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Hi everyone, I'm Jesse. I'm the program manager for Crypto Startup School and prior I was on the investment team at Andreessen Horowitz. Prior to that, I was also a founder of a project in the space called Media Chain. And today I'm going to talk about progressive decentralization and give a playbook for building crypto applications. Now before we dive in to this playbook, why are we even talking about decentralization and why is it so important for crypto apps?

Decentralization is important because it's a way to build trust. The internet is based on open decentralized protocols like IMAP, POP, and IP, and these form the basis of the internet services that we use today. On top of these neutral protocols, entrepreneurs have built some of the most valuable companies in the world. These companies are valuable because they extend the functionality of the bare internet protocols and give us rich experiences like search, email, and social media. But today, we know that these types of internet companies follow a predictable pattern.

When internet platforms start out, they do everything they can to recruit users, developers, and businesses to join the platform, because each of these community members forms the basis of a multi-sided network effect that makes the platform more valuable and defensible. Yet, as we know, as platforms grow, they move up this adoption curve and they follow a predictable pattern where they slowly start to change their behavior. Instead of cooperating with their communities, they start to extract value from them. For example, many web 2 platforms used to have rich developer ecosystems. I think at 1 point, Twitter had more traffic going through third-party clients than through their own official app.

But in order to capture more of the value, Twitter changed rules and handicapped the API and centralized the client. Spotify and countless other platforms have done the same thing. So for users and developers, this is a bait and switch. These rich ecosystems that started out cooperative ended up getting killed off and the innovation emerging from them was stifled. In contrast, crypto networks offer a new model for building internet platforms.

Unlike corporate-owned networks, crypto networks aspire towards being decentralized. And what I mean by that is that they strive to be community-owned and operated. But that sounds kind of crazy. How's that even possible? Well, here it's important to understand that crypto tokens are an exciting new innovation in that they enable value to flow at the cost of information.

That's pretty much 0 marginal cost. And that means it's now possible to financially reward independent users all over the world for their contributions to a network. And the result is that crypto networks can have a more cooperative economic model. Instead of having to extract value from users in order to return that value to shareholders, well-designed crypto network routes value directly to those who contribute it. And that in turn means that crypto networks can be much like earlier internet protocols in that they can grow to much larger scales of adoption while enabling sort of unabated and innovative ecosystems on top.

So that's why decentralization is so important. And now I'm going to talk about sort of how building in crypto is actually different from traditional platforms. So in order to explore that, we should probably start with things that are the same, because there is a lot that is the same. In traditional startups and crypto startups, you need product leadership, you need rapid iteration, and a managed go to market. But this is where the differences start to come to the fore because in crypto, you also need to consider how the product can successfully run in a community-owned and operated manner.

So, that's tricky because community ownership is often at odds with these other 3 things. Product leadership, rapid iteration, and managed to go to market require a core team. So, how do crypto founders resolve this tension? That's where the playbook comes in. So to help founders think through this I'm gonna run through this three-step process that hopefully serves as a guide for how to run the process of progressive decentralization And taking a step-by-step approach allows teams to focus on the right thing at the right time, and also posits a path towards regulatory compliance.

And so before I jump in, I want to note that, you know, crypto is still operating in a pretty uncertain regulatory environment. And so the final stages of this playbook are really only pointing towards potential solutions rather than identifying proven winning strategies. But you can think of this as a possible path forward. All right, so let's start with an overview. So I believe that a successful crypto project will need to execute 3 objectives in this sequential order.

The first should be obvious, which is building a product that people want. Without a product that people want, you don't have much. So objective 2 is building a community around that product. And then finally, the thing that's new and exciting about crypto is giving ownership of the product to the community. So let's start with the first.

The earliest stage of building a crypto application is all about finding product market fit. And as I mentioned earlier, this requires a lot of the same ingredients as a normal startup. You need a great team, you need lean development, you need tight execution and quick learning. And again, all of this is in service of product market fit. And here it's important to avoid design by a community or the community.

Great product needs opinionated leadership to do all these things, to hire a great team, to execute quickly. And so in practice, this can mean having admin privileges on an application that uses smart contracts. For example, that would allow the team to effect upgrades or shut down the application quickly as needed, and in turn, iterate rapidly. So at this stage, there should be no pretense of decentralization, since a core team is driving all product decisions by necessity. And accordingly, launching a token at this stage probably isn't advisable because the product is dependent on the core team's efforts and dependence on the efforts of others is 1 way you might fail the Howey test, which is an SEC regulatory framework that you're going to hear a lot about in the coming weeks.

And you don't want to fail that Howey test because thinking about securities regulation is a huge distraction from product-market fit. So the idea of a core team controlling all the aspects of a project may sound weird because we're talking about decentralization and it's likely to ruffle the feathers of some of the people in the early crypto community who hold decentralization you know to in high regard But if users are complaining about the control you've got, that's actually a good problem to have because it means that someone cares about what you've built. So that said, it's pretty important to communicate about control where it exists, because if you're faking decentralization, that's a quick way to undermine trust with your users, whereas transparency about control is a better way to build it. So At early signs of product traction, which could include a growing user base, developer ecosystem, or some network effects starting to take shape, it's time to start devoting more cycles from thinking about product to thinking about how to engender harmony between the core product team and the community. And that's what objective 2 is all about.

