The Trillion Dollar L2 Opportunity | Part Two

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. Guys, we have a sequel to our excellent episode from yesterday. This is part two of the episode on the bull case for layer two, the trillion dollar case for layer two. Just to recap, part one we did yesterday. If you haven't listened to that podcast, go listen to that. I think that's helpful context for part two today. In part one, we covered Ether economics in an L2 world. What L2, that is layer twos, will do for the price of ETH, and we asked the question will we get a layer two season with all of the new layer two tokens that are coming? But today's episode is all about public goods. Public goods are the new alpha. David calls this a trillion dollar opportunity as well. We're gonna talk about how L2s are going to compete, how some L2s are going to beat other L2s with growth and adoption through public goods funding. And here's where the opportunity comes in. We talk about how you can become a public goods entrepreneur and also how to become a public goods investor. Because, of course, public goods investors and builders are the new alpha. That's what we're talking about today. David, what were some of the highlights from this episode?

Yeah, I feel like I'm about to become a broken record with how many times I'm going to say public goods are the new alpha. It's the new frontier. It's the new way to make money. And we are just on the horizon of this. We can see it on the horizon. Optimism is leading the charge into this whole entire movement of turning alpha into public goods, where public goods and public goods builders and public goods investors has the same amount of upside that we saw power Silicon Valley and Web 2. So with retroactive public goods, we're putting the upside potential of a brand new startup, but we're injecting that with the products and opportunities that public goods create for the world. And so the reason why I'm calling this a trillion dollar opportunity, the second trillion dollar opportunity of the layer two ecosystem, the first being the one that everyone knows, L2 tokens, apps on layer twos, ETH itself, of course, trillion dollar opportunity there. But this brand new one has never before been seen on the face of this earth. It's something that is uniquely enabled by crypto and by layer twos themselves. And it's going to be the vector that all layer twos compete on. Whether or not layer twos survive and adopt and have uh see adoption and see growth is whether they can compete with other layer twos as to how well they can fund public goods. And with the innovation, the tinkering of mechanism design using retroactive public goods funding, gives uh layer twos the path towards turning the upside of layer of building public goods into market opportunities and injecting the power of the market with the opportunity of public goods. Uh so Ryan, we walk through this whole entire subject matter and and give you the narrative and the reasoning behind why you might want to be the first of its kind a public goods investor or public goods builder.

That's a lot of opportunities here, and that was the word we used so many times in our last episode. We're gonna use it more today because that is the truth. There are a lot of opportunities in this brand new horizon that's opening in front of us in layer two. So that's what we're gonna talk about. We're gonna get right into the episode, but first we want to tell you about these awesome tools for going bankless from our sponsors. All right, hey guys, we are talking. This is part two of our bull case for layer twos, the trillion dollar opportunity in layer twos. And uh in part two, I think we're gonna make the bull case for public goods and where all the opportunities for you are in the public goods space. Um, let's first talk about public goods a little bit, maybe some definitional characteristics. But David, what are public goods? And we could use this analogy we've been using throughout this episode in part one and and now uh this as well of like chains being a little bit like nation states and countries and nations, they have public goods. And so why shouldn't chains? And what are public goods and what's the what's the analog to uh the nation state world here?

Yeah, public goods are globally shared resources that are like non-rivalrous and non-exclusive, is like the technical definition. Um, but it's also it's things like uh clean air and clean water. These are all public goods. Um, roads are things that we all use when we drive to the grocery store. Uh and so public goods are these public utilities, basically, like transportation and like access to healthcare. These are all things that we all need. And it actually benefits everyone, even if other people have them, right? And so clean air is beneficial to you if I have it. Like good access to roads is beneficial to you if I have access to roads. It's like uh when we generate good economies, it benefits our neighbors, which benefits ourselves. Uh and so it's these globally shared utilities, like these commons, these common, common utilities that just make the quality of life for people better. Like it's better when we have clean air, it's better when we have clean water. Uh Kevin O'Walkie likes this line is like, what's the point of having a Lambo if the sky is on fire? And it's uh it's uh just been a part of the grand story for crypto at large, is how do we actually price in the value of these public goods into our markets? Because previously, before crypto, and still to this day, because crypto hasn't solved this yet, but we're working on it, is that like we can't find ways to protect public goods without top-down government intervention. So this is ultimately what taxes are for. Like they take the governments take our taxes and they are meant to protect public goods, protect our national parks, like clean our clean our water systems, make sure we have good roads, fill our potholes. Governments, you know, are famously inefficient for this, but that is the ultimate purpose of taxes in the first place is to produce public goods. Um, and governments that can figure out how to make their public utilities more and more useful.

