How Futarchy Ends the Rug Pull Era | Felipe Montealegre & Proph3t
Felipe:
[0:00] All of these rugs are stopped by Futurki. So if you say, for example,
Felipe:
[0:06] in Futurki, funds go into a wallet and they are controlled by the governance process. So if you raise $50 million or $100 million in an ICO, and then the team is like, well, we want to send it to our own Binance accounts and cash out, obviously that market's going to vote no.
Ryan:
[0:27] Bankless Nation, very excited for this next episode. So this is the bull case for futarchy. You've heard that term before. If you haven't, don't worry. We'll define it. How it's going to make our tokens more valuable. That's something we always want in crypto. We've got two self-ascribed futards on the podcast today. No, I did not insult them. They are self-ascribed futards. Felipe Montalegre is an investor at Thea Research. He's actually been on the podcast before talking about how tokens kind of suck right now. And they're in need of a revolution, let's say. But he is a long-term token bull. He's also a futarky bull. Felipe, welcome to Bankless.
Felipe:
[1:03] Thank you for having me on. Excited to be here.
Ryan:
[1:06] We also have Profit on the podcast. He's a co-founder of a neat little project. It's called MetaDAO. This is a futarki and token launch platform on Solana. He, I think, is also a token bull, but he might call them, let's see, what's the term you use for this, Profit?
Proph3t:
[1:21] Ownership coins.
Ryan:
[1:22] Ownership coins. All right. Not just tokens, ownership coins. Profit, welcome to Bankless for the first time.
Proph3t:
[1:28] Yeah. Thanks for having me.
Ryan:
[1:29] Okay. We should do a disclaimer here. Of course, the project we're talking about a little bit today is MetaDAO. So Profit is, of course, a co-founder. He's definitely built on the project. Felipe, I believe you are an investor in the project too. So we should disclose that you're an investor. So naturally, you're bullish as well. That's the case. Am I correct?
Felipe:
[1:48] That's right. Yeah. Investors in MetaDAO, investors in many of the companies that have spun out of MetaDAO. And it's not investment advice.
Ryan:
[1:56] Very good. Very good. Okay. With that out of the way, I think I want to divide this into three parts to really set this up. So part one is kind of like, what is Futarki? We need to understand what this means. And then part two is kind of the case for why our tokens suck right now, at least from an investor perspective. I think we all kind of feel that. A lot of tokens in crypto, they're destined to go to zero. Many of them have been rugged. They kind of suck. We'll talk about that. And then we'll talk about how Futarki might actually fix this and MetaDAO's
Ryan:
[2:24] specific implementation. So a three-parter here. Let's start at the beginning. What is futarchy? I'll throw that over to maybe Profit, you give an answer. And then, Felipe, if you could give your investor answer after that. But Profit, go ahead. What is futarchy?
Proph3t:
[2:38] Sure. So futarchy is essentially governance by markets, right? Like democracy is the word we use for countries that are governed by voters. And futarchy instead is market-driven governance. So instead of voting on what we should do, we bet on what the right thing would be to do.
Felipe:
[2:55] Okay.
Ryan:
[2:56] That sounds simple, but also I have so many questions. Felipe, how would you flesh that out?
Felipe:
[3:01] You know, I'll just, before getting to the mechanism, I'll just echo what Prophet said. It's basically, in Futarki, you allow markets to say whether they think a particular proposal will make the price of the token go up or down. Okay. So, you know, in theory, when a company is deciding, when a CEO is deciding what to do with a company in the US, they're thinking about maximizing shareholder value,
Ryan:
[3:25] Right? Right.
Felipe:
[3:25] That's the culture of U.S. corporate America, of corporate America. And in future you actually let the market vote on the proposal, trade on the proposal and say, do I think that if the CEO is replaced, the stock price will go up or down? And then based on how the markets trade, you loop the outcome back into the actual decision. So just to make that real with one example, if you were deciding to hire Steve Jobs back to Apple, you know, after they had a few CEOs that weren't Steve Jobs, you could set up a proposal saying Apple stock right now is 100%. Let's let the market trade on whether if we rehire a Steve Jobs CEO, it will be higher than $100 or lower than $100. And you have the markets trade those two proposals,
Ryan:
[4:10] Which we'll get.
Felipe:
[4:10] To in a second. And if the higher Steve Jobs proposal is $180, so 80% higher for the stock price, that is what will actually happen in reality.
Ryan:
[4:21] Okay. And I guess the key thing is we can answer that question with Futarki ahead of making the decision. because we have sort of a binary if Steve Jobs outcome that the market decides on ahead of time. And then if not Steve Jobs or if candidate B or C, then some other token price. I guess the way things work today with that sort of decision in a shareholder vote company type of structure, right, is large investors or the board of directors would make a decision on who the next CEO is. And they would just not consult the market at all pre-making the decision. And then basically, they'd make the decision. And after the fact, the stock price would reflect whether their decision was bullish or bearish. But they don't get to, ahead of time, a priori, test the other outcomes, right? And you're saying Futarki is different because you actually, ahead of making the decision, get to somehow market validate and market test the outcomes ahead of time. And then it's simply a matter of like, oh, let's pick the one that maximizes, you know, share price. And you get to like make this, you get to almost like see into the future before you make a decision. That's what's different here. Is that correct?
Felipe:
[5:37] That's right. When a board of directors makes a decision today in a current setup in U.S. capital markets. You assume that they have skin in the game because they are the large shareholders. So they are trying to maximize their own share prices. And they use, you know, they kind of use their own common sense. They do analysis. They try to think about whether, you know, in this case, changing CEOs will increase or decrease the value of their holdings. In Futarchy, you actually open up the decision to the entire market. So it's almost like prediction markets on whether the token will go up or down based on the decision. And people who are outsiders in the company and maybe don't own a lot of tokens can go and can trade the market based on their best assessment of whether the decision will make the stock price go up or down. And the beauty of the mechanism, and I'll let Profit explain it well, is that if you trade and you are right, you will make money. And if you trade and you are wrong, you will lose money.
Ryan:
[6:33] How does that work, Profit? So yeah, what are the mechanics of how this works? Because I'm still having a hard time grokking how, like why market participants will make money in one case and lose money in another. What's kind of the capital at stake? How is this whole thing incentivized?
Proph3t:
[6:53] Sure, so probably something most, I imagine of your listeners will be familiar with is Uniswap. So let's take that as an example. So imagine Uniswap is deciding whether or not to turn on the fee switch. Like the classic governance example. Here in Futarki, what would happen is you would have two markets, one for Unitoken if you turn on the fee switch and one for Unitoken if you do not turn on the fee switch. And you place what are called conditional trades in these markets. You can essentially place an order like, I would buy Uni at, say, a dollar if the fee switch were turned on. Maybe I'd buy 500 Uni, So for $500, if the fee switch were turned on,
Proph3t:
[7:37] And then if the fee switch is not turned on, that trade is reverted. So if I place that buy, I get my money back. And yeah, you place trades in both of these markets. So like you can buy if it happens. You can sell if it happens, if you think it'd be bearish if it happened. You can be also like you can speculate on what would happen if the event didn't happen. Like you could say if someone could say, oh, uni would be worth, I don't know, 60 cents. If it doesn't happen, like maybe that's the market price and you're like, no, I think it'd be higher. So I'm going to buy there. So I could either hold those uni that I've now acquired at a cheap price or just sell them on the open market. Right. If I buy at 60 cents and then it actually turns out to be 70, if the proposal fails, then I can sell and pocket that 10 cent difference.
Proph3t:
[8:26] And then, yeah, so you have these two markets, and we just take a time-witted average price of both the markets. And if one of them, if the market is saying that you need to be worth like a dollar if you turn on the fee switch and 60 cents if you don't, then that's a pretty clear signal that you should turn on the fee switch, and then you can just turn it on automatically.
Ryan:
[8:46] Okay, and then you turn it on, and those who voted that, okay, so how are the participants rewarded again? So let's say, you know, the market dictates which outcome increases UNI token price more. Then tell me again, how are participants in the market actually rewarded for this?
