Company-Building, DeFi & Fixed Interest, Big Tech in India, Coin Voting Governance and Crypto 2.0
The Tech Tok Weekly #26
Welcome to the Tech Tok Weekly #26, for the first time on a Tuesday by virtue of a bank holiday!
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Tuesday Musings
One of the articles we’re going to look at below, about the clampdown on social media in India, once again got me thinking about decentralised social networks (DSNs) and how they may be a salve to so many of the problems we’ve seen with social media in the last decade. I’ve only briefly touched upon decentralised social media previously, and since I mention it below again, I thought it’d be a good idea to include a primer on how they work. DSNs operate on independently run servers rather than centralised servers and allow individuals to set up their social network independently, enabling them to set rules of operation. These networks can interconnect with other decentralised networks, allowing users to engage across platforms, in complete contrast to today’s networks, where, for example, Facebook users can only interact with other Facebook users. Email can be a good example of a similar service – there is no restriction in sending emails from Gmail to Yahoo, and vice versa. These DSNs work in a similar way. There is an obvious Achilles Heel here, though – moderation is almost non-existent, and that can lead to very ugly outcomes in terms of toxicity and the spread of misinformation. Moreover, offending posts (e.g., child pornography) cannot be directly taken down as they are today, leading to huge criminal implications. Therefore, before the moderation and governance issues are resolved for DSNs, they will likely not take off and become dominant.
Meanwhile, this week…
Sam Corcos walks through how he spent his first two years of building Levels, the fixed income interest rate will open the world of DeFi up for retail and institutional customers, and Big Tech is facing a harsh reality check in India. Also, Vitalik Buterin expands on the issues with coin voting governance and provides some solutions, and Crypto 2.0 is on the horizon.
#1 An Exact Breakdown of How One CEO Spent His First Two Years of Company-Building
You get an idea that blows your mind and dollar signs start flashing in your eyes. You start a company and realise the extent of the task ahead of you – strategy, engineering, operations, recruitment, fundraising, team-building, and so on. And the first year or two of building your company are the most crucial and intense, where survival or failure are decided. In the most Silicon Valley CEO move ever, Sam Corcos, co-founder and CEO of Levels, shared his insights from tracking every 15-minute increment of the first two years of building his company. Some of these are:
A CEO should primarily be an information router, and communication is a top priority. Corcos blocked off 3-4 hours every day to stay on top of communication, pinpoint gaps in the company, and figure out how to solve them. He recommends using asynchronous tools like email as the tool of communication and turn off notifications for disruptive tools like Slack to maintain focus.
The actual time spent vs. how Corcos expected his time to be spent diverged a lot. He spent a lot less time on recruiting and strategy than expected, and a lot more time on networking.
It isn’t integral to build a completely scalable system from the beginning – the goal is to learn what’s working or not.
A CEO spends less time on strategy than they think they do, and if that needs to be a priority, then time should be reallocated.
Use content to scale your time. Unless you enjoy taking calls to repeatedly answer questions like, “What’s the TAM?”, “What are the customer personas?” and “What’s your go-to-market strategy?” you should try to solve this by writing those ideas down and sharing the written content. I guarantee it will save you time in the fundraising process — and it has the added benefit of sharing context with everyone on your team!
#2 The Lowly Fixed Income Interest Rate is the Magical Motor DeFi Needs
Several protocols serve to mitigate the interest rate volatility endemic to DeFi, a characteristic that has limited participation in the space by both retail and institutional investors. An example is 88mph, a protocol offering fixed-interest rate bonds (FIRB), floating-rate bonds (FRB), and zero-coupon bonds (ZCB).
In a FIRB, investors deposit stablecoins or tokens and get a fixed return over a time period. 88mph puts these funds into the yield-generating vaults of protocols like Compound or Aave, and offers 50% of the Exponential Moving Average (EMA) of the rates on these protocols. Buyers obtain an ERC-721 NFT which represents their principal that they can hold, transfer, or trade, and also get $MPH as rewards for contributing to the protocol, which they can stake and earn yield on.
FRBs fund the fixed-interest rate for FIRB holders by letting users bet on the 30-day EMA of the APY of protocols like Compound. If FRB APY > FIRB APY during the lending period, FRB purchasers obtain a share of the additional revenue generated. If FRB APY < FIRB APY, 88mph uses the funds collected from FRB investors to cover FIRB debt.
ZCBs are mirrored tokens that do not pay interest rates but trade at a discount and offer face value of the underlying currency at maturity. ZCB buyers obtain ERC-20 tokens wrapped with fixed interest rates, allowing lenders to own a liquid and easily tradable asset class which reduces friction. Essentially, ZCBs are savings accounts offered to investors that reduce volatility.
