62 - Governance and Capital | Joel Monegro

welcome to bankless where we explore the frontier of internet money and internet finance this is how to get started how to get better and how to front run the opportunity this is ryan sean adams i'm here with david hoffman and we're here to help you become more bankless david fantastic episode who did we have on and what did we discuss we had on joel monegro of placeholder vc joel is uh very close with chris burniske who we've also had on the

podcast and i personally really enjoy this duo of of really big thinkers and these guys really take the very nuanced details of you know token governance uh you know crypto network management and really extrapolate it from the micro all the way to the macro and this is a bankless podcast that i think is really pushing the frontier of crypto knowledge because again we are not designing these systems we are exploring these systems and joel i think is doing a really good

job exploring the frontier of crypto network governance and what that means and he has i think done a very fantastic job really defining and articulating what is actually going on when we talk about governance and linking it to capital and his association of governance and capital is actually two sides of the same coin i thought was extremely profound and perhaps actually the entire through line of this entire episode yeah what's crazy here is i feel like a lot of people who whether they're bankless listeners or just you know the

population in general have this like feeling that something big is happening like something has changed like we are entering into almost a new era where our previous institutions no longer work and we've got to discover these new institutions like change very much maybe it's the 2020s thing but it feels like change is in the air david and people are uncertain how this is all gonna shake out and what i love about this episode with joel is he thinks big picture about how these technologies specifically these

coordination technologies capital coordination technologies governance technologies will shape humanity's trajectory will shape us into the future it's just a a very big brain a very big picture high-level long-term type of podcast that blends like what we love to talk about so often on bank list this kind of philosophy side um you know this anthropology side of things the societal impact side of things with the technology this is dude this is right in our sweet spot this is

a podcast that we we love to do because out of joel we get definitions for things that um we hadn't previously really defined or thought about like what is the definition of capital david hmm let's ponder that for a bit what is the definition of governance we talk about these terms so often on bank list but joel actually brought some definition to these terms and that's what i loved about this episode and i don't think there's any other realm of knowledge outside of the crypto space that is really tackling questions like this tackling questions that that joel

is really going after and the the inspiration for this podcast came out of a desire to really articulate why governance has value in the first place because we've been here ever since defy summer we've been hearing that like oh these defy tokens they control the the passing of money you know uni uni governance tokens control the lp fees they control how money is uh sent around in the system and there and therefore the governance tokens will just vote in fees to the the tokens and then that's how there's money that's how there's

value collected in these governance tokens that's why governor tokens have value and it's been this very hand-wavy explanation as like oh the the governors of a system will just vote in fees for the governors and so i really wanted to get joel on the podcast to ask him is it really that simple is it really that you know if this then that and that's why governor tokens has value and to some degree joel said yes but also he said no and we dove into like how actually capital is a form of power over the world and as a capital owner you can

direct power and route power as you see fit and whether or not fees actually do make it from the hands of the protocol into the hands of the token owners the value of these governance tokens have value no matter what because of their ability to dictate power around the world and just like you said we can talk about that in the might very micro aspect of you know crypto network governance but we can go all the way back into the history of human governance at large and talk about governance is power power is capital

capital is governance and all of these same things are becoming distilled inside the same asset on ethereum and tokens when crypto networks at large if you love previous uh bankless episodes like slay slaying moloch or our episode on the crypto nation state with bellagi or where we talked to chris dixon about how the nation state would be unbundled how there's this new capital coordination technology this is the episode for you and of course if you are a paid subscriber to bankless stay tuned for the debrief that comes out on the

bankless premium feed where david and i do an after the podcast digest of our thoughts definitely one to catch up this time david one more thing we'll get to sponsors then we'll get to the interview is dharma is hot these days folks that are listening to the bankless podcast over the last few episodes know we've been talking about dharma which is a smart contract while it enables you to go directly from your bank account into a crypto protocol start earning yields in something like wires particularly if you're in the us david

tell me something good about dharma because we're really excited about them these days yeah the the my current thesis and i'm pretty sure ryan you agree with me is that retail season is right around the corner how could it not be when doge is at 40 cents uh retail is coming and retails is expecting a centralized platform level of performance but we are trying to get people onboarded to the values and merits of decentralization and dharma i think it's how we do this right dharma is how we make sure that people get into actual real capital assets like the ones

we're about to discuss with joel and they do it in a very easy and quick way and without having to worry about things like doge or litecoin because the capital assets on uniswap are legitimate assets and you can access those legitimate capital assets directly from your bank account with dharma if your friends are asking for a way to get into defy send them to dharma at dharma dot io speaking of fantastic defy tools we want to tell you about the sponsors that made this episode possible

bankless is proud to be supported by uniswap uniswap is a new paradigm in asset exchange infrastructure instead of a cumbersome order book system where trades are matched with other humans uniswap is an autonomous piece of software on ethereum which is what ryan and i call a money robot no human counterparties or centralized intermediaries just autonomous code on ethereum input the token you want to sell and receive the token you want to buy something brand new in the unit swap ecosystem is the uniswap grants program

is now accepting applications for grants we have been saying this for a while and will say it again dows have money and they are in need of labor if you think that you have something to contribute to the uni-swapped out apply for a grant to uni-swap just look at the size of the uniswap treasury it's almost three billion dollars this mountain of capital is looking for labor do you have something of value to contribute to the uniswap dao no matter how big or small your idea is you can apply for a uni grant at unigrants.org and help steer

unit swap in the direction that you think it should go that's exactly what we did to get uniswop to be a sponsor for bankless and you can do the same for your project thank you uniswap for sponsoring bankless balancer is defy's most powerful automated market maker typical amms just have two tokens inside of one liquidity pool which can lead to fractured liquidity across the many pairs in d-pi with balancer you can access the full power of multiple tokens inside of one single amm which unlocks an entirely new playing field of possibility this makes balancer an awesome building block for so many

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a partner at placeholder ventures placeholder is a venture capital firm which invests in decentralized networks and companies uh we call these crypto native organizations he started the firm in 2017 with his friend chris berninski who is a bankless podcast an alum go check out chris's episode as well and one of his mentors brad burnham after three years at union square ventures which is a relatively famous vc fund he developed the firm's early blockchain

thesis and portfolio there including such memes and articles as the fat protocol thesis he is now a big believer and has been for quite some time that crypto will change the structure of all markets maybe even how humans organize societies into the future guys prepare yourselves this is big brain stuff today we are going deep we are super excited about this episode welcome to bankless joel thanks ryan um and david i'm super

excited to be here and looking forward to the conversation you know we got to start at the that the highest level macro place we can to get introduced to this and this is like the structure of societies the structure of humanity one of my favorite books i know is david's as well is a book from yuval harari called sapiens and there's a lot of great insights in that book but one of the insights is the thing that separates humans from all the other animals and all of their species is our

ability to coordinate socially that is humanity's superpower and you can even think about our trajectory our technology trajectory through the ages we've come from kind of a cave society to agrarian society to this digital society as just increasing progress on coordination technologies um i want to start with this this question around with that grounding around coordination technologies in a term that we use so often in crypto which is the term

governance now i think of governance as uh the the ability to really determine how decisions are made but governance is is almost a coordination technology in and of itself how do you think about governance at the highest levels joel what is governance yeah um so governance is is a tricky term because it's so broad right um and i think that's what makes it sometimes difficult

to think about and analyze but um i'm with you that governance is ultimately about how decisions get made and the structures that drive decision making between groups of people or among groups of people it can also be within an individual though there i guess you would call that autocratic governance or use a similar term um but yes at a high level governance is how decisions are made and

they're usually tied to some kind of system uh whether it's a social system or economic system and um you could say that those are the same but governance exists um between a group of friends for example if you're going out to eat there is a governance process by which humans find consensus about which restaurant to visit all the way to d5 protocols there is a governance process and a system that

gets created for deciding where a network goes and also like ryan said sapiens mentions how the reason why humans are different from other species is that we can actually scale governance and uh we he talks about how humans use stories initially to scale governance uh shared stories and shared myths um but uh as and also as ryan said governance is also a technology and it's really a humans

are trying to find governance mechanisms governance technologies that allow us to scale into larger and larger groups and that allows us to scale beyond just like tribes of 50 to 150 things below dunbar's number into uh you know nations of millions and hundreds of millions and so joel when we talk about governance what is it that we are actually governing over that allows us to scale from just you know hunter-gatherer

societies of you know 50 to 152 nations of hundreds of millions yeah um i think ultimately government what we're governing is uh pools of economic economic resources um and so that can be anything from a household um you know if you live in a house with people uh there is a kind of understood or maybe not so well understood but there is a governance process internal to the household that is about how to

make decisions for that little system um and in economic history there have been periods where we have set for example the family as the as the core economic unit um other other uh schools of thought think of the individual as the core economic unit but this idea that it's a it's a little economic system we're deciding how resources are distributed and how responsibilities are distributed within that system you can have governance over another kind of economic

system like a company and there you're making decisions about how voting power is distributed same kind of exercise how do you distribute the economic resources within that system who's responsible for certain aspects of that system you can have governance over countries as you men as you mentioned and it's the same dynamic it's who makes the decisions about how resources within that country are distributed um and now the principles are the same whether it's you know a family or a company or a