Proph3t:
[9:08] Yeah, we had these two markets, which were like, if this V switch is turned on and if it isn't, all the trades and if V switch is not turned on market would be reverted. And then all the trades that happen in the if V switch is turned on market would be finalized. And so if you like, yeah, let's just say that the fee switch is turned on and then uni goes to a dollar and 10 cents. So the market was like under by 10 cents of what the price was. Right. Then if you bought in that market at like 70 cents per uni, then you could now sell at a 40 cent profit. Right. Or you could just hold and be up, like have high unrealized P&L. On the other end, if you sold, like for every buyer, there's a seller. So the person who sold at 70 cents is probably not very happy right now because they sold a token at 70 cents and then just watched it go up to a dollar and 10. And yeah, so like those are the, it's not really, it's pretty much the same way you make or lose money just by buying and selling tokens in general. It's just that here you, it allows you to like speculate on or like kind of remove risk for you, right? Because maybe you're bullish uni only if they turn on the fee switch and you think a dollar is a good price there. So you buy there, then you're not taking the risk that they don't turn on the fee switch, which has actually happened before.
Proph3t:
[10:29] Actually, yes. And Uniswap, a lot of people, traders got burned because they thought the fee switch was going to get turned on. A lot of people bought uni
Proph3t:
[10:36] and then the fee switch ended up not being turned on and then it sold off. So if you bought at the higher prices, you've just lost money. Right.
Ryan:
[10:44] There have been a lot of fake outs with respect to the fee switch. It's always a kind of a when fee switch. I can't believe we're in 2025 and it's still sort of a when fee switch situation for Unitoken. But then you said, so the outcome would be based on some sort of time-weighted average price, okay? And then would there be, for an example of this type of example, kind of a date, you know, within one week, you know, Uniprice will be X or Y. Is that kind of how it works? There's like a time-based deadline or like what are the specifics of this binary outcome?
Proph3t:
[11:17] Sure. So it's just trading in these markets over three days, which are just like spot markets. They're not futures markets. You're just buying and selling conditional on an outcome. And we run those for three days, take the time with average price, and then finalize whichever market and take the decision that the market thinks is better.
Ryan:
[11:36] And you're saying we, in this case, Profit, that is Metadao's specific implementation of these types of futarki decisions, but there could be other implementations of that, right? Correct. Okay, that makes sense. All right, so who are the market participants in this case? So you sort of know who the market participants are if you did something like a uni token holder vote, which is anybody that has the uni token is eligible to vote on something with respect to governance. This is kind of like DAO 1.0 that we've seen in crypto, you know, since the beginning of these governance token experiments, right? And the problem, you know, there's lots of problems with this, which we'll get into. One is like, who's participating, right? It's like, there are very few participants. Are the participants even informed as the outcome? I get the sense that the participants for this type of futarchy market in driving one decision or another doesn't have to be the UNI token holders. In fact, could be a completely different market in general. So profit, who is participating in the market for this type of a decision in, Like, how informed are they? Like, and do we know that they're informed that these are, you know, smart market participants who will drive towards an effective outcome?
Proph3t:
[13:00] Yeah, so I think they are generally sophisticated, at least the people who trade in size, for the simple reason that like, yeah, I mean, if you're listening to this and you understood all of that perfectly, you probably have like at least one standard deviation above the average on IQ, right? Like, it's not super easy to grok the first time or even the second time. It takes people some time to, like, figure it out. And, yeah, but it generally is, like, the people who are kind of involved in the community is one. That's, like, one cohort of people that trade in these markets. They just care about the project. And then we also see some just generalized, we call them decision market traders. These are decision markets who trade in pretty much all organizations' markets, even if they're not a quote-unquote community member of that project. They're just basically saying, no, I think this price is wrong, and I can profit by trading against it.
Felipe:
[13:57] I think that one thing to add is that these markets call the people with the most information trade naturally.
Felipe:
[14:04] One example is, if you think about prediction markets, the people with the most
Felipe:
[14:08] information have the most incentive to trade those markets. So there was a prediction market recently about whether Taylor Swift would get engaged. And obviously, obviously, You know, her family had information that she was engaged for a few weeks before it was public. And they all had a strong incentive. I don't know if they did, probably not, but they all had a strong incentive to trade the prediction markets because they had information that she was engaged and the market was trading like a 20 cents. Right. So they could have made a profit that way. And that's true for every prediction market. Whoever has the best information can beat the market and make money by trading. It's true of future key as well. So if you are an investor and you have a very strong view on some governance decision, you can come and trade those markets, even if you're not an investor in the project and have never been an investor in the project. And ultimately, you will own the outcome. own the outcome. So, you know, one example is I'd say there was one market where we were a very small investor in a project and there was this decision, you know, proposal where we thought it was pretty negative to the project and we were willing to put our capital behind our... So we ended up trading very aggressively in the fail market, you know, for that proposal, which means we said we were willing to buy a lot on this token if this proposal fails. And ultimately the proposal failed
Felipe:
[15:30] Largely because of us trading the market. And is that fair? It is because then we ended up owning a lot of the token after the fail. So that's the beauty of the mechanism. If you are aggressive in trading a market, you have to own the outcome if it happens. So you own
Ryan:
[15:47] The outcome and you own a specific outcome, let's say. So I guess you're making the case, Felipe, that this will attract, so these are more granular types of decisions. This is not, are you bullish unit token? Yes, no. This is a decision that's more granular. It's still sort of high level and very important strategic, but still granular.
Ryan:
[16:07] That's like, if token, if fees switch on, then this, if fees switch off, then that. And so you're getting more informed investors even than the average uni token holder or the very involved uni token holder because you're getting investors that are willing to put skin in the game and substantial liquidity on a particular granular decision of which you presume they know a lot about. And the reason you presume that is because they're willing to bet big on this particular decision, right? So you almost like you broaden the market and you create a more informed market participant for specific granular issues or governance items. And I guess the expected outcome or the hope is that this leads to better governance decisions around, in particular, the thing that investors care the most about, which is capital allocation. So futarchy for these types of decisions is the idea that it even beats shareholder vote, and it can be even smarter than, say, a very well-informed board of directors. Is that the concept here?
Felipe:
[17:22] Definitely. So in a board of directors, in board of directors in the U.S. Capital markets work well, but you do have board members who have outside incentives. You know, maybe they're friends with the CEO, maybe they are not big shareholders, they're just on because they're famous or they did something.
Ryan:
[17:40] I would say most board of directors are like that. Like, isn't that the default case, would you say?
Felipe:
[17:44] There's a lot. It's default to have some members like that. I think the best case is private equity boards where everybody there is like 100% owner of the company. And that's going to be more similar to Futarchy. But in a lot of public boards, you do have Dana White on the Facebook board. He's great, but he's not like a top 10 owner of Facebook. So it is the default for some companies. But in Futarchy, you said, Well, you only get to vote, trade, we say trade, but vote to the extent that you're willing to put skin in the game behind that decision. So you should actually call out the most informed and most aligned decision makers for every market. And ultimately, you do get better outcomes than from a typical board of directors
Felipe:
[18:32] in terms of shareholder alignment with the token price.
Ryan:
[18:36] I could imagine some failure scenarios here with respect to liquidity. So say you had some sort of futarchy decision, but you didn't get enough market participation or enough liquidity or enough size to actually like make it a meaningful decision. Is that a failure mode? And how does one prevent that in a futarchy type scenario?
Proph3t:
[18:55] Yeah, you definitely need liquidity because liquidity is what my, like, you need liquidity so that traders have an incentive to look at these decisions and participate, right? Like, if there's $1 of liquidity, even if I think the market is super mispriced, or if like I add a lot of alpha, it's just not worth me digging in and placing all those trades.
Felipe:
[19:17] So you need liquidity.
Proph3t:
[19:18] And what's nice here that you have where you don't have in like prediction markets is there's an organization that's pretty well primed to provide that liquidity, which is the project itself. So what we do is the projects themselves provide liquidity in their own token. And well, yeah, they provide USDC and then their own tokens. So like an example would be OMFG, which is one of the projects that launched on us, OMFG USDC. And then that liquidity can also be used in decision markets.
