Crypto founders have spent years asking policymakers for regulatory clarity. That goal got closer this week—just not in the United States.

There has been a lot of noise, finger-pointing, and posturing about crypto regulation in the wake of several high-profile meltdowns in the industry. In the absence of meaningful new legislation—a.k.a. new rules for new things—many American officials continue to pursue regulation by enforcement, a posture that’s been unhelpful for builders working to create innovative, compliant products and services in web3. These recent trends are disappointing, but there are bright spots emerging overseas.

By abdicating its position of regulatory leadership, the U.S. is creating opportunities for policy arbitrage. Other countries are stepping in to provide needed regulatory clarity and protection for consumers. That’s why we’re monitoring the United Kingdom’s early, encouraging efforts to develop web3-friendly policies. There are still a lot of questions to be answered about how the rules in the U.K. will evolve, particularly around DeFi and stablecoins. However, the British government made an important announcement about their intention to provide regulatory clarity for digital asset projects in the U.K. this week. We are working closely with our portfolio to capitalize on this progress.

What’s Happening

The U.K. has taken a meaningful step toward a post-Brexit regulatory update for its financial sector that looks to be a sincere, serious effort to transform Britain into a global hub for digital assets. Today, U.K. Treasury official Andrew Griffith announced the beginning of what will likely be a rapid process to develop and formalize comprehensive rules for digital assets. This is the beginning of a consultative process, not the end. Many of the details still need to be finalized before we will know the full impact of the new regulatory package. At a minimum, we expect the new rules will cover best practices for exchanges, custody, and lending. They will also address issues related to consumer protection, operational resilience, and data reporting.

Why it Matters

While the past decade has been littered with governments making promising gestures that ultimately end up hindering innovation, there is reason to believe that the momentum in the U.K. could prove more meaningful to the long-term prospects of the ecosystem. Unlike the U.S., where the separation of powers complicates legislative action, the U.K.’s parliamentary system enables the party in power to act decisively. The new rules probably will not be delayed by partisan divisions. The U.K. has a long history of using policy innovations to further their global leadership in financial markets and well defined processes for making and updating financial regulations.

What Comes Next?

• The consultations announced today will likely move quickly. The government has committed to collect input from the public by April 30.

• Guidance on how to participate in the consultation is available here. We encourage members of the community to take part in the process. Policymakers want perspective on how to build a smart, successful framework to support economic growth and future innovation.

• The government will likely seek to have comprehensive rules in place for both businesses and consumers by early next year.

The rulemaking in the U.K. represents the country’s first big effort to reshape its financial sector in the aftermath of Brexit. This broader package of reforms and regulatory updates will be critical to both the U.K.’s economy and London’s future as a financial hub. The bill could finally establish the certainty and clarity that the builders and communities have been seeking for years. If that happens, London may emerge as a destination of choice for web3 projects.

The new rules could also empower specific regulatory agencies—the Financial Conduct Authority and Payments System Regulator—to provide oversight for the sector. The Bank of England may get new powers to regulate the use of digital assets for payments and stablecoins. In the same way the Telecommunications Act passed by the U.S. in 1996 was grounded in a policy commitment to make the America a global leader in innovation, the new rules in the U.K. are based on a commitment to make the U.K. a global leader in the next generation of finance and technology innovation. Again, it is still too soon to speak with certainty about the ultimate outcome, but it’s a hopeful ambition that stands in contrast to the current posture of many regulators in Washington.

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*This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information. *

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

The events surrounding FTX have shaken the confidence of many. How did one of the largest crypto exchanges collapse so quickly? Why do meltdowns like this seem to keep happening?

At times like this, it helps to have a long-term view of web3 as a sector, not just a forward-looking long-term view, but also some perspective on where we have come from.

As longtime investors in web3 and board members (also individual shareholders) of Coinbase, one of the oldest and best-known companies in the space, we thought we might share some thoughts.

Web3 is a software-driven innovation that has a built-in financial system. This has been both a strength and a weakness. On the one hand, tokens enable developers and users to contribute to open-source protocols and participate in the economic upside of doing so, leading to strong developer communities. That’s been a positive relative to how software has been developed, monetized, and governed in the past. On the other hand, tokens lend themselves to boom/bust cycles and a sense by many that web3 is simply a speculative endeavor with no real substance behind it.

This perception is only reinforced by the companies and individuals who started web3 companies and projects with the exclusive intent of making a lot of money very quickly through leveraged trading and speculation, pumping and dumping, and, sometimes, outright fraud.

Most of the well-known meltdowns in web3, going all the way back to Mt Gox and including recent failures like 3AC, Celsius, and Alameda/FTX, have happened to centralized companies operating trading, lending, and speculating businesses. Many of the failures have been offshore and all of them were largely unregulated. These companies and their activities have given web3 a bad name. We have also seen high profile decentralized projects, like Terra, fail due to flawed design but those failures happen out in the open in a transparent way that is much healthier than the way centralized companies fail.

Contrast that with regulated web3 businesses like Coinbase, Kraken, and Anchorage that operate in the US and you will see that the companies that have followed the rules and behaved properly have weathered these storms. Coinbase’s early innovation was creating a secure, easy-to-use, regulated bridge from fiat currencies to crypto and a safe place to store crypto assets. Coinbase provides a number of important services that have allowed the web3 ecosystem to grow and thrive.

The most important software innovation of the last decade, which started with the Bitcoin white paper fourteen years ago, is the emergence of open-source software and decentralized protocols that are the foundation of web3. These protocols have survived recent market volatility. It is the promise of software that is not controlled by a company, but instead by an open-source community with built-in safeguards and increased transparency relative to today’s tech and financial systems, that gives us so much confidence in the future of web3.