The volatility in variable interest rates deters investors from participating in the DeFi protocols. Imagine a business depositing USDT to C.R.E.A.M. Finance with an active interest rate of 7.5% on June 7. In just a month, the APY on the deposit would go down to 6.3% and risk further contraction depending on the state of the market.
The difficulty of entering China has been a long-storied and infamous rite of passage for numerous Big Tech firms, with Google, Facebook, and Amazon all failing to crack the largest market in the world. India, with its huge and increasingly literate and tech-savvy population, has been seen as the panacea to this expansion problem. Recently, though, the dynamics of the Modi government have seen Big Tech hit many roadblocks. New rules enacted in May require social media platforms and streaming services to hire additional staff to address ‘grievances’ filed by Indians offended by content and employ full-time officers to liaise with law enforcement agencies. News websites also have to submit compliance reports and submit to increased censorship, while another rule mandates messaging apps like WhatsApp to break encryption. Penalties for non-compliance are severe – local officers can be jailed and companies can lose protection from liability for content their users put up, which can lead to an avalanche of lawsuits. Combined with similar headwinds from countries like Vietnam, Nigeria, and Russia, the social networks face a steep battle to maintain their services (and profit). To protect profit margins and their presence in India, then, many (although not all) social networks are falling in line, and the consequent impact on free speech could be significant. It seems as if the only model of social media that may work globally may be decentralised, and it will be interesting to see the impact this model makes (and the blowback it receives) if it becomes predominant globally.
Despite India’s mercurial and daunting regulatory climate, Silicon Valley is unlikely to reduce its presence in the country, even if it means walking a near-constant tightrope in the years ahead. The world’s second-largest internet market is just too big and too important to ignore. But companies are also unlikely to acquiescence entirely, experts say.
#4 Moving Beyond Coin Voting Governance
Vitalik Buterin makes a case that we need to move beyond coin voting governance due to two specific issues with the mechanism: incentive misalignments in the absence of attackers, and vote buying attacks. The former occurs since whales are better at executing decisions than larger groups of individuals holding fewer tokens, and coin voting governance empowers the interests of coin holders at the expense of the rest of the community, leading to conflicts of interest. The latter occurs due to the unbundling of the economic interest and governance rights that come with coins; e.g., in a wrapper contract where coins are deposited for yield and the governance power auctioned off by the wrapper can be bought by an attacker. A few solutions he proposes are:
Limited Governance: On-chain governance should only be used for dApps and not base layers like Ethereum; limit governance to a fixed parameter; time delays for governance decisions; and fork-friendliness is encouraged.
Non-Coin Driven Governance: Proof of personhood systems verifying that accounts correspond to unique individuals and governance is assigned to one vote per human, or quadratic voting making the power of a voter proportional to the square root of the economic resources that they commit to a decision.
Skin in the Game: Votes become bets; to vote in favour of a proposal, you bet the proposal will lead to a good outcome, and to vote against the proposal, you bet the proposal will lead to a poor outcome. Good bets entail more coins, and bad bets entail losing coins.
The most important thing that can be done today is moving away from the idea that coin voting is the only legitimate form of governance decentralization…coin voting may well only appear secure today precisely because of the imperfections in its neutrality.
#5 The End of The Beginning for DeFi: 2.0 is Coming
The second version of Web 2.0 differed significantly from the first version; where the first version involved tools like Yelp, the second version brought to the forefront companies like Uber and DoorDash that managed three-sided marketplaces and real-time logistics. According to Benedict Evans, this shift showcased ‘a different kind of business with different assumptions about what the internet looks like’, and that is the shift we’re seeing crypto make. Crypto 1.0 refers to tools like Uniswap or Compound that enable financial arbitrage and trading. They are crypto-native, anonymous, and fungible. Crypto 2.0, on the other hand, will utilise the building blocks of 1.0 (stablecoins, money markets, DEXs, dApp UI patterns, etc.) to evolve into a version of crypto that is defined by real-world interactions, reputation, and less fungibility. Firstly, crypto will (or has to) push into real-world interactions to succeed, since a majority of the economy is still in the final throes of Web 2.0, and has to be brought into the Web 3.0 upgrade. Secondly, reputation will be used in the form of companies getting loans at good rates, funds building up reputation on-chain to attract capital, etc. Thirdly, there will be less fungibility due to the high volume of tokens to invest in, while individuals will have their own tokens (e.g., social tokens). The scale of opportunity is huge – social media, lending, payments, tickets – the list goes on, and Crypto 2.0 is getting ready to take over the world.
Social media is one of the largest sectors of the economy, and crypto will finally get to take a shot at it during the next wave. Similarly, merchant payments, the massive segment that built companies like Stripe and Square, will likely finally see some crypto competition.
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