3. Network Funding Updates - Lisbon 2022

thank you Evan uh it's a hard act to follow but I'll try my best here um we'll just take a second here um as Evan mentioned uh my name is Matthew kic I'm the head of the network funding team here at protocol Labs um and I want to talk to you about funding networks which is iron probably you know a more simplistic title than I would have liked but uh we're we're going for Simplicity here so I think what what we'll cover today is I I'd like to go through a little bit of like what we've done as a team over the last year because I think it's like very it's a good example of I think of a lot of the problems that people are facing espe within web 3 about how do you solve some of these public um Goods funding problems and how that actually reveals itself through a set of problems that you see when you try and fund a large scale Network that has a lot of public goods so we'll talk about you know a very high overview or high level overview about like how do we specify the resource allocation problem for public goods um how protocol Labs has actually created a network funding team uh to solve this like what do we do ourselves and like how do we do this um for more broadly outside of the protocol Labs Network and then I just want to give a quick high level overview about what we've done last year so I'm going to oversimplify for the sake of trying to make a point here um but really when I think of like resources and capital allocation we're getting a capital source and trying to allocate it towards projects that are gener generating an A positive impact as indicated by the capital Source if the capital Source thinks that the POS the impact that has been created is worth the investment then it will continue to allocate in a regenerative way so really that's that's all it boils down to in an Ideal World Capital would be able to find suitable endpoints um for product or for productive impact relative to cost um if you look at the diagram here you can see see each of those arrows is an exchange of not only funding but it's an exchange of information um it's an estimate of positive impact relative to the cost it's um finally also a resource um transfer so what it means is that each of these arrows actually has um significant cost associated with it and ideally it would be perfectly allocated however oh also when we think of the projects that are seeing on the other side these can be kind of like public goods so net positive externalities but they don't have sufficient value capture to capture all of the value they create or it can also be um projects that are self-standing so they create impact and they also have sufficient individual value capture however the distribution of this capital is a really hard problem so often you aren't actually going to get a large cap amount of capital and actually be able to allocate it perfectly to all the problems in the projects that you want to create the impact that you need um IT projects can be missed it leads to um a decrease in efficiency and you know a negative impact in some cases so what can you do you can introduce distribution methods that those can be entities mechanisms um new theories new valuation methodologies to actually help allocate Capital more efficiently and even at a local level um but it can also increase overhead because you're introducing additional steps to the process another thing you can do is find fewer larger Investments that are still going to create like a positive impact with the capital that you are deploying so how do you think about this in a very kind of generalized way there's kind of four things you need to consider in this Capital allocation um question it's one where is the capital coming from and how is it regenerative and how is it continuing to invest into these problems two what are the distribution methods so some would call these transaction costs but distribution methods are kind of like the structures the methodologies everything that you use to pass information and match Capital with projects Um this can be legal and financial entities it can be mechanisms um it can be you know bonds quadratic voting whatever whatever you want it to be and it can also be information Gathering metrics like or methods like metrics um gathered from an ecosystem um it can be valuation methodologies um the impact is something that can be many different things depending on the fun it can be profit it can be strategic it can be a public good benevolent idea um but it's a useful feedback loop to understand are the things that we are funding um and is the capital being deployed um in a correct way that is actually achieving the outcomes we need and then finally um you have projects you need to have a series of projectss that can actually absorb the capital in an efficient way um to be able to get the right outcomes here so over time we've seen structures emerge to actually solve this allocation Pro problem in various different ways you can it's you end up in this messy situation where a lot of the funding problems um that we are trying to solve start looking a lot like governance and a lot like the way that we coordinate U more broadly as a society but I would generalize into maybe three examples there are some missing here and each of these kind of looks at a different way of Sol solving this problem of where's my Capital Source where are my distribution methods and how do I think about impact um on a few different factors so you have kind of like governments and corporations that typically um they have almost a self-contained value umbrella where through either taxation or like Revenue capture they're able to kind of fund um all the projects and they will go through and typically do either internal structures or some amount of like internal and external Contracting to allocate the capital they have um typically this is all done internally when on the far right side you see Market structures and Market structures have a unique um flavor to it where because they have very robust methodologies of things like valuation so how do we think about discounted cash flow in the case of like traditional you know companies security stocks Etc um how do we think of like the development of the pnl um Financial Roi all these things have helped us actually compress this information gathering and passing problem um to be able to actually kind of externalize a lot of these um steps and has enabled us to kind of open up a new kind of like Market dynamic because we're able to do so since there is such a robust methodology on the distribution side however we see that the impact is actually very you know it's it's oversimplified it's a financial Roi most