These web3 protocols are in active development for mainstream adoption and some key features are still missing. For example, blockchains as they were originally architected are public by default. This is not suitable for most applications. Imagine if your email, banking, and social data were public for everyone to see on a blockchain. Also, blockchains are slow and complex networks. Improvements to performance, scalability, and privacy are happening at the infrastructure level of the web3 technology stack. Emergent technologies like zero-knowledge proofs and rollups are starting to address these issues without compromising decentralization. These breakthroughs are still in the early stages of deployment among a small subset of developers. This is the kind of important work that happens behind the scenes without any coverage. But it is these developments that are preparing web3 for the mainstream.

Eventually, as the web3 infrastructure improves, the user experience gap between self-custody and storing assets on centralized entities will shrink. More users will feel comfortable self custodying their assets in software they control and managing the keys that provide access to their assets themselves. This is how many web3 users interact with decentralized applications, like NFT marketplaces, today.

When web3 becomes a credible alternative to web2 for the masses, large centralized companies like Facebook, Apple, Amazon, and Google will have to compete for access to our data thus redefining how we use the web. Software development will be more open-source and composable. And large financial institutions like banks and brokerage firms (which includes the FTXs of the world) will no longer control our assets and lend them out without our permission.

Ironically, web3 is about giving control of data and assets back to the people and taking it away from large centralized companies. But the transition from web2 to web3 has been slow and messy and many of the early web3 companies have been copycat versions of what came before them. That is where the risk has been in the web3 ecosystem and what we need to move away from.

The lesson of these recent events for policymakers should not be that web3 is bad and must be constrained. It should be that pushing innovation offshore is bad. We need trusted and well-regulated centralized entities to survive and thrive and we also need decentralized web3 protocols to flourish and provide a path to a fully decentralized web. Both are possible and the good news is we are already on a path toward both. We need to stay that course, provide for a healthy web3 sector in the US, and stop pushing US users to risky/shady offshore entities with unclear, uneven, and unfair policy actions.

This is another hard moment for web3 and we will see negative headlines about “crypto” for some time. But it’s important to remember that these headlines are all about the speculating/trading part of web3. The much more important underlying software innovation continues unabated. And that is what we remain so excited about and will continue to fund and champion.

This piece was also shared on the AVC blog.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

The battle for the House and Senate remains too close to call. However, it is clear that the margin of control in both bodies will be sufficiently narrow that advancing a meaningful legislative agenda will require support from Democrats and Republicans.

We’ll be discussing these legislative dynamics and the current politics of web3 in a Twitter Space today with a group of political experts including former John McCain spokesperson Niki Christoff, Democratic strategist Simon Rosenberg, and former Obama campaign press secretary Ben LaBolt. We hope you'll join us.

In the meantime, a few immediate takeaways:

• Pending some internal discussions among Democratic committee chairs, the DCCPA may still advance to a markup (kind of like a public editing session) in the Senate Agriculture Committee. To be clear: the bill needs to be improved from the drafts that became public several weeks ago, especially as it relates to DeFi. However, in crafting legislation it is often the case that the meaningful changes come at the end of the process—therefore, we do believe it is important to engage as an industry to see if we can get the language to a point where it will address the important concerns that have been raised rather than just give up, not engage, and run the risk that the DCCPA is passed anyway, and in current form.

• In our collective work to improve the bill, it is important to recognize that a key figure will be Ohio Senator Sherrod Brown. Sen. Brown is on the Agriculture Committee and Chair of the Senate Banking Committee. As such, he will likely be a central player in the work to improve the language, especially given that he has historically been focused on both consumer protection issues and policies to expand economic inclusion. We know nearly 20% of voters in Ohio own digital assets and that these are voters who are young, people of color and middle and working class. Going forward, it will be important for Senator Brown, as well as other members, to appreciate that their constituents own digital assets and care about forward looking policies when it comes to web3.

• If it makes it out of the Agriculture Committee, the DCCPA will likely be attached to a “must pass” bill such as a continuing resolution to fund the entire government. This would likely occur in mid-December. Should this occur, the bill would not receive a stand-alone vote, but rather be bundled together with many other provisions, most of which will have nothing to do with digital assets. Lawmakers would then vote on the entire package.

• In the unlikely (but possible) event Democrats maintain control of the House and Senate, there may be less pressure to move forward with legislation before the end of the year. Lawmakers will face many competing priorities, and some might welcome a bit more time to shape language around issues such as DeFi regulation.

• The European Union's recent decision to slow walk rule making related to decentralized finance is providing some cover for American officials who are cautious about pushing extensive legislation too quickly before they have a deeper understanding of the opportunities and risks around DeFi. However, both policymakers and industry leaders increasingly acknowledge that it's time to get serious about creating responsible rules for the broader web3 ecosystem.

• The next Congress will also have a chance to create clear rules for stablecoins. That issue is unlikely to come up for a vote prior to the end of the year, but it could be first in line for action when the House Financial Services Committee reconvenes in January.

The events of the last several days underscore that the U.S. has two paths. One option is to create regulations so web3 companies can operate in the U.S. under the rule of law that protects consumers, creates economic inclusion, and helps assure that the next generation of the internet is built here. The other path is to continue with unclear rules that are driving activity off-shore. This does not serve the interests of consumers, reinforces the status quo, and perpetuates a financial system that is not working for far too many. It also incentivizes technologists to build the next generation of the internet outside the United States. We believe there are important economic competitiveness and national security considerations at stake in this debate. We look forward to discussing all of this in today’s conversation.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

Yesterday, we submitted extensive comments in response to a request for input from the Treasury Department. The agency is looking for help figuring out how to support the development of digital asset technology without enabling bad actors. As a reminder, an Executive Order issued by the White House in March assigned the Department responsibility for quarterbacking elements of the government’s broader web3 strategy.