So this is going to look different for different types of communities, but a lot of the products building in the crypto space are developer facing. So for developer facing products, community building might involve investing more heavily in the best practices for running open source communities, which can include good documentation, building a developer evangelism program, or issuing bounties and grants and other incentives for third party development. And going even further, it could make sense to start thinking about how to eliminate dependency on the core team in order to build more trust with the community. And so limiting control over the product is 1 way that you can start to invite community participation. For example, Compound, who we're going to hear from later, made a change to their smart contracts that delayed upgrades for 48 hours, which allowed time for the community to sort of review the upgrades and respond.

So relinquishing some control comes with this opportunity to invite community participation. But as you go about engaging community members, it's important to revisit their incentives and ask the question why will community members contribute to the product in the first place. So last week you heard from Ali about business models for crypto projects and hopefully you recall from that presentation that the business model for crypto is actually somewhat similar to the business model of web 2 platforms. Crypto applications are multi-sided marketplaces and like web 2 platforms their defensibility comes from network effects. Those network effects create switching costs which allow for the possibility of charging a fee so long as the fee That's charge is less than the cost of switching to a new platform This model is sustainable and so the concept of charging a fee for a service of course is nothing new But as we touched on earlier what's new in crypto is who benefits from that fee stream.

So because crypto tokens reduce the distribution cost of moving value to the cost of moving bits, it's now possible to distribute economic value directly to community members to incentivize their contributions. That being said, it may not make sense to start charging a fee right at the outset of the project. And it almost certainly doesn't make sense to just to start distributing fees right at the outset either because that has the potential to trip regulatory wires. So what is important is to think about how to design an effective incentive and token distribution plan. And part of that needs to mean conceiving of a distribution of incentives that's both fair and effective.

Fair in that it rewards past participation and effective in that it will sustainably reward ongoing contribution from community members in the future. In 2017, we saw a wave of ICOs, which is 1 way to distribute value, selling tokens to a community. But I think since then, we've learned that the ICO model is somewhat suboptimal in that ICOs invited sort of unengaged communities of speculators and a ton of regulatory scrutiny that distracts from finding product market fit. So crypto applications that focus on product market fit have an opportunity to do better than ICOs did because they can distribute tokens to an already active user base. And to start, teams might do this by testing an initial distribution of tokens with a managed group of community members.

A number of layer 1 blockchains have done this by running testnet programs where independent community members can register to run Node. Those testnetwork participants are promised tokens from a future distribution, but only after they've demonstrated their ability to run the network. So a permission group can be an effective way to demonstrate that a network can operate in a truly community-owned and operated fashion. Once you've got a sustainable network operating a service, it's time to start thinking about how to scale this distribution of incentives to a wider group of active participants that might contribute to the network in the future and the wider community to boot that might join even later on. So an effective distribution should of course consider the core team that built the product as well as the users that make it useful.

And some common questions to think through here are what percentage of tokens should be allocated to the initial team versus how will you, you know, reward different types of contributors to the product or service in the future? And 1 important 1 is how will technology leadership be rewarded going forward? And getting this right is hard, and I don't know that any single project has figured it out perfectly yet. But starting to model this out is really important at the stage where you're thinking about building a community, because communicating about incentives and the roadmap for community ownership in the future is a powerful way to invite community participation. And once you've got a model in mind it's it's time to move to the last and final objective which is all about actually distributing ownership to the community.

Now I keep coming back to this idea that crypto tokens are a new instrument for distributing value, including a fee stream to a community of stakeholders. And what I mean by this is I mean actually giving that community tokens. So in practice how do you actually do this? I like to call this this stage exiting to the community because I think 1 way you might do it is by actually air dropping tokens to users based on the plan that you mapped out in the previous step. So imagine there's a smart contract that mints and distribute tokens per the schedule, the distribution schedule defined prior.

At the moment that that smart contract is triggered and those tokens are minted and distributed, a number of exciting things will have happened. Number 1, the core team will have ceded control of the application from the company to the community. So the product is now governed and owned by its users. And that of course mitigates the risk of the platform changing against the rules, against the wishes of the community. The community can now sort of make changes to the product that they agree on.

And hopefully another thing that will happen is the company will found a sustainable business model by having retained enough tokens to benefit from the stream of this product and its growth in the future. And similarly community members who are now part owners of the product will also start to be rewarded economically for their contributions and hopefully they will see increasing returns to scale as the cooperative economics of the service allow for continued growth. And finally Because the product is no longer dependent on the core team, it's possible that the token may not be considered a security, which eliminates some of the regulatory overhead that comes with SEC securities regulation. So the spirit of this objective is really all about marking a specific moment when you call the smart contract, where a crypto product completes its journey from a traditional product company to a sustainable community owned and operated network. Now, a reminder, if you're a crypto founder and you're ready to exit to the community that means you've done objectives 1, 2 and are on number 3.

So you've built a product that people want, built a robust community around that product, and figured out a way to incentivize community participation on an ongoing basis such that you can turn over ownership to the community. And I think right now we haven't seen a crypto app application execute on all 3 of these yet, but there are a few that are well on their way. And 1 of those is Compound, which is why I want to invite Robert Leshner, the founder and CEO, to help us think through how they've been approaching progressive decentralization in real time. And so for those that don't already know, Compound is a money market for borrowing and lending crypto assets, and it runs a smart contract on Ethereum. The company was founded in 2018, and they've been executing a progressive decentralization plan ever since.

So with that, I'm gonna invite Robert to join me here on the Zoom and we're gonna sort of have a little chat about what their journey has been like. And afterwards, we're gonna open it up to questions from you guys. Robert, Are you out there?

Yes, I am. Hey, Jesse.

Okay, okay, nice. Awesome. Thanks for joining us, first of all. From, looks like from the Compound office, which is great. Yep.

And so I guess let's start from the top. First, I briefly introduced Compound, but maybe we can just start with your quick summary. What is Compound?

So Compound is a market for interest rates on crypto assets. It lives as a smart contract on Ethereum, and for a number of supported aetherium assets our protocol has created interest rates that an application or a user or any aetherium address can earn if they have the asset and supply to the protocol or that an application or user can pay to borrow an asset from the protocol.

Okay, got it. That's great. That's a much better explanation than the 1 I gave. So also, I'm curious, I'm sure a lot of folks are curious. What were you doing before crypto?

How did you get into all this?

So before this, I went down the traditional Silicon Valley founder and product manager track. So I founded 2 software companies prior to this, built teams, built products, brought them to market. And I also worked in a large tech company as a product lead, going through like a large software development cycle, building hardware and software.

Okay, cool. So I imagine a lot of that experience was useful and applicable to Compound.

It's actually surprising to a lot of people, but I think there's a lot of similarities between developing a product for crypto and Developing a product that's traditional software. It's more similar than it is dissimilar in a lot of ways.

Okay, cool I mean, yeah, I agree as as you probably just heard in my presentation I think you know finding product market fit is still the very obvious number 1 objective for all founders in crypto just like traditional startups. So I'm curious, what did Compound look like at the early days as you guys were striving to find product market fit?

So most people don't know this but there's actually been 3 versions of Compound that we've built over time. And the goal has always been to find product market fit, to iterate, to incorporate feedback from users and the community, and into a cycle of building a better product. The cycle for us really has been 1 of 3 phases. In the first phase, we had version 0, which was an unreleased product that was really for our team, our friends, and a very small number of people to privately test and sandbox. The core idea behind Compound, that we could create interest rates for cryptocurrencies.

It was clunky, it was difficult, it was ugly, but it helped us get the principles into the hands of a very small user base. We then used that to build and launch the first main net version of Compound, which we launched in August of 2018. And from there, there's nothing that gives you data and education and product feedback, like being live in the market. And then we used the opportunity to be live starting in

2018

to learn as much as we could before building and releasing what we consider to be the final version of Compound that incorporates all of the lessons learned from having the first product live in the market. We made a number of incredibly large changes based on user and developer feedback, including tokenizing balances, which is now C tokens, including having risk parameters that are set for each asset and streamlining the code base to make it simpler for developers to use. And so for us, our vision has always been the same from day 1. We're going to create interest rates for crypto assets, and we followed a very traditional product cycle to find and refine the product until we've achieved a semblance of product market fit.

Cool. So it sounds like when you started out, you guys kind of built full stack. You built the original protocol, you were the first consumers of that protocol, building your own user interface, and then you started to open it up to you know what you learn from you know building full stack and then you start to focus on the developer community. Can you talk a little bit about you know this this sort of second phase of developer community building and what that looks like.

So most people won't remember this, but we've always envisioned Compound as a protocol that developers could build. You could launch applications with interest rates built on top of Compound. And This has always been the idea that we've been pursuing, but the very first version of Compound didn't see developers building on top of it. What we did is we actually built the first interface on top of Compound version 1 in order to prove that we could, to dog food the process of building on top of the protocol, and to create a very basic interface to help bootstrap liquidity. Because the basic idea is until there's usage, other developers don't want to plug in.

The same thing happened as we launched the second version of Compound, but this time we had the advantage of knowing what the underlying system should be to make it easier for developers to build on. And so when we launched Compound version 2 we had a depth of experience so that we could launch with a number of partners. From The moment that we put it on testnet, we actually worked side by side with a number of different teams preparing to go live for when we finally launched the production protocol. And so when we launched, we actually did so with a couple of core developers that had been building with us the entire time.

Cool. Okay. So very much the case that you guys sort of you found product market fit by dogfooding and building a product yourselves, bootstrap some liquidity in your marketplace, and then shifted gears to, you know, focus on the developer community. Can you talk a little bit about today what that looks like? Like how do you work with the developer community and what's the relationship between the company and the community?

So this goes to phase 2 of decentralization, building a community. We view developers as the users of Compact, as the community of Compact. And at this point, 100% of our effort is focused on enabling developers to build on top of Compound. For us, that means thinking about the product as being holistic and everything that developers need. So we spend a lot of time doing things that most people find boring like working on documentation working on you know guides working on content working on things that really make the entire product experience when the user is another developer And so it starts off with thinking about what is the product that you're offering.

For us, that's a protocol and the ability to build on it. So we spend a lot of time on docs. We also spend a lot of time building a community of developers. And we do this in a few ways. So 1 is we get everyone into 1 place.

You'll notice that when we talk about, you know, how to interact with compound, we always say, join us in Discord. It's a chat server that we really try to focus on developers and creating an environment where everyone can ask questions, can compare notes, can share code, can collaborate, can trade ideas, and to build collectively. And it's extremely active. We probably have 1 of the most active discords in crypto and it's been a way to bring everyone into 1 place to enhance what everyone's already doing. And lastly, we try to celebrate and market what our users built.

Our homepage of Compound is just a list of the products built on Compound. We think that the most important thing we can do is enable other developers to succeed. For themselves to go through the cycle of finding product market fit to building a community to decentralize on their own. And that means doing everything we can to empower them. It means helping them think about product development.

It means helping them think about fundraising. And it really means leveraging our expertise and giving that as much as we can to other teams.

That's great. So earlier in the talk, I was, you know, at the very beginning, I talked about why community ownership is so important for compound, or for crypto at large, but also for compound. So I guess I wanna hear from your perspective, you know, you've been very vocal about the goal of turning, you know, ownership over to the community members. So why is that important for Compound?

So for us, we believe that having a decentralized protocol does 2 things very powerfully. 1 is that it allows the protocol to live forever. Right now, you know, our team is necessary to maintain the protocol, but if we can distribute the responsibility and the ownership of the protocol to a wide audience, there's the expectation that it can run forever. I like to say that, you know, if Bitcoin was run by the Bitcoin Corporation, nobody would trust it or use it. It's the fact that it's not run by any 1 company that you expect that it's going to be there next year, next decade, next century.

And we wanna put Compound into the same position. You know, That's the biggest advantage, especially if you're building a developer-centric product and something that you want developers to build on. They want to know that it's going to be there. They want to know that the rules aren't going to change because, you know, I wake up 1 morning and feel like it. And they want to know that it has a sense of permanence.

So that's the first major advantage of decentralization. The second, and I think this gets talked about a lot less frequently, is that it enables a wider audience to upgrade and to contribute to the protocol. Right now, you know, we're a small team based in California. There's only so much that we can do to upgrade the protocol. But if you can open up to the entire community of open source developers to enable them to contribute changes, upgrades, and improvements, then the speed at which compound advances can accelerate on its own.

So we see that as 1 of like the biggest things that's gonna change is that the pace of evolution is going to accelerate once we decentralize.

Got it, okay, that's awesome. Yeah, so I guess another thing I wanna touch on is, right now you're in the middle of this process, right? You're you're sort of you've got the community going you're trying to figure out how to turn ownership over to them I'm wondering like has there been attention there? Like how do you talk about? This plan with the community members.

How do you keep everyone sort of rowing in the same direction?

That's a great question. So since day 1, we've always communicated that the goal eventually was to decentralize the protocol. And when you're day 0, just launching, nobody really takes you at your word because you haven't proven anything yet. Everyone says, oh, of course, you're planning to decentralize. But it's been like us pounding the drums about this for 2 years consistently.

And we've taken a number of steps along the way, such as restricting our ability to make sudden changes to the protocol, creating a significant number of pages around transparency of governance, starting to show people how the protocol operates. We're now going through what I consider to be the final 3 changes as we start to hand it off. And this really is step 3 that Jesse was talking about before, which is the decentralization process. Compound has a 3 phase decentralization. And right now we're starting to talk about it heavily.

So phase 1 is the company that built the protocol, the team that built the protocol, is still generally responsible for making changes, but they're done in the open. They're done transparently. They're done with some limitations to slow us down. And they're done in a way that brings people into the process. Even when we're the ones shipping the code, we still try to incorporate the community's involvement voting for what they'd like to see, even if they're not doing it with a token or they don't truly, you know, have the ability to make the change on their own.

Next we're going to move to a sandbox decentralization, where we're going to be testing on chain mechanisms of decentralization, where it won't be just our company, it'll be sort of this middle step where we can test the end goal platform of decentralization, but with a limited number of stakeholders. Really it's our team and our company and a slightly wider group of people that are going to be able to test the governance mechanisms before they're rolled out to the entire community of users and Ethereum. And so then lastly, once we've been able to like ensure that everything's operating smoothly, that there's a huge amount of transparency about how compound governance works, and we think that the variables and parameters that we've set are the right ones, then we're going to take the final step, which is handing it off entirely to the community to run from there on. And by the time we do that, we're gonna have a lot of confidence that this governance mechanisms that we built, that are very customized and calibrated to compound work. And then from there, we will have achieved complete decentralization.

Yeah, and that maps perfectly to the sort of you know three-step plan or the token the distribution plan that I talked about where you start with sort of a permission group and then you move out to sort of a more active group of active participants in the protocol and from there you can imagine going even further to potentially all the sort of users that come down the pike in the future. Yeah, that's awesome. So it's pretty exciting because I think you guys are literally like a couple weeks away from doing the first permission distribution, right?

Yeah, I think by the time this talk goes live, we're gonna have achieved the first major upgrade to the protocol.

Okay, that's incredible. All right, So another question is, I think you're sort of out in front of, in terms of projects that are executing this. And there's also been, I think a lot to learn from, other teams in the space that got started maybe, 2017, a little bit earlier, where this playbook wasn't quite clear. So I'm wondering if you had some advice for founders What would you tell them to avoid like how do you how do you not get stuck executing this playbook?

So there's really 2 things that I think founders can do to execute this playbook. 1 is to have a extreme laser focus and tunnel vision on the goal that you're working towards. I've seen a lot of teams and a lot of founders try to do too many things and try to spread themselves in many different areas. You know, at Compound, we always had a very specific vision of what we were trying to create. And we started off very simple, we started off very rough.

And over time, we've kept focused on improving that 1 simple thing that we're trying to do. The second is to leverage the sort of decentralization playbook to start from a position of extreme efficiency, prove out product market fit while you're still efficient, while you're still making all the decisions yourself, and then eventually using decentralization and using the superpowers of blockchain for what they're best at. Making a system that's unkillable, that'll run forever, that's transparent, that's frictionless, and that's open. But not starting there. I think it's very easy to get caught up and do it backwards where you try to start with decentralization and then design something that has product market fit.

I don't think any product that's been successful has ever been designed by committee or has ever been really truly designed in a completely decentralized fashion. There is a wisdom to the crowds, but you know, the crowds need very specific tools to be able to express their views. And so I think that, you know, the real, you know, success that we've had has really just come from being very focused on building 1 thing extremely well and iterating on both the product as well as the amount of decentralization Up until the point that we can step back that it runs without us and that ideally it runs forever

Yeah, I think I think that's really great advice basically Stay focused don't do these things in the wrong order, and iterate your way towards community ownership. Well, yeah, so thank you so much for bringing to life all the ideas that I discussed in the presentation. I guess, you know, is there anything else you wanna leave students with, anything that, where they can learn more about what you're up to?

So we're 1 of the first teams to go through this entire decentralization process, but we're not gonna be the last. There's probably, you know, thousands of teams that hopefully, you know, learn from what we're doing, learn from what other teams are doing, and don't have to reinvent the wheel. We're doing a lot of work right now as we think about governance and governance mechanics and how we're building the compound governance token that we hope can be recycled by other teams So I would encourage people to go check out The announcements that we've done around governance look at the code look at how we're implementing on-chain voting and look at how we're incorporating into the protocol. And we'd love if other teams can use that as just a starting block for their own efforts later. But I would say, until there's a community that is excited and ready to take over governance, don't try to implement it too soon.

Yeah, That's great advice. Okay, awesome. So with that, I think let's open it up to questions. So it looks like we've got a bunch of questions from the Slack. So the first 1 is from Guy, and I'm just reading this 1 out loud.

I think it's for me. Jesse, you mentioned there is no gold standard for a project that has found a balance between allocating value to the original development team and distributing tokens to all network participants once the network is live. Can you talk through which projects occupy different parts of that spectrum and what the trade-offs from each choice are. Yeah, so I guess 1 thing I'll say here is that I think a lot of projects that, I touched on this earlier, but a lot of projects that got started in 2017, they ran ICOs. And so essentially, in my playbook, they started backwards.

They started with decentralization first, and they tried to get that decentralization by literally selling it, selling ownership to the community. And I think crowdfunding is a cool idea, and it's exciting, but when you're doing it in the sort of speculative me and it's sort of invites the wrong crowd and so I'd say that's like you know that's on the wrong end of the spectrum and what we've learned since from you know projects like my Compound is that it's much more effective if you're out there with a product first and people can wrap their heads around why this thing is useful, why they might want to build on top of it, and what it means to actually own a piece of it and sort of the value of that in the future. So of course, Robert's here because we think compound is on is on the very much on the right end of this, this spectrum. And so, you know, if I had to assign a gold standard, I'd say, you know, compound is it today. And like Robert said, hopefully, there's many more to come.

So So hopefully, that answers that question. Next one's from Paul and this 1 is sort of when exiting to the community, will the community be expected to purchase tokens at that time, like in an IPO, perhaps beyond any tokens they've already earned? That's an interesting question. I guess, maybe Robert, I'll turn that 1 over to you, and maybe you can, again, touch on exactly how tokens are gonna get distributed in Compound.

So, we haven't released the exact mechanisms that we're gonna use yet, but I will say this now, this can be exclusive to crypto startup school, you can be the first to hear exactly how it's gonna work. So no, no one's gonna be buying tokens. What we're gonna do is distribute tokens for free to the users of the compound protocol over time. You know, right now the primary users of the protocol are other applications. What we're looking to see is, you know, for the applications and users that know the protocol best to wind up receiving for free ownership and governance rights in the protocol itself.

And so the idea is, you know, we're not using this to raise funds. We relied on venture funding years ago to be able to build the protocol. You know, we don't view tokens when built correctly as fundraising mechanisms. They're used to align incentives and To decentralize governance and to create a stronger better protocol. And so for us, there's not going to be any sale of tokens They're going to be Distributed for free to the users

Cool. Yeah, I think I'd add to that that I think you know 1 of the benefits of running the playbook is that you have the active user base to sort of gauge and and And and let those of analytics there inform what the distribution should look like, right? So you actually have some data to go on in terms of determining what a fair and effective distribution might be. And that I think is really important and advantage that, you know, Compound has that ICO projects didn't. So okay, next one's from Sarah for Robert.

What kind of user research around borrowers have you discovered? Are they mostly traders trying to short currencies? What other applications are there for borrowing that you've seen?

So that's a great question. And the longer you're live in the market, the more you learn about your users and it helps you think about the use cases. So we've seen 3 primary use cases and these all surprised us. It's funny because when we launched compound originally, we didn't even launch with a stablecoin. Who would have thought that stablecoins were the primary use case?

The 3 use cases that we see, 1 are traders and speculators. So they're typically interacting with borrowing assets for leverage or to hedge a portfolio. So they're either borrowing stable coins in order to buy more crypto assets they like or they're borrowing crypto assets. They might borrow ether to sell it as a hedge against other assets they may hold. Traders are a dominant use case.

The second 1 we've seen is We've seen miners actually borrowing Stable coins to finance their own operations and to smooth out You know the cost structure that they have So they don't have to sell in certain market conditions, you know, they can basically, you know, plan their financing more seamlessly. The third that we've seen are, we've actually seen some teams borrowing stable coins to actually do international global payroll without having to figure out how to manage a treasury. You know, there's a lot of teams out there with large amounts of crypto that are just borrowing stable coins so they don't have to think about, you know, how do they manage a treasury, sell crypto, pay people, do all these things. They just say, oh that's complicated. We're gonna put crypto and compound, take stable coins out and pay our developers.

So we've seen a couple different use cases, and I actually think the number of use cases are actually gonna increase as more applications get built. So as there's more stable coins in different currencies, as other blockchains start to get bridged into compound and Ethereum for that matter, I think you're going to see more borrowing use cases that just aren't available yet. Like being able to settle transactions in different currencies internationally, being able to settle OTC trades and you know different assets seamlessly. I think the use cases go up over time, not down.

Yeah totally and that's very much aligned with your sort of reason for decentralizing in the first place right, which is if the community owns this thing and they can trust it they can continue to build you know all kinds of use cases on top of it without fear that the rules are gonna change on them and as a result just get you know way more use cases than you imagine that that's it.

Exactly.

Cool alright so next 1 is from mark besides building community how do you think Compound came to dominate this market? Looking at LoanScan, you can see a number of platforms using Compound under the hood. What pitfalls did you avoid in order to get there?

It's a great question. So we've always focused almost entirely more so than anyone would think reasonable on security and safety. We move extremely slowly in the sort of development cycles that we have. And everything that we do internally in the company is always about asking questions about how do we de-risk? How do we do this safer?

How do we think about every possible edge case? And the thing that I like to communicate to developers is that we spend an exorbitant amount of time thinking through what could go wrong. Because developers are trusting the code in a lot of ways. They're trusting us. And so the thing I think that we've really excelled at in rising up the ranks is getting other teams to be able to build an application on Compound, know how it works, know that they can, you know, trust the process that we've used, and know that it's okay for them to build on top of it.

And a lot of the volume at this point, you know, comes from other interfaces, You know, a huge amount of Compound's numbers, you know, come from applications and tools that other teams have built, not us. And that ethos goes into how we think about the future, just trying to create like fertile ground for other teams.

Yeah, I think 1 thing you guys have done super well is basically run a great developer evangelism program. And there's like, you touched on a number of facets of it. And we're actually, I think in a few weeks, we're gonna hear from Tom Preston Warner, founder of GitHub, and he's gonna talk about developer evangelism. But this is like a well understood sort of go-to-market strategy for developer-facing products, and I think you guys are executing from that playbook quite a bit, right?

Yeah, thank you, yeah. We think crypto's great and blockchains are great. I mean, the thing that got me excited in the first place was you could program money, right? Ethereum was in my mind like the killer developer platform for us, you know I I was enamored and just you know impressed wildly with you know, Vitalik and all the work he's done. Ethereum had a developer first approach as well.

And we're just 1 more stack on top of another developer first product. And we're taking that ecosystem that people can build on top of compound. But we're not the first ones to do this extremely well in this space of crypto. I think the best delivery of a developer-led ecosystem really is Ethereum. I think Ethereum has just knocked the cover off the ball and done a better job of this than anything else.

And so, you know, we're not writing this, you know, approach from scratch, you know, we're learning from the best.

Yeah, that's awesome. Okay, cool. So Next 1 from Abhishek, do you find some jurisdictions to be more friendly in terms of regulation for decentralizing a product and feeling comfortable that it is compliant with securities and financial regulation and is the US 1 of those?

So I can only really speak to the US because we're located here in the US. I would say that within the US, it's probably harder than many other jurisdictions, but it's not impossible. The regulatory landscape in this country is people just want you to build things that protect your users, that are safe, that you're playing by the rules which have already been written. And they're not there to stifle innovation, they're not. They're there to help create a safe environment for innovation to grow.

Everything that we've done so far has been within the context of regulations that exist. In some ways it'd be great if there was no regulations because we could just go hog wild, but I actually like the ecosystem that exists here because the playbook that we're following, the sort of decentralization playbook works here. It's, you know, build something that works, that people want, that you don't have to do a public token sale for. You don't have to do a, you know, violate securities laws to finance. You know, you can use venture capital financing to build a product.

That's not controversial at all. Then to build a community that works great within the existing regulatory structure. And then finally once you can you know have an asset, you're decentralizing it you know in order to strengthen the underlying system. You're not doing it to raise money. You're doing it to make what you've already built safer and better.

And you know, I actually think, you know, this playbook here can operate extremely successfully here and in any country around the world. I think a lot of other strategies and approaches won't work here. I think the era of the wild ICO is over for a reason. There was a lot of bad behavior there. I think we've done a great job as a society and a country of cracking down on some of the worst behavior that I think a Lot of us, you know grimace when we remember from

2017

And so I think it is a conservative and cautious approach But it allows you know Good teams with good products to excel wildly and I think that's the goal

Totally and 1 thing I'd add there is like in 2017 You know There was a lot of bad actors as you mentioned and you know Certainly there was there was a lot of greed involved and people looking to get rich quick from the bubble But I do think that something else important was expressed during the ICO boom, which is that people want to own a part of the platforms and services that they use every day, and here is this technology innovation that allowed them to do it. And what you're doing today has the same result, right? Like the users of the protocol will own a piece of it. It's just you're doing it in a way that sort of eliminates all the bad actors from the equation. And that's, I think, you know, That's great.

Yeah, I mean, what's great about this sort of, you know, increasing decentralization approach is, you know, you don't have speculation on the success of the project until it's already successful. And that changes everything, you know, when there was teams that were raising, you know, capital using tokens, you know, before a project existed, of course, it was going to be speculative, of course, it'd be mania and booms and busts, because there's nothing there. And so I think that, you know, being able to exit to the community at the very end as the final step will reduce a huge amount of speculation and create much more stable and responsible assets that the community can use.

Right. Okay, so 1 next 1 is also from Paul. If you were to start Compound from scratch today, would you consider using a token or affiliate fees to incentivize third-party front ends or third-party smart contracts building on top of it from day 1?

It's a great question. I don't think so. I think 1 of the things that's really interesting is that you know post decentralization once the community and a much wider audience are the ones managing compounds if that's the best approach if that's what you know creates the largest outcome then the token holders can vote for that. But those decisions you don't have to make day 1. I've really enjoyed not having a token, and not having any commercial interactions with the developers on top of the protocol and also it's been Freeing in a lot of ways to enable us to just do 1 thing really well, and that's focus on building the underlying protocol So I actually don't think I would you know have a token or affiliate fees going back.

I think post decentralization, as people see how we distribute tokens to users and how we can allow developers and the applications in the front end built on top of compound to participate in governance and to be able to upgrade the protocol. I think people are gonna say, wow, that's a great way that the front end, the applications can have a say and be involved and have a stake in the game.

Yep. Okay, next question is from Rochelle. Can you talk about the monetization model for the core team after ownership of compound is turned over to the community?

So that's a great question as well. So at compound it kind of goes to some of the things Jesse said earlier. You know we're focused first on decentralizing the protocol. Our company as a business model you know hasn't looked too far beyond building something that's widely adopted widely used Beloved and can grow to be really really big because until something is really big, you know, there's no sense trying to monetize So I think over time our company might develop alternative revenue streams, similar to how Red Hat built an amazing business off of Linux, where we can build an amazing business on top of the compound protocol, still in support of other developers and still in support of other teams, and helping the entire world build on top of Compact.

Right, makes sense. Okay, so next 1 is also from Sarah. What are your thoughts on under collateralized loans and the risk associated with that?

Another great question. So, you know, DeFi in general is still an extremely early stage. 1 of the reasons why DeFi works so well and so efficiently is everything is contained on the Ethereum blockchain. Right now, if you look at a lot of the projects that are starting to work, it's because all of the data, all of the value, and all of the state is sort of in 1 place. And so it can operate very quickly.

You know, Compound doesn't need to know who you are. It treats everybody the same. It just says, how much collateral do you have to be able to buy? That's it. I think 1 of the things that's difficult about under collateralized loans is if you look to traditional finance, it requires really a sense of identity that right now is not contained on the blockchain very well.

So either you have to build a sense of a credit score within this bubble of Ethereum for it to work, or you have to be able to import it from outside of Ethereum, which doesn't work very well yet. Or you have to find some completely new approach that doesn't rely on the traditional ways of doing under collateralized loans. I think it will absolutely happen. I'm a huge believer that someone's gonna solve this. I don't know if they're gonna solve it next week, but I know it's going to be solved.

Right, and maybe it could be solved on top of Compound. And it

could be solved on top of Compound, you know. The future's bright, if you're working on something, let me know.

Right. Okay, cool. So, next 1 from Blake for Robert. When the protocol becomes more owned and operated by the community, and they start actually contributing code and such, what is the spectrum or distinctions between compound employees and simply highly engaged community members? Would users be rewarded for code contributions or would it be more that community members with lots of the network token have a high amount of say on upgrades and features

So here's the cool part The employees are just individuals. We'll each have you know our own You know tokens our own personalities our own, you know individual aetherium addresses You know, there's gonna be a lot of cool things you're gonna see about compound governance. People are gonna be able to voluntarily identify who they are. There's gonna be a leaderboard of all the different contributors to the protocol. We hope to see crypto politicians emerge, you know, or responsible for just contributing code and ideas.

But you know, you're not gonna see Compound, the corporation or the company, involved in governance. There'll be, you know, a lot of people participating and our employees will just be as individuals, not as the company. And so everyone is gonna be free to contribute code to Compound. Anyone can receive the sort of strength and support from the network that they need to propose changes that the rest of the protocol can vote on. And we'll see.

The answer is it's an unknown. It's going to be a lot of fun to watch this unfold. Governance that we're building is designed to be upgradable by governance. And so there might be changes, but it's going to be a lot of fun. And I'm really excited for members of the community to be extremely active.

I'm excited for applications built on top of Compound to be active. A great example is like, if you're a developer at an application that's built on top of compound today like insta dab or Dharma or linen or any application is built on top of compounds and you would like to see a change even if it's as simple as reducing the gas or the protocol to make it more cost-effective to interact with the protocol you're gonna have the opportunity to propose those changes. And so I think it's gonna bring a ton of people into the process, it's gonna be a lot of fun. And just like many things in crypto, it's uncharted territory.

Okay, so next 1 from Paul, how important have C tokens been for Compound's continued success?

I think they've been very important for 1 reason. And the reason is it's enabled developers to more easily build products on top of Compound. You know, it makes it easier, I think, in some ways to understand what's happening. You could do a lot of the same functionality before C tokens as you can with C tokens, but really they're just programmable compound balances you know

maybe you just explain what they are sorry I should have preface with that but for those that don't know what what are C tokens and then why are they a big part of the success

yeah it's a great great point So within the compound protocol every balance of a user is represented as a C token. So it's just an accounting object that tracks how much of an asset you've supplied to the protocol but it allows developers to do really cool things and to basically do magic tricks with Compound the Protocol. It allows developers building applications on top of Compound to program C tokens, to send them, to receive them. It allows people to transfer a balance to an address they control, like a cold storage address and retrieve it later. It enables people to use the underlying protocol in whatever ways that you can imagine because you can move your balance anywhere.

You can move your balance outside of Compound. You know, you can move your balance to another application that combines them in interesting ways. And so, we think C tokens have been extremely important just because it's teed up the creativity of developers to think about what can they build on compound and manipulate the balances of users inside the protocol more easily. And, you know, for us that's been like a really nice advancement.

So yeah, just all part of the developer evangelism playbook and making it a nice experience for them.

Yeah, it's why we designed it. Because developers, before we had them, said, oh, it's really hard to program a balance inside CompCount. Why can't I figure out a way to manipulate the balance inside the protocol?

Yep, totally. Okay, great. So next 1 is from Nori. Did you see any issues with collateralized loans on Compound during the past few days? Where, for folks who are watching this later, we just saw the, you know, a huge drop in the cryptocurrency markets alongside the main financial markets.

So Nourian is saying, I heard that MakerDAO had some issues. What about Compound?

Yeah, so for anyone who has been paying close attention, yesterday crypto prices dropped by about

40%.

It was basically the worst sell off in 1 day in history. It happened alongside massive declines in global financial markets. You know, it was the worst day since Black Monday

1987.

Compound performed phenomenally and there was no issues with under collateralized loans on the platform. You know, 1 is we were lucky, but 2 is we benefited from the fact that compound is not yet massive. We spent a lot of time thinking about market risk. We actually recently commissioned a paper by a team called Gauntlet to actually analyze the conditions of the compound protocol, how liquidation works in different settings, price declines, order books, slippage, time delays, all these things. And it's really interesting if you Google compound market risk assessment gauntlet, you'll probably get there.

If you go to our website, you can find it. But we spent a lot of time looking at the market parameters and what that would mean for the health of the protocol and the positions in it. We actually didn't anticipate a day where prices moved down 40% or more, because the worst day in history was like 25% you know in either declines. But compound held up phenomenal. I'd like to think we're lucky.

You know if compound were 10 times the size you know there might have been significantly more issues but you know even on the worst day in history The protocol that we built performs phenomenal. There were other issues elsewhere in the ecosystem. I think it's a great learning opportunity and moment for every project, every founder, every developer to see what's working and what's not working. Because the goal is to build things that work over the next 100 years. And there's gonna be hiccups along the way.

Certain projects will always have a stumble here or there, but it's really about how does the entire community and ecosystem learn from it, fix it and become stronger. And so, you know, It was definitely a wild day yesterday. There were definitely some problems, but this is not the beginning of DeFi. This is probably the beginning.

Right. Okay, cool. So next 1 from Meta. Could you explain your relationship with companies like Dharma and how they've evolved, as in going from previously competitive to then Dharma building on top of Compound. What type of support do you give these companies in your ecosystem?

Yeah, that's a great question. So we like to give every company that's building on top of Compound a huge amount of support. Really, it's access to our team, access to our knowledge. We like to help celebrate the teams building on top of Compound. We're just trying to build neutral infrastructure that everyone feels comfortable building on top of you know it doesn't matter if someone was previously building their own product, you know, we want them to enjoy You know working with us and building on top of the protocol that we built You know huge fans of them huge fans of a lot every team that's building on top of compound You know, I don't think there's any like, you know, you know, secret sauce or hidden things here.

It's just, you know, I think teams try to find, you know, the best way to achieve a goal. And for some teams, the best way to achieve a goal of an extremely simple wallet that anyone in the world can use to earn an interest rate and send and receive money between fiat and crypto. You know, compound as a piece of its, you know, toolkit.

Right. Okay, so last 1, finally. So this one's sort of on hiring and sort of how you build out the team at Compound. What does staffing and marketing look like for Compound?

So, I'll start with marketing. Marketing is 0. I'm the only person within Compound that you could really even consider a marketing employee. We have 0 members of our team focused on marketing at this point. But in terms of staffing, I think this is actually 1 of the most important things for a crypto company, because if you have a great team, you'll go extremely far.

And I think if you have a team that doesn't work well together, you'll go less far than a traditional software company. Because building on top of a blockchain is 5 times harder than building a traditional web stack product. So we spent a lot of time as a team thinking about hiring. What we've done is we've set an extremely high bar and we try to put a lot of effort into meeting that bar, bringing people onto the team. We're still mostly engineers at the end of the day and you know we're very cautious.

You know you're building financial software, you're building software that moves money. You have to be extremely cautious and you have to make sure that the people that join your team have the ability to build software that moves money responsibly and safely and so for us you know the question I always ask in my interviews is whether or not I can get to the point of trusting someone to build financial software. And you know, it's a very different process than hiring for, you know, your standard mobile app, where, you know, you can look for different characteristics, you know, a compound, we're always looking for extremely quality people that we trust to build software that moves money.

Awesome, okay well thank you for answering all these questions and and for being here again to sort of like elucidate in real time how to run this this playbook. That's that's all the questions we've got for now So I think with that we can we can give you a virtual round of applause for being here And and yeah, thanks. Thanks so much

go build great products Awesome great products.

Awesome. Thanks Jesse.

You