Ultimately help generate economies that are stronger. Because when our roads don't have potholes in them and they're efficient and we have clean water, just life in these in these countries are is better. They're more desirable. It's a more desirable place to live where commerce can happen more efficiently. And so the the countries that invest effectively into public goods ultimately become stronger economies because there's just lubrication everywhere. The populace is happy, and they can actually charge more in taxes because they have created a more desirable place to live. And people aren't actually like dissatisfied or disgruntled about paying their taxes because they see it going to things that make their lives better. So public goods are just a part of this world, and they're also famously difficult to price in. This is why we have this the concept of the tragedy of the commons, right? Where like if it's a public good, people will just consume it all as much as possible for free without giving back. So how do we establish a business model for public goods has been one of these core drivers of crypto economics. And part of the layer two opportunity is that we actually have an actionable, concrete, known path forward for actually producing valuable market prices on our public goods. And that is a trillion dollar opportunity that is coming. Uh, and it's like not just coming in a decade from now, but it's coming just like in a mere month, and was something I want the Bankless Nation to be prepared for.

All right, I think we'll we'll talk about that in a in a minute, like how to get access to these public goods or how to, you know, be a builder of these public goods. Cause I think that's sort of the opportunity and the invitation, right? And this this uh whole podcast series is all about layer two opportunities. But you know, just to kind of establish that a little bit, so like a public good is kind of a utility that benefits everyone. And it's generally not like privately funded either. It's like funded by like a collective, right? It's owned by the people.

Yeah, and so like the like um you know and and I think people who'd say, well, public goods aren't uh aren't important, uh you haven't really looked at the public goods that they benefit from in their own lives? Like who who goes and looks at a house and doesn't look at uh you know, if you have kids, the neighborhood, and you're looking at the school system where the kids can play, and is there green space and how are the sidewalks? What's the flow of traffic like? Uh do I have easy access to downtown? Is there, you know, a metro station nearby? All of these public goods enhance the value and the network effect of the place I decide to call home. And so the idea of like, like, first of all, neighborhoods have public goods, cities have public goods, states have public goods, countries have public goods, and it is a way for one country to compete against another, one region to compete against another. Uh, where I live is ultimately it's a determination of, okay, does this have the best like uh public goods infrastructure at a reasonable tax rate, right? And so that can be part of making the calculus. And there are some like countries or jurisdictions that might have um high taxes and like terrible public goods. And you're just like, why would I want to live there? It's not worth it. Uh, in other countries that try to try to give you kind of the right mix. And maybe chains are are no different. There was actually a tweet thread from um at Tasha uh Tasha Labs where she talks about um chains needing to subsidize uh various industries, and she advocates this this in the future. And so, like, if you think of like what does a blockchain produce, what is its original public good, it's like block space. It's defense is the original public good. It's security. When you pay your transaction fee taxes, what are you actually funding? You're funding national defense of the chain, you're funding the security of the chain, you're you're funding the miners or the validators who are economically protecting the chain. And that so far has been really the major, maybe I might say the only, aside from new experiments that are happening, but it's been the original public good uh that that chains produce. And the reason it's so useful and valuable is of course we need these um uh security for the for the chains to function, but it's also the distribution of it is very, very fair. It's like it's credibly neutral distribution. How does Bitcoin decide who to reward? It's well, it's based on your hash power. Everyone's treated equally. It's like if you have X amount of hash power, you get Y amount of tokens. It doesn't matter who you are, anyone can permissionlessly um participate. Same with Ether. If you're staking, you have you know allotment of ETH and you get a share. Um, Tasha, in Tasha's uh Twitter thread, she was actually talking about the the notion or the idea of chains starting to fund other things as well. So you can imagine a um different industry that a government might want to fund, like uh the green energy industry or the solar industry or like healthcare, the electric car industry or something like that. Electric car innovation, yeah. And so what what types of things might a blockchain want to fund? Well, probably like wallet infrastructure, potentially, maybe liquidity funds to like incent people to to come in, maybe like marketing budget? Does a chain want to stand up like a propaganda ministry?