To date, much of the agency’s focus has been on managing potential risks related to money laundering and illicit use of digital assets. We think that’s the wrong starting point for a conversation about how policymakers should engage with web3. Our response, available in its entirety via this link, is built around three main points:

• (1) The current financial system is failing to meet the needs of millions of Americans and billions worldwide. Consumers are currently spending $46 billion on anti-money laundering protections that only stop 0.2% of illicit financial flows. At the same time, the system is preventing millions from accessing basic financial services. Many legacy systems simply aren’t working the way they should.

• (2) Web3 technologies can provide significant improvements over a broken status quo. Programmable assets can bring new functionality to finance. For example, emergency relief funds could be programmed for use on food or housing or designed to decrease in value over time, thereby reducing the potential for inflation. ZK proofs offer better solutions for preserving privacy. And digital assets in general provide a new infrastructure with the potential to be far more efficient, inclusive, and innovative than the antiquated systems currently used for moving money.

• (3) Given the benefits of web3 architecture, the Treasury should prioritize responsible collaborative efforts with the private sector. The infrastructure of the internet and global finance is going to change. That much is clear. The question is whether the United States and other open societies can leverage web3 to provide serious alternatives to the sophisticated systems emerging from authoritarian regimes. That’s still an open question, and the answer will depend on regulators working together with technologists and industry.

We suggest that the Treasury Department take specific actions including building policy around consultative rulemaking rather than punitive enforcement, encouraging development of open standards for privacy-preserving digital identity, and embracing open-source innovation as an alternative to closed, centralized systems. Fostering the responsible growth of web3 is one of the most important steps the United States can take to ensure its strength and competitiveness in the 21st century. Our engagement with Treasury is one of many ways we’re working to help policymakers understand and embrace that potential.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

Rather than encouraging this innovation, the CFTC has taken a big step backwards. From what we’re seeing and hearing, the fallout from the action has been to inject fear, uncertainty, and doubt among builders and participants. The CFTC’s legal theory acts a bit like a sword of Damocles over DAO participants—any tokenholder who votes her tokens, even if she votes against a proposal later deemed unsound, even if she votes and then later disposes of her tokens, could potentially be held liable under the CFTC’s theory. Another way to think about it: imagine every contributor to Wikipedia, past and present, was held personally liable for a copyright violation on the platform.

Until the CFTC issued its order, the web3 community had no meaningful notice that the act of voting tokens could expose a tokenholder to significant personal liability. That lack of notice is a big problem: many protocols governed by DAOs were built with minimum voting thresholds. If tokenholders stop voting en masse, it could become impossible to update a protocol; or, worse, it could become impossible to patch the protocol in light of vulnerabilities, creating an attack surface. Tokenholders’ fear of participating in DAOs due to the CFTC’s aggressive approach to DAO-participant liability could severely restrict this nascent but flourishing technological innovation in the United States.

Given the impact on innovation, we think it’s important for the industry to engage here. There are two obvious paths that we see.

One path is litigation. As part of a legal defense, Ooki DAO’s members will be able to raise some of the arguments alluded to above because they have what is called standing, a legal doctrine which limits who can file lawsuits. Interested third parties can also get involved in litigation by filing amicus briefs to make their voices heard. (Our friends at Paradigm did just this—recommended reading.) But civil litigation is a long and arduous path that could take several years to wind its way through the court system, courts can disagree with each other, and the uncertainty from all of this could cast a long chill over web3 development.

Another path is to go through the administrative process, which has specific rules around filing a petition for rulemaking. That’s why, today, we petitioned the CFTC to initiate a rulemaking process and promulgate a regulation to provide certainty related to the activities of individuals participating in DAO governance, including specific text for a rule we think the CFTC might adopt to limit DAO-participant liability. Given that the leadership of the CFTC has, to its credit, generally adopted an open-minded and constructive approach to web3, we’re hopeful the CFTC pursues such rulemaking. This would be consistent with its statutorily mandated mission “to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.”

The ball is now in the CFTC’s court to take whatever action it deems appropriate, and it will have to notify us of its decision. There could be a notice and comment period, during which the agency would solicit public input on the prospective rule. If it denies our petition, it will have to explain why. Our sincere hope is that this petition causes the CFTC to prioritize proactive rulemaking to provide clarity to web3 builders and participants versus just regulating by enforcement.

There will always be bad actors who will attempt to use new technology for illicit purposes, and CFTC and other government agencies may sensibly enforce the laws against them. But we think, by and large, there are far more people who try to use new technology for good than for ill. We think the CFTC should engage with the communities behind the many DAOs that are already, even at this early stage of innovation, having a positive impact on the world.

We hope this petition can reorient them in that direction.

Rachael Horwitz, Chris Lehane, and Tomicah Tillemann, contributed to this post. Thanks to Shahab Asghar, Brandon Neal, Marc Boiron, Rebecca Rettig for feedback.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

Earlier this year, we invited a group of web3 founders to Washington for a series of high-level engagements with policymakers. These discussions, part of what we call Founders Days, have spanned meetings with Senators, Members of Congress, the White House, executive agencies, and even foreign embassies. The timing isn’t coincidental.

Web3 founders are currently facing the most dynamic policy environment in the history of the space. Legislative and regulatory developments are having an almost weekly impact on the calculus around web3 projects. Compounding this challenge, it’s often prohibitively time and resource intensive for early stage founders to build out world class policy operations of their own. Structuring high-impact founder discussions with policymakers is one way we’re responding to this challenge, so policymakers can hear directly from the builders themselves.

Historically, Washington's understanding of tech innovations only reaches critical mass when policymakers start using the products. There are some structural limitations preventing policymakers from engaging in the same way with web3. For example, due to well-intentioned but misguided government rules, certain regulators are banned from owning any digital assets. This means they don’t get to interact with the technology they’re responsible for regulating. (Imagine how air travel might be different if employees of the FAA were banned from using commercial aviation.) As a result, the state of innovation in web3 remains far ahead of most policymakers’ practical experience with the tech. Direct engagement with voices at the leading edge of web3 provides an antidote to some of these challenges, and we follow up on our discussions in DC by hosting regular conversations with founders whenever top officials are visiting their cities.