Ryan:
[19:49] Okay. Talk more about that. So the liquidity of basically the project or even the founders can also participate in these markets. I think previously I'd been considering futarchy markets and sort of the decision as all outside investors. But certainly insiders could participate in these markets as well. And why, again, profit? Is that a good thing? Does that not present some sort of conflict of interest? Or like, why is this, in addition to providing liquidity, why does insider participation drive to better outcomes?
Proph3t:
[20:22] So the liquidity itself isn't coming from insiders. It's just coming from the project treasury. So like today when a project launches on us, 20% of the USDC that they raise, which I know we're going to get into this later, but like basically it's all automatic where they just automatically are providing liquidity, USDC and their native token. And that automatically goes into these decision markets. In terms of, is it good if insiders trade the markets? I think this is actually an open question in economics in general, right? Obviously, in US and many other countries, insider trading is illegal, like you're not allowed to trade a security where you have material non-public information. But actually, I mean, yeah, some economists think that insider trading would be better if we allowed it because this idea where, yeah, you generally want people with alpha in a market correcting prices.
Felipe:
[21:16] So that they can like,
Proph3t:
[21:18] So the prices can be more efficient.
Ryan:
[21:19] Well, it's always struck me that basically the bull case for all prediction markets, just outside of Futaki, but prediction markets as information markets is basically all insider trading. So Felipe, like even you mentioned Taylor Swift in kind of that market. I mean, you're basically advocating, these are not securities, of course, but you're basically advocating for insiders to inform the market and to participate in that market because that's how we get the most accurate markets possible, right? So there's a certain element of prediction markets kind of does depend on insider trading, and I guess that would extend into futarchy.
Felipe:
[21:58] I guess the one thing I'd say there is sometimes you have people with very informed views using public information, and they would be very helpful to the price as well. So what most hedge funds do today is that they kind of think deeply about a sector or thinking about companies and then buy or sell based on their, you know, superior judgment on what company is good, what management team is good to allocate capital. And for the most part, they're not using insider information because insider information is defined as, it's like knowing whether a company will be earnings or not, right? Things like that. You can also have a superior judgment on a stock or decision just based on doing analysis with public information.
Ryan:
[22:43] Sure, you can, but you'd have even better information on that if you're an insider, right? You'd be an even more informed participant.
Felipe:
[22:52] Yeah. And that's where you get into profits straight off, which is where do you want to cap how much insider information people are allowed to have? But capping it does come at the cost of market efficiency.
Felipe:
[23:05] If you allowed perfect trading on this information, markets would be slightly more efficient than they are today. You wouldn't have earnings pops.
Ryan:
[23:12] Is a good way to, I guess, summarize what Futarchy is, is it's applying prediction markets to decisions, to governance types of decisions. Is that a good summary?
Proph3t:
[23:25] Sure. I would say just markets. You don't need to add the prediction there. But if it makes it easier to understand, sure, prediction markets for decision-making.
Ryan:
[23:33] Okay. Who created the idea of futarchy? So I recall reading a post from Robin Hanson a long time ago. He talked about prediction markets, and I believe he was applying this to political systems, actually. I think he's written some white papers after that. I've browsed them. I haven't you know, dug fully into Robin Hanson's massive brain. I've also read posts from Vitalik talking about this in the early days, but how long has the idea of Futarki been around and who created this?
Proph3t:
[24:05] Yeah, it was Robin Hanson. For those who don't know, Robin is an economist at George Mason University and who's also, some would call him the inventor of AMMs. Some would also call him like the primary person behind prediction markets. But yeah, he also invented Futarki and decision markets back in 1999.
Ryan:
[24:22] It's a fun fact, actually. The only time we've had Robin Hanson on Bankless, we actually didn't talk about any of those things. We talked about his grabby aliens theory.
Proph3t:
[24:31] Have you guys run across this?
Ryan:
[24:33] Which is basically his answer to the Fermi paradox, which I think is like the best answer. And he basically thinks like, we're too early in the universe and they're too far, but the aliens are all coming towards us as we approach them. It's just a really elegant, interesting theory. Anyway, we talked about that. We didn't talk about futarchy. And I feel like that was somewhat of a missed opportunity.
Felipe:
[24:53] I guess it shows you his brain,
Ryan:
[24:55] His mind on so many different subjects.
Proph3t:
[24:57] Yes, he's very cross-disciplinary. And like, he also has this book called The Age of M, which is, I believe, like about minds and potentially how we can create a computer mind. Yeah.
Ryan:
[25:07] Yes, yes. Okay, so he wrote this paper sometime in the 2010s, I believe, or came up with this concept, but we really haven't seen it applied anywhere in practice. So certainly the governments of the world are still, like the U.S. Is still running. And its governance software is like representative democracy, you know, and so it's not using futarchy. We've got other nation states that are using some sort of, you know, a dictatorship or like small cabal kind of ruling their country is something like Russia. We already talked about how our corporations are governed and that's shareholder vote. I think in crypto, generally, aside from DAO governance vote, which is sort of similar to shareholder vote, except like worse in some ways that maybe we'll talk about. We have this other governance mechanism that maybe partially we created. It's kind of the technocratic Linux-based technocracy sort of or benevolent dictatorship type of model where you have this technical elite and there's this rough consensus. I would say something like Linux and Bitcoin and Ethereum run on that governance mechanism. So that's four that I've named.
Ryan:
[26:17] Futarki would maybe be a fifth, but so far it's just been concept.
Ryan:
[26:22] We haven't actually seen it at play. I know MetaDAO is starting to do some of this, but maybe my broad question is, why haven't we seen Futarki out in the wild if it's just like applying markets to making decisions? It seems fairly simple, but why haven't we seen it?
Proph3t:
[26:37] Yeah, I mean, it's a really good question. Simple answer is just no one really tried it before MetaDAO. So, I mean, yeah, there are a few people who said they were going to do it. Like, yeah, Vitalik wrote that blog post. Gnosis said they were actually going to do future key as a Gnosis safe. But yeah, no one really did it in production.
Ryan:
[26:56] Felipe, do you have any idea as to why? Like, what's, it's just the rest of the world is kind of entrenched in their existing decision-making frameworks and governance. And there's kind of power dynamics. And so it takes a net new experiment to actually like try things.
Felipe:
[27:10] I think that's part of it. And I mean, there are a lot of cases where there have been these big ideas in economics or finance that were never tried until blockchain has made them possible. Because in the kind of traditional financial system, you have all of these permissions, regulations, blockers, and you can have a situation where like a group of two engineers just tries an idea in the world. So you've seen it, even like Cowswap is a good example too, right? Like Professor Budish wrote about Cowswap's mechanism 15 years ago, tried, I think almost 20 years ago now, tried to get it onto every exchange and just never had the opportunity to really try it out until Cowswap reached out to him and said, we want to try out the mechanism he wrote about 15 years ago. So there's a lot of precedent for things not really being tried until CryptoRails started opened up this permissionless system for, you know, two engineers to just give it a go. I guess that makes sense, right?
Ryan:
[28:08] I mean, so the Robin Hanson, if he dreamed up the concept of AMMs, he didn't specifically apply that to crypto that could work in TradFi. It's just TradFi never tried it. And it took crypto to come along to actually have the blank white space to actually experiment and make that idea real. And I suppose something similar you're arguing is happening with Futarki.
Felipe:
[28:29] Yeah, I mean, the number of new banks open since 2008 is almost zero, right? Like the restriction on new experiments in the financial system is very severe. And that's why so many of these things are being tried for the first time in crypto work for missionless. But I think the other big thing is, you know, in Vitalik's blog, he had a big con for Futarki, which was that token price isn't always the objective function.
Ryan:
[28:56] And I think that's.
