Ren is an engineer who supports founders to build new, sustainable crypto protocols.

Ren invests in emerging technologies that expand what is possible for users. He drove our investments in Tonk, Monad, Ellipsis, and Solana. Tonk uses zero-knowledge tech to enable developers in a variety of applications. Monad gives users fast finality at very high throughput by building the world’s best parallelized EVM. Ellipsis is the #1 CLOB on Solana and offers users better liquidity opportunities at low costs.

Ren represents our philosophy of using deep technical expertise to help founders. He frequently works with founders on user experience, user journeys, and other technical challenges. Ren is also a contrarian who prefers to support ecosystem-changing teams instead of the latest hot narrative. For example, Ren advocated for our investment in Solana during the depths of the last bear market, recognizing early that Solana offers unique scalability and security benefits that users need and that the Solana developer community is resilient and retained. He thinks about how to meet users’ infinite computing demands without sacrificing user ownership, which requires major innovations in scalability and security. Ren is currently researching BTC, L2s, game theory, and other approaches to how blockchains will evolve to meet user demand.

Ren joined Electric in 2021. He initially reached out to us after digging into Electric’s Developer Report. His crypto-native technical skills and quantitative research experience were a perfect fit for our engineering-first investment approach. Ren has since helped build Codeslaw, which is used by thousands of security researchers and engineers.

Before joining Electric, Ren was one of the youngest people to work in public policy at the Federal Reserve Bank of Chicago. He also researched and implemented quantitative trading strategies and models for energy commodities at AQR and Citadel.

We invest in visionary founders. Our expertise helps them build iconic companies.

Unlike many venture firms, we do not hire investors. We hire engineers who can support the visionary founders with whom we work. We hire software engineers to deploy capital because we believe that crypto is software eating money. Crypto infrastructure will eat all of the money movement and capital markets of the world, including venture capital. In such a world, the people who most deeply understand software will be best positioned to understand how to help founders succeed.

We demonstrate our commitment to this approach by building in public alongside the ecosystem. Our engineers build systems that help builders advance crypto, like the Developer Report, an index of open source developers in crypto, Codeslaw, a search engine for smart contracts made for developers, and open source tools to audit and inspect the blockchain.

Ren exemplifies our values and our engineering-first investment approach, which is why we are delighted to have him be a partner at Electric Capital.

About Electric Capital

Electric Capital is one of the largest crypto-native venture capital firms. Electric manages nearly $2 billion in assets, and invests in early-stage crypto companies and protocols with investment sizes generally ranging from $1m to $50m. Electric is unique in its ability to provide founders with deep expertise in engineering, product design, cryptography, community governance, incentive mechanisms, and distributed systems. Two-thirds of the Electric Capital team are engineers and former founders with successful exits. Electric Capital's investments include Bitwise, Eigenlayer, Ellipsis, Espresso, Frax, Magic Eden, Monad, NEAR, Solana and more.

For more information, please visit electriccapital.com.

This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. Any information and/or opinions expressed is subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://electriccapital.com/disclosures for additional important information.

Thuan Le is the heart of Electric’s Founder Platform.

Thuan was Electric’s first employee in 2018. She leads Electric’s founder platform initiatives.

Thuan connects founders with the expert resources they need to thrive. She creates opportunities for founders to learn and unwind at Electric’s Founder Summit. She adds a human touch to all of our engagements, from designing custom swag to sending gifts for founders’ new babies. Thuan also builds the broader crypto community by hosting dozens of open cafes and events at global conferences like EthCC, Solana Breakpoint, Token2049, and more.

The Head of the Electric Founder Platform is a key part of Electric’s investment strategy since beyond the investment decision, the founder platform is one of the primary means through which we help founders. Thuan’s promotion to Partner recognizes both her contributions and the importance of founders to Electric. We would not be the firm we are without her, and we are grateful she has chosen to be part of our team.

Supporting visionary founders is the heart of everything we do.

Many investment firms treat ongoing founder support as an afterthought. Our approach is different. We devote significant time and resources into helping our founders succeed. 50% of our employees are former founders and 66% are engineers. We know first-hand how difficult it is to create real value in the world.

The founders with whom we partner are exceptional and our founder platform under Thuan’s leadership delivers exceptional value for them:

• Our general partners and engineers work closely with founders to help solve cutting-edge technical challenges. We often build alongside engineering teams to help them move as fast as possible. We only invest in companies when we have deep conviction in the founders and their vision—and when we can provide meaningful support.

• Our network of world-class experts, within and outside Electric, consult with founders on engineering, design, hiring, regulatory issues, and everything else needed to build outstanding companies. Advisors like Akash Garg (former CTO), Jay Clayton (former SEC Chairman), Kevin Warsh (formerly on the Board of Governors of the Federal Reserve), Rebecca Rettig (current Chief Legal & Policy Officer at Polygon Labs), and others provide deep subject matter expertise for challenges that founders face.

• Our events and conferences encourage connections that enable long-term founder success. We create opportunities for founders to help each other navigate the rapidly-changing crypto landscape and find new opportunities for growth.

Thuan has spearheaded and built many of these services for founders over the last two years, which is why we are delighted to have her be a partner at Electric Capital.

About Electric Capital

Electric Capital is one of the largest crypto-native venture capital firms. Electric manages nearly $2 billion in assets, and invests in early-stage crypto companies and protocols with investment sizes generally ranging from $1m to $50m. Electric is unique in its ability to provide founders with deep expertise in engineering, product design, cryptography, community governance, incentive mechanisms, and distributed systems. Two-thirds of the Electric Capital team are engineers and former founders with successful exits. Electric Capital's investments include Bitwise, Eigenlayer, Ellipsis, Espresso, Frax, Magic Eden, Monad, NEAR, Solana and more.

For more information, please visit electriccapital.com.

The CFTC grouped the enforcement actions together, even though each has different facts. The CFTC charged Deridex and Opyn with operating unregistered commodities futures exchanges because they offered swaps via perpetual futures (on Deridex) and oSQTH (on Opyn), a token that tracked the price of ETH squared (Squeeth) relative to USDC. The CFTC also charged Deridex and Opyn with failing to implement anti-money laundering controls.

The CFTC charged all 3 DEXs with illegally offering leveraged and margined crypto commodity transactions to retail users. But notably, ZeroEx did not itself offer such leveraged or margined transactions. Instead, the CFTC held ZeroEx responsible for developing and deploying a protocol and front-end that others used for leveraged trading of BTC and ETH.

None of the 3 DEXs was accused of misappropriating customer funds, or otherwise harming market participants. The CFTC recognized each DEX’s substantial cooperation in its enforcement investigations, and reduced their civil penalties accordingly to a combined total of $550,000.

Key Takeaways

1 - The CFTC is looking to expand its jurisdiction over crypto.

The CFTC moved fast and stretched the law to stake its claim to regulate DeFi.

The CFTC quickly went after Dervidex. Dervidex developed its protocol mid-2022, and launched it January 1, 2023. Rarely does a regulator move so fast to have completed and settled an investigation 9 months after product launch.

The CFTC also stretched the law. To make its case against ZeroEx, the CFTC expanded the definition of “offeror” under the Commodity Exchange Act to include anyone who “facilitates the use of margin, leverage or financing arrangements.” 0x was built for pure spot trading of crypto commodities—legal, unregulated activity. But the CFTC’s broadened definition captured the 0x protocol and front-end (Matcha) because they facilitated users’ ability to source financing or leverage from other users.

The CFTC might have trouble convincing a judge that this interpretation of the law is correct. But in the context of an enforcement settlement, whatever terms the CFTC got the protocols to agree to will stick. This could put developers on the hook for future uses of their protocol that they never contemplated.

Even the way that the CFTC lumped together these 3 distinct enforcement actions for Commission consideration, voting, and public announcement sends a strong message to DeFi that the CFTC will aggressively enforce its interpretation of the Commodity Exchange Act.

2 - Anti-money laundering remains a top regulatory priority.

The CFTC found that both Opyn and Deridex violated anti-money laundering requirements. Neither DEX adopted a customer identification program. That the DEXs operated via smart contracts, which are accessible by anyone—including via a “blockchain explorer”—was no excuse.

But the CFTC offered no guidance as to how DeFi protocols could comply with applicable anti-money laundering rules, or other Commodity Exchange Act requirements. Commissioner Mersinger recognized in her dissent the difficulties that DeFi protocols face in trying to implement such compliance, and urged that the CFTC take up rulemaking to bridge those gaps.

3 - Banning US users requires more than blocking US IP addresses.

The CFTC found that Opyn took certain steps to exclude US persons from accessing the Opyn Protocol, including blocking US IP addresses. The CFTC states that those steps were insufficient, but offers no guidance of what would be sufficient to effectively block US users from the Opyn protocol.

How can founders of DeFi protocols reduce US regulatory risk?

Regulatory frameworks like the Commodity Exchange Act rely on centralized intermediaries. Regulators impose on those entities rules to follow, and obligations to share information. But DeFi is fundamentally about disintermediation. This puts DeFi directly at odds with the CFTC’s regulatory framework.