It’s critical to ensure that those designing the future of the internet have a voice in the governance of web3. As we’ve helped technologists build bridges with policymakers we’ve seen some positive  results. The issue has migrated from being primarily a focus for law enforcement agencies into a subject for serious legislation. It’s also transitioned from being pre-partisan to truly bipartisan. We’ve watched critics emerge as champions for constructive legislation, and many officials have recognized that web3 is actually a solution for policy problems rather than a policy problem itself.

We’ve seen enough to be confident that honest engagement between web3 builders and policymakers can produce real breakthroughs. But we have also seen enough to know that we need many, many more such interactions.

In Washington, we talked with national security leaders about the importance of web3 to long-term U.S. competitiveness, White House and executive branch officials who are crafting regulation, and lawmakers writing the statutes that will govern web3 for the next generation. Across those conversations, it was clear that web3 founders are the best advocates for why we need a better, decentralized internet. They can show, not just tell, how web3 projects are unlocking access to opportunity and creating alternatives to broken legacy systems. Increasingly, policymakers understand that they need the help, especially when we can offer them clear language and concrete use cases.

Realizing the potential of web3 in this environment will spur technologists to help develop new legal code in addition to software code. Founders Days are just one example of how we’re working hard to make that happen.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

This week a draft copy of the Digital Commodities Consumer Protection Act (the DCCPA) appeared online. The DCCPA is a new draft piece of legislation being developed by Senators Debbie Stabenow and John Boozman, the top Democrat and the top Republican (respectively) on the Senate Agriculture Committee, which oversees the CFTC. This bill is actually broken out from the Lummis-Gillibrand draft bill, a measure that represents a promising attempt to establish some basic rules of the road to regulate digital assets. The fact that the bill has strong bipartisan Senate support is critical—the longer web3 remains a bipartisan issue, the better the chances of getting smart rules. The version of the DCCPA being circulated is driving a fair amount of conversation and, understandably, generating anxiety among those of us who care about DeFi.

The language included in the version shared online can and should be improved. What was shared online is a work in progress draft and part of a process that starts with putting down early language so others can react. The early stages of legislative drafting are the time to provide constructive, serious feedback, because policymakers want to hear it. Again, circulating versions of this bill are not final.

New rules for DeFi, as in other areas of web3, need to answer the core question at the heart of a longstanding debate about technology: should the government regulate the development of open-source software protocols? We believe the most effective place to regulate web3 is at the application layer, not the protocol layer. This approach should allow for smart policy and rule of law, and gives builders the runway they need to innovate. The CFTC should ensure access to safe, regulated onramps to DeFi for everyday users. The bill should:

• Provide a clear definition of a “digital commodity” so builders and regulators can understand the lines.

• Separate out DeFi protocols so that they’re treated differently from centralized applications that provide analogous services.

DeFi is an important piece of the larger web3 ecosystem with the potential to provide improved alternatives to big banks. Instead of relying on costly, opaque, centralized intermediaries to make decisions around how and when you can access assets, DeFi relies on open-source protocols that operate accountably, transparently, and continuously. Policymakers around the world are thinking through how to manage the opportunities and risks associated with DeFi, and the European Commission put out an extensive paper on the subject today.

In the U.S. when lawmakers decide they want to develop new rules, they generally kick off a long, complex effort to solicit feedback from stakeholders and circulate updated drafts. It’s important to note, there is no guarantee that the bill will move forward during this Congress. It’s likely that it will be reintroduced next year. However, if the Agriculture Committee does decide to proceed, they will hold a “mark-up” session, when members of the committee will update the bill in response to feedback they’ve received from us and others in the community. There is an enormous amount of engagement underway right now—including by our team—to ensure lawmakers have access to good information and understand the consequences of the draft as written in advance of those deliberations. You can help:

• Write or call your Senators and Representatives in Congress, especially those on the Agriculture Committee in the Senate or House.

  • Lay out a clear, positive case for why DeFi is good for the world and why any new legislation should help the field grow.

  • Cite the bill (S.4760) as both a risk and an opportunity to get this right.

• If possible, participate in Town Hall meetings, fundraisers, and campaign events where you can speak with elected officials and voice your concerns and hopes for DeFi.

Once the mark-up session is done, the legislation will be significantly closer to its final form and the community will have a better basis for determining whether to support it. Until then, we should participate in the process. We’ve been in plenty of sessions with policymakers and their staffers where they tell us: “We took our best crack at it. The most helpful thing you can do now is to send your feedback.”

There is still enough runway left to improve the bill and deliver a win for the future of DeFi and web3. Let’s use it.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

Since our post last month, there have been some further developments in reaction to the Tornado Cash sanctions, from Coinbase’s lawsuit to Treasury’s clarifying guidance and Coin Center’s complaint. We’re glad to see a strong response from the industry because we believe foundational principles are at play in this case. Namely, can governments ban open-source technology with sanctions, proscriptions, or embargoes that aren’t narrowly tailored? OFAC is right that many criminals have misused the Tornado Cash platform, but the stakes here go beyond Tornado Cash. The real question is whether the government can target the architecture of a blockchain itself, because what can be done to one kind of open-source protocol can be done to any open-source protocol.

I say this as someone who spent a decade prosecuting money launderers: the fight against illicit finance must be done in a way that’s legally sound. There’s a tried and true playbook for addressing money laundering if there exists sufficient evidence of intent to subvert the law — bringing prosecutions, enforcement actions, seizures, and other steps against bad actors.