Like uh all of these things.

Chain is good efforts.

Exactly. Or like maybe we're just funding all of these influencers to talk about our particular chain. Like you could start using public funding, which effectively is how do chains pay for defense? It's issuance of the underlying asset itself. They produce more, you know, there's a Bitcoin reward, block block reward, and Ether has block reward. So you could actually issue, mint some of your chains coinage, some of the assets to pay for some of these other things if you wanted to. I mean, you know, Bitcoiners realize this very early. I think the Ethereum community realized it early as well. But like, what happens when you start rewarding and picking and choosing different industries or different things to fund with block rewards?

There is certainly a place where public goods should be invested from, but at the L1 layer, it gets a little dangerous. Um, we also have to remember that money, the system of money is a public good, where like the actual unit, the actual like dollar or unit of ether is a private good, as in that like that's my ether, that's my dollar. Um, but the system itself is a public good. Like the system of money uh is a public good. And we need to, and money, like this is a very famous Bitcoiner approach, is that money is the ultimate public good because it coordinates resources around the world. Like money is this resource coordination mechanism. And when we start tampering with the money, if we start tinkering with the money, we lose some of that power, we lose some of that effectiveness, especially if a privileged party can direct money into places where they think that it should go because humans are inherently corruptible and crypto is in the business of making uncorruptible systems. Uh, this is in the in the fiat world, this is called the Cantalon effect, where if you are proximate to the money printer, you have the positive benefits of the new issuance of money. And there's like a bunch of industries uh that have been able to lobby their position to be close to the money printer. For example, the military-industrial compact complex, like Lockheed Martin. Uh Lockheed Martin is really close to the money printer, and now they're incentivized to create wars or conflict. And so that's a that's a corruption example. And so having money issuance at the layer one to fund block space security protects the system of money. But if we start like siphoning off like a dev fund, right, like 10% of all issuance goes to funding like propaganda or funding like public infrastructure. What that public infrastructure is can be corrupted, right? And like people, the entities that produce that public infrastructure can be corruptible. And so at the layer one level, it's my belief, and I think Brian, you agree with me, that the money needs to be not tainted. The L1 asset needs to be not tainted. However,

This is where we can get into the layer twos because layer twos can tinker with their own public goods funding without corrupting the layer one. And this is where layer twos can start to compete with each other about who can fund the best public goods, along with the other layer ones who do choose to take the risk of tampering with their money issuance and their and their distribution of their currency to fund certain efforts. And so layer twos, they also generate revenue, just like the Ethereum protocol generates revenue at the layer one. Ethereum layer twos will also generate revenue from block space sales. Optimism has pioneered this thing called Miva or minor maximum extractable value auctions, as in they can auction off the rights to produce a block, and that money goes into the optimism like balance sheet, the optimism treasury. And all of a sudden, this gives the optimism, which is a DAO, the Optimism DAO, gives it has like ammo in the tool belt to start to fund public goods infrastructure for the Optimism Layer 2. And I think this is going to be the vector on all layer twos that all layer twos compete by is can my layer two produce better and more efficient and more useful public goods to attract more people to come onto the layer twos.

So just to recap here for people, public goods are important in any sort of social structure, and uh, you know, including blockchains. The original public good that chains produced is security, defense. And the reason that worked is because there was a credibly neutral issuance policy. No group of people got to decide. It was basically you participate, you present hash power, you present validator power through uh a token, and you're allotted this credibly neutral allotment of uh total funding rewards, right? When we start to branch out beyond that, even though it could be hypothetically useful for a chain network to uh compete by creating other public goods, then you start to get into this governance territory of well, who actually gets to decide which dev team gets the millions of dollars we are producing? And what happens if insiders start to sway that vote in one direction or another? And what you end up doing, if you don't have credible neutrality, is you like corrupt your entire money system, you just recreate policy.

Tex.