country or the world um if you think of the united nations as a way to create a governance system that can coordinate across countries um and the technologies change right um in a at a household you know you may not need a rule book though i know that some households have household household rules that are written down um and um other systems have um you know for example a company have shareholder agreements um and all kinds of of

contracts that that define the governance system for that kind of organization and different companies or different countries will have different systems and by and large the technology the dominant governance technology is writing writing is what you use to define um a lot of the processes and a lot of the responsibilities and it's ultimately about what mechanism do we use to find consensus among a group of people and it's how it starts

um kind of giving us a window into um why blockchains are so intertwined with this idea of governance um because we primarily know them as consensus protocols um and it's very different from say the protocols of the internet which are communications protocols um and so this idea that we now have this new technology that allows us to create consensus protocols of various different kinds from the bitcoin blockchain to adao um really helps us understand um that we

are dealing with not only a financial technology but also a governance technology it's a new tool um and a parallel to writing which has been used for thousands of years so joel you said um the thing that we we govern over most often is economic resources various economic resources i've often heard crypto and systems like ethereum being described as sort of a capital coordination tool or a capital governance tool if you will you just use the word consensus maybe where we're

kind of swirling around some synonyms here and maybe these these terms have different meanings how would you relate the concept of capital to governance are it are we essentially in these uh crypto economic systems are we governing over capital is that the thing or are capital and governments more closely related in your mind i think they're more closely related than than we might think and um to to zoom out a little bit um a lot of my

time uh over the past couple of years um i've spent it trying to understand capital a little bit more um and it's it was this funny thing because i found myself kind of thinking about the traditional definitions of capital which are taught in economic schools and and so on and i think the the most common definition goes back to adam smith who describes it as the part of your your stock um that

that affords you revenue and capital is this interesting thing because i i found out that um everyone is aware of capital kind of the same way that everyone is aware of energy it exists in every social system um people usually understand what you mean when you say capital though most people don't seem to be able to describe it precisely and so it's something that we experience that we know what it is through experience but don't necessarily know how to how to precisely define it and

i found that the the classic definitions um in the textbooks don't cover the full spectrum of capital that that we have observed um in society over the past couple hundred years that that 300 year old definition of you know those those um possessions that you have that afford your revenue um were created at a time when there were um there was a limited number of observed forms of capital um and so we're used to thinking about capital as money for example

um we're used to thinking about capital as um you know the the equity of a company um but capital takes so many different forms uh we now know to speak of political capital we now know to look out for social capital as well and i find that those new forms of capital don't adequately fit within that framework of this thing that affords you revenue per se and so

um as i started thinking more about it i came to the conclusion that at the end of the day what all the different forms of capital have in common is that they all represent some kind of power or control over economic resources and which is a form of governance and so for example if you think of political capital if you have a lot of it uh you're a congress person for example and you have through your career accumulated a lot of political capital

there's no object right that that embodies your political capital it's kind of a power that you have and the more you have of it the more influence you have over how laws are created and which laws get or which proposals become law and so your political capital in that scenario is governance as control over the rules of an entire country and that's an incredibly valuable thing even if it's not a revenue producing

asset like a share of stock in a company if you have 10 million followers in social media you have a lot of social capital you don't have again this object or this instrument that necessarily gives you direct value like the dividend on a stock but you have the power to influence the public opinion of your followers or the opinion of your followers and that's an incredibly valuable thing and so what's interesting about that exploration is that if once we understand capital as control

and once we understand governance as control then we start to see this very intimate relationship between capital and governance and we might even say that governance is capital in this idea that governance equals capital is i think a a foundational principle for understanding um how to think about governance and decentralized systems because once we understand that the governance of a protocol is really the capital of that protocol um it helps

us understand then uh what to expect from from a governance system or what to expect from say a governance token joel there's so much to unpack there like just the idea of governance equals capital like i mean i think that that could be quite honestly the rest of this podcast it's so deep um yeah like i i want to get in back into just uh some of the the concept you were talking about so what you're saying is basically there are all of these other forms of capital that aren't very visible to modern society that adam smith didn't

see and we might not see might not be quite obvious now we might not recognize them as forms of capital and it's probably partially because there aren't assets around these forms of capital and there aren't um markets around these forms of capital so if i wanted to measure the level of political influence of a senator say like senator bernie sanders for instance over time there's no asset i can purchase like i can't purchase burn token you know right and uh and chart that over time not yet that's interesting social capital right

um you know david is a really popular crypto social media figure as we all know i uh i can't chart the the value of that over time because the asset is not visible so what one thing i think you're saying among the many things is that um there are all of these forms of capital in human societies uh that are like forms of influence as well forms of governance as as well that are basically invisible to us because we don't have financial markets set up for

them at least that's part of the reason why is that is that what you're saying um for the most part yeah um i think you're right i the way i like to think about it is um or the terms that i use are there's there's capital which is uh a natural social phenomenon um and it's if we think of capitals control or influence or power um all those things are related um capital kind of emerges naturally out of any social system

if you have a group of friends there are some friends who are more influential than others in terms of how a group decisions are made um and same with a company there's a more established hierarchy same same with the government and so as we scale the systems they tend to have more structure around them but there's there's capital and then there's capital instruments um and the instruments are what define the behavior of that capital and

the instrument layer if we want to think about it that way is where technology comes in and so for the most part because we have used writing as the governance technology for thousands of years um instruments have been defined with language um and so for example um reusing that friend circle example there's no friendship agreement that you might use with your friends and so the capital exists but there's no instrument around it and the instrument is the object the abstraction of capital that makes it

observable measurable and tradable and once you can do those three things then you can create markets around it and that's where the financial market aspect of it comes in but there's a really important concept here to impact this idea that capital exists whether or not it has an instrument and then the instrument is the mechanism that we use to build consensus among a group of people about how that capital is distributed and so for instance um in a company you use the

the full stack of contracts from the incorporation documents to the membership agreements or the shareholder agreements to the employment contracts to the lease agreements when you're renting an office all of those things are instruments attached to different forms of capital that define the behavior of the assets within that system for instance um if you are the ceo of a company you have a different set of rules and responsibilities than

if you're an employee um and your capital within that company is represented by shares of stock that you own and those give you certain governance powers over the organization and certain control over the organization if you have if you're a an employee you have some capital in the organization and that is defined by your employment agreement and it tells you what things you have power and control over and what things you don't

if you're an investor in the same company you also have shares of stock usually with different rights and different uh terms than say the shares owned by the ceo and that's another instance where we use writing to define how this form of capital behaves differently from this other form of capital but the instrument there is the share of stock and so the stock that is distributed to employees versus the stock that is distributed to the founders or or leadership versus the stock that's distributed to investors may have different terms and different rules

and so it defines how the different kinds of capital within that system behave and it ultimately defines what they are worth so for example investor shares tend to have certain economic properties and protections and we usually call them preferred shares and those have a different economic arrangement than say common shares um now the instrument remains the share of stock um for other forms of capital like intellectual capital for instance we may have other kinds of instruments

so um a patent is an instrument for um an idea that you had uh and it's it's the instrument that we use and it's in writing it's a legal contract as well um that gives you certain rights um and certain control over that idea that you had and that ends up in this instrument called a patent or a copyright um we may have also um for example uh property titles are yet another

paper contract written in language that gives you ownership and control over a piece of physical land and that's an instrument for a different kind of capital um some people call it real capital um or land is a is a form of capital and so the instrument there is a property title and so we have these different kinds of capital and then we have associated instruments that allow us to do those things observe it measure it and trade it and you know i can i can sell you my patent right and it's how

i am able to trade uh something that's not tangible like an idea uh using this instrument that's been created around it but what's interesting about that is that we have all of these other forms of capital that don't have any instruments yet so going back to political capital or social capital um you know political capital as you described it's hard to measure we don't really have anything to measure it and if we can't measure it we can't value it or price it and we also can't trade it formally and so it kind of

stays in this gray market governed by lobbying and other forms of capturing value from that political capital and so that i would argue is inefficient and i'm sure we'll we'll go into that in a second um but then using the example of social capital we have we have a way to measure it right like followers on social media so we have that but we don't have an instrument that allows us to trade it because we don't have those instruments then we can't create markets around it and so we can't accurately price and

value what that capital is worth and so i think one of the big opportunities we have here with blockchain says um at the end of the day we have a technology that collapses the cost of instrumentation and it makes it so much cheaper and easier for you to create instruments for all kinds of capital and i would argue that most kinds of capital that exist in the world don't have instruments attached to them and therefore don't have markets attached to them and so there's a lot of wealth out there in the global system that is yet to be captured

because we haven't created instruments for those forms joel this is insanely cool and i want to i want to back up and just kind of recap the the conversation so far and and so when people typically talk about capital they typically talk about perhaps their their net worth and their net worth is always something that is a collection of all their defined assets right but but what you're saying is that capital we can actually look at capital more expansively and perhaps a way to define capital is a trying to measure the some individuals