Here, OFAC sanctioned Tornado Cash based upon IEEPA, a federal law that gives it the authority to block “any property in which any foreign country or a national thereof has any interest,” alleging that the protocol had been “commonly used by illicit actors to launder funds, especially those stolen during significant heists.” OFAC’s concerns in this respect are undoubtedly legitimate. But in issuing broad, indiscriminate sanctions against an open-source protocol writ large, the agency overstepped its legal authority to sanction the foreign hackers and their property in a way that leaves it exposed to both statutory and constitutional attack. It’s also produced a chilling effect for plenty of builders in the space who are rightly concerned whether OFAC’s view is now the law.

We don’t think it is.

Today, we’re publishing a legal memo that open sources the core arguments as to why, which we hope will be used in existing cases and ones still to come. When we thought about who to collaborate with on these arguments, Steve Engel was the first person who came to mind. Steve and I were co-clerks at the Supreme Court and he went on to lead the Office of Legal Counsel, the office that reviews the President’s executive orders for legality and also effectively serves as outside counsel for all executive branch agencies, including Treasury (read: Steve doesn’t hang out on crypto twitter so I called him up, explained the situation, and we brainstormed a bit).

The bottom line is that we think that OFAC went too far as a statutory matter because it appears to have blocked open-source, self-executing software that isn’t a person or the “property” of any foreign national or entity. IEEPA doesn’t grant such broad, roving authority to target open-source software architecture, and that is true no matter how noble OFAC’s intentions may have been. As the Supreme Court said in a recent case, our system of government “does not permit agencies to act unlawfully even in pursuit of desirable ends.”

What’s more, the agency has exposed itself to constitutional attack on a few fronts. It’s likely a court may not even reach the constitutional questions, however, because of the doctrine of constitutional avoidance which instructs courts to avoid ruling on constitutional issues when a case may be resolved on other statutory grounds. As the Supreme Court noted recently, the constitutional-avoidance canon provides “extra icing on a cake already frosted.” But suffice it to say these sanctions resulted in an asset freeze that deprived some innocent Americans of their property—without due process of law. And the sanctions may have violated the Fourth Amendment’s prohibition on unreasonable seizures to boot. Finally, while OFAC’s recent guidance shows that it recognizes the First Amendment problems inherent in altogether banning the publication of and interaction with code, its prohibition on the use of Tornado Cash code burdens the ability of Americans to use the privacy-enabling application to facilitate anonymous speech. That itself raises a substantial First Amendment issue.

Speaking of extra icing, sanctioning open-source code is also bad policy. These sanctions are reminiscent of when the U.S. government attempted to curtail public access to encryption tools in the 1990s by banning the export of encryption technology. Had the U.S. criminalized the use of cryptography without a license, we would have a much less secure — and much less developed — internet today.

We think that OFAC has overstepped, and it should fix that sooner rather than later. The first Tornado Cash lawsuits have already been filed against OFAC in Texas and Florida, and these may not be the last. OFAC can and should focus its sanctions efforts on the bad actors who abuse open-source software, not on the tools themselves.

The full memo can be found here.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

At Haun Ventures, our belief that we need new rules for new things is central to our advocacy for web3. For over a decade, many in the crypto community have focused on effecting change through engagement with the executive branch of government. As we head into a new chapter for the space—a moment in which a myriad of new use cases beyond finance are emerging—it is the other two branches of government, the legislative and the judiciary, that will feature prominently in whether or not the United States remains a global leader in technology and innovation. That’s why we’re closely tracking legislation making its way through Congress that has the potential to set new rules designed for bleeding edge technologies and provide clarity for builders. It’s also why, as a team, we’re turning our focus to the upcoming midterm elections. Specifically, we want to help political leaders on both sides of the aisle understand the growing constituency that cares deeply about the corrosive effects of Big Tech and Big Finance – challenges that web3 is uniquely positioned to address.

In November, a handful of key races in swing states will likely determine the makeup of the Congress that will be poised to establish new rules for the next generation of the internet. Today, we are sharing a recent poll commissioned by Haun Ventures and conducted by Morning Consult of likely 2022 midterm voters in four key swing states that surveyed voters’ views on web3 and how they might impact their vote.

In particular, we wanted to understand how the values of web3 resonate with voters, as the values voters attribute to an issue will drive electoral choices. The findings from the poll make clear that over 90% of voters express support for an internet that is community owned, community governed, and gives people greater control over their information. Significantly, and reflective of how the values that voters associate with web3 will drive electoral behavior, voters are less likely to support candidates perceived as standing in the way of a decentralized internet. In other words, as both parties consider how good web3 policy will translate into good politics, the values of web3 are what voters want to see elected officials supporting, not standing in the way of.

The poll also found that nearly one in five voters own digital assets. To put that number in perspective, there are now far more people in each of these swing states that hold digital assets than a union membership.

In the swing states we surveyed, these “Web3 Voters’” lean slightly Democratic, but this issue remains largely bipartisan. On the whole, Web3 Voters believe a decentralized, democratized internet represents economic opportunity, and they see web3 as a positive alternative to Big Tech platforms. However, at the same time, these Web3 Voters have limited faith in the government’s ability to build an appropriate regulatory approach for web3.

This poll makes it clear that in these swing states, Web3 Voters now represent a significant cohort of the middle class electorate, and are younger and more diverse than the population as a whole.

As web3 products and innovations become ever more widespread, and the perils of our current tech paradigm, including the erosion of privacy, data security, and trust, become more evident, we anticipate that even more voters will recognize what is at stake in shaping rules for web3.

Below, we dig into specifics on five major take-aways from the poll:

1. Nearly one in five voters own digital assets.

• 18% of voters across these four swing states hold digital assets.

• Given the adoption curve of web3, this is likely as small as the Web3 Voter bloc will ever be.