of the time and doesn't take into account strategic impact positive externalities you know the classic failure of the capital markets what this means is if you click a layer deeper is that public goods allocation is often underdeveloped or it's very centrally um planned so governments are typically taking um on a lot of the burden of like funding a the public goods within their own sphere of influence um in some cases you see corporations getting large enough that they are actually taking on this public goods funding uh process so you know the classic example that we use at protocol Labs we would think of something like Bell Labs which although it had Monopoly power was able to fund you know incredible developments in information Theory the transistor um you know continue continue the one thing I'll note here is that when you look at the amount of development that has happened on each of these kind of distribution methods um when it comes to like the legal legal structures the valuation methods um everything that we can do to get capital from A to B the market structure side of things has far more development than any of these internal processes and that enables some very interesting Dynamics um but also allows it to not need a central governance um to be able to actually allocate that capital in the proper way now come to today web3 networks actually create a very interesting new paradigm where we have these new systems that now have to think through new ways of figuring out how to allocate Capital within themselves you have an interesting scenario where if you look at the capital Source you're seeing a bunch of different organizations that now have to come together in some ways to fund an ecosystem and we've seen ways of doing that through things like Coalition funding Dow formation we've also seen a really interesting and like developing field in kind of tokenization you see ecosystems tokens that are able to tie together Capital allocation in a way that wasn't previously done before it also allows us to kind of capture value in a way that we can uniquely fund Network goods and public goods in a way that wasn't done before now I will point out though that the distribution methods particularly for things like public goods and network goods are very poorly developed so it takes a lot of effort and it's a very high lift to be able to do things like identify um as a kind of like coherent unit across multiple funders what are the key infrastructure Goods that we have within our ecosystem that we should be investing in um it falls under a lot of the kind of Commons problems that you know elanar austrom pointed out so it's really because we're now seeing this decentralization of the funding entities but also this additional layer of the the ecosystem token value alignment that we're seeing a need for a rapid development in some of the methodology to understand what is value what are the intermediate institutions that we need to actually distribute capital from the ecosystem to the projects that are going to invest and grow in the ecosystem itself you know where how can we identify uh projects that are actually going to be valuable and scale them up um because right now we're seeing you know a a bit of a cliff when it comes to ecosystem funded or kind of Coalition funded large scale public goods or network Goods problems so try and point out a $50 million run rate company or project within an Eco system that is not funded by the central institution within that so I think another big thing here is the Imp impa um and this comes back to how do we value public goods impact it's very very difficult to be able to properly allocate and understand the efficiency of how we're funding these problems if we don't understand how impactful the capital that we are spending is I'll also point out that there's a very large need for scale public goods investment um it's interesting when you start looking and there's a few different angles to this um different types of funding sources um are applicable for different sizes of funding and different types of projects are only enabled at certain funding uh funding Cliffs so if you look down the list you'll see that in some cases you know when you get to the top at the bottom you can crowdfund you can see individual projects that are able to support these kind of like smaller developments but there are a series or a class of problems that only are solvable when we start looking at orders of magnitude larger um funding problems so when you think of like what could we get done with $100 million um that's only scale currently fundable really by NOS foundations corporations that exist within the web 2 world but that could be like massively massively impactful for web 2 once we figure out how to actually get a coalition funding model for up to 100 million a billion things like 100 billi 100 billion plus which is almost like a supernational level we'll start seeing some really interesting problems um revealing themselves once we get to that scale of funding and it's also worth noting too that there are a lot of funders that won't actually write checks below $10 million it's easier for them to write a $50 million check than a $50,000 check and when we start realizing that we we see that we really need to fill the Gap and be able to create these systems so that people can fund at scale and bring that into kind of the public goods ecosystem so that's where protocol Labs Network Funding comes in and I'm going to try and tie this all Al together in about five minutes here but really what protocol Labs Network Funding is in a nutshell is we are an organization that is trying to create scalable funding systems for public goods and Commons so to tackle all of what we see as the most pressing problems into today Society so when we think about how do we get there there's a couple Steps step one is since we are we do have the benefit of being a network with a kind of defined value capture mechanism in our ecosystem we can build and test these systems with some kind of more naive assumptions um using our own ecosystems um once we have those methodologies developed we can actually take those expand to broader public goods in web 3 and Beyond and step three is solar Punk future we all live um in kind of like the Jetson Jetson's era but we're not we're not quite there yet so how do we actually like piece this thing apart um I would kind of split it into three different areas um the way that we've organized ourselves is one there are a lot of like we looked at a few pages ago there's a lot of like unsolved problems or things that need to be drastically improved from an efficiency and Effectiveness standpoint when it comes to mechanism research so we need fundamental research to understand what are the entity structures what are the valuation methodologies that we need to be able to actually properly allocate money towards public goods what are the distribution methods that we can improve there's things like hypers certs which um we'll be talked about later today impact evaluators many other experiments there and there's again legal and financial um areas which we've been exploring which I'll touch on in a second um also we just need to operate these funding structures we need to Pilot the existing mechanisms we need to productize and scale we have parts of our team that's dedicated to doing that and the third is we need we can't do this Al we need Community we need Partnerships we need to bring everybody in or else going to be able to do this so in the same ethos as what we've done with protocol labs open sourcing everything we've done um creating working groups try to design events like f of the commons to aggregate the community so we've only been around for about one year um what we've done so far is on the funding side we' structured over $10 million in funding um allocated towards public goods and network Goods problems we've created uh two decentralized investment structures um that are allocating Capital towards what we view as like the public goods of the protocol Labs Network um we fund over 70 teams and contributors um in the last 12 months um we've also pushed forward mechanism research um although we'd like to accelerate that as well so we have hyper certificates um the vzero standard has been launched hula our colleague will uh talk a little bit more about that soon we've launched multiple funding experiments on impact evaluators quadratic voting internally um which we'll be doing a better job of releasing going forward and we've also done a lot of these fun of the comms events so thank you for everybody who has seen those uh previously these have been very exciting so I'll just go into detail about a few specific ones and give you an overview and there'll be people later on who will actually talk in more detail about all of these um for you so blue funds are an interesting mechanism that we've been developing essentially this is more of a kind of like financial and legal play about how can you create a structure that has a scoped focused investment thesis um and has an area our Network or public goods with like very clear success metrics so that you can allocate against it when you define a closed system here you can actually allocate a ton of mechanisms and design like incentive structures around it so you can do a series of Once you've defined the outcomes you've defined the area you can identify multiple funders who might be interested in this problem and you have this like optimized structure to be able to bring them in and actually you know action against it you can design incentives you can design the funding Fields against it so it's just a really optimized way to bring multiple people in right now we have two active funds we have a private retrieval fund which is investing in WR reader private access um to ipfs file coin um that's a combination of core fundamental research where we're actually sponsoring like multiple um phds and research groups to push forward like fundamental research there and also Implement some of that research so we're trying to accelerate the field drastically um in research um Addy my colleague will talk more about that um we're also have launched an ipfs implementations fund which is meant to accelerate the development of ipfs um again combination of research productization and scale skill grants along with a bit of a budget for experiments like impact evaluators retroactive funding uh different ways we can kind of optimize this we've also run a ton of impact evaluator experiments I know we've talked about impact valers a lot I'm not sure if any of you were in Bogota but um we we spent a little bit more time there um we've run multiple impact Val exper experiments both like explicitly and implicitly um you know the cheeky answer on the left hand side is file coin is an impact EV valuator um so I didn't run that I'm not Juan Benet I did not create fcoin but um we did do some other cool experiments ranging from like very kind of quantitatively focused impact evaluators all the way to very subjective like expert opinion um impact evaluators similar to what optimism has been doing with retro pgf so we've got a lot of learnings there and we've been scaling this up um pretty rapidly and plan to like really put a dedicated effort into scaling us up alongside the community going forward we also have actually created this PL Network Capital funds um so if you look there's actually if you're in the protocol Labs Network Network there are a series of different funding mechanisms across all levels of ranging from kind of network Goods all the way down to research um we also have different kind of like we want to basically stage it so that there's funding at at every kind of like important Milestone similar to what you'd see in VC so what we've done is with you know between ourselves and members of the ecosystem there are various different funding categories that people can go to to actually fund Network goods and public goods within our ecosystem so pretty happy how this has come together one of the critical things here is that it's um the coordination problem among various different entities becomes very tricky especially if you want to truly decentralize is like how do I know that somebody else isn't already funding this person um how do we ensure that we're like funding this person in the optimal way um without over capitalizing them things like that so what we found so far and existing programs have really good coverage on like early stage Network goods and pl I think like people have developed good things like grants foundations um Builders funnels those actually are pretty well suited to public goods as well and it's almost hard to distinguish between kind of an Roi seeking project and a public goods a lot of the time at the beginning as long as there are people using it um so that's great it means that we can kind of take advantage of existing systems and focus our efforts on kind of the scale public goods um we've also seen that between point Solutions of trying to deploy Standalone impact evaluators Standalone grants or mechanisms those really aren't as effective as combined programs where you see a combination of Grants to solve one part of the incentive problem um impact evaluators to provide um you know follow on incentives and signal at the end and a series of Grants at every single stage so I think there's a lot of work to be done about pulling together all of the cool stuff that you've seen for fund the commons into like more composable projects I think there's a lot of Need for kind of like you know dedicated versus oneoff funding pools um right now I think a lot of things are done on a case-by casee basis where you could really benefit from having a large pool of capital dedicated to specific functions over a long time versus them having to reapply every 6 months for a grant and then finally there's like a huge amount of open space on tooling um with tooling we've already seen like drastic reductions in the amount of time it takes to perform kind of like allocation and coordination efforts and there is so much open space to do better versions of quadratic voting tooling better impact evaluators um working on top of some of the the examples that have been built with um hyper certificates like there's just a lot of room for tooling to drastically improve the distribution process here so what's to come um we are looking to massively scale mechanisms so our Focus has been so far on hypers certs impact evaluators um we are going to look at some new mechanisms going forward um so if you have any ideas we're all for it uh we want to formalize and accelerate blue funds and really start seeing how we can focus those externally and focus on like you know broader public goods between beyond our own network once we've kind of proven that they work um in a kind of like idealized situation um with protocol apps we also want to kind of like build out multiun F efforts on large scale public goods so how can we get multiple aligned parties together in some of these new structures that we've built to invest on large scale public goods efforts and then finally we want to kind of build a more kind of comprehensive system with like robust validation tracking um to kind of solve that part of like the are we creating impact with a lot of the capital that we're spending great um I think I made it with one minute to spare so happy to answer any questions if there micone do you have a m i proba y so I wanted to ask if you you guys are thinking about how to incorporate previous experience and all the from all the public and private sector ways that people have approach these kind of problems into these current structures to oh thanks uh I guess I'll repeat uh my question is uh how are you guys thinking about incorporating effectively all the previous experience from people who have have been doing this kind of uh Public Funding work as well as similar things in the private sector uh large corporations uh even VCS and so on and make sure that we're not Reinventing the wheel not you know falling the same traps over again yeah you mean we're not the first person to think of all this no it's um yeah no we fully understand that and I think we want to avoid the Trap of like web 3 trying to invent some everything from the ground up um what that means I think is a lot of like collaborations and talking to people within the space so um previous funing the commons we actually talked to people who are coming from kind of like the traditional um the labor side of like how do we do do unions how do we do kind of like trade organizations that have learned a lot of these coordination problems and have different approaches to the same problem um it just means a lot of like how do we partially bridge the gap between kind of web outside of like our web 3 kind of echo chamber to you know existing people with a lot of or existing organizations people with a lot of like historical context Falon Foundation is is like within the protocol ABS Network they do a lot of work with traditional Nos and we have a lot of great people that um kind of have given us advice about hey like you guys are solving a problem that somebody looked at 40 years ago um so it's really like maintaining a little bit of kind of like being humble and understanding that we don't need to reinvent everything and this you know it's the classic there's there's no such thing as novel ideas anymore we're just like rediscovering things that we already knew before so if there are things that you have seen up there and you think would be good to look up um in the past please let me know perfect how how are we doing on time we good sure yeah this is half a comment half a question I just thought that umine seems uh almost unique in fact that a lot of people were um kind of worried about maybe a negative externality of Bitcoin in terms of you know energy consumption Etc that's been quite famous with proof of work and you know the next uh uh step or so it was seen was to was to have sort of zero impact but then filecoin seems to me to be the first to be a little bit more ambitious and actually have a a positive externality which seems to me to be uh the way to go so I mean it is it as far as I know is is is that related to your interest in in funding the commons that you can you can have a sort of positive output as a sort of side uh uh effect of of of the protocol is it is are those two two things related or it just a my imagination no I mean uh Juan can give you a better answer here but I think it's like it's something that is very core to the protocol apps ethos and was like built in I think the way I've heard it described is like filecoin was built as a way to how do we fix a how do we create like useful work out of all these like proof of work algorithms um and then there's work on things like fcoin green which is actually trying to offset the carbon impact of the protocol Labs Network and you know all of our activities so it is something that's like very clear and I think I would almost flip it and say that we are trying to create the mechanisms for the public good um the fastest way seems to be to prove it in our own backyard um because we have like a very you know very beautifully setup system that allows us to quickly test these like economic mechanisms and then like use that to kind of expand it more broadly so yes to your answer cool I think I'm I'm over time and getting stared down here no all right well thank you very much everyone um if please like ask me any questions we'll be around the whole day and I would be super interested in introducing my next um speaker Carla um if she's if she's up to uh oh she's on the other side I was looking over here um well so Carla is the head of um Network research um among many other things that she does she's been you know critical to a lot of the initials that we've done as well here and um she's got a lot of interesting um ideas and work that our team is doing on kind of expanding the future and re reimagining how research is done