Felipe:
[28:57] That you can argue that for different scenarios. You can say that, for example, in a democracy, GDP or whatever isn't the right objective function, right? Sure. Or whatever you end up making it. Or even for Ethereum or Solana, where it's like an ecosystem, I think you can argue that token price may not be the objective function. I would probably take the counter to that, but I think it's a debate. But when you're starting a company, right, when you're launching a token that represents the future cash flows of a company or an equity that's where you have your tokenized price has to be your objective function Because you're asking people to give you their savings so you can start a productive enterprise and make the money. So you have, I think that situation where, it's a situation where like Futurki found its killer app with tokens, right? Because if you're launching a company in U.S. Capital markets, U.S. capital markets work fine, right? You don't have this kind of underserved market situation where you can raise capital through VC, you can go private through private equity, you can go public through the NASDAQ or the NYSE, and corporate law is basically good enough to get you what you need out of capital markets. But if you're launching a token, you're in a situation where
Felipe:
[30:20] There's no legal protections. There's so many ways to rug investors. You don't, people don't even know. There's no way to govern these things for the benefit of token holders. And you have this kind of underserved market with a severe problem. For the first, you know, I think for the first time, that future key just neatly exactly solves. So I think it's both things. It's a limit on, you know, limits to innovation outside of crypto rails, but also you'd now have the killer app with tokens and token holder protections.
Ryan:
[30:49] I see. So what you're saying is like, you know, one of the limitations of futarchy is it has kind of singular objective functions, right? That can be too narrow. So, for example, if you're trying to like govern the United States of America, and I think even Robin Hanson's initial proposal, he's still, you know, he's not saying not a democracy. He's saying you vote for representation, but then you use futarchy for these objective based decisions, such as like which policy is going to increase GDP by the higher amount. And you use futarchy for that amount. But I suppose what you're saying for capital markets, and this is certainly true of stocks and U.S. Capital markets, there really is a single objective function. Now, it's not the only one, but it does make sense to have the focus of the entire company be to maximize shareholder value. I would edit that and say maybe long-term shareholder value. In fact, that's the entire fiduciary responsibility of a board and a management team. It's kind of embedded in our laws around U.S. capital markets. Maybe let's talk about that for a little bit. So we've set up this idea of Futarki. Let's talk about, Felipe, something that I've seen you write about many times. You think Futarki is a partial solution.
Ryan:
[32:00] But today, our tokens kind of suck. Our DeFi tokens, that is. And as an investor, I still feel like I have better protection and better shareholder rights.
Ryan:
[32:13] And better commitments to maximize the price of my investment with stocks versus tokens. Tell me why I feel like that, why you feel like that, and why to date, a lot of our crypto tokens just like don't have good investor rights.
Felipe:
[32:32] You feel that way because it's true. And it's been proven thousands of times across the past, you know, 10 years since we've been launching tokens. So right now, most people who invest in tokens and believe that get rugged. That's the reality.
Ryan:
[32:49] And you're not just talking about meme coins here. You're actually talking about like legitimate projects that have some sort of concept, have some group of believers who are trying to build something here, right? Yeah.
Felipe:
[33:00] If most likely case, in the majority of cases, not all, but the majority, if you gave money to somebody over the internet in the past 10 years through an ICO, you were rugged, which is really unfortunate because that is like one of the most exciting things that we're working on in crypto, right? It's the ability for anybody to raise capital on the internet at a reasonable cost of capital and build a business
Ryan:
[33:22] With those funds. You're using the term rugged, which is different than the project not working, right? So like investing in anything at an early stage comes with massive amount of risk, which is like 95%, 99% of companies will fail anyway. But you're talking about not just failure, you're actually talking about something that's like rug, get into that term. How are we getting rugged with our tokens?
Felipe:
[33:46] So I'll go through the, there's many ways to get rugged. And yeah, I'm talking about not a good faith effort by a team where the project failed. That is to be expected. It's part of capital markets, part of capitalism. It's normal. I mean, a situation where the team acted in their best interest or the best interest of a few shareholders at the expense of everybody else who gave them money over the internet. So I'll give you more specific examples. You know, we had a company a year ago where we gave, you know, we invested in them when they were making like 400K in revenue. And it was an exciting investment. We put a few million dollars to work. Within about six months, they were hitting $50 million of revenue, right? So it's a tremendous outcome for us. That's the kind of thing that you live for as an investor. And the team reached out to us and said, we decided that you know we're going to abandon the token and our response is what do you mean abandon the token like oh well you know this is a lot of money You know, we built it as a team. We're going to just give it in ourselves, give it in ourselves the money.
Ryan:
[34:47] And did you just have the token or did you have the token and also the equity of whatever entity was receiving the revenue distribution? It was just the token.
Felipe:
[34:56] Okay. It was only a token. There was no equity entity here. That's a pretty common occurrence. There are many cases like that where projects do well and teams either siphon all cashflow to themselves or part of the cashflow to themselves. You know, there's a case, So that's one type of rug, right? Another rug is when there's a token in equity to your question and the team decides to siphon cashflow to the equity entity instead of the token entity. So we mentioned Uniswap. If you bought the Uniswap token, right now you have no rights at all to the cashflows of the Uniswap app. Only the Uniswap labs, the equity entity, has the rights to those cashflows. I hope they repair that situation. But as of today, if you bought Uniswap token, you don't own the company, you don't own their front-end fees, you don't own any of the fees related to that. There is the more obvious rug situation where people raise money through ICO and they just walk away from the project. So I think on the MetaDow website, you have a few examples, like Pixelmon raised $70 million and the token's down 95%.
Ryan:
[36:05] But Kevin, our friend Kevin, right? This Pixelmon creature that was very popular in 2021?
Felipe:
[36:12] Believe that's right yeah
Proph3t:
[36:13] That's right yeah yeah
Ryan:
[36:14] Okay am i remembering my nft lore correctly i think.
Felipe:
[36:17] You know the the project's down 95 for mint price where did that cash go right there are so many teams that have ico and the cash goes to the team they stop working the project altogether keep the cash and walk away right parrot is the same thing where they raise 90 million dollars they get back money but they kept 45 million dollars for themselves for doing approximately no work. There's cases where teams build a business, they have a token, they sell the company, and they get payments themselves and don't distribute them back to token holders. There's the Bali slow rug where the team raises money, they move to Bali, they work four hours a week, and they get paid 500k a year for working four hours a week in Bali. And there's no way to get the cash back to the investors.
Felipe:
[37:05] There's the, I mean, I just, I see this all. So I'm a liquid investor full time. Right. I see this happen everywhere. Basically everywhere, all the time, all at once. There's the kind of foundation rug where teams will keep all the money at the foundation, but then maybe they'll do a little bit of branding work through an agency and charge the foundation $5 million for like an hour of branding work. And what is that? That's a dividend being paid to the team, to one team member, as opposed to shareholders. And all this is really sad because what's happening is people are giving money over the internet to people in good faith, hoping they build projects. And then either the team or a subset of investors end up taking that money in a way that would never be legal in U.S.
Felipe:
[37:54] Capital markets, never even be close to legal. And that's happening to such an extent that it makes it very difficult for internet capital markets to take off. The reality is that ICOs are a killer app for blockchains. You know, people have trouble raising money outside the U.S. They can raise money over the internet. That works. The tech works. We've been able to do ICO funding since 2017, right? Like people were contributing hundreds of millions of dollars to projects. So the tech works. The problem is what happens after, which is all these rug problems.
Felipe:
[38:28] And the natural consequences of all these rugs is that if you invest in people on the internet, you lose your money because of something that you consider to be inappropriate or bad faith, you don't come back, right? And that's why we've seen these waves of ICOs taking off and then failing. Because people get rugged, get burned and don't come back. Or if they come back, they come back smarter, which means that they sell the top. That's where you hear all these people talking about selling the top or kind of getting out before the music stops.
Ryan:
[38:56] Yeah, you call them, what's your term for them? Is it, there's the foxes and the rabbits, right? And sometimes once people get rugged, they come back as foxes, which is basically like predators that are just trying to kind of scalp the true believers and get them to bid up projects. and then they dump it on them in some way. And so we've created these lemon type tokens with more and more FOX types of incentives. You're saying none of that would fly in US equities markets and stock markets. Why? Because we have shareholder protections, we have a legal system, we have Delaware C-Corps and LLCs and like shareholders, which is.
Felipe:
[39:35] Take those founders to court,
Ryan:
[39:37] Right? And get some sort of retribution. So there's a legal code protecting us in the share situation. Is that the difference?
Felipe:
[39:45] That's the difference. And by the way, before that legal code had fully developed, U.S. Capital markets were also full of fraud and rugs.
Ryan:
[39:54] Yeah, you have this story of, how did shareholder primacy come to be? Was this a court case in the early 1900s?
Felipe:
[40:02] That's right. There was the court case of Doge versus Ford. So Ford, founder of Ford, Motorco, decided that he had to earn enough money and wanted to spend some of the retained earnings at Ford on social causes that he considered important. And the Doge Brothers, which were two early investors- Is that Dodge,
Ryan:
[40:23] By the way? Maybe you're crypto-sizing that. Yeah, Dodge, not Doge.
Felipe:
[40:26] It's Dodge. I've gotten too much- It's
Ryan:
[40:29] A Doge Brothers- Yeah, too much crypto on the brain. Got it.
Felipe:
[40:31] Yeah, exactly. Dodge versus Ford. The Dodge Brothers were 10% owners of the company. And they took him to court saying, you know, we invest in this company for a return. We can't have the CEO making decisions for the benefit of social causes he considers important instead of shareholders. And the Supreme Court agreed with the Dodge Brothers and set up... The doctrine of shareholder primacy. So now if you're the CEO of a company with outside investors, like any public company, you have to be making decisions for the benefit of shareholders over the long term. Now you get a lot of leeway. There's another rule called the business judgment rule that says, you know, if you turn down a big deal because you thought it was bad for the reputation of the company and would hurt you down the line, you can say those things, you can protect yourself that way. But ultimately you have to be making decisions for the benefit of all shareholders. And if you do anything that obviously hurts all shareholders or shows negligence in terms of thinking about them, you will be sued. You will be sued and the shareholders will be made whole. I'll give you one easy example, and I don't want to go too hard on Uniswap, but there was this case where the DAO voted through $20 million for the DeFi education fund, right? And that's fine. I have nothing against DeFi education fund, but there wasn't a discussion of how it benefited shareholders.
Ryan:
[41:55] Uni token holders specifically.
Felipe:
[41:57] Yes. Uni token holders specifically. And that's like, again, a legitimate project with good people donating to a legitimate cause. But in any kind of, if it was a decision in U.S. Capital markets, the first thing discussed would be, how does this benefit uni token holders? How does this benefit our objective function? Right. And what MetaDAO does or what FuturKey does in general is it solves this token problem. Because now every decision needs to go through the test of whether it benefits token holders or not. So, and I've been going for a while now, but this is kind of the big thing is, for me, is all of these rugs are stopped by PewTurkey. So if you say, for example... In future key, funds go into a wallet and they are controlled by the governance process. So if you raise $50 million or $100 million in an ICO and then the team is like, well, we want to send it to our own Binance accounts and cash out, obviously that market's going to vote no.
Felipe:
[43:03] You don't need to think about all this insider information and who's smarter. The market's going to say, absolutely not. That would hurt the token price of this project. If you want to do the Bali slow rug you know the team's like oh we raised a hundred million dollars we're going to move to Bali work for hours a week you submit a proposal through future key saying return the funds because the token would start trading below cash value if that happened and that actually happened to over a hundred tokens during the bear market where the teams kind of went away the tokens traded below cash value and there was no way to get the cash out future key it's simple it's a three day process I would submit a proposal saying get the cash out, the team moved to Bali, it's over. They're not working on this project anymore. If you want to do, back to our friends at Uniswap, and I think it's a great project, there's reasons why they developed the way they did, but if they want to say we want to send funds to equity as opposed to token, there'll be a future proposal saying, do we want to send funds to the equity entity? And the market would say, absolutely not. That's terrible for the Uniswap token.
Felipe:
[44:06] So basically all of these, the example that I gave where the team took the IP away from the token. That would never pass because the IP is owned by the token, by the future key. And they would put up some proposals saying, can we remove the IP from the token and dividend it to ourselves? And the market would say, absolutely not.
Felipe:
[44:24] So future key, I think the killer app is not really... You know, deciding so much on these like fine-grained hard issues. It's just baking in shareholder protections, token holder protections directly into the mechanism so that whenever teams or minority shareholders proposing is bad for token holders, it gets immediately shut down.
Ryan:
[44:45] Okay. I really want to get into how this all works with MetaDAO and Futarki and you've started to go there, Felipe. I do have one more question before we do, and this is sort of maybe partially a defense of the, you know, DeFi 1.0 tokens and the previous DAO type models and like a defense in general of kind of the uni decisions and what they made, which is regulatory, which is basically big bad Gary Gensler didn't allow us to have actual on-chain tokens with any shareholder rights. So we were forced into creating kind of these governance token charades that like couldn't provide true utility or revenue back to token holders. Basically, because if we did that, Gary Gensler would come down on us in our crypto capital markets. And indeed, I mean, Uniswap was like, what do they get a Wells notice along with how many other companies? So part of the reason we are where we are in crypto with our futility tokens is because of regulators and Gary Gensler. And it's not so much Futaki. What do you say to that kind of like counterpoint or retort?
Felipe:
[45:58] You're absolutely right. I usually give that a disclaimer when I talk about Uniswap because I think they're a great project that's been acting in good faith the whole time. The reason I mention it is because it's a very well-known example of sending funds to the equity entity. You know, I believe there's a big chance that had Gary Gensler not been, you know, the chief regulator and Uniswap had been allowed to give utilities a token they would have done so I think in this particular case you're right I don't think that's true for the much more obvious rugs, which I kind of don't mention because it's almost a criminal implication in the most case. But with Unuswap, I agree with you. They're well-intentioned. They probably would have done the right thing for the token holders. Had the regulatory situation been different.
Ryan:
[46:42] Maybe my other question to you, though, is before we get into the deals of futarchy, there are some experiments that actually worked, right? So let's take Aave, for example. Maybe they were a bit more cavalier. with respect to regulation, maybe that's because they weren't based in the US, for instance, there are tokens like Aave or even tokens like, you know, kind of new class of DeFi, like Fluid, that are actually returning revenue back to token holders. And so they're doing this without futarchy, they're sort of, quote unquote, making the right decisions. And indeed, in the case of Aave, seems like they're making fantastic decisions, almost in a kind of a dictatorial type of way where you have Stani and a fantastic management team and then input from the DAO and like they are the leaders in their respective ecosystem for collateralized lending. So without Futarka, we've still made some of these token experiments work. I know maybe we could make more work, but there are still some investable tokens that made it through this gauntlet. How do you explain that?
Felipe:
[47:44] So, I mean, I invest in liquid tokens for a living. So certainly, I agree with you that there are a lot of tokens that have worked. The entirety of my net worth fund is in these tokens that have worked. Again, so I couldn't agree with you anymore. The problem is, there's two problems. One, there are too few of them, right? I count by all accounts. I think the max number of tokens I can say are investable is 50. You know, after all this time and one of the most exciting industries in the world, you know, 50 investable tokens at the most is just not enough.
Ryan:
[48:16] And those are investable because you have some sort of access to basically profits, upside, shareholder revenue, or like token revenue, something like this?
Felipe:
[48:24] Because you trust the team to do the right thing for the token. It's trust-based, right? And sometimes that trust is earned because the teams went through brutal bear markets and proved that they can do that. in the case of like Maple, Euler, Aave, Fluid. Or sometimes you can trust them because you know them and you know they're based in the US and you know they have family networks in the US and that helps a lot actually. So there are ways to earn investor trust and there are people who want to do the right thing, of course. Again, I make my living investing in those projects. The problem is one, there's too few of them.
Felipe:
[48:57] Two, it really is hard for new teams to prove that they are trustworthy. And this is where we get to the lemon problem, right? If you're a new team attempting to raise funds through an ICO, you don't have a good way to differentiate yourself from the teams that are untrustworthy, which is the majority by number in these ICOs. So what you get is you get higher cost of capital issue for tokens. So again, I invest in tokens for a living. The return I need to promise our investors is significantly, significantly higher than the returns that hedge funds these promise investors. In large part because of all these token rugs and all these token holder rights problems. So I think If I go to an investor, I'm like, oh, we're going to earn you 15% a year or 20% a year, they're lapping you out of the room. Again, because this industry is so fraught with all these token holder rights problems. So the, and then the downstream effect of a higher cost of capital is lower valuations. So if you are a token launching in a, in a world where there are all these token holder problems, you're going to trade for the same earnings or for the same promise or the same team quality at a lower valuation than an equity company trading in public markets or trading even in venture markets because of all these issues.
Felipe:
[50:19] And then that, again, there's one more downstream effect, which is if you trade at a lower valuation, if you raise a token, then if you're a really good team, just go raise equity. Why not? Get a better valuation with better terms. So I just think that this kind of, even though there are many good teams that can make it work with tokens, the fact that the majority by number don't make it work by tokens means you have higher cost of capital, lower valuations, and way fewer good teams launching tokens than you would otherwise.
Proph3t:
[50:48] Yeah. So recently we did an ICO for a project called Umbra, which is an early stage project. It's new. It's even pre-product like many seed stage startups. They've developed the product, but they're waiting for Arcea mainnet. And there was $156 million committed to that ICO. So they didn't take all that, but they actually, they could have. All that could have gone to the project and, And I think a big reason for that is because people knew like, hey, if even if this money goes to the project, if it goes to the it's not going to the team, like we're not just giving 156 million dollars to some team to walk away with. It's going into this treasury governed by this or like with oversight by by markets such that, yeah, like if they try to rug, if they try to walk away with it, we can get our money back, essentially. Like we can raise a proposal to do partial liquidation, do a full liquidation. And yeah, so I think that is like a pretty good data point for- Oh,
Ryan:
[51:48] Let's talk about this more than profit. Okay, so Felipe, your interest is in making, you know, our crypto capital markets like great and having more investable tokens and making these as good as like kind of US equities markets. And so part of the solution to this is Futarki. So profit, let's go through that Umbra example some more. So Umbra, it's a kind of a startup phase type of project. They have some sort of concept similar to ICOs. maybe we saw in 2017. It's a real team, let's assume real team, doing something real. And they're trying to raise on crypto capital markets instead of through securities. Now, and I believe it's like a privacy thing. Is that what they're doing?
Proph3t:
[52:29] Yes, exactly. Okay.
Ryan:
[52:30] All right. So, okay. So they raise 150 million using this mechanism. In ICO 1.0 in 2017, that would just be the team's money. Like there's no strings attached for investors. There's no protection here. How is this different with Umbra? You said profit, it goes into, I assume, some sort of smart contract-based system. So it's not directly going to their bank accounts or their multi-sigs, the teams, I mean. It's going to a smart contract-based system, I assume, that has some strings attached, that has some governance associated with it, some sort of futarchy. Describe that in more detail because I'm not sure I understand. Sure.
Proph3t:
[53:11] And to be clear, they didn't take 156 million. They could have, though. That's like the key point. And if you put money in, you risked that happening. Or like that could have happened.
Ryan:
[53:20] And they would have in 2017, right? They would have just taken all of it for sure.
Proph3t:
[53:24] Yeah, for sure. Okay. And the reason why they didn't is actually because of the mechanism, which I'll explain. So they ended up taking $3 million. So that $3 million then goes to the project. Just $3 million?
Ryan:
[53:36] That's very not greedy of them.
Felipe:
[53:38] Yeah.
Proph3t:
[53:39] Because they don't want to trade for below NAV. because, yeah, so the $3 million goes to the Project Treasury. That Project Treasury is on-chain. It's like, yeah, a smart contract. The team, it's actually built on squads protocol, if you're familiar, like the multi-sig on Solana. But it's not a team multi-sig. It's a programmatic treasury where the team gets to spend their burn rate every month, which in this case, they've set that to be 40K a month without needing to do any- And did they set that as
Ryan:
[54:07] Part of the ICO terms, basically? Correct, yeah. Our burn rate is 40K per month and we're raising on that basis. And so we get to, the smart contract kind of kicks that out every month to them as part of the initial programming.
Proph3t:
[54:19] And we recommend adding a buffer just so you have enough. You don't have to constantly raise proposals if you're like, oh, it turns out we need to spend a little more, whatnot. But yeah, so they get up to their burn rate every month that they can pull, which in their case is around 40k. And if they want to make a large spend above that amount, so say they need to spend a million dollars on CapEx or something, that would need to go to a proposal where decision markets would decide whether it goes through. And also if they want to issue new tokens, that also goes to a proposal. So yeah, every token in the system is mintable and it can only be minted by decision markets. Why they only took 3 million, right? The status quo would be like, why not just take 156? Like if the market wants to give you 156. And the reason why is because In this system, as a team, you have actually a lot of discretion. As someone building a product, I can't expect founders to just be constantly negotiating with their DAO and raising proposals all the time. I think probably the right number of proposals is, we'll see where this lands, but maybe between two and four a year. Not a lot.
Ryan:
[55:32] What would these be? Big budgets, annual budgets, kind of major CapEx spend above a million, like who the CEO is, kind of board level decisions? Is that the granularity for these types of future key votes?
Proph3t:
[55:45] Yeah, like fundraise is a big one. Like if you want to OTC out tokens to a big investor, that would be one. If you want to issue new tokens for like a liquidity mining program, that would be one. Things like that. We've actually, we've not had yet, had a situation yet where a team needed to raise a proposal for a big CapEx, like including ourselves. We're also based on this mechanism or like all of our money is stored in this programmatic treasury. And yeah, so why did they take 3 million? Because imagine they took all 156 million and then the market cap of the token traded down to like 130 million. In that case, then there would be the possibility of someone creating a proposal to do buybacks. And that proposal should, in theory, pass because it's trading below the net asset value. As in like the market, if $156 million of cash is trading for $130 million, the market is basically saying that this cash can be better invested elsewhere, right? If you're only willing to buy a dollar for like 70 cents, that implies that you think that dollar is gonna kind of potentially be squandered away, at least partially. And so that would make it possible for someone to raise a proposal to do buybacks, to like shrink, to kind of return some of that capital to,
Proph3t:
[57:04] Token holders, which we've actually had before. So yeah, Felipe earlier mentioned a fund that was governed by this mechanism that kind of failed to deliver returns to shareholder or to token holders. And so gradually shut down. And yeah, so Umbra essentially, like I actually don't think it's that bad to have to deal with these buybacks, but it can be a distraction, I understand, for teams to have to deal with this. And so they don't want to deal with that. And so they want to have, they want to always trade above NAV and they've decided that there's probably enough market demand for the Umbra token such that they can trade above essentially a $3 million market cap.
Ryan:
[57:41] Okay, so they raised $3 million, right? I see right now their market cap right now in terms of token supply is something like $11 million. The fully diluted valuation is $32 million. That excess in kind of the fully diluted valuation that's not on the market right now, is that in their treasury? or is that tokens to be minted later?
Proph3t:
[58:03] Sure. So some of it is tokens in liquidity. Like I mentioned earlier, the project actually provides a lot of liquidity in its own token. Okay. Which is, yeah, like kind of a pump fund inspired mechanism where like, yeah, the people buy and then you take some of the money and you take some additional tokens and provide liquidity. And then the other component is we allow teams to do, to set up these performance packages where they get tokens dependent on both time passing and hitting price targets. So in their case, they just use the default performance package where if it's, there's five tranches and if the ICO price is 2x, or sorry, if the price is 2x above the ICO price, they unlock 20%. If it's 4x, they unlock another 20%. If it's 8x, they unlock another 20%. But yeah, basically this kind of like performance package where they get, they will, they would get tokens or they will get tokens if the price is higher than ICO price. In about 21 months.
Ryan:
[59:07] Interesting. And so part of your job at MetaDAO is to be sort of a steward of kind of like the most, I guess, investor friendly kind of ICO and sort of launch kit with some of these recipes, right? Which is like, you know, founder performance bonuses and just, I guess, some of the recipes that you guys are providing. Now, in the case of like Umbra, let's say. So let's say down the road, they want to unlock a million in CapEx, right? Because they want to invest in something that exceeds their 40K per month burn rate. And their token right now is trading at $1.12, right? Then the Futarki decision, one of these two to four types of board of director type decisions per year would be give Umbra team $1 million to do XYZ, whatever their proposal is, versus do not give the team $1 million. And then the market would determine whether the token price is higher in the event that they release that $1 million CAPEX, say $2 for the Umbra token versus $1, or whether it kind of like goes down in that scenario. And then Futarki would be at play and at work and essentially resolve as to whether the team would get $1 million in CapEx from their smart contract, multi-sig or not. Is that how it works.
Proph3t:
[1:00:27] Profit? Yep. At a high level, yes.
Ryan:
[1:00:30] Interesting. All right.
Proph3t:
[1:00:31] And so...
Ryan:
[1:00:32] It seems like you'd have to have tokens like fully launched on this platform from inception, from birth. You know, so they'd have to be involved in kind of the ICO process. And so it's really meant for new projects, new tokens. In other words, I guess MetaDAO doesn't allow for an existing token to sort of append futarchy governance decisions on top of it. You're more are doing it from like inception in the full life cycle, but they have to really be born on MetaDAO for this whole thing to work, right?
Proph3t:
[1:01:06] We actually do support an existing project wanting to migrate to decision markets. And that's what I spent about a year, like we spent about a year trying to get existing DAOs to move over. So it's less so us wanting to not support there. I just don't think that there's PMF there yet, as in the, it's not like the number one, two or three priority on an established projects priority list, which makes it a tough, especially on Solana, right? Like on Ethereum, you guys care about governance. We don't really care that much on Solana. And yeah, so we definitely support it, but I think the real value add is to an early stage founder. Yeah.
Ryan:
[1:01:49] Yeah. I do have to say, mostly we cover a bank list. We cover the Ethereum ecosystem. And there've been many really interesting innovations on Solana. This is one of the first ones where I'm like, oh my God, this is so Ethereum coded. I'm jealous. I want MetaDAO on Ethereum too, because it seems like it's really innovating in the governance space. So well done on this. What you're doing is very cool. And so you like to call these, not futarchy, because that's governance nerd shit, but profit, you call these ownership coins. Can you talk about what that meme confers?
Proph3t:
[1:02:24] Yeah, I mean, I think, yeah, there's been so many failed governance projects and like DAO projects. I've even considered getting rid of Meta, like Meta DAO. Like we have Meta DAO, that's our name. But then we would just be Meta, which I guess is what Facebook is now.
Ryan:
[1:02:39] Yeah. It's kind of tough. It'd be a lawsuit for you there, Prophet. They've done it before.
Proph3t:
[1:02:43] But yeah, so, and also I think Feudarchy as a name, like I almost kind of want to distance a little bit from that because like if you're an early stage entrepreneur, you're not thinking about, oh, I want to go start a democracy, right? You're just like, I want to go build a business. And ownership coin as a term, I think, well encapsulates what we're doing here. Because, yeah, if you think of the word ownership, it actually becomes obvious why
Felipe:
[1:03:11] Governance is actually some component of that,
Proph3t:
[1:03:14] Right? It's not the only component. We actually do a bunch of other stuff too. So yeah, like Felipe earlier mentioned the IP thing where we spin up legal entities for every project where the legal entity operating agreement, well, so that legal entity owns all the IP and the operating agreement actually enshrines the on-chain governance as like the arbiter of what's allowed.
Ryan:
[1:03:34] Okay. All right. So talk about that piece because I think that's an important component here, right? So you're actually also spinning up a real world legal entity, some sort of C-Corp or Delaware thing somewhere that actually owns IP and is owned. And that IP, say whatever code that they create is actually owned by sort of the token holders as well as part of the smart contract. Is that correct?
Proph3t:
[1:04:02] Yes. So yeah, like basically if there's a proposal that passes to, I don't know, sell. Like, yeah, to move IP, you would need to get a proposal passed, essentially.
Ryan:
[1:04:13] And there is some legal structure, meatspace structure, that has to own that IP in the real world and that comes with the MetaDAO package.
Proph3t:
[1:04:22] Yes. And yeah, so for today, we use this offshore jurisdiction called the Marshall Islands. Oh, okay. And we're working with Metal X, like Gabe Shapiro, former GC at Delphi's company.
Ryan:
[1:04:36] No, Gabe, well, yeah, yeah, very cool.
Proph3t:
[1:04:37] Okay, cool, yeah, he's awesome. And we're probably going to move to Cayman.
Ryan:
[1:04:42] Okay, wow, very cool. All right, so, Felipe, what do you think of when you see this? Like, what's new and different versus kind of our DAO 1.0, governance 1.0 stuff?
Felipe:
[1:04:54] It's really just the token holder projection where you can't do anything that's adverse to token holders. I think that is it's really the killer app like I If we can solve, you know, raising money on the internet is the most exciting thing that's, I'm going to high level, it's the most exciting thing that I think we can solve as an industry over the next few years. And the thing that's been stopping that is poor token holder collections and the ability to defraud or skim off the top from token holders. So I think if we can solve this token holder rights problem, all of a sudden we will get thousands, tens of thousands, maybe hundreds of thousands of companies. Raising capital on chain through the internet.
Ryan:
[1:05:37] And just to be clear, so raising capital on chain through the internet is so great because it's borderless. It's available to anyone with an internet connection. It's a global market from day one. You get all the benefits of DeFi and liquidity and markets and everything we built up. So it's like, it's way better than US capital markets in this certain perspective. What this is solving, profit calls it ownership coin. We've used the term futarchy. It's almost sort of like an unruggable coin though, right? It's an unruggable token. So we're not solving all the problems here. Let's be clear. So there are still tokens that will go to zero here because there are still projects that just won't achieve product market fit or founders that can't execute or ideas that were too early in their life cycle or just things that didn't work, right?
Felipe:
[1:06:22] And that will always be the case.
Ryan:
[1:06:24] What we are solving for here is something that feels small but is vitally important, which is we're creating ICO mechanisms capital market mechanisms that can't be prone to all of the rug risks that you were talking about earlier. The Bally Slow Rug.
Felipe:
[1:06:42] All the kind
Ryan:
[1:06:42] Of the diverting, you know, share like revenue into some other like token, you know, all of those things. That's what we're solving for specifically. And that's going to improve the quality of tokens that we have on our platform. Is that the case?
Felipe:
[1:06:58] Oh, exactly. And I think, you know, all the things that you mentioned, permissionless capital markets, global capital markets, DeFi, programmability of tokens. All of these things are amazing. I think that the token problem, you know, the rug problem, we call it the token problem, is the Cheeto and the door meme that's holding all of that back right now. Because fundamentally, we've created this amazing ecosystem in DeFi. It is, all the things that are possible are incredible. But people do not raise money for most businesses on chain. they don't hold most of their assets on chain because of because you don't get
Felipe:
[1:07:38] You can't pick up high-quality capital on-chain, right? This team, the Umbra team, I don't think they would have gotten $156 million of demand had they launched a random ICO with no protection. Or I know for a fact that they wouldn't have, right? But as soon as that amount of money becomes available on-chain for people to raise funds on-chain, they will come. And as soon as the returns are there because you remove the reg problem, capital will flow into the space. It's very easy to raise liquid capital for an industry that's growing when returns are good, right? If we had three years of good returns through ICOs, you would have billions of dollars on-chain chasing these ICOs. That process is really fast. You get good returns, new funds come up to take advantage of those returns.
Felipe:
[1:08:30] Fund to fund see that they're like liquid token allocators doing well. Again, getting billions of dollars on-chain is very fast. And for teams, you know, the Umbra ICO happened, they got $156 million in capital and, you know, profits getting dozens of DMs the next day from teams I want to raise on Metadap, right? Like both sides here want to meet. Both sides, you want to cooperate, but you have this token problem, the rug problem in the middle, stopping it from happening. And I think that as soon as you kind of get rid of that through future key, you are going to see a tidal wave of on-chain capital raising.
Proph3t:
[1:09:08] And I would say, if I could just add to like the entrepreneur side, like why is an entrepreneur go this path? Because I think the obvious answer is just because they can raise money here where maybe they can't raise money elsewhere. But I think I'm also, I've seen like the really high quality founders that I talked to that want to raise with MetaDAO. They want to do a token because they like the distribution edge of doing a token. Like they like the idea of getting all these bag holders that are then incentivized to like shill them on CT into their friends and whatnot. But they want to do it the right way. And today there's a few playbooks of doing a token. Like the main one is this low float high FDV playbook, which is really not a fun game to play. Like you're basically just trying to hype up your thing as much as possible, get as many Koreans to buy it. And then like your token is going to go down over an extended period of time.
Proph3t:
[1:10:00] And like it's not, yeah, it just is not really purpose built for building a business, the existing, the established token playbook. And then we have this new token playbook where you can launch a meme coin on PumpFun or like some other bonding curve based platform. Which does solve the low flood high FTP problem, but then you're not actually creating a valuable token, right? You're launching a meme coin and that tends to attract short-term holders and just like people betting on tension because the thing itself doesn't have value. And here's like, if you really want to do things like a grassroots way, we're launching a token on day one, allowing it to potentially appreciate over time because you're not launching it like a $5 billion FTP or $1 billion FTP, but you want to do it in a way that you can like sleep at night and gets high quality people to surround you. I think that's like the main, the main pitch.
Ryan:
[1:10:52] Right. And if you're right, and if this works, then you become kind of the, the anti lemon ICO platform where all of the good teams and the good projects kind of come to you and you slowly kind of transform our token markets to higher quality projects. Let me throw out one wrench that could totally gum up the works here. And this is, I'm going to invoke the G name again, Gary Gensler, okay? And let's talk about maybe a V2 of Gary Gensler. Right now, we have a favorable SEC in Paul Adkins, who seems to be sort of letting things happen, letting experiments play out. Indeed, someone like Hester Peirce is very in favor of sandboxes and all of these things. That, however, is not the last word on the SEC and securities regulation.
Ryan:
[1:11:43] Coming back to kind of like the full circle lessons from 2017 through 2022 is the SEC as kind of the king capital markets, they are going to have something to say about these types of setups and ICOs on internet, in internet capital markets, right? And there's existing US law for this, right? There's accredited investor laws, you know, they feel like they have the investor protection capital markets thing figured out. Of course, we being crypto natives, we're like, okay, well, we're still in the spirit of everything you're provided. You want investor protections? We could do you one better. Smart contract-based investor protections where no one gets the money and you could see it all on chain and it's all glorious. If they were thinking from first principles, then they might come around to our idea. Anyway, this is a long-winded way of saying what happens with regulation, okay? So we got to be still somewhat in the gray zone here. I've seen enough crypto projects get torched by, you know, angry regulators, the SEC. We've seen the anti-crypto army. This is not a settled matter in the U.S. So I don't know if you have a perspective on this, Felipe, or Profit, but I'm a little bit worried that some sort of form of a Gary Gensler reincarnation comes back and strikes back at these ICOs that we're trying to do and kills our experiments. Do you have any takes on this or any perspective here that you can lend?
Proph3t:
[1:13:10] I have a take, which is essentially, this is a risk. Like this is a real risk. And I understand that. And I mean, there's two things I would basically say. One is that there are countries outside the US. I know the US has like a long arm. I live in the US and San Francisco, which I love, but there are plenty of entrepreneurs who are outside the US and like, potentially don't have to care that much about what the SEC says. And then the other point is that I think like if you work in crypto, like if you're building something in crypto and you're not willing to enter the gray area, at least, you should probably find a different industry to work in. Because yeah, like if you go back the history of crypto, Bitcoin is an unlicensed money transmitter, right? There were previous iterations of Bitcoin that got shut down by the feds because they were unlicensed money transfer. Only difference with Bitcoin is that it's decentralized, so it's hard to shut down, right? I think a lot of DeFi as well is like, probably if you were to look at it with a really sharp eye, is breaking at least some existing rules. I mean, I'm skeptical that the existing token playbook even is not a security, right? The model that Fenwick dreamed up where you have the labs entity, the foundation entity, and then the DAO, and there's these different relationships between them. Like that's not been tested in court. We don't know that that's not a security. It still seems to satisfy some of the
Felipe:
[1:14:38] Requirements of being a security, right?
Proph3t:
[1:14:40] Investment of money in a common enterprise with the work, with expectations of profits based on the efforts of others, right? Most people are buying tokens with expectations of profits on the efforts of others, right? Like if the team just went away tomorrow, aside from maybe Ethereum and Bitcoin, like there wouldn't, most tokens would go down at least 50%, if not more. And so, yeah, those, I guess then that's three points. One is like outside the US, two is, yeah, if you're working crypto, you'd probably be okay with gray area. And number three is like, even if whether you like it or not, you're actually already in the gray area.
Ryan:
[1:15:16] Can I add a number four, which feels like the being on the right side of history, I feel like is important. And like when you're in the business of, you know, quote unquote, doing the right thing and providing value to market participants, I think you are on the right side of history. And I think there's the case that you can blitz scale such that regulators just have to start accepting you.
Felipe:
[1:15:36] I was going to add something a lot like your point four, which is, you know, I have faith that people who are concerned about crypto and how it meshes with U.S. Capital markets regulation will be much more open to hearing arguments from the people who just had a hour and a half podcast on how to secure shareholder protections and on-chain capital markets and how to stop rugs from happening and how to make sure that, you know, people who put their savings in these instruments don't lose all their money. Like we are trying to achieve the same goals here. So there's always going to be some friction between old regulations and new technologies. But if you're on the right side of the argument and you're trying to, and you are trying to adhere to the spirit of the law as much as possible, I think you have a much better shot at being listened to and being in the conversation than if you are going very much against the spirit of the law, which is what I think a lot of the industry has been in over the past few years. For better or for worse.
Ryan:
[1:16:33] So Profit, scale this forward. What's next for MetaDAO? It sounds like you've got active ICOs kind of launching today. What's kind of the next step in this platform?
Proph3t:
[1:16:43] Yeah. I mean, really just scaling out the number of projects. I think it's a really tough, like market sequencing is a really tough problem. Like how do you introduce this in a way where that's okay, basically, because you have this two-sided platform. On one side, you have the capital providers. On one side, you have the founders. If there's too many founders and not enough capital providers, then things under-raise. And if there's not enough founders and too much capital, I guess that's slightly better. But still, people lose excitement because they're like, oh, I don't go to this platform because there's nothing to participate in.
Ryan:
[1:17:17] And that all happens in waves, right? There's never a time where you're going to have perfect balance, I suppose.
Proph3t:
[1:17:23] Yeah. I think it's kind of like a zigzag. Of some weeks, I focus on getting more capital providers, like DMing people on Twitter and being like, hey, you should check out this ICO thing. It's actually kind of interesting. And then some weeks I focus exclusively on meeting founders. But yeah, I think we are more. And there's also some things that we need to tweak with the mechanism itself. More, I would say, around the edges than core changes. But yeah, basically just, I have reasonable conviction that this market, like this product will work. And so now it's a question of how do we improve the product incrementally? And then how do we, yeah, capture the market and like go to market as quickly as reasonably possible?
Ryan:
[1:18:05] Felipe, what's your take on where all this leads?
Felipe:
[1:18:07] I think that you'll know that future key and ownership coins have won when existing projects get a valuation bump from converting. So I think at some point in the future, you will see projects like Aave and Maker and these well-known tokens that are reasonably good faith convert into future keys and get a valuation bump on the news, basically. Because investors will, and that's when you know that investors have appreciated the mechanism, understood why it's so valuable for them, and decided to put more money, all else equal, into future keys than unprotected tokens.
Ryan:
[1:18:45] Well, Felipe, Profit, it's been really a pleasure to learn about this. Very interesting project. Love what you're doing over there. Hope maybe you come to an EVM chain at some point, Profit, maybe a base or something like that. But cheering you on in this governance experiment, it's certainly good for crypto.
Proph3t:
[1:19:02] I mean, yeah, if the market wills it, we'll go to base. But yeah, thanks so much for having me on.
Ryan:
[1:19:07] There you go. Maybe we'll put up a prediction market or futarchy decision on whether the market wills it at some point in the future we'll see guys thank you so much bankless nation gotta let you know none of this has been financial advice has not been ICO advice either crypto is risky you could lose what you put in but we are headed west this is a frontier it's not for everyone but we're glad you're with us on the bankless journey thanks a lot.