2. Voters across the political spectrum are more likely to oppose candidates who stand in the way of a decentralized internet.

• 55% of voters surveyed would be less likely to vote for candidates who oppose policies that enable web3 (defined as a decentralized, open, internet where people have more control over their data).

• What’s particularly compelling about these findings is that voter sentiment regarding web3 tends to be bipartisan, with independents expressing the strongest views in favor of web3.

• 91% of voters hold a favorable view of the principles of web3 as described above.

3. Voters view web3 as both a response to an unfair economic system and a positive alternative to Big Tech monopolies.

• 60% of voters in these swing states view the current economic system as unfair and failing everyday Americans.

• 75% of voters agree that Big Tech has too much power over people’s lives, and favor greater individual autonomy and digital decentralization.

• 72% of voters who own digital assets say they do so because they want an economic system that is more democratized, fair, and works for more people.

• In three of the four states surveyed, NV, OH, and PA, over 40% of respondents who hold digital assets said that they use them to facilitate international remittance (managing of global cross border payment transactions).

4. Neither party garners a majority of support from Web3 Voters for its approach to the technology, however, voters lean slightly towards supporting  Democratic Senate candidates.

• While swing-state Web3 Voters are inclined to support Democratic candidates outside of the poll’s margin of error, these remain competitive races.

5. The Web3 Voter is middle class and represents a younger, more diverse voting demographic.

• 80% of the Web3 Voters have incomes under $100k.

• 31% of Web3 Voters are people of color compared to 15% of all voters.

• 65% are between the ages of 18-44 compared to 30% of all voters.

Methodology

The Morning Consult poll surveyed 800 likely November 2022 voters across New Hampshire, Nevada, Ohio, and Pennsylvania from September 15th to 20th and has a margin of error of plus or minus 3.5 percentage points for all swing states combined, and plus or minus 6.9 percentage points between states. These states were selected as swing states when it comes to both competitive senate races and states with a number of House districts considered toss ups.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

The recently announced Commodity Futures Trading Commission’s (CFTC) enforcement action against Ooki DAO is the latest example of why an "enforcement-only" approach to web3 is bad for the rule of law, bad for the US economy, and bad for national security. It’s also further evidence that the country will need to embrace new laws for new things if we want to lead the world in building the next generation of the internet. To be clear, we don't know all the details of this case or whether there are specific facts that may distinguish the matter from other projects. And we certainly believe innovation needs to be responsible. What we are concerned about is that absent clarity on the rules of the road for this new technology, this enforcement only approach is having an increasingly negative impact on the sentiment of entrepreneurs building in this emerging industry because it is providing no actionable visibility or certainty as to what are the rules.

First, to state the obvious: enforcement actions can play an important role in ensuring accountability and fairness. Many people on our team have served in government, including in enforcement roles. Through this work, we know that the rule of law works best when people have a clear understanding of the rules.  Most individuals want to follow the law and will do so – especially when rules are established through transparent, democratic processes.

The challenge in the United States today is that our existing laws did not contemplate the entirely new universe of technologies embodied in web3. The original legal framework assigning oversight authority over commodity exchanges to what eventually became the CFTC dates back to the Grain Futures Act, enacted 100 years ago this week.

Not surprisingly, laws going back more than a century could not have adequately accounted for the invention of blockchain or what could be built from web3 technology, including a decentralized autonomous organization. Existing laws were written for a different time and do not provide the clarity developers need to be able to follow the law.

However, government agencies have compounded this challenge not only by insisting that existing laws are sufficient, but also by refusing to provide any actionable guidance in response to requests from industry. Enlightened partnership has typically characterized how the public sector and private sector worked together (from the railroads to the auto industry to aerospace to the internet) when old laws are applied to the new technology. The only guidance some agencies are providing is through an “enforcement-only” approach where developers can only learn what the government thinks if the government chooses to act against them.

This “enforcement only” approach is irresponsible in advancing the rule of law; irresponsible when it comes to our national economic interests; and irresponsible in undermining our national security interests.

First, the enforcement-only approach is perversely undermining the rule of law. The U.S. government’s enforcement actions against U.S.-based companies both penalizing those projects and founders who make the affirmative decision to base their operations in the U.S. and rewarding their non-U.S. competitors. Furthermore, by adopting an enforcement-only approach as opposed to an enlightened partnership, the U.S. is pushing this next generation of developers to go off-shore.

Second, in the midst of an ongoing national conversation about why the U.S. does not build big things like the country used to build and how that relates to the nation’s long-term economic interests, it needs to be understood (and many from across the political spectrum have made a similar point across a range of economic sectors) that a major contributing factor to this national malaise in building is a that we have government that is overly-optimized to find ways to say “no” through enforcement as opposed to an enlightened government seeking to partner with those builders seeking to be responsible to advance new ideas that will serve the common good.

Nowhere do we see this attitude pervade more than in web3. The CFTC’s action against a DAO speaks to the perils of such an enforcement only approach. A DAO represents a unique opportunity to leverage the underlying technology of web3 to build a new form of decision-making into the actual governance structure of an economic enterprise in ways that could represent the single biggest step forward to those interested in stakeholder capitalism. Rather than an enforcement action that could chill this innovation in governance, why not seek to work with it?

And, third, this enforcement only approach will almost by definition risk the country’s national security. The infrastructure of the internet is going to change. That change is going to take place amidst the global fight between democracies and autocracies.  If the U.S. does not lead in supporting the developers for this next generation of the internet it is going to cede its ability to shape what the future of the internet looks like – and by extension what the world order looks like.

As we write, there is legislation with significant bi-partisan support that has been put forth coming out of the Senate Agriculture Committee to give the CFTC more authority to regulate digital assets. The legislation needs to be improved, including defining more clearly what kind of digital assets should be a commodity bringing DeFi protocols within the regulatory purview of the agency.  However, the mindset behind the legislation represents an understanding that new rules are needed for a new thing and reflects a seriousness of purpose from leaders in Congress to engage web3 with an enlightened approach. The enforcement actions of various federal agencies make clear what is at stake and why it is critical for the U.S. to shift from an enforcement-only to an enlightened approach.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

tl;dr – the Ethereum merge is a historic milestone for the crypto ecosystem and a good reminder that core infrastructure is still in an early development phase; the full crypto tech stack will continue to evolve in parallel for a long time to come.

The merge took place late last night (PT), marking the transition of Ethereum from Proof of Work to Proof of Stake consensus. It was the culmination of years of work among participants in a decentralized ecosystem: research by the Ethereum Foundation, software implementation and refinement by individual contributors from around the world, and coordination among a global set of independent validators all motivated by the greater good and economic self interest.

For Ethereum, this was nothing short of a historic accomplishment. The core processing unit of a globally open, distributed network was seamlessly upgraded without downtime, while supporting hundreds of billions of dollars in value. It also represents a key milestone towards the intended end state of the protocol. With several major upgrades now behind us, we stand roughly at the halfway point of Ethereum’s current engineering roadmap.

However, the merge is not only significant because of the transition of Ethereum to Proof of Stake; it’s also a demonstration of the core values of crypto at work, a reminder of where we stand in the grand scheme, and a hint of things to come.

Given how many “crypto-years” seem to fly by every 12 months, it’s easy to forget that crypto as financially incentivized open-source software development has only really existed for about seven years now (counting from the initial release of Ethereum in Summer 2015). In fact, the crypto tech stack is the first example in history of compelling financial incentives in place for continued innovation at the protocol level.

Consider this: while the number of emails sent worldwide increases each year and the Gmail application is updated multiple times each month, SMTP (the core email protocol) has not been meaningfully upgraded in decades. Meanwhile, the world’s most valuable smart contract platform, which was just upgraded by a decentralized community of individuals and organizations, will continue to be improved upon for as long as we have effective incentive mechanisms in place.

While we’re still so early in the scheme of what we hope to accomplish as an industry and ecosystem, the rate of exploration, iteration, and invention has never been higher. The best is truly yet to come.

***

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

Zero Knowledge Proofs (ZKPs) are an exceptionally powerful method of cryptography that will have far reaching applications as infrastructure for the new internet. ZKPs enable an entity (the prover) to verifiably demonstrate to another entity (the verifier) that some computation took place without revealing certain underlying data or requiring the verifier to execute the computation. With this property in mind ZKPs are an incredibly promising class of technology for privacy preservation, verifiable computation, and data compression — all of which are core, unsolved problems in web3. ZKPs are highly practical because the proofs generated are very small and computationally fast to verify, and are quickly moving from theory to application as proving hardware rapidly accelerates.

We are extremely early in our exploration of the potential use cases of ZKPs, but today, there are three primary applications in web3: privacy, scalability, and interoperability.

Privacy. Blockchains as they were originally developed are public by default. All transaction history, account balances, and smart contract execution is available for anyone to inspect. But web3 cannot scale without unlocking privacy, for the simple reason that mainstream participants and institutions won’t use technologies where all of their data is available to the public. ZKPs are a great tool for shielding some, if not all of this data in a compliant way.

In 2016, the Zcash protocol launched using ZKPs to obfuscate the details of user transactions in a Bitcoin-like payment network. In the last few years, advances in zk circuit constructions, accelerations in prover efficiency, and more efficient software implementations have paved the way for ZKPs that support private general purpose smart contract execution.

A few of the teams building privacy focused infrastructure:

• Aleo is building its own zkVM for developers to define private applications deployed and executed on the Aleo blockchain.

• Anoma is building a private, intent-centric counterparty discovery protocol.

• Aztec is building a privacy protocol for shielded assets on its L2 to interact with defi on Ethereum.

• Espresso Systems is building an asset privacy protocol to define private ERC-20 assets with configurable viewing policies with compliance and other new use cases in mind.

• Iron Fish is building a shielded payment protocol that greatly lowers the resource requirements to run a full-node.

• Mina is building a recursive SNARK protocol for developers to write smart contracts in typescript, only requiring a small proof to be submitted on the blockchain.

These are just a few examples of the teams focused on privacy in web3. More privacy focused infrastructure will lead to more privacy focused applications. We’re particularly excited about the new protocols, primitives, and products that will surface at the intersection of ZKP-enabled privacy and existing and new use cases in defi, nfts, gaming, and more. While we are excited about the potential for more private applications, we also expect that they will introduce new challenges for the ecosystem. We are starting to see this play out with the U.S. Treasury Department’s sanctioning the Tornado Cash application, a piece of privacy preserving code running on Ethereum. Read more about our position on the matter here.

Scalability. ZKPs are extremely useful for blockchain scalability because they can summarize a complex set of computations into a succinct proof that can be quickly and cheaply verified. Given that scalability has been at the forefront of blockchain research, this has been the predominant area of focus and investment for ZKPs. Rollups (L2s) and new L1s are leveraging ZKPs to further scale.

Rollups are a scalability method by which the execution of most transactions and the calculation of intermediate state updates are moved off the L1. Zk rollups generate validity proofs that verify the execution of a batch of transactions leads to the accompanying state. Zk rollups rely on ZKPs for verifiable computation not for the obfuscation of data. As such, the transaction data, the proof, and the updated state are periodically committed to an L1 allowing the rollup to inherit the underlying L1’s security.  Newer concepts in rollup designs such as recursive (or fractal) roll-ups are largely theoretical today, but incorporate ZKPs to present a path towards the arbitrary scaling of execution without trading off security. Furthermore, sovereign rollup designs leverage ZKPs to not only scale up execution relative to traditional L1s but also scale down the work and resources required to sync the chain. Such super-lite clients are made possible with the inclusion of DA layer consensus in the rollup proof. Super-lite clients have a similar trust model to full nodes, but are able to sync the chain in the time it takes to verify a single ZKP.

Some of the teams building  zk rollups:

• Matter Labs is building zksync, a zkEVM L2 on Ethereum.

• Polygon is building a zkEVM L2 (Hermez), a STARK based zkVM L2 (Miden), and a Plonky2 based zkVM L2 ( Zero) all on Ethereum.

• Scroll is building a native zkEVM L2 on Ethereum.

• Starkware is building a suite of STARK based zkVM L2s  on Ethereum.

• Sovereign Labs is building a zkEVM sovereign rollup using the RISC Zero zkVM.

ZKPs are also being leveraged for new layer 1 designs that enshrine the use of ZKPs for native data compression, verifiable computation, and more efficient gossip protocols. It’s simpler to build a new layer 2 solution with a centralized sequencer / prover than it is to build a new layer 1 with decentralized block production and block proving so there are fewer teams working on this. That being said, Aleo, Espresso Systems, and RISC Zero are working on new, high throughput ZKP-based L1s.

The common thread among all of the techniques outlined here is that ZKPs have opened up the design space for how blockchains can scale. In the short term as some of these techniques make it to production, we expect to see ZKPs increase blockchain scalability by 10-100x and in the medium to long term as hardware acceleration converges to a theoretical asymptote we may see ZKPs accommodate arbitrary scale via fractal rollups and recursive proofs.

Interoperability. Existing blockchain interoperability protocols rely on trusted systems which have led to many billions of dollars worth of exploits. ZKPs replace crypto-economic trust assumptions with cryptographic guarantees. Most cross chain communication protocols are backed by a multisig or an incentivized validator set for relaying block headers from chain to chain, but a protocol that accepts block headers along with a ZKP to prove their inclusion and finality would have much stronger security guarantees. Moreover, the use of recursion in zk interoperability protocols may remove the need to maintain pairwise bridge contracts and further reduce the surface area for exploits.

Among the primary applications of ZKPs, interoperability is the most nascent. There are only a handful of researchers exploring this topic. As access to the technology accelerates and experts converge on best practices we expect to see more focus and innovation in interoperability.

Since the launch of Zcash, ZKPs have made great strides moving from theory to application. But it's extremely early. There are still vast discrepancies in performance benchmarks across proof systems, software implementations, and prover hardware. Over time we expect to see the industry converge on best practices and many of today’s most notable differentiators may be commoditized. This is a feature and not a bug. ZKPs are a revolution in computer science and unlike previous iterations of the internet, will be built in public. As the zk ecosystem accelerates we are excited to partner with and invest in the very best teams who are using the technology to build innovative solutions to core problems in web3 – from the earliest stages to those that are well on their way already.

If you are a zk researcher, engineer, or founder interested in collaborating please reach out to me at breck at haun dot co.

Thanks to Alex Pruden, Dan Boneh, Preston Evans, Scott Sunarto, and Ye Zhang for their review.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

Securities and Exchange Commission Chair Gary Gensler recently asserted that when it comes to digital assets, the federal government can rely on rules that have applied to the financial markets since the 1930s. No need for new ones. Gensler pointed to the Motor Vehicle Safety Act, signed into law by President Lyndon B. Johnson in 1966, to make the case that laws passed to protect consumers decades ago can keep protecting them even as “new technologies come along.”

Chairperson Gensler, your own example, when not drawn so narrowly, is in fact one of government support for private-sector technological innovation that helped position the US as a global economic force equipped to help preserve democracy. Let’s quickly review the history of the car:

Over the course of the 1800s, European inventors worked on what were then called “mechanically propelled vehicles.” Early proponents envisioned cars ushering in the democratization of travel at scale and a fundamental transformation of how people lived, worked and moved around—to say nothing of how food could be delivered without rotting, and supply chains could be expanded and diversified.

Skeptics scoffed at the clunky technology. Critics doubted people’s capacity to operate and maintain it. And governments, some beholden to deep-pocketed legacy companies of the time, pointed to a lack of suitable roadways to justify using regulations to block it.

In the UK, where some of the earliest cars were introduced, growth of the nascent industry was stunted by the 1865 passage of what was called the Red Flag Act, which required three people per vehicle, one of whom had to walk ahead of it with a red flag (doable because of another requirement—that cars move no faster than 4 MPH) so as to warn others on the road and wave the car aside to make way for horse-drawn transport.

Across the Atlantic, however, a young country busy transitioning from a pre-Civil War agriculture-based economy into a global industrial powerhouse took a very different approach—one that merged private-sector innovation and imagination with public-sector enlightenment and creativity to figure out how to best unlock new technologies to advance the common good.

Henry Ford (despite his flaws) made the US the global heart of the auto industry, mass-producing affordable cars in collaboration with open-minded local, state and federal officials. Public health and safety concerns over horse-drawn vehicles in increasingly crowded cities moved local officials to support the switch to cars. The vastness of the US prompted states to invest in better roads.

And at the federal level, auto industry regulation did not begin in 1966 with the Motor Vehicle Safety Act—it started in 1916 with the passage of the Federal Aid Road Act with policy actions designed to support the scaling of car transportation.

The big-picture lesson here is the progress made possible by partnership between an innovative US private sector and an enlightened public sector:

• Led by Ford but joined by others, the US became the global hub of the auto industry, eventually embodied by the “Big Three.”

• A new model for industrial production emerged: the assembly line.

• This new model helped the United States become one of the world’s largest economies.

• Our economic and manufacturing might was later foundational to America’s ability serving as the “arsenal of democracy” during the Second World War.

• The approach of the Big Three, impact of New Deal labor policies, and the efforts of the United Auto Workers, