Vinay Gupta, Hexayurt.Capital | Blockchain: Ecology, State and Anarchy - Lake Harding Association

Vinay Gupta, Hexayurt.Capital | Blockchain: Ecology, State and Anarchy

Vinay Gupta, Hexayurt.Capital | Blockchain: Ecology, State and Anarchy

By Micah Moen 1 Comment October 10, 2019

(Music) (Music) (Applause) Vinay: Now my voice is a little weak today because I have a sore throat, so wish me luck. Thank you. Okay So, I want to start with a simple objective. We are in a world where our ability to solve the problems we have is constrained by our ability to innovate. Anybody that’s doing anything really substantial about directly working on big global problems knows that the hardest problem is that there’s no money for solving big global problems. The money that we have, the innovation capital that we have as a society, as a whole is split up into lots and lots and lots of tiny little pots, things like regional innovation funds. And each one of those funds, those little buckets of money is specifically tied to a set of local policy objectives. There is no liquid money. All the money is directly tied to some set of responsibilities, there’s a kind of legal chain that goes from the state level, down or the international level down and there’s just no liquid money with a big box on it that says save planet earth. It’s all divided into agendas and until you can get some particular cause taken seriously enough, for the states to begin to allocate funds to it, or the thing happens to be profitable inside a free market setting, there’s basically no way to fund the research and as a result we don’t do the research, we don’t do the innovation and you can’t get the big problems solved. So I’m going to talk a little bit about that and I’m going to talk about how we construct kind of micro-jurisdictions that could have the right set of properties to be able to allocate fund directly to innovation. So this is about governance, it’s about smart contracts, it’s about law, but most of all it’s about the ability to get funding behind things like these rockets rather than behind designing you know 14 new flavours of Cheetos. (Laughter) Erm now. Ah there we go. So here’s out kind of poster child. It’s going to be rather expensive to go to Mars. It seems like a good idea that somebody should do it. Elon Musk is attempting to figure out how to get to Mars, he is doing a lot of engineering. But at the end of the day SpaceX is reliant on building a very large commercial establishment to be able to make the investments necessary to get a Mars mission going. And the ability to do that kind of heavy lifting financially relies on a fit between the general objective of ‘let’s go to Mars’ and the specific set of technical objectives on the way there. And if ever those two agendas come to pieces, there will be an enormous funding gap because the commercial space flight money will go in one direction and the necessary R&D for Mars will go in another direction and we will be left with a highly unfortunate gap. So, if we are going to pay for this, it would be nice to be able to put money directly behind this. If you are reliant on this convergence of interests between the commercial and the, you could say, existential, If you need to align the commercial and the existential at every step, there’s no guarantee they are always going to align. So the old solution to this problem was, we used to have a thing called government. Now, in Berlin you may still have government, it may just about function but in most of the rest of the world, the institution of the nation state is in serious trouble and specifically it’s stopped doing this thing that it used to do, which Mariana Mazzucato describes in The Entrepreneurial State. Which is, it put 40 years of money into R&D in Silicon Valley. Mostly in the form of defence spending, which laid a sort of multi-generational micelial under layer of competence which could then be assembled into what became Silicon Valley. Silicon Valley was the 3rd generation, they were you know working off not only Uncle Sam but Grandpa Sam’s money for generations before they got to the critical mass necessary to produce the explosive innovation that we know Silicon Valley for today. It’s a long process. The one thing I’ll note here is that FOSS became a useful exception to this general rule because free software created a way of doing the innovation spending that was not state driven. Because we had commons based peer production we could put all of the resources collectively into a structure that allowed us to innovate. But the collectivisation structure wasn’t the state, it was the open source pools and what Yochai Benkler called commons-based peer production. And we are going to talk a lot about open source later on. Open Source solved the innovation funding crisis which is why we had an enormous explosion of value inside of open source software and then the commercialisation of that as the dot-com boom exists because of a license bug, Richard Stallman describes as a license bug in the GPL. Because GPL2 permits you to keep your software proprietary as long as you’re not distributing it. What happens is we’ve got the arising of software as a service, where I build a web application made of open source components but I never give away the critical logic because I’m not distributing the application by the license terms. So, if the GPL2 had been phrased slightly differently all of the dot-coms would have had to either buy their web servers from Microsoft or they would have had to give away the source code of their services into the open pool. So, what we’ve seen is the privatisation of trillions of dollars worth of wealth because of a very small bug inside of the license agreement in GPL. And it was an unforeseen future circumstance that gave rise to that haemorrhaging of wealth out of the commons. So, my suggestion is that a structural reorganisation of the ICO could give us the necessary innovation capacity to fund projects up to, including and even beyond things like a Mars mission. We need to build several layers together into this picture but once those layers are successfully aligned, something very very interesting happens. So, right now the ICO market is really only funding software and most of it is blockchain infrastructure and most of it is frankly not very good or very interesting. The ICOs are generally nonsense. I don’t want to say they’re garbage but they’re generally junk. Now, on one side of that, there are a handful of ICOs which are genuinely let’s build the future of humanity and let’s do it right now. And the hard part, as we’ll talk about in a second, is how do you tell the difference? Inside of the blockchain space, if you’ve got a bit of experience with the blockchain thing, you can look at an ICO, you can have some notion of whether it’s nonsense or not nonsense. But what do we do in areas that we are unfamiliar? If we want to build a market for ICO-ing say self-driving car research. How are we going to figure out how that works? If you go through an initial public offering, you have a sort of 80 page prospectus document which will describe what the technology is, it will list lots of authorities that have thought about the technology and they will give you a review of it the whole thing will have an enormous amount of state driven handle turning to try and make it possible for an ordinary investor to invest or not invest based on feedback from competent authorities. And all of that creates an enormous overhead for doing the public offering route and the result of that is that we have lots and lots and lots and lots of delay lag and overhead if you want to do this kind of stuff and it’s very difficult to IPO things which are extremely high risk and this is an unintended side effect of the structures that we are using. So, we have to face a problem which is, we can’t always tell whether or not something is legit. Somebody decides to go into ICO a perpetual motion machine, an awful lot of the investing public don’t know that that’s not going to work and we have to deal with the fact that this is how the world is. Right, it’s all very well to have a set of games that were designed for people with engineering degrees to play with each other but when people that don’t have that technical foundation come in they are going to get hurt, because they don’t have the ability to tell the difference between real and unreal. And this is not just restricted to people that don’t have technical educations. If you think about the cold fusion thing from the 1990s the entire world scientific community was torn apart by the decisions out whether cold fusion was real or not and to this day there hasn’t been a definitive analysis. Nobody’s really entirely sure. So we have to deal with the fact that we just can’t tell in all cases what is legitimate and what is not. And the Securities And Exchange Commission is the thing which is fighting hard to try and protect investors from these kinds of uncertainties, basically by keeping them entirely out of the field, but as a result we have an enormous starvation of capital because if you’re a technical professional, you might have the necessary knowledge but unless you meet the SEC criteria, you can’t invest. So I want to suggest an approach which is, rather than using the current accredit and investor standards which in the US require you to have a million dollars of liquid capital in excess to your house, after your house or an annual income of 200,000 dollars a year. What if we designed a new set of criteria for technically accredited investors? You’re an investor, you’re sophisticated, you’ve got a PhD in computer science you want to put some money into an ICO to build a distributed computing framework. Is it really the SECs business to tell you that you are not smart enough to do that? No. It seems like the answer is no. So, I want to suggest that we could, as we attempt to figure out how to legitimise the ICO processes, we could ask for a new class of investor accreditation. The entire blockchain community could say, look we’d like a technically sophisticated investor or an expert investor accreditation, we’d like to try it out in the computer science space and if it works well enough in the computer science space, let’s take a look at doing it for biotech, let’s take a look at doing it for robotics, for AI. We could build pools of technically sophisticated or expert investors in all of these areas and they could form the backbone of the innovation economy and you could then organise their collective investment using the same protocols that we are using for the ICOs but now these things would be regulated. And I think that that has enormous potential. Now. This approach is a potential funding vector for an enormous acceleration in our ability to build new things. You know, we know that we are going into this kind of series of complex exponential feedback loops as we approach the, mumble mumble, and that process is going to continuously strain our ability to get things like venture capital behind projects. Because the VC model is about 50 years old, it doesn’t necessarily have the technical skills at the very bleeding edge because often you have to wait until somebody’s made a bunch of money selling one or two companies at the bleeding edge before they have the resources to enter the VC game. So, automatically you have a 5 to 10 year lag and VC companies that have the necessary specialisations to fund particularly exciting fringes, still take years to form after those kind of initial research breakthroughs happen. So what we have is a bunch of informal arrangements for funding this kind of extremely cutting edge research but those informal arrangements are not actually all that effective. So, there’s the opportunity here for small regulatory changes to really increase the global pace of innovation. And the idea that you could take people who really know what they are doing, pair them up with other people that have a pretty good idea of what they are doing and then have the state basically handle a bunch of the fraud prevention that will be necessary, seems like the way that we could really get this thing moving. Because, the global problems that we are facing are not easily soluble in slow methodical application of existing models. We’re really in a position where we need revolutionary change and a lot of it, really quickly. Because by any reasonable metric we are at least 10 times and probably more like 30 times over our ability to sustain life on the planet indefinitely. If we bring every body up to the point where they are no longer dying of poverty the environmental consumption will be so large, the planet will wipe itself out. I mean these are really fundamental constraints. So if we have this technically accredited investor metric, if we took the 2, 3, 4, 5 million people around the world who are technically sophisticated and we turned them into an investor pool. Many or most of them are making 100,000 dollars a year or more, and if they invested 5 or 10,000 dollars a year each, you’re talking about a 10 billion annual stream of investment that could be targeted towards things which are currently impossible to reach. And that’s genuinely game changing. The entire blockchain space has generated something like 120, 130 billion dollars of funding money but the actual amount of investment to make that happen is probably more like 10 or 20 billion dollars. This entire thing, the valuations are extremely high, but the conversion of cash into those tokens is much lower. So, the possibility is that we could really hugely increase the global innovation reach and we could take this existing ICO framework and we could completely legitimise it. Now the downside to these kinds of approaches is that stuff goes wrong. SpaceX told people that it was going to lose a bunch a rockets, it proceeded to lose a bunch of rockets. But what if it had lost a couple of rockets more than investors had thought was reasonable, and they had decided that the current teams were incompetent and they want to get rid of them? What if you wind up in a position where the innovation agenda that you’re on begins to hit technical obstacles or you have to change the direction because the thing that you are working on is impossible and you now have to do something else. Now, figuring out whether something like that is fraud or whether something like that is sensible people making a sensible decision is extremely difficult. Because if you are working in some kind of esoteric area in synthetic biology, if you take this to a regulator, the regulator is going to have very little idea of what’s going on. So you either wind up with a battle of expert witnesses or you need some kind of new structure and the new structure is based on a very common mechanism which is currently known as Binding Arbitration. So Binding Arbitration is how specialised courts come into existence to handle things like disputes in construction. And there are lots and lots of these things out there. The American building industry standardised on this model about 35 years ago and you hardly ever see a law suit. Almost everything to do with the maritime world is based on Binding Arbitration. If you’ve got a ship that’s owned by Germans, licensed in you know Italy and it then you know sinks outside of say Namibia, all of that stuff will be resolved in London because all of the parties to those contracts agree that London is where they will resolve them. So we already have lots and lots and lots of courts, which have this kind of specialised technical capability. It’s just that most of them are for existing large industries. Nobody’s yet done these things for the software world, never mind for the blockchain world. And that turns out to be a necessary step, because if you don’t have some kind of deep technical knowledge with a punt of legal capability behind it, even if you set up these kinds of complex investment vehicles which allow all this technical know-how and technical money to start building the future faster. When you hit problems, you are going to wind up with a bunch of very very legacy nation state machinery coming in to solve the problems and the result will be that it’s very very hard to get everything aligned properly. So the idea is that we could actually create private courts to solve these problems. There has to be an evolution of law, because the law has to keep track with the innovation otherwise, what you get is unregulated frontiers. When the innovation gets out, ahead of the law, you simply wind up with these kinds of lawless horizons which are very very very rapidly invested in and then the carpet baggers arrive and you get a whole bunch of fraud. Then the horizon gets shut down because it’s become a lawless wasteland and it’s dangerous for ordinary people to be running around over there. And the cure for this is not that we slow innovation down, it’s that we speed law up. And the private court structures allow us to accelerate law almost as fast as the innovation is going. So that you always have competent independent neutral decision makers to resolve the disputes between the people who are operating on the frontier. And these mechanisms are legally standard, this doesn’t require government to come along and pass a bunch of new law to allow this to exist. It’s a relatively straightforward procedure to set something like this up. So the basis for this is contract law. Two people make a contract and the contract will be seen as being a valid agreement between two people and in almost all the countries in the world, nobody will gainsay the right of those people to make the contract, unless the contract is illegal. So you have to make sure that the contract is legal in the jurisdictions that apply to the contract. If I’m in the UK and you’re in say Thailand and we want to do a deal about land, we are going to have to check the land laws very carefully in each jurisdiction because land law is old law and therefore it’s very particular to the place that you’re in. New law tends to be fairly global, old law tends to be very very specific, national, regional, even local. But, as long as the contracts are legal in both jurisdictions, courts will enforce them. And because there is so much ambiguity about where a transaction happens if it’s international, there are things like choice of venue and choice of law. Which are clauses written into contracts, which allow you to specify that it will be dealt with say, in London under English law, in New York under American law, in some cases in the Bahamas under US law but with UK judges. There are all kinds of strange things out there, because the commercial world is a complex place. So the other thing that goes with this is that you can chose your own courts. You can say, in the event of a dispute, we’re going to go to a particular arbitrator and that particular arbitrator or arbitral body will be the same as the judge in this instance. So, we have choice of venue, we have choice of law, we have choice of judge and that mechanism is used for literally hundreds of billions of dollars of cases every year, completely standard. Why we haven’t had one of these in the tech industry until now, I have absolutely no idea. It’s completely perplexing once you see it. So, what we are attempting to do with this… oops I’ve gone forward one too far, go back, right. …what we are attempting to do with this is establish a legal structure which is capable of keeping pace with innovation and we want to set that up as a template. Do it first for blockchain and then create more of these things as we move forward, to handle innovation in other fields. It’s basically a factory for producing courts. Now, I want to talk about how this stuff factors into the big problem one more time. The GPL is essentially an opt-in legal framework. It’s almost like a country, the country is called the open source community. If your assets are in that country, because your code has the GPL attached to it this creates a common pool in which all of that activity is happening and it happens inside of this contract. But the GPL turns out not to have its own courts, it has its own statement of what the law should be, but it didn’t have an arbitral body associated with it. So there were years and years and years of questions about whether the GPL was enforceable. But, if the GPL had clearly stated choice of law, choice of court and choice of venue then you could have absolutely made it clear that the GPL was enforceable, because the arbitral body that was associated had agreed that it was enforceable before they agreed that they would arbitrate it. So you would start by pre-approving the enforceability of the contract with the arbitrators before you distributed the contract draft. And the result of that would have been that we might potentially have closed the GPL to a hole at the arbitration level, rather than having this enormous haemorrhaging of a trillion dollars worth of value out of the open pool, which is roughly the equivalent of asset stripping a nation state. The open source movement is in trouble because it lost a trillion dollars of value into the dot-com world and the amazing thing is, that even after a trillion dollar loss of value, it’s still worth hundreds of billions. So this idea that we could begin to build these structures, where we build governance that is both paper and also structure this, I think is the future. Now, this notion that we can build these new structures to enable coordination is obviously true. Everybody that opts-in to a legal agreement that has arbitration attached to it is going to be bound by that arbitration as long as the local law doesn’t say different. And if you’re working mainly in areas like IPR finance, the global systems around this stuff are very standard and they’re all pretty much the same. So we can definitely coordinate all kinds of things with these structures. No doubt that that’s possible. You take a blockchain, you take some contracts, you take an arbitral body, you bind all of that stuff together, no doubt at all that will stand and we’re going to be building a lot of these things in the next year or so. The problem is that we can’t compel people that aren’t parties to those contracts. So this is a rough and ready graph of the climate change thing from XKCD and what we can’t do with this kind of opt-in wall model is we can’t compel people who haven’t signed the contracts to stop doing something. So there’s no legal base layer in which everybody in the world is attached to some kind of opt-in law system. If you are in a position where you are not part of an opt-in law system like the GPL and you are doing something which is making the life difficult for the people who are in that system like you’re poisoning their climate, it’s very very difficult to persuade people to stop, because there’s simply no way of getting these people into the area that your regulations have any force in. So, although it’s possible that we could do enormously powerful permissive innovation, we just go into the future and build things. What we can’t do is stop people doing bad stuff outside of the areas that we are operating in. So unfortunately, although I think it’s very likely that we are going to be doing amazingly interesting things with these kinds of constructs, there are a bunch of really hard problems that we face globally which are about stopping people doing bad stuff and unfortunately these mechanisms don’t really give us any reach on that stuff. So, we get to build really powerful mechanisms for regulating these kind of structures that we are building ourselves, but there is still a foundational layer to reality that we are reliant on the nation state to manage and they’re not doing a great job of that. So we can build these kind of little utopian enclaves where we’ve got sensible law and we can do a ton of innovation but we are in, you know, seriously in a position where the world is dragging along and it’s hard to fold these changes back into the legacy systems to get things like improved environmental regulation. So, to conclude. The legal structures are completely doable, we can do that. Expert accreditation is not an unreasonable ask of the global financial regulators, I think it could be prototyped in countries like The Netherlands, Singapore, maybe even London, without it breaking anybodies brain and I think we should be actively lobbying for that or something like it. The real sort of bread for this opt-in law stuff has taken us literally 20 years to understand. It was originally proposed as a way of managing smart contract type structures or digital currency structures by Ian Grigg who’s the chief scientist of Mattereum, 20 years ago. And they have litigation over these things. So this is not something that we stumbled across yesterday. We are going back to models that were actually deployed on live products in the 1990s, modernising them standing up for the blockchain space and this time the world and the regulators are ready to hear and ready to deal with us. Erm, we don’t have leverage on problems like climate because of these structures. It’s fantastic to be able to roll your own law but it doesn’t give us the ability to deal with the people that are not playing those games. And things like terms of service clickwrap, where you just click the button and it lets you into the system are probably not strong enough legally to be used for holding these kinds of situations together. If you want to make really substantial changes to somebodies behaviour based on a contract the fact that they’ve really assented to it and they understood the implications may turn out to be quite important, clickwrap may not meet those standards. Finally if we are going to fix a lot of the big problems that we have in terms of the bad stuff that we don’t seem to be able to stop. It may wind up that you need things like a world government backed up by a blockchain. You know, UN mandates that all carbon emitting sources will be put onto a blockchain and then it’s up to local government to do the taxation that goes with that. Those kinds of things are entirely credible over the 10 to 20 year timespan if we don’t simply obsolete the entire oil industry one step at a time through things like solar panels and batteries. If you want to read more about this stuff there is a white paper at that handles the kind of gory technical detail and it’s somewhat overdue for a revision, so it’s a working draft 5, we should be on 7 by now but we just haven’t released it yet. Erm, there will be an arbitrator, an arbitral body standing up in London that can handle the legal side of this, probably in the next couple of weeks and we can help build things like this for people. If you have something that looks like this and you want something building, come talk to me. If you’re looking for more information Internet of Agreements conference in London in a couple of weeks. Three days of Hack Day. So a conference and then two days of discussions, followed by a formal conference. We are going to get all the way to the bottom of these things. Final piece that I want to talk about, just to wrap. Is the level of complexity that we are discussing here from a legal perspective is not that high these things are completely routine, there are hundreds of thousands of lawyers in the world that are familiar with these kinds of structures. The reason that we are not seeing an enormous adoption of these things in the technical industry is because all the expertise in law and all the expertise in technology are basically separate. There isn’t a super strong link between the two and so what we have is two areas of expertise that if you stitch them together, produce a completely new landscape for us to play on. And I think that we will find in the next 10 years or so that this notion of a kind of synthetic generation of knowledge. Where you take expertise in different fields and you bring them together will bring all kinds of really radical new changes. And I think that this kind of interdisciplinary thing which has been happening in academia for a couple of decades hasn’t really fully clicked in the entrepreneurial communities, there’s a lot of specialisation. But the prospect for this kind of interdisciplinary entrepreneurship, I think that might turn out to be the theme for the next 10 years, because it’s the best way that I can see of managing the complexity and the rate of change that we are seeing as we really begin to jet up this exponential curve. So that was it. Thank you very much. (Applause) Dimi: Thank you so much Vinay. Oh wait, wait. We might have a question for you. Vinay: Okay. Dimi: So. Anyone has a question for Vinay? There is a few in the back if the mic reaches. Audience Member 1: So I have a general question regarding governance. So you mentioned that IPOs are kind of too complicated to fund innovation quickly and to fuel human progress. However the original idea of stocks was actually to fund human progress by financing the ships that were going out in our world to explore the lands that we didn’t know. However, roughly 200 years later, you could buy shares in companies that were traded on the stock exchange that were trading slaves. So an initially good idea to fuel human progress turned into a disaster. So how would you prevent this from happening with the ICO structure that you propagated, for example how would you prevent I don’t know, the North Korean Government of doing an ICO to fund their nuclear power like their nuclear bomb program or something extreme in that direction. Vinay: I think if anybody tried something like that the existing legal structures have enough force to stop it. So to take that specific example, I think international anti-terrorist financing or sanctions around, regulations would cover it. But the general principal is that when you build new things in the early stages people haven’t really figured out how to game them and how to attack them and they generally flourish and in the last stages there’s a whole bunch of people finding exploits and attacks and then you have to harden the systems against that. And either the systems become successful systems that are mature and robust or they fall prey to one of these problems and they fall to pieces. I think that the thing that we are proposing here, is such a small innovation in terms of the legal structures that it’s unlikely to have loads of failure that haven’t been seen before in the legal system. It’s unlikely for example that you’re going to get like run away arbitrators. On the technical side it’s a lot more innovative and I think at that point it’s going to be trial and error and slow evolution. But the macro historical questions of you know, how do you stop things which are great today being bad tomorrow? If I knew that I would be philosopher king. Audience Member 2: Do you have any practical thoughts about this tactical investor accreditation because the organisations like the FCC and the FCA are you know struggling enough with things like high net worths and sophisticated investors and obviously the pace of change in the technology arena is like unparalleled anywhere else and like something that could be you know a reasonable accreditation today will, may be completely out of date in one year from now and may be continuously changing. So is it just like a theory or do you have any more practical thoughts about this, how this could practically happen? Vinay: So I’ve had early discussions with a few regulators in a few different countries and it definitely is one of those kind of hmm, chin scratching things, hmm. I think if we were going to take it forward in a very direct way what we would need is some kind of really substantial buy-in from the current ICO investors. So if somebody was to come and say okay, we’ve got a oh what’s the word I’m looking for, erm a petition and it’s signed with the keys of say 12 billion dollars worth of crypto-assets and we would like this to be seen as a way that we could invest these assets in sensible things. I think if you did something like that, it might be possible to get their attention. It could also be worked through the innovation side, where it’s introduced completely outside of the crypto-space in something like the dot-com arena and you could basically suggest that it was a kind of startup investor passporting and then you could kind of build out from there. So it doesn’t have to be introduced into the crypto arena first. That might even be the hardest place to do it. But it’s a sufficiently simple idea that I think you could do kind of pilots fairly easily and it would just take a community of people to kind of write down what they wanted in a way that the regulators could recognise as sensible, to get the kind of you know, maybe we’ll license 10 startups to take money in that way and see how it goes sort of pilot programme. This isn’t something where you have to open the entire thing in a single sweep. You could license individual startups to operate on that kind of basis and just see how the performance went for a few years. Dimi: Thanks Vinay. Vinay: Thank you. (Applause) (Applause) (Music) (Applause) (Music)

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that there are no responses here really surprises me. Is nobody seeing the problem…. or is nobody understanding this solution. Don't know what would be worse. Brilliant proposal imho.


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