As Commissioner Mersigner stated in her dissent, the CFTC must do the hard work to protect market participants while promoting responsible innovation, including via decentralization. Until the CFTC takes up rulemaking or softens its aggressive enforcement stance, DeFi founders face tough choices for their protocols, especially if they want to continue to operate in the US.

Some ways for founders to reduce their US regulatory risk include:

• Take extra steps to block US users beyond just by IP address. For example, deploy middleware that can correlate IPs to addresses, and block addresses if there are 3 or more correlations of the address to a US IP.

• Don’t operate a front end. Have only unrelated third parties do so.

• Decentralize more and control less. Give parameter controls to users or oracles that may direct certain aspects of the transactions. Sacrifice full control and upgradeability.

• Identify all US touchpoints. Explore possibilities to relocate outside the US, including through offshore entities.

None of these options are ideal. The best approach now is to fight for laws and regulations that make sense for DeFi. Get involved in the policymaking process and educate stakeholders.

• Call your Congressperson and explain why crypto and DeFi are important. Not sure who to contact? Find out who represents you here.

• Vote. Tools like Coinbase’s legislative portal show US policymakers’ stance on crypto.

• Want to engage directly? Let us know if you’d like to meet with policymakers in Washington, D.C., key states (e.g., CA, NY, TX), and/or other jurisdictions ex-US (e.g., UK, EU, Singapore). We’re part of various policy initiatives that are always looking for developer input and participation.

The two SEC actions differ in fundamental ways: the SEC alleges that Binance and its founder engaged in fraud, manipulative trading, and self-dealing, whereas the Coinbase allegations are limited to technical securities violations; there are no allegations of fraud or other wrongdoing with Coinbase. Coinbase Trust Company, LLC, its regulated custodial entity, was not named in the SEC suit or any of the state actions.

Neither action is a surprise. The SEC has been investigating both exchanges for some time. Both will take years to resolve. In the meantime, both exchanges continue to operate. Coinbase also continues to operate its regulated custodial entity, Coinbase Trust Company, LLC.

Like the SEC suits that have come before these, they have limited impact on the broader crypto ecosystem. These lawsuits will take years to resolve in court. During that period, crypto developers will continue to build and innovate in the US and around the world.

Binance and Coinbase Lawsuits & Timing

On June 5 and 6, the SEC sued the two largest global crypto exchanges: first Binance, then Coinbase. In coordination with the SEC’s action, 10 states also sued Coinbase alleging violations relating only to Coinbase’s retail staking product.

These lawsuits come directly on the heels of a Digital Asset Market Structure Proposal by US Representatives McHenry and Thompson on June 2, and amidst constructive Congressional engagement on crypto, with hearings by the House Agriculture, Energy & Commerce, and Financial Services Committees that include discussions of that Proposal. (Our summary of the joint draft Proposal is available here.)

What do the SEC lawsuits allege?

Both suits allege that Binance and Coinbase violated US securities laws by: (1) operating an unregistered securities exchange; (2) selling unregistered crypto asset securities, including staking; and (3) misleading investors about their risks and internal controls.

Both suits also allege that 17 digital assets that Binance and Coinbase trade are unregistered securities, overlapping on 6 of the 17. All 17 digital assets are on proof of stake blockchains.

The Binance complaint includes additional allegations that Binance, its co-founder and CEO, and two related entities committed fraud, tried to avoid US regulatory oversight, permitted manipulative trading, and engaged in self-dealing. The SEC sought a temporary restraining order to freeze all assets tied to Binance’s US entity, but the court has not granted it.

What impact will the lawsuits have on Binance’s and Coinbase’s operations?

Binance and Coinbase have both stated that they will vigorously defend their companies, and continue to operate as usual.

Coinbase will likely see little business disruption. It is noteworthy that Coinbase’s regulated custodial entity, Coinbase Trust Company, LLC, is not named in the SEC’s action or any of the companion state actions. We do not anticipate disruptions to its custodial or trading services. Coinbase may choose to change or pause its Earn product, which provides staking rewards to retail customers, because it is the only issue in the 10 state actions.

Binance will likely have to suspend US operations if the Court agrees to freeze Binance.US assets, and could lose access to US banking services.

What impact could these lawsuits have on crypto more broadly?

Like the SEC suits that have come before these, they have limited impact on the broader crypto ecosystem. SEC Chairman Gensler has claimed that most digital assets are unregistered securities. Since he has been Chair, the SEC has stopped collaborating with industry participants who seek guidance on how to comply with federal securities law. Instead, the SEC has brought enforcement actions, including against other exchanges alleging the same violations.

It is unsurprising that the SEC sued Binance and Coinbase. Both exchanges’ tussles with the SEC have been well-publicized. More remarkable is that the SEC’s allegations are relatively limited in scope; the Coinbase allegations are only technical violations, there are no allegations of fraud or other wrongdoing.

These lawsuits will take years to resolve in court. During that period, crypto developers will continue to build and innovate. It is possible that US federal law clarifying crypto’s regulatory status will be passed while these suits are pending. It is certain that other countries around the world will implement crypto regulatory frameworks over the same period. The EU, Hong Kong, Singapore, UAE, and UK are all vying to attract developers and become crypto hubs.

What happens to token holders if the tokens named in the complaints are ruled securities?

The 17 tokens listed in these two suits are among nearly 100 tokens that the SEC has labeled as unregistered, non-exempt securities in enforcement actions against a party other than the token’s issuer. It is impossible to predict how a judge will rule on any of those tokens, and, if any of these are deemed to be securities, how the Court or the SEC would address all of the tokens currently in circulation, or what the impact to token holders would be, especially because the tokens may be trading lawfully in other jurisdictions.

Disclosures

This post reflects the current opinions of the author and are not the views of Electric Capital Partners, LLC (“Electric Capital”), its affiliates, or other individuals associated with Electric Capital. Certain information contained herein has been obtained from third-party sources. While taken from sources believed to be reliable, Electric Capital has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation.

This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://electriccapital.com/disclosures for additional important information.

The Proposal uses existing securities and commodities laws to regulate digital assets, which works better in some ways than others. It isn’t perfect, but it is an important step towards US regulatory clarity for digital assets, and provides an opportunity for Congressional engagement with hearings in various House Committees to discuss digital assets and the Proposal’s ideas.

What does the Proposal cover?

The Proposal enables issuing, supporting, purchasing, and trading of digital assets, under both the securities and commodities laws. While the SEC remains the default regulator for digital assets, the Proposal:

• Defines which assets are digital commodities and gives the CFTC jurisdiction over them

• Expands the SEC’s existing exemption for unregistered securities offerings to cover digital assets offered as part of an investment contract 

• Establishes a process for digital assets that are securities to be regulated instead as digital commodities, and permits secondary market trading of those assets

• Sets out SEC and CFTC registration requirements tailored for digital asset exchanges and broker/dealers

• Requires the SEC to update its regulations to address digital assets and issue joint rulemaking with the CFTC 

• Provides a safe harbor for existing digital assets to trade until the SEC and CFTC draft rules and issue a notice to the trading venue identifying which assets may no longer trade as digital commodities

Does the Proposal define which digital assets are securities?

Not expressly—the Proposal regulates digital assets as securities, unless they: (1) relate to a decentralized blockchain network; (2) are issued directly to a functional blockchain network’s end users; or (3) are certain payment-backed stablecoins. 

A decentralized network is one where during the previous 12-months: 

1. no single person or entity (other than a decentralized organization) could control or materially change the network, or restrict others from participating in on-chain governance, or operating infrastructure, like a validator node; 

2. no digital asset issuer (other than a decentralized organization) owned or had voting power of 20% or more of the then outstanding digital assets; and 

3. all digital asset issuances were airdropped directly to end users.

And during the previous 3-month period the issuer neither: 

4. contributed code to the network that materially changed its function or operation; nor 

5. marketed nor issued any digital assets on the network.

A functional network allows participants to use the network’s digital asset to: (1) transmit and store value on the network; or (2) access an application running on the network. 

Digital assets that are securities are regulated much like TradFi securities, with minor changes to licensing, registration, and disclosure requirements. Digital commodities are exempt from most regulatory requirements. But all digital asset exchanges—whether for securities or commodities or both—must put in place investor and market integrity protections. 

Will the Proposal’s requirement to comply with both securities and commodities laws work?

Under the Proposal, digital asset issuers and exchanges are regulated by both the SEC and the CFTC, depending on the digital assets’ characteristics. It is challenging to harmonize two massive bodies of law—including rules by their complementary self-regulatory organizations (FINRA for securities broker/dealers, and the NFA for derivatives). The Proposal tries to address inconsistent or overlapping requirements, but it could be tough for digital asset issuers and exchanges to comply. 

For all its empowerment of the CFTC, the Proposal leaves discretion with the SEC that could be used to stifle digital assets, undermining the Proposal’s objectives in two key ways. First, the SEC may determine that a blockchain network is not sufficiently decentralized, keeping its digital assets under the SEC’s jurisdiction. If it rejects a decentralization certification, the SEC must satisfy the Proposal’s requirements for public comment, analysis, and reconsideration by specific deadlines. But those guardrails might not prevent the SEC from blocking the path to decentralization and deregulation for many digital assets.

Second, the SEC may co-opt the rulemaking process. The Proposal sets deadlines only for the SEC to update its rules to address digital assets, but not for joint rulemakings with the CFTC to define key terms like “decentralized network” and “digital asset issuer,” and outline requirements for exchanges that must register with both the CFTC and SEC. Those rules could have significant impact, given the number of exchanges and other stakeholders who need to comply with both rulesets.  

Also, embracing both securities and commodities regimes could create fragmented markets for digital assets. Exchanges could face liquidity challenges or other operational difficulties segregating digital assets that are securities from digital commodities.

Will the Proposal change how the SEC and CFTC engage the crypto industry?

The Proposal paves the way for more constructive regulatory engagement. It mandates SEC and CFTC rulemaking for digital assets, and establishes a joint advisory council to both regulators. It also ensures that both the SEC and CFTC maintain innovation hubs that report to the Commission rather than the Chair.

What aspect of the Proposal should be revisited?

Definitions in the Proposal may be too broad or imprecise. For example, the definition of “Decentralized Network” requires that neither the “digital asset issuer” nor any “affiliated person” has contributed to the network’s code for the previous three months. But the definitions of "Digital Asset Issuers" and “Affiliated Persons” could include any software developer who contributes to the network’s source code, not just the network’s founder or software developers employed by the protocol’s foundation. Scoping the decentralization requirements that way could prevent network upgrades to address security issues or add new features, harming the investors that the Proposal aims to protect.

The Proposal also doesn’t include any funding mechanism for the CFTC’s additional oversight.

We need to clarify the Proposal’s impact on DeFi, which is not carved out like NFTs, the use of restricted tokens for staking and governance, and the scope of protections for ancillary activities like validating, compiling, searching, sequencing, or providing access or other incidental services to a blockchain network. 

Does compliance with the Proposal satisfy other global regulatory obligations?

No, the Proposal’s requirements don’t currently align well with other prominent digital asset regulations, including the EU’s comprehensive Markets in Crypto Assets (MiCA) law. If founders cannot export or passport their regulatory compliance to or from the US, they might avoid the US entirely.

Is the Proposal likely to become law?

Given the hurdles to Congress passing any legislation, it is unlikely that the Proposal becomes law in the next 12-18 months. Republicans enjoy only a narrow majority in the House, and have not yet collaborated with their Democratic counterparts to get their support to advance the Proposal in the Senate.

But Representatives McHenry and Thompson have made clear that the Proposal is a draft, and they welcome feedback. Now is the time to engage with Republicans and Democrats alike to craft the best possible Proposal. The more Democrats who support the Proposal in the House, the better its chances of passing the Senate. Even if the Proposal stalls out this term, key provisions will be taken up again next Congress when they may have a greater chance of becoming law.

What does the Proposal mean for digital asset developers?

The Proposal is a strong signal that members of Congress want to provide regulatory clarity to enable developers to keep building in the US. That’s why it is incredibly important for founders to make their voices heard in the legislative process. Contact your representatives and the Proposal’s sponsors to provide feedback on the bill, and thank them for engaging on digital asset regulation. Educate lawmakers on the value and utility of blockchain technology now and what it promises for the future. Share why you build digital asset products and services, and why you want to build in the US. 

Disclosures

This post reflects the current opinions of the author and are not the views of Electric Capital Partners, LLC (“Electric Capital”), its affiliates, or other individuals associated with Electric Capital. Certain information contained herein has been obtained from third-party sources. While taken from sources believed to be reliable, Electric Capital has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. 

This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://electriccapital.com/disclosures for additional important information.

But a key question remains. Are L2 tokens just worthless governance tokens? Or can real value accrue to these L2 tokens?

In this blog post, I'll dive into the key mechanisms through which L2s will accrue value.

The Core Mechanisms of Value Accrual

L2s will primarily accrue value through two mechanisms:

1. MEV

2. Transaction fees

Let's explore each of these in greater detail.

MEV as a source of value accrual

Currently L2s don't generate MEV revenue, as they are run by centralized sequencers that don't want to be extractive to users. However, eventually the sequencers will be decentralized, which will open these rollups to MEV extraction.

To understand MEV better, we can think about it from two different lenses:

1. Harmful vs Good MEV

   a. Harmful MEV negatively impacts users. A sandwich attack on a DEX is a good example of this, as users end up executing their trades at worse prices.

   b. Good MEV is beneficial to users. For example, price arbitrage across DEXes helps prices across different DEXes stay aligned.

2. Intra-domain vs cross-domain MEV

   a. Intra-domain MEV occurs within a rollup, such as if you arbitraged prices across two DEXes on the same rollup.

   b. Cross-domain MEV occurs across different rollups, such as arbitrage across two DEXes on different rollups.

By combining these classifications, we arrive at four subtypes of MEV.

Harmful MEV will likely be mitigated or rebated, and won’t accrue value to rollups

As an end state, most harmful MEV will likely be mitigated or rebated back to users. Why? Because this type of MEV directly harms users, there’s a large incentive for participants at all levels of the stack (wallets, apps, rollups) to create ways to more effectively deal with it.

Some great teams are already working on solutions to harmful MEV:

• CowSwap is a DEX that leverages batch auctions to mitigate harmful MEV

• MEV blocker is RPC endpoint that shields your txs from harmful MEV

• MEV Share from Flashbots is a protocol that designed to rebate MEV back to users

The methods to reduce harmful MEV will continue to improve, and it will get easier and easier for users to avoid harmful MEV.

Rollups themselves will also want to help users mitigate or rebate this MEV, in order to offer a superior user experience and get more adoption. Very few businesses accrue value by exploiting their customers!

So ultimately, harmful MEV is unlikely to be a source of value accrual for rollups.

Good MEV will likely accrue value to rollups

On the other hand, good MEV benefits users and can serve as a significant source of value accrual for rollups. Since I expect most rollups to use shared sequencers in the future (such as @EspressoSys and @AstriaOrg), the question is how will this good MEV be allocated between the sequencer and the rollups.

Here it can be useful to separately consider both intra-domain MEV and cross-domain MEV.

Intra-domain MEV

It’s been argued that no rollup would join a shared sequencing network if it didn’t at least receive back intra-domain MEV, because a rollup could earn this amount of MEV on its own without joining the shared sequencer.

I disagree with this assessment, because whether a rollups receives back it’s intra-domain MEV ultimately depends on the network effects of the shared sequencer, which remains to be seen.

Shared sequencers enable cross-rollup interoperability. If the network effects from this are extremely powerful, and it ends up being a winner takes all market, rollups would choose to join shared sequencer network despite having to give up a portion of intra-domain MEV. Why? Because if they don’t offer this interoperability, while other rollups do, they could have difficulty getting users (and valuable tx fees).

That said, my view is that the network effects of shared sequencers will be moderate, due to lack of atomic cross-chain composability. With shared sequencers, you get a guarantee that two transactions will be included atomically across two chains, but not that they will be executed (since one of the transactions could be invalid and revert on one of the chains). James Prestwich lays it out simply in his blog post.

With moderate network effects, I agree with Sreeram that shared sequencers will likely need to rebate intra-domain MEV back to rollups.

Cross-Domain MEV

Cross-domain MEV will likely be split between rollups and shared sequencers. It's hard for rollups to capture cross-domain MEV themselves, so shared sequencers will want to take a cut of this MEV.

The exact division will depend on the pricing power / network effects of each specific shared sequencer.

Summarizing value accrual from MEV

Summarizing the above, here’s how I expect MEV value accrual to play out for rollups.

Note that there is one very important question arising from the diagram above. What percent of MEV is harmful vs good MEV? If a majority of MEV generated is harmful, then that limits the amount of value that rollups can generate from MEV. The answer to this question is still unclear.

Transaction Fees as a Source of Value

Aside from MEV, transaction fees will also serve as a critical source of value accrual for rollups. Here are the various fees that rollups will collect from their users.

At a minimum, rollups will charge users (directly or indirectly) for the two costs they incur.

1. L1 costs for data publishing and execution

Rollups must pay for posting data and proof verification on the L1. They will recoup these costs from users.

2. Fees for operating the L2

Rollups networks incur various costs for operating the chain, including costs for sequencing, proving, execution, etc. They will recoup these costs from users.

In addition to recouping their costs, they could also optionally earn revenue from the following

3. Implementing minimum fees to protect against spam

In scenarios where their direct costs are very low, rollups will likely need to set a minimum fee that is artificially higher to deter spam and prevent bloating of the L2 state. So even if EIP-4844 brings L1 costs down to almost nothing, all of these savings won’t get passed to the user since it may otherwise result in lots of spam.

4. Implementing minimum fees to maximize profit

Additionally, rollups may opt to charge more than their directs costs plus spam protection. Why? Like any other business - to maximize profits. Just because it costs Starbucks $0.10 to produce a cup of coffee, doesn't mean they sell it at that price. They sell at the price that will maximize profit.

Example:

Imagine a rollup that incurs a 0.01 gwei costs for L1 and operating costs. They put a small 10% markup on that, and charge their customers 0.011 gwei, netting 0.001 gwei profit / tx. Now imagine that instead this rollup decided to set a minimum L2 gas price of 0.1 gwei. Even if the number of transactions reduced by 75%, they would still be making more profit. Like any product, there will be a profit maximizing price that the rollup can set.

In fact, L2s may already be doing this today. Arbitrum currently implements a 0.1 gwei minimum L2 gas fee for transactions. This is 100x what Optimism's min L2 gas fee is (0.001 gwei)

It’s important to note that only rollups that generate real network effects, and aren't easily copied (ie. have valuable state), will be able to generate pricing power and charge fees above and beyond the costs they incur, thus leading to additional profits. Otherwise competition will drive pricing down to operating costs.

But those that can generate these network effects and valuable state may become extremely valuable.

James Ho

@jamesjho_

1/ Arbitrum doing $100m+ in annualized revenue, which net 30-40% margins today (after calldata costs)

Will expand to 90-95% margins after eip-4844 / proto-danksharding

For perspective ETH is doing $3-5bn annualized fees

L2s on path to being incredibly profitable

601

12:16 PM • May 6, 2023

Lastly, L2s will generate congestion fees.

5. Congestion fees

Congestion fees occur when blockspace is saturated. Here you can see the spikes in fees over the last year when Optimism blockspace became congested.

As you can see, there were limited instances of congestion over the last year on Optimism (the same is true for Arbitrum). However, as demand for blockspace grows, fees from congestion could increase.

Summarizing value accrual from transaction fees

Summarizing the above, here’s how we can think about value accrual for L2s from transaction fees.

Putting it all together

To put it all together, I believe L2 value accrual will stem from

1. Intra-domain good MEV

2. A share of cross-domain good MEV

3. L2 gas price above costs for spam protection

4. L2 gas price above costs to maximize profits

5. L2 congestion costs

As mentioned above, certain L2s will likely be quite valuable. Which L2s will be the most valuable? Those that can generate network effects and valuable state, which then allows them to command pricing power for their blockspace.

They will not run a simple middleman model where they charge a fixed % above the what their operating costs are. Instead, they will be in a position to set floor prices for their blockspace (both to reduce spam and/or maximize profit), as well as earn from congestion fees, and value from good MEV.

Finally, it should be noted that app-specific rollups have a lot of room to implement entirely different business models! For example, dYdX and ImmutableX both charge users a percent fee on trades. These different business models will allow these rollups to accrue even more value than had they just charged fees for gas / congestion.

Special thanks to @apolynya, @jskybowen, and @avichal for providing valuable feedback on this post

We believe the next generation of iconic venture firms will be led by software engineers because capital markets will be crypto-enabled. As value becomes digital, new technologies to transfer and aggregate that value naturally emerged: DeFi has over $50B capital in smart contracts. NFT trading volume is $12B+ annualized. There are over $120B in stablecoins on chain. Crypto demonstrates the potential for on-chain, 24/7, global capital markets.

Engineering capability and technical contributions are essential to helping founders succeed on these new open platforms. VCs will need expertise in areas such as liquidity provisioning, governance, code security, designing novel token mechanisms, and more.

We are excited to welcome Ken and Maria as General Partners who exemplify our philosophy.

Ken Deeter is an engineer who leads our DeFi investments.

Ken invests in novel DeFi mechanisms such as Frax, a new approach to stablecoins and liquid staking derivatives, Hashflow, an on-chain settled RFQ-based trading system supported by the largest crypto market makers, Hourglass, the first protocol to create a market for time-locked digital assets, Tokemak, the first “liquidity gun” in DeFi, and many more.

When DeFi emerged in 2018, Ken created the term Guarded Launch, a process to de-risk DeFi launches. Ken used his experience writing software for 3 billion people at Facebook to introduce a concept of a “roll out” for DeFi protocols to protect users without slowing development.

Ken also leads our liquidity provisioning and governance participation efforts. Today, we have hundreds of millions of dollars participating actively on-chain. Capital deployment at this scale has required us to build custom monitoring and management systems that can keep pace with the ecosystem’s break-neck speed of innovation.

Ken has over 20 years of experience leading teams and building products including at VMware and Facebook. He was an early engineer at VMware, writing code for the desktop product suite used by developers and IT managers across the majority of Fortune 500 companies. At Facebook, he was an early contributor to the Newsfeed team, and helped to build the Events product used by over a billion people on a monthly basis.

Maria is an engineer who leads our NFT investments.

Only a handful of women in the world are General Partners at crypto funds with more than $1 billion in assets. Maria is one of them.

Maria invests in NFT companies and protocols that push the boundaries of what is possible with NFTs as infrastructure, like RabbitHole, the most efficient way to give token rewards to high quality users on chain, Atrium, the auction house for exceptional artists to earn through commissions and create productions such as the Nouns Movie, and Curta, a capture-the-flag protocol where the best engineers create and solve on-chain puzzles to earn NFTs.

Maria was one of the first to write in-depth about NFT use cases in early 2021 when NFTs were not well understood. Since then, many use cases she outlined have become reality and sophisticated financial systems are increasingly built on top of NFTs. Maria heads experimentation across the NFT space to provide liquidity to burgeoning NFT asset markets and participate in community governance.

Outside of investing, Maria created and publishes our annual Developer Report. The Developer Report is a public good and the industry standard for understanding developer adoption since 2019. It analyzes more than 200 million code commits, 500k repositories including deep dives in Bitcoin, Ethereum, and DeFi to index developer activity across the entire crypto sector. Every year, the Developer Report receives coverage from Bloomberg, Coindesk, Decrypt, Forbes, Techcrunch, and many others. The Developer Report also powers insights that regulators use to understand crypto adoption. Maria wrote the code for the data analysis layer that generates these insights every year.

Maria is a former founder and worked on search technology at Microsoft that shipped to more than 1 billion devices.

Electric Capital is built differently - by necessity.

The process of raising capital, identifying opportunities, and deploying capital is increasingly moving on chain. Soon, venture investing will happen primarily on-chain. In the on-chain world, capital deployment is not just software-enabled, it is only possible with software. 

In order to invest in a future where money is software, we must build software to deploy capital, participate in governance, and assess the quality of code both on- and off-chain. We demonstrate our commitment to this approach by also building in public alongside the ecosystem. Our engineers build systems that help builders advance crypto like the Developer Report, an index of open source developers in crypto, Codeslaw, a search engine for smart contracts made for developers, and open source tools to audit and inspect the blockchain. 

If you are an engineer or have a technical background, we welcome you to apply to our open positions.

About Electric Capital

Electric Capital is one of the largest global venture capital firms focused on investing in early-stage crypto companies and protocols. Founded in 2018 by successful entrepreneurs, Electric Capital believes all capital markets will be crypto-enabled. Electric believes the next generation of iconic venture firms will be led by software engineers who have the technical depth to invest in a financial system run by code. With a team of over 60% engineers, Electric applies their experience in distributed systems, cryptography, and machine learning to each stage of the investment process. Electric invests in layer 1s, decentralized finance, NFTs, developer tooling, infrastructure, crypto-enabled fintech, privacy solutions, and marketplaces.

• Elad Gil is the co-founder of Color Health, former VP at Twitter, began Google’s Mobile team, and an investor in over 40 companies worth over $1 billion, including Airbnb, Airtable, Coinbase, Figma, OpenSea, and Stripe.

• Akash Garg is the former CTO of MoonPay, CTO at Afterpay (acquired by Block), and led engineering teams at Uber and Twitter that onboarded millions of new users to mobile.

• Rebecca Rettig is Chief Policy Officer at Polygon, former Chief Legal and Policy Officer at the Aave Companies, and a pioneer in understanding legal considerations surrounding DeFi, DAOs, and more.

Electric Advisors Are Experts Who Support Crypto Founders

Building crypto companies and protocols is uniquely challenging. Founders must build easy-to-use products on entirely new software platforms, navigate complex and nuanced regulatory questions, and create new markets to support creators and promote financial inclusion. Electric Advisors are the world’s leading experts in these areas and are available to help founders navigate these challenges.

Elad, Akash, and Rebecca will join our existing advisors Jay Clayton, the 32nd Chairman of the Securities and Exchange Commission, Kevin Warsh, a former Federal Reserve Board of Governor, and Pratiti Raychoudhury, Head of Research at Meta.

We are excited to welcome the newest Electric Capital Advisors:

Elad Gil

Entrepreneur, Investor, and Advisor

Elad Gil co-founded Color Health and Mixer Labs (acquired by Twitter). He helped scale Twitter from 90 to 1,500 people, started Google’s Mobile team, and authored the High Growth Handbook. Elad has invested in over 40 companies worth $1 billion or more, 30 of which he funded at the seed or series A, including Airbnb, Airtable, Anchorage, Brex, Coinbase, Figma, Instacart, OpenSea, and Stripe. 

Elad will work with founders on fundraising, product strategy, and organizational growth.

Akash Garg

Former Engineering Executive at MoonPay, Afterpay (acquired by Block), Uber, Twitter

Akash Garg was CTO of MoonPay, CTO at Afterpay (acquired by Block), and led engineering teams at Twitter and Uber. At Afterpay, he founded and led the technology teams that were responsible for Afterpay’s US expansion. Block acquired Afterpay in 2021 for $29 billion. Previously, he led all technology products for Uber’s 3.5+ million drivers including onboarding, compliance, and driver experience, as well as led technical teams that added tens of millions of users to Twitter.

Akash will work with founders in engineering architecture, building and scaling high-performing engineering teams, and more.

Rebecca Rettig

Chief Policy Officer, Polygon Labs

Rebecca Rettig is the Chief Policy Officer at Polygon Labs, where she oversees global policy and drives relationships with regulators across the globe. She was previously Chief Legal and Policy Officer at the Aave Companies, where she advocated for policies supporting decentralized blockchain technology. Rebecca was previously a partner at Manatt, Phelps & Phillips and FisherBroyles, where she represented well-known DeFi & crypto software development companies in litigation and regulatory matters. Rebecca is a pioneer in understanding the complex legal considerations around DeFi, DAOs, legal structures around protocols, tokens, and more.

Rebecca will work closely with founders in areas such as legal and regulatory compliance, government relations, and public policy.

Welcome Elad, Akash, and Rebecca!

About Electric Capital

Electric Capital is one of the largest crypto-native venture capital firms. Electric has raised over $1 billion in capital to invest in early-stage crypto companies and protocols with investment sizes ranging from $1m to $50m. Electric is unique in its ability to provide founders with deep expertise in engineering, product design, token economic design, liquidity provisioning, on-chain governance support and cryptography. Two-thirds of the Electric Capital team are engineers and former founders with successful exits. Electric Capital's investments include Aven, Bitwise, Bitnomial, Certora, dYdX, Frax, Hashflow, Magic Eden, NEAR, Slingshot and more. 

For more information, please visit electriccapital.com.

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I spent a quarter of a century(!) as an engineer and manager.

The last decade, I led large engineering teams in hypergrowth phases: I was VP of Engineering at Robinhood and Director of Engineering at Facebook responsible for GraphQL and React.

At Electric Capital, I code and help crypto founders think through engineering challenges such as organizing their engineering teams, recruiting senior talent, understanding architecture trade offs, and much more.

I know it's stormy skies over cryptoland these days, but I want to tell a story about the early days of React that's not all rainbows and butterflies.

Maybe you think React’s success was a foregone conclusion.

But that sure isn’t how it felt to me.

When we first presented at JS ConfUS in 2013, we were confident that we would impress people with the superiority of functional style, the silliness of coding in templates, and the elegance of React’s component model.

But the audience hated it.

They had been brainwashed by arguments like “don’t mix your presentation and your business logic.” React was too different from how people were used to doing things. No one wanted to adopt it. Debriefing on the presentation, the team felt like React was a failure.

In the end, we found we had to bring people on board one-by-one. Our big ideas were just ideas, and people didn’t need big ideas. They needed good error messages, decent documentation, and — most importantly – an incremental path that allowed teams to try React in their app without having to change their whole codebase.

This was a far-cry from our revolutionary aims, but we found the force-multiplier of one happy customer had more power than the purest monad. We spent years filing off the rough edges from React and making sure it worked for our first users: Facebook engineers. Then we turned around and noticed that adoption was growing outside of Facebook—at first, just a building away in Instagram, but soon at other Silicon Valley companies and then around the world.

Today, React is defined more by its version upgrade process than by anything else. It doesn’t really matter how React started. It is now a community that moves forward together.

Obviously, crypto is different from Web 2.0. But they share this arc of building in the open, often with a lot of haters.

To get people to adopt React, we had a goal of turning haters into advocates. That can only happen if you are willing to hear what the haters say; maybe even go further and accept that they have a point.

We proved the value of React to people one-by-one and brought them on-board individually. We helped them slog through bug reports and metrics parity battles. We found that our big ideas were just ideas. What people needed in order to adopt React were not ideas, but useful tools they could use every day.

Turning haters into advocates was not easy. To change someone’s mind, you must risk changing your mind. You must welcome feedback even when it sounds harsh or ambiguous.

I’m here for the big ideas in crypto.

I want to see the better web that crypto enables.

Software that can't be censored or blocked.

True privacy.

A web that connects every human.

For crypto to reach that potential, we need to build this next iteration together, in public. We have to package this exciting new technology in a form that end-users will understand and embrace.

I'm so excited to be part of it.

Let's get to work.

For most of my career I have been part of fast-growing companies working at the intersection of law and innovation. I led the launch at Paxos for their de novo national trust for digital assets – a first for a crypto-native company. We worked closely with the US Department of Treasury to help them understand that digital asset custodians can meet the same standards as traditional banks. Prior to my work in the private sector, I was an attorney at the Federal Election Commission working on enforcement-side issues. My focus was on regulations and new technologies, such as how campaign fundraising laws applied to Twitter. I am excited to use my experience in the private and public sectors to help support founders in the Electric portfolio.  

In my work with policymakers, I lead Electric’s relationship with the Crypto Council for Innovation (CCI), the premier industry alliance for advancing Web3. Keeping with Electric’s engineering ethos, we bring data to the discussion in order to better inform policymakers and regulators. We have provided them with details from our annual Developer Report, and more recently we shared  trends showing web3 developer activity is moving outside the US. It’s also a huge pleasure to get to do this work alongside our recently announced Electric advisors, Jay Clayton and Kevin Warsh.

There is nowhere more exciting for a lawyer to be than Web3 today. Being successful requires harmonizing the law with new technologies and use cases. Some of the most interesting questions are around understanding NFT licensing and royalty mechanisms, how zero-knowledge technology can be used for privacy while staying compliant, the definition of decentralization and its application to US securities law, taxation of staked assets, and how the law intersects with today’s geopolitics. There are countless other interesting and open challenges for us to work through. 

We have a rare opportunity to help build products that revolutionize finance and culture, and along the way, we get to refine existing banking, payments, commodities, and securities laws to encourage innovation while protecting investors and consumers. I am grateful for the opportunity to work alongside the Electric Capital team, founders, policymakers, and other stakeholders to build the future of Web3.

I’m delighted to join Electric as a designer!

I help founders hire great designers, build solid design foundations for their products, and scale their teams.

Prior to Electric, I was a design lead at Facebook, Unity and Deliveroo, where I shipped numerous products in VR, consumer, and creative tools. I also bring my experience as the co-founder of Enigma, an analytics platform for public and financial data.

Why do Web3 founders need design in the first place?

With Web3, no one “owns” the front-end anymore. Teams can build on top of protocols without asking for permission. This opens the door to a free market of user experience execution. Whoever designs the best front-end — one that is trustworthy, simple, and performant — is best positioned to win.

1. Gain user trust — Trust is not just about protocol security and bug bounties. It’s also about making your product “feel” trustworthy. In other words, does your product convey accuracy, honesty, professionalism, and empathy?

2. Simplify the product — Regardless of your stack, technical idiosyncrasies need to be hidden to gain mainstream appeal. Good designers will challenge you to simplify where you thought control and customization were necessary. Great designers will do so without alienating your power users.

3. Speed up execution — The benefit of speed is well understood by Web2 incumbents. Speed does not only apply to the product, but also to how quickly designs come together. Structuring your team with the right designer profiles and investing in tooling will enable faster iteration and execution.

Case Study: Tokemak

Recently, I collaborated with Tokemak, just as their liquidity bandwidth protocol reached $1B TVL. They were thinking about adapting their dApp UI for new use cases. Over a one month sprint, we explored how design updates could improve trust, usability, and scale.

Visuals for Trust

Tokemak’s brand was already strong, but wasn’t shining through the product’s UI.

First, we applied very strict layout so the UI feels structured, almost machine-like. We reduced the use of gradients, shadows, blurs and color variations, and added large color blocks, as you would encounter in terminal user interfaces. We used monospace fonts and simplified icons to their most simple expression.

Abstracting Away the Complexity

Tokemak can be overwhelming at first glance. We explored what a dashboard would look like for new users as they get more familiar with the protocol.

Instead of concentrating user flows in a single view, we relegated them in their own section, surfacing only high-level status and recommended next steps in the dashboard. When users land on the product for the fist time, they are presented with an explanation of Tokemak’s functionalities. As they deposit, stake, and vote in the protocol, they are shown helpers to ensure they complete their tasks and get the most out of their positions.

By only displaying need-to-know information, labeling navigation and actions in plain language, and using colors to highlight action items, we can reduce the learning curve and onboard more users.

Design System Foundations

For the design and product team to move quickly, a solid set of components is crucial.

We overhauled their design system in Figma, nearly halving the number of colors, typography styles, and component variations. We also pushed for using components that can adapt from desktop to mobile with minimal customization. With less options to choose from, designers spend more time designing features, and engineers don’t have to maintain extensive style libraries.

Great Design Can be the Edge to Win

I’m excited to help founders get there. Follow me @raphelectric for design resources and rants 🫡.

• Jay Clayton is the former chairman of the SEC. During his tenure, Bitcoin & Ethereum were classified as commodities.

• Kevin Warsh is the former Federal Reserve governor from 2006 until 2011. He was instrumental in architecting the recovery plan for the 2008 US financial crisis.

• Pratiti Raychoudhury is the Head of Research and User experience at Meta. She leads user experience research across products that reach over 3 billion people worldwide including Whatsapp, Instagram, Oculus, and more.

Electric Advisors are experts who support Web3 founders

Building companies and protocols in Web3 is uniquely challenging. Founders must create easy-to-use products on entirely new software platforms, navigate complex and nuanced regulatory questions, and understand the world’s financial plumbing. Electric advisors are the world’s leading experts in these areas and are available to help Web3 founders navigate these challenges.

We are excited to welcome the first batch of Electric advisors:

Jay Clayton

32nd Chairman of the Securities and Exchange Commission

Jay Clayton worked with the CFTC, the Treasury Department and the Federal Reserve to address the classification and regulation of digital assets.

During his tenure, his focus was on making public capital markets more accessible by recognizing and adapting to rapid changes in technology. Chairman Clayton is an Adjunct Professor at the Wharton School and the Carey School of Law at the University of Pennsylvania, and currently serves as Lead Independent Director of Apollo Global Management.

Chairman Clayton is a champion for responsible innovation that benefits investors and consumers, while safeguarding against fraud and manipulation. He is an active advocate for improving cybersecurity, highlighting the dangers of poor corporate security, the importance of resiliency, and the necessity of modernizing software infrastructure. His experience provides founders with invaluable expertise balancing rapid consumer innovation with necessary regulatory protections.

Kevin Warsh

Federal Reserve Board of Governors

As the central bank’s point man during the global financial crisis, Kevin Warsh was a key architect of the policy response that ultimately averted economic collapse. Governor Warsh previously served as Special Assistant to the President for Economic Policy, Executive Secretary of the White House National Economic Council, and executive director at Morgan Stanley & Co. He is a partner of Stanley Druckenmiller at Duquesne Family Office LLC and a member of the board of directors of UPS, Inc. 

Warsh is a leading monetary policy expert. He writes frequently on matters of economics and finance, especially the effects of macroeconomic forces on growth, productivity, and innovation. His service in the public and private sectors provides valuable insight on financial infrastructure, capital markets, trade and capital flows, and recent developments in central bank digital currencies (CBDCs) and stablecoins.

Pratiti Raychoudhury

Head of Research at Meta

Pratiti Raychoudhury leads teams across Facebook, Instagram, WhatsApp, MetaQuest and more. She oversees an organization of over 1,200 researchers around the world and has held a number of leadership roles at Meta since joining in 2010. 

Raychoudhury is deeply invested in how research informs product development and how technology connects people around the world in inspiring ways. Web3 is full of challenging, complex new interfaces and product development; founders find her guidance invaluable, drawing from her vast background in research and new product development. Raychoudhury will ultimately help founders better understand the ever shifting landscape of technological progress, and build successful user products.

Welcome Jay, Kevin, and Pratiti!

About Electric Capital

Electric Capital is one of the largest crypto-native, venture capital firms that invests globally. Electric recently announced $1 billion in fresh capital to invest in early-stage Web3 companies and protocols with investment sizes ranging from $1m to $50m. Electric is unique in its ability to provide founders with deep expertise in engineering, product design, token economic design, liquidity provisioning, on-chain governance support and cryptography because two-thirds of the Electric Capital team are engineers or product designers and over half of the team are former founders with successful exits. Electric Capital's investments include category leading companies such as Aven, Bitwise, Bitnomial, Certora, dYdX, Frax, Hashflow, Magic Eden, NEAR, Slingshot and more. 

For more information, please visit electriccapital.com.

In the middle of a bear market, there is a lot of skepticism around crypto. But for those of us who live in countries with robust economies, it is easy to take things like stable currencies, reliable banks, or 401ks for granted. That is far from true around the world, and I believe there is enormous potential to harness crypto technologies and craft them into simple, powerful user experiences. 

As I have explored products across Web3, I have been surprised by how difficult so many basic tasks are, like buying cryptocurrency, setting up a wallet, or finding NFTs. The user experiences mimic the complexity of the underlying systems. This is often true with new technology and has been the historical norm. 

I spent almost twenty years as a Product Designer and Design Leader at Google, YouTube, and Facebook, where I tackled making highly complex systems simple and usable. The early experiences for search, video, and social were clunky and complicated until we abstracted away the underlying technology in favor of simple, powerful experiences.

In 2007, the interactivity of Google Maps was still novel and we had a huge, ever-growing amount of data we could show at any time (roads, labels, routes, transit stops, traffic, pins, businesses, reviews, photos, parks, landmarks, etc.). We had to create a thoughtful system to display enough information to enhance, but not complicate the experience. We developed a dynamic system of colors, lines, contrast, typography, and overlays to seamlessly display the most relevant information for different zoom levels and contexts. Google Maps has continued to be iterated on elegantly across mobile and desktop, but underneath the seemingly intuitive interactions are complex data systems and intentionally simple, consistent designs.

Often the technology does lead, and I saw this pattern repeat across Google Search, YouTube, and Facebook's profile, privacy and social impact products. For these products, the early implementation was powerful, but complex. It was simple user experiences that made them accessible to billions of people. 

I am delighted to be exploring this new frontier with the team at Electric, founders, and web3 designers. The community is filled with so many bright, creative people and I am excited to see the magic that emerges as crypto technologies become simpler and accessible to billions of people around the globe. 

For more on design + crypto follow @elizlaraki

To support this mission, we’ve joined the Crypto Council for Innovation (CCI), the premiere industry alliance for advancing the promise of crypto. We are excited to join existing members from across the industry, including Andreessen Horowitz, Block, Coinbase, Fidelity Digital Assets, Gemini, Paradigm, and Ribbit Capital. 

As part of CCI, we will continue to share with policymakers the data that our engineering team collects and analyzes. Data is critical for governments across the world to make well-informed, data-driven decisions on crypto regulation. We’ve already shared data from our annual Developer Report with legislators. The report tracks developer activity across Web3, and showcases the ecosystem’s astonishing growth over the past few years.

We have also shared data related to the locations of Web3 developers. Today, the U.S. is losing market share of Web3 developers to countries like Russia and India. While the U.S. remains ahead overall, U.S. policymakers should be focused on crafting a regulatory framework that encourages innovation at home rather than pushing it overseas. 

Much of the world will follow the U.S.’s policy lead. Europe, Latin America, Australia, and Southeast Asia will all look to the U.S. and how it chooses to regulate Web3. Because of this, we are first focused on crafting the right policies in the U.S. Ultimately, we believe these American policies will be implemented globally.

Fortunately, more U.S. Congress members and Senators want to engage with us than ever before. They are hungry for data, and want to learn more about Web3. Already, we are meeting with two to three Representatives and one to two Senators each month to explain the importance of Web3. The recent White House executive order also signals that the U.S. is seriously exploring how best to regulate the industry.  

Engaging with these legislators and regulators is critical to passing legislation that unlocks innovation. Currently, these policymakers question Web3’s impact on consumer protection, financial stability, and illicit finance. They want to understand how Web3 can drive economic equity, broaden financial access, and fight authoritarian regimes. Our challenge as a community is to offer them concrete information and real solutions. 

We are delighted to join CCI and have new, top-tier partners with which to work towards the sustainable growth of the Web3 ecosystem. We will work alongside CCI, Sheila Warren and the CCI team, and all of CCI's other partners to demonstrate the transformational promise of crypto and help communicate its benefits to policymakers, regulators, and people around the globe.

When a market is eaten by software, companies must reimagine their human organization.

Walmart has not been able to compete against Amazon, despite having 30 years to do so, and about as long of a head start. Most newspapers have died despite seeing the writing on the wall 30 years ago, too. Why?

When software eats an industry, building great software products becomes the primary means to acquire, retain, and monetize customers. In order to build great software, a business must empower those who know how to build software. Engineers, designers, and product people must be given decision-making authority. Software engineers must go from being considered a cost center (i.e., “IT”) to being the primary revenue generators. This is a dramatic shift in power, prestige, and compensation from how businesses were run in the past.

For an old-world business to become software first, it must pay software engineers significantly more, take power away from the partnerships, marketing, and sales divisions, have the CEO become the COO, and have the CTO or VP of Product (if there is one), become the CEO. Most companies are incapable of this sort of organizational upheaval.

Thus, startups emerge with organizational models that are software-centric from inception, enabling them to quickly build the software products and services that the market demands. Engineers and designers, the talent most suited for building the best software, run the company. They are compensated as the revenue drivers. The CEO is the product person and the COO is the “business person.”

Software is eating money and capital markets.

With the rise of Bitcoin and Ethereum, software began to eat stores of value. As value became more digital, a marketplace to transfer and aggregate that value naturally emerged. While the ICO boom of 2017 was speculative, it demonstrated the potential for on-chain, 24/7, global, capital markets.

Since then, the crypto market has grown to $2 trillion, the market cap of stablecoins has grown to over $180 billion, and the total value locked in DeFi protocols has grown to over $100 billion. These permissionless protocols for value transfer will eventually outcompete their traditional counterparts because they are composable, permissionless, global, and available 24/7. Eventually crypto will eat all forms of money movement and most capital markets.

Crypto is already eating venture capital.

Venture capital is just one of many forms of capital deployment in the global capital markets that will get eaten by crypto. Already, blockchain-based decentralized autonomous organizations (DAOs) such as Seed Club, The LAO, and others are building decentralized venture firms. SyndicateDAO enables anyone to form an on-chain investment club. The founders of projects like yearn.finance ($680M market cap), LooksRare ($380M market cap), Silo ($60M market cap), and others have used on-chain mechanisms instead of relying on venture dollars.

Crypto lowers investment barriers and further commoditizes capital, posing an existential threat to venture firms that do not adapt. To compete over the next ten years, venture firms will need to be run like software businesses.

The most successful venture firms of the 2020s will be software-enabled and led by software engineers.

We firmly believe that software engineers, not financiers, will run the next-generation of iconic venture firms. When software eats an industry, new companies emerge, led by software engineers. These new firms design their organizations to use software from the ground up. Most incumbent firms struggle to make the transition because they must upend their existing organizations, processes, compensation, and power dynamics.

Unlike traditional venture firms, we don't have a heavy band of investment associates or principals for sourcing. In fact, we have none. We hire engineers who ship code and hang out in Discord, not an army of associates who cold-call founders and hang out at happy hours.

Electric Capital’s org chart reflects our software-first approach. Over 60% of our team has a background in engineering, while 50% of our team members are former founders. We have two designers on staff, and our investment partners still write code.

This approach also makes us better investors and better partners to founders. Our team has the skills and resources to help founders dashboard key metrics, design the right user experience, and think through governance and tokenomics. Founders can lean on our engineering and design teams to help interview candidates, review code, conduct user studies, provide actionable feedback, or integrate with product teams to deliver scoped features. We actively participate in the governance of the protocols we invest in, and we will stake tokens and provide liquidity when founders need it.

We are building a modern VC firm by shipping public goods.

One of the biggest challenges in building a new venture firm is attracting the best founders. For the last 15 years, many investors have established their brands through media. Partners at firms published thought leadership via blog posts, Twitter threads, and YouTube videos.

As a software-enabled venture capital firm, our approach is different. We build open-source public goods, and return this value to the community. For example, we publish industry-leading reports like our annual Developer Report, where we fingerprint over 150 million code commits to understand developer activity within the crypto ecosystem. We build the Report in collaboration with most of the top foundations and largest DAOs in Web3. The taxonomy of data we use to generate this report is available in our Github–we regularly share data about ecosystem growth and app adoption with DAOs and foundations to help them grow their communities.

By shipping public goods like the Developer Report, we demonstrate that we are focused first and foremost on creating value for founders and the ecosystem at large. In addition to demonstrating our intentions and alignment, we develop deep expertise in ecosystems and platforms, which makes us better partners to early-stage founders.

We are hiring engineers and data scientists.

We are hiring more people to work on public goods projects, including:

• Suite of public data dashboards – We’ve already shipped dashboards tracking Curve pool balances and metrics on Convex. We are working on shipping many more.

• Community Report focused on understanding NFT and DAO communities – For social projects like NFTs and DAOs, developer activity is less meaningful than social dynamics. We are mapping and will share data on community growth across top communities.

• Smart contract verification tools – As with any new technology, crypto users are unfortunately the target of scams and attacks. To help make the Web3 community safer, we are creating tools to help verify smart contracts for top DeFi protocols and NFT collections.

We’ll lean on the community to iterate on each of these, and to identify other needed public goods. As a founder-first, software-forward venture firm, we are dedicated to building and sharing tools and data with the community.

Does one of the public goods we are working on excite you? Have another idea for what tools or data the crypto ecosystem needs? If so, join us and work with founders, get paid to ship open-source software and public goods, and help build a next-generation venture firm.

Check out our open positions in software engineering and data science, or DM us on Twitter.

Disclosures

This Content is for Informational Purposes Only

Nothing in this publication should be relied upon as financial, investment, legal, tax, or other advice. You should consult your own advisers as to those matters. Nothing contained in this publication constitutes a solicitation, recommendation, endorsement, or offer by Electric Capital or any third party service provider to buy or sell any securities or other financial instruments, provide investment advisory services, or adopt any investment strategy. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation. Furthermore, this content is not intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by Electric Capital. (An offering to invest in an Electric Capital fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and all such documentation should be read in its entirety.)

Any forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Past performance is not a reliable indicator of current or future results. Actual results could differ materially from those anticipated in forward-looking statements, and future results could differ materially from historical performance.

Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Electric Capital may have previously held, currently hold, or will in the future hold tokens, or otherwise invest in some of the projects mentioned in this publication. We do not short tokens.

We Provide Crypto-Native Support

We are long-term investors and partners to our founders. We have spent the last four years building software and data systems that enable us to participate in Web3 ecosystems. We use the infrastructure we have built to provide liquidity, drive key governance proposals, help teams better understand their ecosystems with our data, and more.

We Invest $1M to $20M in Programmable Money & the Web3 Economy

Since 2018, we have been investing in “programmable money”. We believe that crypto enables a parallel, programmable financial system. Now, a new economy is developing on top of the programmable money stack — DeFi enables permissionless access and innovation, NFTs are digital-native assets, DAOs create a way for communities to allocate resources, Decentralized Infrastructure provides alternatives to centralized tooling, and more. In this article, we outline the key trends we believe will emerge and are looking to fund as the Web3 economy develops.

5 Key Trends in the Web3 Economy

We believe five key trends are emerging:

1. DAOs will empower global communities to allocate resources to initiatives large and small.

2. NFTs will form the asset layer for Web3 and the bedrock for new types of financial instruments.

3. Decentralized Finance will democratize access to financial products around the world.

4. Decentralized Infrastructure will allow engineers to build the next generation of applications without a central point of failure or control.

5. Accessible user experiences will onboard millions of users to Web3.

Here are some ideas we are excited to fund in each trend:

DAOs

Decentralized Autonomous Organizations (DAOs) are internet-native organizations. DAOs have the potential to acquire customers, investors, and contributors in minutes instead of months, acquire bank accounts in seconds, make decisions transparently, and more. We will see increased experimentation in DAOs in the next year, from tweaking governance structures to finding new ways to incentivize contributors.

Specific ideas we want to fund:

• Merit-based systems to onboard new members — DAOs will become organizations that attract talent on par with the best companies. Many people join DAOs through a token purchase, but this cannot ensure that the most talented or most prolific contributors join. We want to fund mechanisms that allow more people to onboard onto DAOs based on merit.

• Governance aggregators — People have trouble tracking and prioritizing new proposals, especially across multiple DAOs. We want to fund platforms that aggregate and surface proposals in a way that allows members to participate more easily.

• Mechanisms to improve distributed decision-making — Today many decisions are made by those with the greatest number of tokens. We need mechanisms to not only increase the number of participants, the level of engagement, but the ability to solicit engagement from the right people.

• Compensation mechanisms — DAO contributors need fair and transparent compensation. One effective way to compensate contributors for their work today is through DAO-issued bounties on platforms like Layer3. Contribution to DAOs can be on-chain, off-chain, one time, or recurring. As DAOs grow in complexity, these contribution types will also grow and evolve. We want to fund projects that allow DAOs to distribute compensation fairly and openly for all types of contributors.

• DAO discovery platforms — The rate of DAO creation is growing exponentially. The largest DAOs control a treasury of billions in value, give out grants, and employ large teams. In contrast, the smallest DAOs can be a small group who have pooled resources to purchase an NFT. We need platforms that allow more users to discover and explore DAOs that fit their needs and interests.

• Recruiting platforms — DAOs need the ability to tap into talent networks and expertise. Platforms like Rabbithole enable users to start earning credentials that DAOs can use to verify talent, just as we use diplomas and certifications to ascertain expertise and experience. We are looking to fund different projects throughout the recruiting pipeline that can help DAOs identify and recruit the best talent.

• Treasury management — Today, DAOs can have complex treasuries that include a mix of different types of tokens and stablecoins. DAOs have the challenge of effectively managing their treasuries with distributed decision-making. Organizations like LlamaDAO are experts in creating proposals and helping DAOs walk through treasury decisions. We want to fund more economic tools that empower DAOs to effectively grow and leverage their treasuries.

Initiatives we’re proud to support in this vertical:

DAO creation platforms like Syndicate, talent entry points like Rabbithole, DAO-focused bounty systems like Layer3, platforms for DAOs to complete engineering work like Gitcoin, and financial tooling for DAOs like LlamaDAO.

NFTs

NFT art is just one use case of this new primitive. NFTs can represent credentials, memberships, financial positions, baskets of assets, tickets, music, in-game items, real estate, social networks, identities, and many more. Despite billions of dollars transacted each month in NFTs, we are still in the early stages of unlocking NFT use cases.

Specific ideas we are excited to fund:

• Pricing mechanisms for NFTs — Accurately pricing NFTs is a challenge. The lack of pricing creates two problems: (1) most NFTs do not have liquidity, and (2) financial derivatives cannot form on top of NFTs. Projects that enable us to accurately price NFTs will unlock new use cases and greater adoption.

• Infrastructure to support NFTs as productive assets — Currently there are two mechanisms of capital generation through NFTs: (1) generating yield through rental, lending, etc., or (2) revenue sharing through royalties and splits. Both these mechanisms are in their infancy. As this space matures, we expect to see music NFTs that split royalties with fans, Hollywood movies that share revenue back to NFT-based characters, and the ability to lend or rent the cash flow on these NFTs. We believe verticalized infrastructure to support these types of productive NFTs will be some of the most important platforms in Web3.

• Discovery platforms — It is difficult to discover NFT collections or find out about new mints. Effective discovery platforms will increase the adoption of NFTs and allow more people to find their niche.

• NFT financial derivatives — Like assets in the real world, we believe NFTs will have futures markets, options for hedging, insurance, and other types of financial derivatives. Financial products built on top of NFTs will make NFTs more useful.

• Creator guilds — We believe creators will leverage NFTs for monetization and use them to mobilize their fans. Today, however, there is a lack of best practices and infrastructure for creators to use NFTs. We believe creator guilds may allow creators to share resources like community managers, playbooks, and fan bases.

• Verticalized secondary marketplaces — When NFTs can represent anything from music to metaverse land to credentials, new marketplaces will emerge to support the specific needs of each type of NFT.

• Physical to digital bridges — NFTs can be digital representations of the physical world. We believe we will see more generalized mechanisms to get a physical asset by burning a digital one, event ticketing systems that leverage NFTs, NFTs as immutable storage of medical records, course attendance, identification, and more.

Initiatives we’re proud to support in this vertical:

Curation platforms like JPG, social platforms like Hyype and Myty, and lending and trading marketplaces like Taker Protocol and 4k.

Decentralized Finance

DeFi has evolved from a set of experimental financial services built using smart contracts to mature protocols handling billions of dollars. We see the ecosystem evolving onto multiple blockchain platforms and democratizing access to sophisticated financial instruments.

Specific ideas we are excited to fund:

• Growing DeFi on non-Ethereum chains — Ethereum presents a unique set of tradeoffs between security, speed, and decentralization. Non-Ethereum chains may be a more affordable onramp for the next wave of users into DeFi. We see significant opportunities in building DeFi services for these new users.

• Bridging yield opportunities across chains — As more users onboard onto alternative chains, they will want to access potential yield opportunities on other chains. Similarly, Ethereum users will want to access yield opportunities by providing capital onto new chains.

• Simple exposure to complex strategies — Platforms like Ribbon simplify complex options strategies. We want to fund platforms that give users simple exposure to strategies like delta-neutral yield farming, leveraged market making, downside protected lending, and others.

• Novel mechanics to bootstrap protocol owned liquidity — As more protocols launch and grow, the need for bootstrapping mechanisms will increase. We believe there will be new, innovative bootstrapping mechanisms as new protocols launch.

• Payment streams and vesting — Standardization of payment streams in crypto would unlock many use cases: employment contracts, vesting contracts, DAO-to-DAO contracts, and even unsecured lending.

Initiatives we’re proud to support in this vertical:

• Accessible DeFi solutions like Kresko

• Algorithmic stablecoins like Frax

• Crypto-native exchanges such as DerivaDEX, dYdX, Hashflow, Saddle, and Slingshot

• DeFi credentialing systems like ARCx

• Lending platforms like Sublime and Swivel

• Liquidity aggregators like Tokemak

• Liquidity management systems like Gamma

• Options protocols like Primitive and Zeta

• Privacy solutions like Anoma

• Protection protocols like Cozy

Decentralized Infrastructure

To realize a decentralized future, infrastructure will need to allow applications to be truly distributed. We want to fund projects that address the unique challenges of building decentralized applications, enabling developers to build applications without centralized points of failure.

Specific ideas we are excited to fund:

• Verified frontend hosting –The BadgerDAO hack resulted in $120m lost funds because hackers inserted malicious code into the dApp frontend even though the smart contracts were completely secure. Verified frontend hosting will help ensure that when a user is interacting with a dApp through their web browser, it is the securely built official version. Services such as these will lower the security burden on developers and improve usability and trust.

• Decentralized computation — AWS, Azure, and Google Cloud are all key players in the tech stack of dApps today while also being major sources of centralization. We are starting to see the unbundling of computation from those services with specialized networks focused on indexing, running background tasks, storing public/private data, and serving RPC requests. For example, if developers can build a docker container that can express their business logic, they could run it on a decentralized network and serve the result of that computation.

• Zero-knowledge developer tools — Zero-knowledge technology is not only useful for private payments and rollup validity proofs, but also useful for interesting new use cases like games. For instance, many games require some game states to be hidden: a poker hand, inventory in a MMORPG, fog of war, and more. In traditional games, private state is held server side and the user’s client displays that state. Privacy tech like zk-SNARKs and developer tooling around privacy solutions is a prerequisite to building incomplete information games out in the open.

• Security review on every commit — Close to $200B in assets are locked on chain in DeFi protocols. Security of assets on chain will become more important because of the immutability and trustlessness of blockchain. We want to fund tools that can review security during development.

Initiatives we’re proud to support in this vertical:

Authenticated commit systems like Radicle, bug bounty systems like Immunefi, identity and user owned data solutions like Spruce, decentralized computing solutions like the Internet Computer, and formal verification solutions like Certora.

Broadening Access to Web3

Web3 can be inaccessible to mainstream users, making it difficult for the next wave of use cases to emerge. We want to fund projects that make Web3 usable for mainstream users.

• Crypto-enabled games with an interoperable backend — Crypto-enabled games have the potential to create user experiences superior to that of traditional digital games. With a fully interoperable backend, anyone can easily build plugins or mods into the game or be able to trustlessly fork the game, thus evolving game experiences quickly. We want to fund games that leverage unique aspects of crypto-rails to create fun games not possible in traditional gaming.

• Mobile DeFi experiences — Most DeFi apps are optimized for desktop experiences today, leaving out user bases who operate on mobile. The verification and research necessary to participate in DeFi today limits it to primarily desktop browsing experiences. Mobile app developers are also beholden to centralized app stores, which may block DeFi experiences. However, as complex DeFi strategies become more simply packaged and as security and verification processes get better for wallet connections, we want to fund DeFi experiences that can be accessible to more users.

• Multichain wallets that verify contracts — As crypto evolves, new challenges emerge. For example, the rise of multiple types of Layer 1s has created new usability challenges, such as difficulties in moving assets between chains or accessing multiple chains with a unified wallet. We want to fund wallets with infrastructure to provide smooth user experiences, like verifying contracts before connecting or integrating with multiple Layer 1s.

• Earning crypto — Fiat onramps have two key issues that exclude important user bases from accessing crypto: (1) many people do not have money to put into crypto, and (2) centralized exchanges will not support fiat from every country. We want to fund bounty protocols, task platforms, play-to-earn, and merit-based on-ramping mechanisms that will make crypto accessible to everyone.

Initiatives we’re proud to support in this vertical:

Low-fees, high-throughput platforms like Aurora and solutions for people to access crypto through traditional financial rails like Bitwise, Bitnomial, and Kraken.

How to Get In Touch

The most creative ideas may be ones we have yet to imagine. This is an incomplete list of ideas we want to fund. We welcome conversations with early founders building in Web3.

You can get in touch with us through emailing info@electriccapital.com.

This Content is for Informational Purposes Only

You should not construe any such information or other material as Investment, financial, legal, tax, or other advice. Nothing contained in this publication constitutes a solicitation, recommendation, endorsement, or offer by Electric Capital or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

Any forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Past performance is not a reliable indicator of current or future results. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

Reference of any securities or digital assets are for illustrative purposes only, and does not constitute an investment recommendation. Digital investments are speculative, involve complex instruments, and carry a high degree of risk. Such investments generally involve additional risks including limited transferability of investments, less investor protection, and less information to investors than would apply in major securities markets. An investment should only be made by those persons who could sustain a loss on their investment.

We may have previously held, currently hold, or will in the future hold tokens in some of the projects mentioned in this publication. We do not short tokens. Nothing in this publication should be construed as financial advice.

For more information, please visit electriccapital.com.