Yeah, you just recreate politics and it's a worse politics because it's all kind of like uh plutocratic and insider. There's no like one person, one vote, you know, like underlying democracy to protect this thing, and you end up with a corrupt system that is destroyed from the beginning. And so that is why chains like Bitcoin will never introduce something like this, and also chains like Ethereum will never introduce uh like blockchain subsidy to to groups that are arbitrarily like governed and arbitrarily decided. So you are saying these sorts of experiments, while valuable, are not suited for the the layer ones, but can be experimented with much more effectively on the layer twos. And that's as far as we've gotten in our story. So you were is there anything else we should unpack there before we talk about retroactive public goods funding, David?

Yeah, the I just let's dive into how funding for retroactive public goods funding comes about, because that's an important part of the story and will answer some questions that will inevitably come up anyway. So we we have this thing called retroactive public goods funding, which we haven't defined yet, but we will in a second. Uh where does the money come from for retroactive public goods funding? And I alluded to this a second ago. There is minor extractable value or maximally extractable value on every single layer two. Some people will propose blocks and they will uh sequence transactions in these blocks that will allow them to extract some value, some arbitrage opportunities on Uniswap, some liquidation opportunities on MakerDAO or Ave that exists on these layer twos, and block proposers can auction off for the right to produce these blocks. Uh and there is such a thing as good MEV, and there's also such a thing as like unethical and bad MEV. And this is actually a very dense topic, so I'll do my best to summarize it. Good MEV is just like arbitrage opportunities. They make our markets efficient, they they balance the prices across various DEXs, they just make things very, very liquid. Uh, they also protect your positions. And so, like, if we don't have MEV opportunities where validators can sequence transactions, uh, then like your liquidation position in compound, if you get liquidated, will get liquidated at a worse price. Highly competitive uh MEV opportunities make sure that if you do get liquidated, you get liquidated at the most favorable price to you. Uh

Good.

It's good. It's a good thing. And it's a it's just good user experience. Like no one likes getting liquidated, but if you do, at least you get liquidated at the most favorable price to you. And MEV produces this. MEV can also be very, very bad and very, very unethical. There are things like sandwich attacks where you can put in a uniswap trade for one price, uh, and because you're gonna move the market, the person can front run you, take that alpha, take that arbitrage, and give you very little in return. And it can get even worse than that. Uh these can MEV can even destabilize entire chains, uh, and there's just it gets crazy how bad it can get. Uh, and there's a just a large conversation in the industry is like, how do we control MEV to optimize for the good side of things and mitigate all the bad side of things? And this is also a vector that layer twos will compete on because layer twos, the protocols, will ultimately come to allow certain types of MEVs to be allowable and other types of MEV to not be allowable.

And so this is going these is going to be protocols that say like the bad MEV uh types are just not allowed on our layer two. And if we discover that you as the validator are engaging in them, we will remove you from the validator set because you are doing what MEV strategies that we consider unethical and harmful to our users. But also

Is that like protocol determined or is that like arbitrary?

Uh it'll it did different for every single protocol, right? So every single protocol will allow certain validators in based on certain rules. Uh, and they will also create certain rules for how to violate the rules of the protocol, the rules of the DAO. Uh and so every single uh this is a again, this is the vector that protocols compete on, is how well they can do this. But basically it's an optimization function. It's like we we need to extract MEV from our users to fund public goods, but we want to make our users feel enabled and protected as they use our DeFi ecosystem and not feel extracted from. So it's a balancing, it's an optimization function. Like how much can we extract without being exploitative? Like how much can we extract that is actually good for our users, not bad for our users? And this goes back to the nation state example of how much taxes are we charging our citizens versus how many public, how much uh public goods are we able to offer them? What are the quality of our public goods versus the level of taxation that we are are pulling out of our users? And uh uh layer twos are going to get better and better at better at this, and it's ultimately going to create a very grantastic environment to to live on. It's going to be an optimization of can I produce the best layer two for my users? And it will force layer twos to compete for the love of their users, not just exploiting them for as much MEV as possible.

I think this is a good thing to zone in on, right? So you're you're saying that a main source of public goods funding for layer twos is going to be this thing called MEV. Yes, right? As opposed to, and they call that a tax, a tax for public goods. As opposed to there are two other taxes that chains impose and that layer twos could impose, but many of the designs are dwelling more on the MEV tax. Maybe it's worth just really quick defining what the kind of the three different taxes are to fund public goods, because this is true of a layer two, but it's also true of a layer one. Um the first type of tax is one we've already talked about, which is block rewards. This is issuance, right? So in the fiat world, we'd call this money printing. Right. We print more money, we inflate more supply, and we use that supply and we pay for public infrastructure, right? We'll cut you a stimulus check with some money that we've just printed, or we'll go bail out the banks with the money printing that we've done, or we'll pay for the military with some additional ether we we printed. That is what a blockchain block block reward is. And this happens in Bitcoin, this happens in Ether. It's not so much going to happen with most layer twos, although they could. I don't anticipate many of the designs, at least at first, will uh will do a lot of money printing. I think like Optimism, maybe they're doing like 2% issuance per year, but they're not awarding that block uh subsidy to to anyone in particular. It's kind of going to the Treasury.

Dow. Yeah.

Yeah, going to the tr so so that is the first um the first category of tax, right? It's you print money just like a government would. The second type of tax is an excise tax. So, you know when you go to like um a store and you buy some clothes, I don't know what y what's the state tax in California, David, like just for buying stuff. Uh do you even know?

I don't know. In Washington it was seven to ten percent, I think.

There you go. 70 to 10%. Like I live in Virginia, it's about six percent. And it's a consumption tax, right? So when I buy stuff in the economy, I pay six percent uh tax on things I'm consuming. If I don't buy anything, it doesn't cost me anything. That's different than the money printing. Money printing costs everyone something equally if you hold that asset. Dilution. But yeah, but the uh the like excise tax is basically only consumption. So if I buy a block in Ethereum, for instance, I get charged a tax. What's the tax? It's gas fees. That's what gas fees are. They're taxes. And what does that go to? Oh, those taxes go to a public good, which is security, defense. Again, that's all that Ethereum and Bitcoin chains like it fund today. The third source of revenue, tax revenue, is this the kind that you were just talking about, David, which is M E V.

And that is almost like a unique form of tax that doesn't exist very often in nation states or exists in in various ways, which is like a tax on the money robots. There's a tax that um must be paid, and that is kind of like MEV, and that's where that comes from. And what you're saying is layer twos are primarily not using the category one of money printing and inflating their supply for public goods funding. And they're not using category two of transaction fees. There are transaction fees on layer two, but those transaction fees actually go to pay for block space on layer one primarily. So the public goods funding is really coming from this big source of revenue in the future, which is MEV. That's what we're talking about here, right?

Right, yes, and this is the beautiful thing about MEV is it's like it's largely totally invisible to the users, at least good MEV is. Bad MEV is very extractive and very exploitable. Good MEV is completely invisible. And it's just it's uh uh I use the metaphor of like it's it's like pulling geothermal energy out of the layer two. There's a certain amount of economic heat. Some economies are hot, some economies are cold, and hot economies generate more sustainable good MEV. Uh and so it's like the MEV is like the geothermal energy of layer twos. And it just is this perpetual heat source, which is a good economy, turns into funding for the Dow, funding for the layer two, which ultimately can go in towards funding public goods. Now, I will say it's not explicit that all layer twos will do this. Uh, this is something that optimism specifically is pioneering and why this opportunity exists in the first place. But I think optimism is going to lead the way into what is inevitably going to be a competition that all layer twos must compete on. Because if optimism makes the best public goods for the layer two, then it's just gonna have the best layer two. And so other layer twos are going to also compete on this vector and they're gonna compete in the same strategy because I think it's a very viable strategy.

Yeah, I agree. So what you're saying is, well, all layer ones for that matter, but also all layer twos, they'll all have MEV, right? And some of that MEV is good, some of that's bad. And let's kick the can down the road on the on the bad MEV. That's a whole nother podcast. We're not going to talk about that, but it's definitely a source of revenue. Now, what a layer two decides to do with that revenue is kind of up to them, right? So some layer twos will just pass that off to the validators in their network, like the block sequencers in that network, and they will receive a dividend. So they'll receive cash for providing this service, right? And others, and you think that this is a more game theoretically uh competitive scenario, will take a portion of that MEV, will tax it essentially, give it back to public goods and build stuff for the whole network. So you don't have a bunch of like wealthy elites that are extracting out of the economy, you're actually feeding some of that back into the public goods of the network and you're building the parks and hospitals and roads that everyone can benefit from. And you think that if a layer two is not doing that public goods strategy, then effectively, like, no one wants to move there. Right. Like, why would I go live there?

Yeah, like is it's a nation state model where two nation states they have the same tax rate, say ten percent, wouldn't that be lovely? But one nation state takes that ten percent and then starts building parks, starts building plumbing plumbing, starts building clean water, starts like investing in public transportation, and the other nation state only gives it to uh

Maybe your poot.

Yeah, the the the oligarchs, right? And so like one all of a sudden over time, one layer two is going to be a very enjoyable place to live and uh one layer two just won't be. Uh and so yes, I think the i the competition collapses down on like, well, the the ecosystem with the best public goods wins.

Yeah, I think that's totally true. Okay, so now we've established why public goods are necessary for chains. We've established where the source of funding comes from. It doesn't just come out of thin air. There are some like three different sources of the funding. Now, can we get to the definition part, the retroactive public goods? So, what's the retroactive part of public goods? What are we defining here?

Yeah, so retroactive public goods. This is the alpha. And this is something that crypto can only enable. And why it makes me so optimistic that we are going to have a better future because of this mechanism design of retroactive public goods. This is where the historical disregard for investing in public goods is fixed, where it's actually becomes profitable to build public goods. Rather than like building out this new private good, this new Web2 social media app, or I don't know, building out Lockheed Martin or something crazy like that. It starts to become equally advantageous, equally like upside exposure to all of those like highly extractive, highly uh, you know, you know, uh like Silicon Valley upside projects, and that energy can be directed into building public goods via retroactive public goods. And so

Can we pause here, David, and just talk for a minute about like um a lot of the most important public goods in the real world and crypto are not getting funded.

Yes.

And why are they not getting funded? Is it because they don't have a like a business model? There's no private

Have a business model. There is no upside. It's like charity. And so like how m you can't really convince people to donate their money to help clean the water. There is no business model for cleaning water.

Exactly. So it's like it's like these sorts of things, like environmental is is maybe the the primary externality, is right. It's like there's no business model for going and cleaning all of the air in a particular city. It's just falls prey to tragedy of the commons. Right. There's no business model necessarily if we if we didn't have an interstate highway in the US, there's no one company who's going to be like, you know what, we'll centrally like

Spend the the hundreds of billions of dollars to build out this road system and connect and charge people taxes, that would never get done because it's not profitable to do that. And yet it brings so much public good to the network as a whole. So there's a whole category of things that we could do to collaborate more tightly and to better society and to live in a better world effectively. And but we're not because the system of capital markets that we use today doesn't allocate funds to those things because there's no short term research, uh, there's no cer short term return on investment. Like research and development is another category. Like the general sciences. I mean, no one is actually investing heavily in like general research that will pay dividends to future generations 10 and 20 years later as they discover things like quantum mechanics.

Right. Yeah. That like requires investment. Like that's where some of your tax dollars go is to educating the kids. And like I don't need to convince I hopefully don't need to convince bankless listeners that like an educated youth turns into just that's a that's an investment in the youth and makes them build better things in the future.

It's investment in the economy, essentially.

Yeah.

Right. Yeah. It's just, but it's also long-term investment, right? And so where's the upside? There is no like equity upside for being a teacher or for like starting a school. Uh, and so like the it's these things that retroactive public goods funding actually fixes. Uh and like how we said, like, MEV is a unique property of crypto economic networks. And so retroactive public goods is a unique property that comes out of being able to extract MEV, a source of income that we've never had before in in humanity. And if we it's really just the power of where can we direct the MEV that we collect from our layer twos into public goods, into things that humans deem to be valuable? And this is what retroactive public goods funding does. This is that mechanism.

And to retro Yeah, what is the retroactive part? That's been the big question in my mind.

Alright, so yeah, in order to explain retroactive, we have to explain the whole entire thing. So let's go ahead and get started with that. Say you are an entrepreneur, a builder, and you are looking to build a product, but it doesn't have a business model because it's a public good. So you build this thing, and because of the commitment of retroactive public goods funding, means that money will be there if you build this thing. And so it's it's partly like a confidence thing. And so retroactive public goods funding says there will be money if you build it. And so here's how this works you come up with this idea. Bankless, for example, if we had started bankless when retroactive public goods funding, we might have started to use that instead of Gitcoin, which is a kind of a precursor to retroactive public goods funding. So we would go around to all of our friends and saying, Hey, would you like to invest in Bankless? We are going to make an education system for all of crypto. And we're going to make the best podcast, the best newsletter, uh, and we're going to provide a ton of education. And we are going to be retroactively compensated for that in the future by proving our utility and proving just the the value of the education that we bring to the crypto world. And then some we get we would collect some investors, we would have some sort of like seed investment round. We would set a valuation as we do in with normal seed investments. So, hey, uh $10 million valuation, uh, we're gonna we just need to raise half a million dollars, uh, and we'll do it from our friends and family and people who believe in us. You can open this up to you can open this up to the world. Uh, and then we mint an NFT. NFT is part of this, and uh as or or tokens, it also works as ERC20 tokens. And then we just give ProRATA shares of who uh invested into Bankless before uh we were like uh doing our work. Uh and so then we have our investors with these tokens, and when we get to work building Bankless, and then later.

As we've built out bankless, as the podcast gets listened to, as a newsletter educates people, and as we onboard people onto Ethereum or onto crypto at large, we get to go to the the the DAO and say, like, look at all the funding that we or look at all the benefits that we've given. And this is where the role of uh optimism's two uh two uh bicameral governance system comes into play. Is they've had the token house and the citizen house. The token is the OP token. The citizen's house are these known entities that direct public goods funding. Uh the token house does like protocol upgrades and things like this. And the citizen's house, which is an identifiable human, like on-chain identity, it's the citizen's house of optimism that directs funding towards public goods. And so they will, the, the, they generate like optimism generates like $10 million every month or so. And so that's the $10 million budget for retroactive public goods. And the Citizen's House just allocates funding from their monthly budget towards the projects and the ecosystems that have benefited the optimism layer two or benefited the system as a whole. And so what they do is they go and like reward token holders who invested in the public good in the first place. And there's many different mechanisms of doing that. You can literally buy and burn the token, or you can just put cash in the pockets of token holders. But basically, it is a commitment to funding the projects that invested or the and the people that invested in this public good. So by like putting the public good into a token on the layer two or on Ethereum, you can identify the early believers, the early investors in this thing, and start streaming cash into them as determined by whether or not they actually provided good utility and good value to the layer two. So it is a top-down like governance system, as in the citizens' house of the Optimism DAO votes and determines how to allocate their other retroactive public goods uh funding that they have. But it's baked into the social contract of the Optimism DAO to do this. And so there's a little bit of a bootstrapping problem, as in like people might not take the risk of venturing out to produce this public goods venture until they have assurances that money is coming. But if you believe in the optimism uh social contract, and then later, if you actually see this actually working out, your uh VCs and entrepreneurs are gonna have better and better assurances that money will come to them if they uh provide something of value to the optimism layer two. Do I explain that okay?

Yeah, I think that's cool. Yeah, I I just want to dive into some of this and repeat some of it back to you. But first of all, I just wanted to clarify. I think you explained this before everyone, like the uh the citizen house, at least in optimism, these are individuals, like individual people. Yes. Like one-to-one, one person, one vote. This is not capital voting. Yes. Uh it's kind of like a decentralized, it's an identity protocol, if you will, in optimism that shows you are a person living in the optimism layer to you, and your vote matters and counts. This public goods funding. You're you're essentially a member of Congress that's allocating budgeting decisions, right? Not setting laws, but actually, imagine that. Imagine if you could actually, as a citizen of your country, vote where your tax dollars were spent, like more directly. That's what that's what this is kind of providing for, which is super cool. But it strikes me that's like what you said was if you are a startup, right? You can start to think about developing an entirely different set class of um applications and products, right? You're not necessarily trying to convince investors of uh like revenue and profit and uh like the hard capital metrics. You you actually just have to convince investors, like you start measuring things differently, and you start to convince investors of like, oh, this is the utility, the public utility that we are going to add. We're gonna benefit X amount of optimism residents, right? We're going to benefit the citizens of optimism by growing the community tenfold through education and bring more of those citizens into the citizens' commons, right? Into the citizens' house. Uh, your your metrics, your success metrics completely change from success metrics based on like revenue and profit and all of these capitalist for-profit things to like impact. What impact did you make in the network in the community? And these are these are notoriously like not captured by capital markets, right? So something like um, God, what is the value of the Geth team and the Ethereum client? So, geth, if you're not familiar with it, this is the client, the main client that runs all of Ethereum, and that all of these other alternative layer ones have forked and used for Binance Smart Chain and for like, what is the value of that?

Right. The Avalanche uh L one, Fork of Geth. Binance Smart Chain, Fork of Geth. Ethereum, it's Geth. So like imagine how much market cap stands on top of the shoulders of Geth and they have received zero funding other than like grants and payment from the Ethereum Foundation.

Exactly and so

It's unsustainable. Yeah.

Not sustainable. And so what is the the value of of Geth? Like you could you could show all of these metrics for impact and then the community would effect effectively vote and say, like, yes, this is so valuable to us. We are going to allocate funding to this. And I would imagine, David, correct me if this is uh this is not true, but like the token economics behind this um further supercharge it, right? So what you're saying is a startup gets funded and it has a liquid token. And that token can trade up or down, right? But it's not trading based on profit, it's trading based on, oh, there's a new report from the bankless education platform that they just crossed a threshold and they're now educating from 5,000 individuals to 10,000 individuals. Oh, it's doubled in the last month. Right. Well, that's worth double the value. Right. And so the token trades upwards. And why? Because it's expecting that liquidity event at the end of this road when the um, you know, the public goods uh essentially voting body votes to fund it and provide that's the IPO, right? And so like you're trying to get from like, you know, uh PMF, product market fit or P uh yeah, PMF, is now it's like public market fit. Yes. It's like how how um how can you design a product that benefits the public the most the most and showcase those metrics in order to get funding and have your IPO? So it kind of flips it on its head.

Right.

Am I right about that? Yeah. Is that

No, you articulated that so well. And and the the the flag in the ground is that like retroactive public goods funding funds uh it creates impact equaling to profit, as in you profit as much as you impacted positively the world around you. Where like old investments are uh investments that like maximize private financial return, like the in retroactive public goods funding, these new investments are are investments that maximize public financial return. So it's a question of how wealthy did you make your community not you? Like how how much did you spread and share in wealth and upside and knowledge to everyone around you rather than extracting and pulling that in for yourself? And so, like you can now, as an entrepreneur, you can now build a whole new slew of products that have never been seen before on the face of this earth, which is why this opportunity, Ryan, is so big because it's completely untapped snow. It's like the internet, we don't even know how big it is. Uh and so if you can build a product that maximizes public financial return, then you get your share of the L2MEV that gets pulled out of the the uh out of the economic energy of the layer two. Uh and so and this turns into like a positive feedback loop where

If you generate more public goods, you make that layer two a more like a more lovely place to live. It's got better infrastructure, it's got better roads. And so because of that, more people will live there and they will go to that layer two, and that will generate more revenue out of MEV because there is more people paying their small pay share of taxes to the layer two. And that layer two now has more funding to fund in further public goods. So it's a positive flywheel effect. And Ryan, like if right now, like I said, like Optimism is producing like $10 million a day in MEV like fees and rewards. Like then the token's not even launched. Like we talked about this in layer one. There is a coming mania of layer twos and is going to generate so much revenue for this opportunity. And so like this isn't this isn't just like Ryan and David saying, like, oh, like public goods, let's all like remember to celebrate public goods, kumbaya. Like, no, no, no, no. This is gonna put money in your pocket.

we made it we made it capitalist. We just made it capitalist.

Public goods are now

capitalist. Yes.

Well w I guess what's what's cool about this is uh it feels very scalable in the way that capitalism is scalable. Yes. Right? In that like but you know, part of I think we want to get to some examples of potential public goods for layer twos. But before we get there, like we could just say we don't even know what the best public goods are going to be.