really hoping to do. Yeah.

I mean, for people who haven't seen the silliness of these foundations, as you know, Blockworks sells into a lot of these protocols that, you know, you get, you get on the even on like a sales call, right? We'll have one sales call with foundation. They're like, I got to bring Labs on. I'm like, great, bring Labs on the call. They're like, oh no, we have to have a separate call because we can't be on a call. With Labs or, you know, post-sale will create a Slack channel with the company or with the protocol, whatever you want to call it. And, you know, some of these things, some of them are so strict they won't let Foundation people and Labs people in the same Slack channel. So it's anyways, it's completely absurd.

And there's— my best anecdote on that is like if I get asked one more time whether or not a Foundation employee and a Labs company employee can be in the same Slack channel, like I'm going to lose my mind.

Yeah, it's crazy.

Like, this should not matter. Yeah.

And it's funny how they're solving a legal problem, right? Like doing— they're obviously not— they're not doing this by choice, right? They want to solve the problem. They want to remain compliant with the rules. But think about it. If your thing is so fragile that two employees being in the same Slack compromise the decentralization of the system, what did you make? Okay, you did not make a decentralized thing, right? It's like a completely— it's a farce. Whereas what we really need— now, that doesn't mean that every protocol needs to be perfectly decentralized from day one, right? That's not technically feasible either, right? But what the implication is, is that there should be a grace period and conditions and guardrails where at the beginning stages, while things are more centralized, they can continue to collaborate on the road to true decentralization, where once we've reached specific technical milestones then they can be in a Slack together because there's nothing to compromise by doing so.

And this is what they're proposing, right? Is something around maturity, like a mature blockchain. Is that right?

Yeah, that's right. So in the, in the Clarity Act, right, it seeks to do exactly what, what Eddie was just saying.

Right.

I think one of the— taking a step back, right, the maturity concept in Clarity is focused on, you know, whether or not someone has control over the system. right? And this control is, is a concept that is, you know, much more well understood in parlance of the law, right? There's, there's control-based kind of frameworks within securities laws already. Um, you know, money transmission depends on control. Tax law often depends on control. So it's kind of a better, a better starting point, right? And that starting point is, is juxtaposed against where we currently are, which is, you know, efforts-based decentralization, which is looking at, okay, If— and this is why we have all these convoluted things about, you know, not being in the same Slack channel. The idea is, right, is if you're engaged in material, you know, ongoing efforts on behalf of the protocol, that, you know, then it's more likely that that asset is going to be regulated like a security. So we've designed all these systems to downplay, right, the level of efforts that people are engaged in or the importance of an individual's efforts with respect to a given system. Now, this is a horrible framework, right, for an innovative sector, right? Why would you want entrepreneurs to not engage in efforts, right? That is the opposite of the incentive that you should be creating, right? And it's led to a lot of this stuff, like you mentioned, decentralization theater. Now, when you switch to a control-based framework, right, you end up with something that is much more objective, right? And objective, you know, that can be measured, right? That can be even verified based on the code. Right, to look at who has potential control over the system. This provides a much better basis for, for kind of analyzing decentralization or maturity, whatever you want to call it. And, and that's really the approach that was adopted in Clarity. So it looks at, right, whether or not these systems are controlled. At the same time, right, it does provide, as, as Eddie was talking about, you don't want to start your system off without having any control over it. That is, may, might not be technically feasible, but it also might not be very smart because you might be introducing security risks by, you know, decentralizing to So what Clarity tries to do is balance that need for progressive decentralization, right, with the ultimate goal of reducing risk to users by having people relinquish control. And so it has this whole maturity framework in there and it balances who has access to the market while people are in control. Most importantly, right, it keeps VCs, entrepreneurs, those that are most likely to have insider information about the system from being able to participate in secondary markets while the system is still controlled. Obviously, right, if, you know, if you're an insider, you have control over the network, right, then you can use that control to exploit information asymmetries and take advantage of retail, right? That helps, you know, that facilitates get-rich-quick schemes, all sorts of stuff, all the bad stuff, right? So what Clarity does is basically say, hey, we're going to keep those that might have information asymmetry out of the market. While you try to achieve maturity, relinquish control. Then once you've relinquished control, then everyone can participate. The asset is very much like a commodity at that point. And that's really the basis.

Why is this all happening? Why or what? So is the end of the foundation happening because of clarity or those are not directly linked?

I would say that they are definitely related, right? Because So under the current law, the current law is still this efforts-based framework, right? So all of the convoluted and opaque structures that we currently live with, right, are, are kind of the reaction to that efforts-based framework, right? Once we remove the efforts-based framework, which is what Clarity does, um, then you, you no longer have a need for those, for those frameworks. So, you know, it's a little bit, uh, outside of, of the SEC's current authority to kind of solve this problem. But obviously they are very much aligned and also trying to, to kind of do so. But really, we do need market structure legislation, the Clarity Act passed, in order to, to be able to, to move on from this, this kind of period of, of, of foundations.

This episode is brought to you by SKALE, the next evolution in Layer 1 blockchains. With a gas-free, invisible user experience, instant finality, and robust security, SKALE allows for limitless scalability and has already saved its 50 million users over $11 billion in gas fees. SKALE's high throughput, zero transaction costs, and powerful Web3 infrastructure make it the ideal platform for gaming, AI, and other high-throughput apps. To explore the gas-free ecosystem, visit scale.space/ecosystem and follow their journey on X at Skale Network. That's Skale spelled with a K. Thanks to Skale for making today's episode possible. Shout out to today's sponsor, Katana. Katana is a DeFi-first chain built for deep liquidity and high yield. No empty emissions, just real yield and sequencer fees routed back to DeFi users. Incubated by Polygon Labs and GSR, Katana is launching with notable ecosystem of primitives assets, and partners like Morpho, Chainlink, and more. Katana's 1 billion KAT campaign is live. Bridge and deposit directly into vaults in one simple click and start earning immediately on your Ether, Bitcoin, USDC, and more. Follow the link in today's show notes to get started. As always, investments in blockchain technology involve risk. Terms and conditions apply. Okay, so you guys have proposed two things. DUNAs, I think it's DUNAs and Borgs, right? Can, can you walk through these two? A DUNA is like an emerging structure. And then Borg basically says, hey, look, a lot of the things that we're doing, I think you can basically automate it and move it on-chain. That's my— Eddie was dumbing it down. I'm triple dumbing it down. But maybe you guys can walk through your proposed DUNAs and Borgs solutions.

Yeah, so I think just quickly, right, I think, you know, if what Eddie was speaking about in terms of control, right, in a lot of systems, it's going to be impossible to remove any type of, you know, discretion on the part of individuals to influence the system over time. So for instance, right, if you want to upgrade a protocol, right, you need some way or way to come up with consensus in order to make those decisions. If you have a treasury for your system, you need to have some way to form consensus around how to make, you know, those decisions about LLM treasury. Um, if you, you know, in a lot of cases it makes sense to maintain POS functionality and have some type of security council to, um, you know, to, to ensure or protect against, um, you know, exploits and, and, and bad actors. So as a result of that, right, it is, it is very difficult to end up in a situation where, you know, the, like, where there isn't any influence possible by humans. Dunas and Borgs basically create an alternative pathway to foundations to, you know, remove a lot of the opacity of off-chain structures, right? And basically move decision-making on-chain. Dunas are a legal entity that essentially just wrap, you know, token-based governance. So in essence, it is what you do on-chain, right, creates, you know, legal implications off-chain. And the Duna is just the mechanism for facilitating that. But fundamentally, you know, it's not going to have, you know, employees. It's not going to have like a hierarchical structure. It's literally just a wrapper for on-chain governance. Borgs, right, similarly, you know, remove a lot of the opacity of off-chain decision-making, move it on-chain so it's very transparently done. And, you know, we think that in combination, these two things will, you know, overall increase transparency and make it more effective to kind of govern these systems as you pursue, you know, the elimination of control.

With a, with a DUNA. So DUNA is Decentralized Unincorporated Nonprofit Association. This is basically legitimizing a DAO as a legal entity. Is that—

That's right.

Yeah. Okay.

Yeah. And then things that can't— I mean, this is again, this is my silly explanation. Things that can't be automated fully, like appointing an administrator to pay tax or like, like paying taxes. Paying taxes cannot be done purely automatically by a machine, right? There's— and there's paperwork and consideration that needs to happen, uh, that needs— you need to appoint an administrator to do that who is not an executive, basically someone who can act on behalf of this distributed group. So the Duna provides a toolkit of solutions to those kinds of problems where a wide array of people who are loosely speaking, part of an aligned group, right, because they participate in this protocol in some way, token holders, they can have those things done off-chain without compromising their legal status.

I see. Why even— this might be a real— go ahead, Miles.

No, I was just going to say, and so I want to, you know, there are a lot of benefits here, right, including, you know, bringing things back into the US, right? The DUNAs allow for, you know, payment of taxes. If you, you know, if you want to do treasury diversification, if you want to have protocol revenue that's going to token holders, all of these things are made possible by the DUNA in a way that's compliant with U.S. law. So reduces the need to do a lot of the offshoring shenanigans. On top of that, it offers you, you know, all sorts of legal protections, you know, limited liability. So we do think that it will lead to increased, you know, DAO participation, which generally we think is good. You know, decentralized governance is not a cure-all. You should not punt everything to governance. But there are some mechanisms that cannot be automated, as Eddie was talking about. And in those cases, it makes sense to give people legal protections to participate.

Okay. That's actually kind of what I was about to get at with my next question, which is why did you focus on setting up, making it so that the DAO is the legal entity? Like there's a different approach here where you could basically just say, hey, just go run this as a company. Like, hey, go like, I don't know, Optimism or Uniswap. Like if you were—

I'll just say, well, they can't— you can— people can have a company.

So then what's the point of a DAO? Like, why? What is it? So as we're 7 years into DAOs, almost 10 years actually, like why DAO?

Well, because not everyone who participates in a DAO or wants to do something or hold a token, right, and like help in a small way or a big way, wants to join a company as a prerequisite to their doing that, right? Maybe they just want to post on the forum, vote on some stuff, suggest a PR on the codebase and walk away. Like they want—

was it a good— was it a good experiment though? Or like, was— do you think that, uh, it's driven value or taken away value? Like all, like on all the on-chain governance and the DAO setup?

Yeah, I mean, look, I think that there's a, there's a lot of good examples and there's a lot of bad examples like there's going to be with everything in this space. I think fundamentally, right, if you look at the control-based framework that necessitates, right, that some individual or company doesn't have control over the system. And so if that is the prerequisite right, then you are going to need to— where there is discretion being exercised, right, you need to kind of disperse that as opposed to having it housed in a single company. The other idea here, right, is— and maybe this we can, we can talk about this next— but is, is you have to have a model for why, you know, Ethereum is different, or ETH is different from a share of stock, right? And if, if there was just a company that sat at the middle of Ethereum and controlled the entire thing and ETH gave you an interest in that company, well, that's just a share of stock, right? And, and so the, the conception is, is that, you know, fundamentally ETH is very different from that, right? It relates to this, this network and derives its value from the network, which operates without human intervention and control. And that's fundamentally very different from a share of stock. And so, so as a result of that, you don't want to kind of taint that system or, or that, that construct by just saying, well, actually, this token gives you an interest in the company itself that controls this entire system, because that then puts us squarely in the bounds of securities laws.

Got it. Okay, Eddie, I saw you give me a—

well, and I'd also say a parallel idea is, is that the, the theory of the DUNA is not that every crypto project should be governed by a DAO totally, and that only DAOs are the way to influence and participate in the functioning of a protocol, right? In fact, I've argued many times and will continue to argue probably forever that as little governance as possible is best, right? Like, more voting, more politicking, all this is like a nightmare. It's totally negative and it's bad. But in some settings, it is unavoidable. You have to have some. In those settings, like where there's a treasury or you just have to have votes, you should have a structure for understanding it legally and giving participation to the people who want to participate in it. So I'd say the ideal future way of running a protocol is as little governance as possible, but to whatever extent there are people involved, there are companies, for-profit entities, individuals, whatever, it's a whole array of things, and that the protocol can accept the support and stewardship of anybody.

Got it. So I saw this tweet by this— I don't know if this is a firm or what— Cowrie. They said a lot of amazing Duna projects announcing over the next few months. We're very much looking forward to those communities sharing their stories on building in the United States. So who— so it sounds like there's a lot of Dunas launching and that's great. Who, if you're a founder listening to this, who should— who is right to do a Duna? Is it if you're like at the L1, L2, but if you're building an app, you don't need to do na? Is it pro— is it size of treasury? Is it like, how do you— is there a framework there?

Yeah, I mean, I think it's suitable for a lot of projects, right? I would say that, that as Eddie said, you know, decentralized governance should not be viewed as like a shortcut to decentralization. You shouldn't just kind of, you know, not have any decentralization, but just turn everything over to token holders to make a decision. That that has proven to be pretty disastrous. But at the same time, right, where you are going to rely on token holders to make certain decisions on a go-forward basis, the Duna is a good solution. So, you know, with L1s, it is not really, you know, they have another mechanism for consensus, right? They have validators. And as a result of that, and node operators and everyone like that. So there's, there's other vehicles for kind of establishing consensus and kind of the functioning of the underlying protocol and upgrades with respect there too. So, you know, in the case of L1s, we really only ever see, you know, people interested in DUNA where they are going to have some token-based governance. Usually that kind of relates to a treasury. But again, in a lot of cases, you know, L1s don't even have treasuries. And so as a result of that, it's not, you know, not unusual to see L1s not go forward with it. L2s, there's a good use case for, but again, it kind of depends on whether or not you're using, you know, token-based governance there. You know, with L2s, you don't have the same kind of consensus mechanism around having a bunch of validators, stuff like that, at least not in most cases. So it can be useful there in terms of protocol upgrades, stuff like that. And then, but I think smart contract protocols themselves are probably the best case, right? Those almost always have treasuries and typically have, you know, upgrade ability, kind of, uh, you know, uh, governance, um, for token holders. And so, so for those key mechanisms, I think that Duna makes a lot of sense. And, and actually, you know, Duna for, for one of our, our big, um, projects just launched yesterday. Towns, um, uh, launched this week, and, and they launched with a Duna. So, um, you know, we're pretty excited to see that, and we do think that there's going to be, you know, several that are rolling out over the coming, uh, months.

Nice. Maybe last question on this, and then— oh yeah, go ahead.

Well, well, I— well, maybe I can do after, but I, I want— just want to make sure that we talk, because we've talked about like foundations, all this stuff. What are we really talking about? We're talking about things related to tokens, right?

Right.

That's like a key piece of this story. And so I want to make sure we cover a little bit about what type of token we're talking about and how to think about that type of token versus, you know, you kind of open the podcast talking about like companies issuing tokens, like drawing the contrast perhaps between these categories.

Okay. Great segue, Eddie. Thank you. Let's get into— you guys had an actually fantastic piece that are actually most people at Blockworks read and we were talking about it and we've got this thing called the Token Transparency Framework and we were thinking about this in relationship to that. And yeah, you guys have this piece called Defining Tokens and you lay out, I think it was 7 different types of tokens. So Eddie, take me into, take me into this piece.

Yeah. So we could spend a long time just breaking through, breaking down every type. It's actually not that complicated. It's more like roughing, you know, polishing the edge cases in your mind. Like, as you, as you think through this, the, the maybe two that we're really talking about, that we've talked about in this conversation, we've really been talking about network tokens. That's what we're talking about. That's what this conversation has been about. Dunas around network tokens, foundations for people who want to issue network tokens, right?

This is like a protocol token, like Uniswap's token or Ethereum's Yeah, Uniswap's token, Ethereum's token, for sure.

Right. And just, there's a lot you can say about this category. We've written like a little bit more about it and talked about it in some podcasts, but the way to, the way, the real way to put it that I think is best.

Okay.

The simplest way to put it is that when there is some sort of decentralized marketplace on a network, if there is a token that is integrated into that, in some critical economic or functional way, that is the network token and that is the network. That can be an L1. It could also be an app layer thing. It could be like a Uniswap. There can be a lot of things that have this. If you think about what it means to be a marketplace, you can blur that idea and generalize it to many things. An exchange is a marketplace. A lending protocol is a marketplace. right? A DEX is a marketplace. A system that sells IPs, that allows people to list and buy IPs, can be a marketplace, right? There's actually a lot of things that have a marketplace structure, multiple participants having exchange facilitated of some good or service, right? That's what a, that's what a marketplace is. When that marketplace has a token, that's a network token. And if that, that marketplace is decentralized, That's, that's, that's the way to go, right? That is a, that is a serious network token. If the marketplace is centralized, it's totally under the control of a single corporate entity, then maybe it is not a network token because it's not a decentralized network marketplace. Maybe it is a company-backed token because the— if the marketplace is under the control of a single company, then the thing that gives the token's value is the company behind it, not the decentralized network. The whole thing that makes Ethereum what it is and other things in Solana and so on what they are is that there is no company that controls it. There's just the network. That's a mind-blowing idea. You go talk to a normie today, even today, they'll say like, well, who's the CEO of Ethereum or whatever, right? And there, there is no such person because there's no company. The fact that only— that there is only a network is itself the cool thing. Which makes this category of asset fundamentally new and distinct.

And I think it might help there to give just an example. So, so as Eddie said, right, Ethereum is a great example of a network token. You have people that are, you know, you have a marketplace, people are trying to get transactions through and you have a token that relates to it. No one controls that system. The value of ETH is, is dependent on the transactions that are happening on the chain, right? Which because of 1559 results in a portion of ETH getting burned with every transaction. That drives value to ETH. So that, that kind of value accrual to the token is completely independent of any individual company. Now compare that to FTX's exchange token, FTT, right? FTT was, was held by a lot of people, and, um, you know, if you held it, you got kind of discounts on the exchange. But the reason that it was valuable, right, was that, that Sam, you know, promised to the market that he would take FTX's profits, its centralized marketplace, you know, centralized exchange, right? And take a portion of those profits, go out and buy FTT from the market and burn it, thereby driving up the price. That's a perfect example of a company-backed token, right? At any point, Sam could have turned off FTX and the price of FTT would have collapsed. And that's exactly what happened when FTX got shut down. So we can see, right, that there is a company in the middle there, right? That is not, you know, that is not kind of— it's not a disintermediated system. At the same time, FTT wasn't a traditional security because it didn't have enumerated rights associated with it. You had no rights to claim assets from FTX. It wasn't a security token, but we call it this company-backed token because it essentially is the same thing. There's a company in the middle and the value of it is dependent on that company's ongoing activities.

One thing I found interesting from this, maybe getting away from the company tokens for a sec, because I do want to go there, is on the network tokens. Yes. The historical way I think if you ask people in crypto how to differentiate this would have been like L1s and L2s, or basically like the blockchain or like the protocol versus applications. And they would have maybe said that like those two types of tokens were different. So like Ethereum and Solana and Bitcoin's token were different than, I don't know if like Polymarket launched a token or Uniswap's token or something like that. Why did you not?

Yeah, but that's, that's, that's, but that's, that's just wrong. That's just wrong. Right. I totally did. I mean, I know the history of it. It's just totally incorrect. That's a good, I mean, that's a fair conceptual split. If you bundle in your mind various features of the token together and see where they are coincident. Right. So for example, If you think of what makes an L1 token as distinct is that it's spent for gas. Okay, well then it's a separate category. You know, we're spending it, we're using it for the specific purpose. There's gas tokens, there's non-gas tokens.

Okay.

Like that's, that's one fair way to split it. I'm not saying that that split isn't useful for any setting, but from a legalistic perspective, from a— and I would even say from an investment perspective, from an economic analysis perspective, from a technical perspective, That is maybe not the best way to split. The difference is that, uh, and you can have an L2 token that is a network token. You can have an app layer token that is a network token. What you need is a totally autonomous decentralized network marketplace type structure next to the token that automatically drives value to the token as the network is used. As long as that's the case, you are a network token. And so whether it's an L1 itself or some application layer structure is kind of irrelevant.

Okay, so just to give an example, so if you had a, you know, decentralized exchange that had a fee switch, right, that resulted in economic value flowing back into the token, right, how is that any different than Ethereum? The more transactions that occur on the exchange right, the more value is going to be driven by the token, and no company intermediates that, right? And as a result, the network effects of the protocol, right, accrue to, um, to token holders as opposed to any company. No company controls that system. Value accrues directly to token holders. The network effects accrue directly to token holders. So it's the exact same as, you know, ETH and Ethereum.

Um, Yeah, I mean, like, let me ask you, like, what makes, what makes, what makes a token, uh, you know, what if the value is accumulating to the thing that has the network effect and you are getting exposure to it and it is totally autonomous, no company controls it, there are a wide array of people can influence it through a variety of means as peers, what does it matter whether it strictly speaking has its own form of consensus or not.

Yeah, I agree. In other words, no, no, it is an L1 or something. No, I agree with you. I like this framing, especially because my problem with kind of like the old framing was that things evolve so much in crypto too. Like things like let's say Uniswap starts as like an app where you can like, you know, swap anything. But now it's a— now it's like now I would define it as a protocol or a platform where you build things on top of it and like especially with hooks and v4 and stuff like that. So yeah, I was going through Aave Aave actually has really clean, nice docs out if anyone likes nerding through docs. And it's— it just shows like how much Aave has become a platform and really a protocol for lending and borrowing in and of itself. And it isn't just like a front-end application. So I— yeah, I like your guys' thing. The one—

yeah, I was just going to say one of the things that we tried to do too here with this approach, right, was to define tokens by both by what they are and what they aren't, right? So like the framing that you're talking about now, one token, right? Like people have always talked about utility tokens and all of this stuff and it's like, okay, well, all of those characteristics, right, are just like a characteristic that any token can have, right? Any token can have utility. A stablecoin has utility, right? So, so that could be utility token. So, so those, those kind of definitions don't really work. What you really need to look at is, is kind of what, what are these tokens? What are the economic rights that they come with? What are the trust dependencies that come with them? Right. How do they function? And then also define how they're not doing those. Like, what do they not do?

Right.

And that's what we tried to do with these categorizations, which I think makes it a little bit more effective in terms of drawing clear lines of how to delineate between these things.

Got it. Okay, let's talk about company tokens. What if a company launches a token and then— okay, here, what did you guys use? You guys used like the exchanges, right? BNB as an example. Okay, never mind. You actually put it here. This answers my question. I was going to say, what if you— what if you start as a company? Can you evolve from a company token into a network token, basically? And I think you would say yes.

Yeah, I think— I think you can if you remove the company from from intermediating. I would say that that is, you know, not a very common pathway, and I would say that the— probably not very advisable, right? Ultimately, I think, you know, tokens should relate to network tokens, should relate to the underlying network, and, you know, juicing their value through activities that the company is engaged in at the outset is, is kind of doesn't make a ton of sense, right? And from the perspective of like, well, why, why are you kind of intermediating this at the outset if you're designing a network, right? And so like, you know, the direction that we try to push and work with our entrepreneurs on is designing these systems that so from the very start, you know, their, their tokens are network tokens.

Got it. Can we— I'm going to pull up this example where I was just grossly wrong, which is about Kaito. So, so Kaito is a company in Singapore. They started as like a research and data platform and then they became like Yaps and social sentiment and all that kind of stuff. They launched the Kaito token and I posted, I was like, this is very interesting. Like every cent, if you're the founder of a centralized company, especially those that raised at, you know, overvalued 2021 equity, You're looking at this saying, oh my God, maybe this is my saving grace. So what I said is you have a lot of centralized companies looking at, looking at launching a token. And I said people should be considering this. This is very interesting. And then Miles posted on Twitter and said, Miles, you screenshotted one of my tweets that said one of my predictions at the beginning of the year was that centralized crypto companies start launching tokens, tokens as a fundraising mechanism. Mechanism instead of tokens as the tech will become obvious. This is the start of this happening. Miles said no, this is called an unregistered securities offering and the rules are actually quite clear. So Miles, tell me more about this. Yeah.

So look, I mean, I think, I think fundamentally, right, I don't think that the world has changed in terms of, of, of where, you know, what tokens can do. Right. And so if you're launching a token, right, that is basically just a proxy for equity in your company, then, then that should be regulated like a security. And it's really hard to argue that it shouldn't be. And, you know, because ultimately the risks associated with that asset are now very different, or are very similar to an ordinary security. And so, you know, one conception of the world is that like, okay, look, I'm gonna, I'm gonna go out to the world, I'm an entrepreneur, I'm raising capital, I'm gonna, I'm gonna launch a token that, that is you know, that I'm going to give you all of the promises that I'm going to treat it exactly like equity in my company, right? But I'm not going to give you any of the legal rights. Well, should we be treating that any differently than how we treat a share of stock? Fundamentally, right, the person that is investing in that asset is subject to all the same risks that someone that would be investing in the share of stock would be, right? All of the risks of information asymmetry— the founder knows more than I do about the system right? They're still dependent on the founder's efforts to make that asset valuable. Um, and but even, you know, but, but then you end up in actual worse situation because you don't have any actual legal rights. So we don't really want to create a regulatory framework that incentivizes, you know, entrepreneurs to, to, to, to basically put investors in a worse position. Now, in the short term, maybe that is helpful, right? But in the long term, what that leads to is a lot of scam and a lot of scams and a lot of frauds. right? And so fundamentally, I think it's, it's kind of unworkable. Securities laws, you know, there, there are a lot of problems with them, but they have been an enormous, you know, wealth creator in the United States and have facilitated, you know, the growth of our startup ecosystem. So while they, you know, at the edges need some improvements, um, I don't think that we want to create, you know, giant loopholes in them that change how our capital markets work. And that was really, you know, what I was uneloquently getting at in my post was that, you know, to the extent companies are just launching tokens as, as a you know, as a proxy for equity, right? That is fundamentally very clear where the law stands on those things, and that's just an unregistered securities offering.

This episode is brought to you by SKALE, the next evolution in Layer 1 blockchains. With a gas-free, invisible user experience, instant finality, and robust security, SKALE allows for limitless scalability and has already saved its 50 million users over 11 $1 billion in gas fees. SKALE's high throughput, zero transaction costs, and powerful Web3 infrastructure make it the ideal platform for gaming, AI, and other high-throughput apps. To explore the gas-free ecosystem, visit scale.space/ecosystem and follow their journey on X @skale_network. That's SKALE spelled with a K. Thanks to SKALE for making today's this episode possible. Shout out to today's sponsor, Katana. Katana is a DeFi-first chain built for deep liquidity and high yield. No empty emissions, just real yield and sequencer fees routed back to DeFi users. Incubated by Polygon Labs and GSR, Katana is launching with notable ecosystem of primitives, assets, and partners like Morpho, Chainlink, and more. Katana's 1 1 billion CAT campaign is live. Bridge and deposit directly into vaults in one simple click and start earning immediately on your Ether, Bitcoin, USDC, and more. Follow the link in today's show notes to get started. As always, investments in blockchain technology involve risk. Terms and conditions apply. Okay, if I'm Kaito, couldn't I just say this isn't my equity? I have equity. I raised a Series B and a Series C, and Dragonfly led my round at a billion-dollar valuation, and I'm going to go public one day. And yeah, I launched a token, but it's really just like this side thing over here. It's not my equity. I've got— I do have equity.

Yeah. So this is going to be boring from a legal perspective, right? But essentially the answer is, is that like you look at— there's a concept called substance over form under securities laws, right? And that means you're looking at what is the actual nature of this transaction as opposed to what are the formalistic criteria that it falls into. So if I, if I come to you and I tell you, hey, do you want to invest in my company? I'll sell you this asset. Like, here's the, you know, I'm gonna, I'm gonna spend X percentage of my proceeds to buy back this asset in the future, just like what Sam Bankman-Fried did, right? You're creating an economic reality, right, that is the exact same as me investing in a profits interest in your company. You may not be giving me the legal rights, the formalistic rights that, that, that are exactly the same as what a profits interest in your company are, but you're creating an economic expectation on my part, right, that that is exactly what I'm getting. And as a result of that, we regulate those things like securities. To not do so, right, would be to incentivize, you know, individuals to raise capital by just not giving legal rights. You can imagine an entrepreneur coming to the public markets and saying, look, I'm going to issue this token to all of you. I promise I'm going to buy back this token and deliver economic value to it, but I can't actually give you a legal right to those things because if I did, this would be a securities transaction. Well, that's just a very convoluted approach and doesn't really make sense, right? So, so formalistic requirements should not trump substantive ones, right? And the substance requires you to actually wrestle with what is the economic reality going on here.

Got it. For anyone who didn't follow that, um, Eddie has a tweet that is basically just a diagram that says, uh, that is a very clear, uh, you know, yes, yes, no, um, diagram.

So yes, yes, yes. And, and for what it's worth Right. All this is about is if you're buying a token, what are you buying? Yeah, that's right. That is the question.

What are you—

that's what we've— with our token transparency framework, that is what we're trying to solve too, which is basically just like you don't invest— most of these tokens are largely uninvestable right now, in our opinion, because you don't know what you're getting. Are you getting a claim on the cash flows? Are you not? Are you getting— Are the founders going to rug?

Exactly.

Exactly. And we can use this magical software called blockchains to enshrine in some of these systems rules around who is getting what, when. And so you can know what you're buying, not just because you relied on someone to report it, but because you can look at the software and know whether it is even mutable.

That's right. That's right.

I think—

yeah, I think that there's a really good point there too, right? I think your transparency framework is fantastic. Right? And I think, I think it's, it's important to highlight, right, how did we get here? Why do so many tokens, right, have obfuscated value, right? And why, you know, why has this been an issue that the industry has struggled with? Well, it's because of the convoluted regulatory structure that we had in place, right? So under the prior administration, you know, the SEC basically said, hey, if you have value accruing to your token, we're going to regulate it like a security. So the reaction of lawyer-designed coins was, hey, well, we just won't have value accrue to these tokens, right? Gotcha. And as a result of that, we end up in this situation where everything is very convoluted and no one really knows, are these assets investible? Where is the value accruing from? Is it from a company? Is it from a network? What have you? And that also led to arguments that, hey, that governance token over there that relates to a network that doesn't have a fee switch on, is really no different than a meme coin. And then you end up with the propagation of these meme coin markets, right? So from, from our perspective, you know, we, we just really want to focus on where we think that the real unique value opportunity here is, which is to have network tokens that accrue value from, from, you know, functional networks that are not controlled by anyone. And that's what network tokens do. And I think your transparency framework is great because that's great. People should understand right, where the value accrual is coming from. That is fundamental.

Yeah.

Yeah, totally agree. The transparency framework is very good, right? Because there are very— it even just the existence of it implies that there are various levels of transparency, right? And that, you know, there's like the least transparent is like people have secret facts that you have no access to and didn't share them. Right. And then there's like steps up to that. They shared the facts regularly and a third party checked them. Then there's like the max level, right? Which is like there's no one to share anything because the code's just there. Take a look yourself. Right. And the existence of that spectrum is very, very exciting and interesting. So the fact that you put in a report is spectacular.

Yeah. What about when a company says, um, we launched a token, it's for this, but really the market thinks it's different. And actually, just to get specific, I'm sure you guys can't comment on specific things, but like I'm thinking about Zora here. Um, so Zora launched their token and Zora said, you know, the Zora token is for fun only and not for investment purposes, but obviously the market doesn't think that. And actually someone commented, this guy, nar.eth said, if it's for just fun, why does it have voting rights? Um, so how do you, how do you, yeah, how do you think of this?

Well, I don't know. I haven't talked with the Zora team about it. We're not investors in Zora. Are, right? So I don't have any— I have about as much information as everybody else, right? But I'd say this implies— this screams to me like lawyer design, right? Is that lawyers said something like, you need to say that it's for fun and create a sort of convoluted explanation, and that, that maybe is not what's really happening. I feel— I don't say that in a disparaging way. I, I'm just saying like, it's kind of a shame that that everybody has been, until recently, painted into various kind of convoluted corners. And I wish entrepreneurs could be much, much more down the middle about what they're trying to do, because I think everybody benefits from that.

Yeah, I think if you, if you go back to 2017-18, right, when the ICO stuff was happening, there were lawyers that were providing, you know, you know, advice to their, their companies saying, hey, look, like You can do this ICO, just put a bunch of disclaimers on the website that says that, you know, you're not going to engage in ongoing efforts and that, you know, the token is, you know, not going to be, you know, not going to have any value from your ongoing efforts. And that's your get out of jail free card. And this again kind of like speaks to the form over substance versus substance over form point I was talking about. Like, that, that shouldn't matter, right? What should matter is what the economic reality is. And, and The result of these lawyer design mechanisms that are all kind of obviously— all of it just means that we don't have transparency and stuff. People aren't building what they want to build. And that's a problem. We need regulatory clarity so that we can stop with the gamesmanship and people can just get back to building things that consumers want.

Got it. I agree. Preach. Can we use one of your guys' portfolio companies to maybe expand on— I'm trying. I think I've got my head wrapped around this, but one company comes to mind, which is Uniswap. So Uniswap has a token, which is a network token, but you also have Uniswap Labs, which has raised, which has raised money. So could Uniswap Labs IPO and Uniswap, the protocol or the network could just have a token that's trading. Is that how you see that going? I'm not talking about Uniswap specifically here, by the way, like, because I know you guys can't talk about it too much.

Yeah, look, another, another good example is, is ConsenSys, right? So, so you have Ethereum, obviously, is, is, is a big, valuable, important network. And you have ConsenSys that builds a ton of great products on top of the Ethereum network. There's no reason, right, that, that ConsenSys shouldn't be able to operate a for-profit business that benefits or that utilizes the underlying credibly neutral infrastructure that is the Ethereum network. Um, I think you can look at Uniswap very much the same way. Uh, the Uniswap protocol is credibly neutral decentralized infrastructure that anyone can build a business on top of. And what I would argue is that, is that it is beneficial for that network for companies to be building on top of it, right? Uh, at the end of the day, do you want everyone to just go away and disappear? No, you want someone that understands how the protocol works and that is out there convincing the Goldman Sachs of the world that DEXs are the future and that they should be moving securities and other types of investment products onto decentralized exchanges. There's a very valuable business that could be run there, and it makes no sense, right, that you would want to exclude the people that might have the best familiarity with a protocol from actually building a business on top of it because they're going to be the most effective at doing so. And the thing to remember is that benefits the protocol because the more transaction flow that routes to a protocol, right, the better it's going to be for the underlying token if there is a fee switch. And as a result of that, right, it is in everyone's interest for, for, you know, everyone's efforts to be moving towards increasing transaction flow and value accrual.

Yeah, they're— these are complementary but different efforts, right? You could have a DEX that benefits from transaction volume, from special integrations, all these things, has a fee switch on, is accruing value to a token, and that token could be used to spend to, uh, you know, reward specific companies for doing specific types of work, or set up, uh, you know, specific agreements to develop new software, things like that for the protocol. And then separately You could have a company that has a different but complementary business model where it like provides a front end and discovery services and safety services for people who want to transact using that, using that protocol. They're just different. These are two different things that have different sets of network effects, right? The DEX itself has some network effects, as we've seen, and wallets and services for discovering and facilitating exchange on those protocols. They have their own network effects. And it's natural because of the means of controlling them are different that they could end up being distinct businesses with different core ways of making money, but that are fundamentally complementary.

Yeah, I understand. Cool. Anything else on the token? Yeah, token classification. There's a related subject that I want to get into, which is when— you guys had a great blog post about a week ago called When to Flip the Fee Switch. Maybe we could get into that. Yeah, I mean, like I said, you guys just had this piece by this guy Scott, who's very smart.

Yeah, this— yeah, this guy. This guy's got—

this guy's got quite smart. People should follow him on Twitter. He's a good follow. Yeah, but Eddie and Miles— Miles, you put it very bluntly, which is tokens should have revenue. Eddie, you added a little more color. You said network tokens should earn revenue from their protocols. This is necessary to fuel growth, attract investment, and pay incentives. One of the toughest questions is when do we turn on the fee switch? Scott considers this from an economist perspective. Link next. And actually, this guy, some random anon, commented on Miles's post, which I thought was a very spot-on reply to Miles. He said, every marketplace trying to hit revenue mode, but nobody want to be the first one to turn the lights on. So how do you guys think about when is the right time to turn on the fee switch?

Well, Scott's piece puts it pretty succinctly, actually. He kind of sets it up really nice and puts it— but I'd say like my sort of spin on the same idea is, you know, there are many factors at play, but what you want to do really in the end, you want to turn it on when you're going to actually boost the amount of, um, you're going to collect enough fees that don't, uh, that allow you to do something new and powerful and interesting, right? By like being able to spend it on new growth, new stuff, you know, boost the value of the token for future investment without subtracting from the source of revenue, which is you don't divert away users, you don't lose users such that you impede growth. I mean, maybe a simpler way to frame it is just turn on the fee switch when it's worth it. Turn on the fee switch when you don't dampen growth, right? That's one way to put it. Uh, and, and I'd say for— it's a kind of a complicated question for protocols that are considering that today because they have to decide, right, do they want to take these legal risks? Those are being answered, those are being addressed in interesting ways, the DUNA being one tool that they now have. Do they want to be, uh, competing against protocols that don't have fee switches on? How does that change the fundamental economics? What do they want to spend the fee switch revenue on? That's another question. Uh, I personally think right now, because fee switches have been off, and fee switches have been off largely because of legal risks in doing so, I personally think that there's a lot of value in someone turning it on. At a low, very low rate. And the purpose is not to extract as much as possible. In fact, I think it'd be a big mistake right now. The purpose is to show that it is possible and that protocols can get revenue and they can do good things that make their protocols better with that revenue. That to me is kind of the dividing line. So Scott is considering it kind of from an economist perspective, and then there's arguments out there about from a legal perspective. Does that answer your question, Jason Yanowitz?

Yeah, it does. Miles, do you want to comment from the legal side? Because I think this was always for years, this was like, it was really, at least I feel like it was a legal question. Like if you flip the fee switch, you're a security, is I think the thing that got tossed around.

So yeah, look, I think, I think that that's right. So, so, you know, I leave the kind of timing question to, to Eddie and Scott. I think from a legal perspective, The time is now. Uh, you know, I think that the— I think that we've got a, an SEC that is— finds the arguments for, you know, why fee switches are, are good, right? They actually enhance decentralization. Just think about it. If, if you don't have the fee switch on, then you're inherently reliant on that fee switch eventually being turned on, right, in order for the value to actually flow back to the token. So that fundamentally creates greater reliance on, you know, some person to kind of, you know, make that happen. After you've already done it, you remove that reliance and now you have a truly functioning network token where the value accrual is happening from on-chain activity. So from my perspective, I think it's a massive step towards decentralization as to something that should be— as opposed to something that should be, you know, increasing your overall legal risk. So I think, you know, the SEC has found those, those arguments compelling. And I think, you know, that the time, you know, in terms of legal restrictions that have been in place, you know, the DUNA also helps kind of, you know, deal with some of the tax consequences. And as a result of that, I think, I think the time is now. From, from all I can do is hope that we get rid of all of the legal barriers. And I think we're right on the precipice of doing that.

What about the second the maybe the second question here, which is there's turning on the fee switch and then there's passing those fees back to token holders. Is that part legal too?

Yeah, I think so. I mean, obviously it depends on, on how you structure it, but, you know, there can be complications with respect to, you know, tax treatment of those things. But fundamentally, you know, that pathway is available and the DUNA is one of the kind of legal mechanisms that can help projects, that can help projects do that. I think, I think it's, it's, you know, accruing revenue to a, you know, a DAO that then has control over those, uh, that, that value is actually, I think, more complicated, um, right, from the perspective, from a tax perspective, than it is to just have your mechanism design, uh, autonomously result in some buyback and burn mechanism such as how Ethereum works, right, where there is no one that's taking kind of all of the pool that comes from transactions and then going out and buying ETH and burning it, right? It just, it just happens at the protocol level and the way that Ethereum functions.

Why do you think Uniswap hasn't turned on the fee switch or hasn't turned on the fee switch and started passing the revenue back to UNI holders?

Well, those are two separate questions. I mean, I'd be— I think we'd be speculating on the first. Like, you know, they're— I'm sure they're thinking about it. You know, I don't know. I mean, we'll, we'll, we'll find out. Um, you know, that's up to them, uh, to the DAO. And I mean, so I feel like, I think, I mean, I had to double-check, don't quote me, but I think someone could just make that proposal today if they want. I think, I mean, they'd probably want to set up various smart contracts and like a theory for how any fees that are collected are distributed. That'd be really important to iron out before you made such a proposal. But it's possible today. In terms of distributing fees to token holders, I mean, maybe I'm being too literal with your statement, but, you know, you can literally take the fees and give them to token holders, or you could indirectly pass them through. I personally favor the indirect approach because I think it's a lot cleaner, in addition to being potentially more tax efficient and simpler. When I say indirect, I mean fees could be collected and then used in an auction to buy back UNI tokens or network tokens and to, to destroy them. And this is a way to pass value back, uh, that's just as powerful and arguably more economically efficient than distributing them in the form of, for example, yields like staking yields, which are much— besides being much more complex, you know, they have significant downsides. So But in any case, it's not my decision to make.

So, and also remember, right, we're only, you know, 6 months, 7 months into this administration, right? And so the administration's kind of continued constructive engagement with the industry is very important to see because fundamentally, you know, the law has not changed here yet, right? So like, like the law is still what it is. So is there still some risk? Yeah, sure. There's some risk. Is that risk different than what it was? A year ago? Absolutely. And I think as people start to get more and more comfortable with the situation that we're in now, it makes it easier to kind of evaluate those decisions and potentially, you know, decide to go forward.

Nice. Okay, that makes a lot of sense. Ever wish you could access cash without selling your Bitcoin? Ledn, the global leader in Bitcoin-backed lending, makes that possible. Since 2018, they've issued over $9 billion in loans and not a single Satoshi of client funds has ever been lost. Here's what makes a Ledn loan different. With custody loans, collateral is not lent out to generate interest. No credit checks, funds in less than 12 hours, and no monthly payments. Repay whenever you want with zero penalties. And they don't just talk security, they prove it. Ledn offers proof of reserves reports verified by a top accounting firm every 6 months. Ledn is 100% focused on doing one thing better than anyone else: giving Bitcoin holders a secure, transparent way to unlock liquidity without selling. Click the link in the show notes to find out more. As always, investments in blockchain technology involve risk. Terms and conditions apply. How do you think about balancing the needs of different portfolio companies? Like we're talking about DC and I'm sure there's a lot of lobbying and stuff like that and token classification, but like, I imagine you guys are in a tough position sometimes with portcos. Like, okay, I'm thinking of like, okay, you've got Coinbase, Uniswap, and like Optimism, right? Those are 3 companies, all entries in portcos, 3 very different needs. And actually some of them work with each other and I'm sure negotiate contracts like the you know, Optimism-enabled base to exist and never knows about that contract and stuff like that. Like, how do you weigh the needs of your different portcos?

Yeah, it's a really good question. And I think, you know, you can even take a— make it even more complex by looking at it across, you know, the various sectors that A16z, the broader group, invests in, right? So we've got investments in the, you know, defense sector, we've got biotech investments, we've got AI investments, we've got crypto investments.

Right?

All of their needs are not always going to be necessarily 100% aligned. I think the perspective that we generally take, right, is that we're in DC to represent the interests of startups, right? So we call it the little tech agenda, right? And what we think that that means is basically trying to guard against, you know, regulatory capture and ensuring that there are clear rules of the roads for entrepreneurs to be able to innovate. Now, when it comes to crypto specifically, right? That means, like, again, you know, that both of those two goals are, are exactly where we're focused. And, and it means that we're not so focused on, hey, what, what lever could we pull that would, would help one of our portfolio companies? As opposed to that, we're looking at what, what can we do to provide regulatory clarity, right, so that entrepreneurs can compete with one another on a level playing field. That's, that's, that's all we can hope for. And that's the basis of what we want to do. Once you establish that level playing field, then may the best entrepreneur win. Right. And that, and that should be the foundation of what we're going for. And that's generally what we're pushing for. The regulatory picture over the course of the last 8 years, because of the uncertainty that has actually favored the bad actors in the space. Right. Because they end up not getting, you know, regulators don't go after all of them. They target the more legitimate, the more upstanding, um, pieces in the space. You know, they went after Coinbase, didn't go after FTX. That same type of dynamic applies all the way down to the, you know, to the two-person startup level. So the level playing field is really the thing that we want to establish, and it's what we've, we've been missing in this space. And that has uniformly hurt our entrepreneurs, hurt all the good faith actors in this space. And if we can ameliorate that kind of risk and that problem, then, you know, then, then it's anyone's game.

Yeah. Maybe as we think about rounding out this episode, I'd be curious to hear the most common questions that founders come to you guys. Um, Eddie, I don't know if they come to you for the legal, maybe they come to you for the, the engineering.

They do not come to me for the legal.

Yeah.

Yeah. They come to you for the technical questions and Miles for the legal. But, um, are there any topics that, topics or concepts or ideas that come up over and over and over again? And hopefully they're more complex than, uh, Just saying, hey, can, can this person—

it's evolved significantly over time. And, you know, uh, often what sounds like a technical question unfortunately ends up being a very legal question, right? That's just like that because those things intersect. Uh, I don't know that there's like a specific most common question. You'd be surprised by the range I get, honestly. Like, if I tried to take a random sample, it'd be— it's, it's pretty, it's pretty wild. Uh, I think Today, um, today what they want to do is they, they want to ship fast, right? They want to ship fast and they want to make great deals with other companies and they want to make partnerships and they want to leave, you know, they want to release products and they want to hire people. Like, that's, that's what comes up today. A year or two years, three years ago, it was definitely how do I launch a token and how do I do so in a way without getting myself in big trouble, right? I want to do it in the right way and tell me like how I can do it while obtaining my technical vision, right? That came up all the time, and that's actually part of what led to our becoming very interested and involved in the regulatory story, is because of how often this question would come up. You know, sometimes little themes pop up. Something I've been getting a lot about lately has been privacy, right? I feel like— I'm hoping for this, maybe I'm projecting a little bit, right? But I think that as crypto obtains a degree of you know, product-market fit in fintech-y kind of like financial institution world, people are looking at it, grappling with it, thinking about it, imagining it in their product, and they are visualizing privacy issues, right? Which I— which is great. I think that they should think that— think of that. So people are thinking about not just the technical questions of how to bring privacy to their system, but also how to do so in a compliant way, right? Because there's obviously consequences to that as well. Uh, you know, I used to get a lot of stuff about scaling. We all know that like 2 years ago was brutal. Like constantly people are trying to save gas everywhere. Now no one, no one cares about that. Not because it's like unimportant or something, but because we kind of solved it, right? Like a lot of blockchains have added a lot of capacity over the last year and a half. Now I get more questions about UX and how to make things intuitive, wallet design, key management systems, permissioning system. That comes up a lot. No one is talking to me about gas golfing anymore, you know. So it evolves, it evolves. It's interesting. And I take most of those as signs of meaningful progress.

Yeah. Miles, what about you?

Yeah, I mean, I think the, the area where I'm most commonly having conversations right now is just like, where are we going, right? What is— what and how is the regulatory picture evolving? And what does it, what does it mean for the founders? And I think, I think they're right. The critical things are, right? We're moving from this efforts-based, you know, decentralization framework to this control-based decentralization framework. What does that mean for entrepreneurs in terms of how they design their systems? I think it's just, it makes the conversation a lot easier, right? No longer have to have the conversations around, can this person be in the same Slack as this person, right? Instead, how do you actually focus on the more technical elements of designing incredibly neutral autonomous systems and not dealing with all of the off-chain obfuscation and nonsense. So that's really exciting. I think the value accrual story is one that is just starting to pick up steam, and I'm very excited about that because I think it just brings a dose of reality to how these tokens function. And I think that that's exciting. And then I think the other areas are just around kind of this foundation stuff and the Duna and all those, and how do people kind of, you know, deal with the structuring around all of that. You know, we're making good progress there. But I think, you know, one of the things that we've come to see, right, is that this industry, you need lighthouse projects, you need to see someone do something that, you know, knocks it out of the park, that works really well. And so we're working with a lot of founders to try and like, you know, form those like perfect use cases that really, you know, show that these paths are now available. How to hit control-based decentralization, how to turn value accrual on, right? How to use these entity structures in a more, you know, in a more transparent way that doesn't kind of increase opacity. So I think those are all of the things that we're working on. And I think that, you know, this year is going to be very exciting because there's going to be some launches that are really going to knock that out of the park.

Nice. Eddie, Miles, this is a great, great wide-ranging chat. Anything that we didn't cover that you guys want to make sure we hit on?

There's tons of stuff we could talk about, trust me. But I know we can get you for a couple more hours here.

Yeah.

Awesome.

No, this is great. Thank you so much.

Yeah, this is great. Thank you.

Cool. Well, appreciate the time. Miles, Eddie, thank you guys. All right.

Good talking to you.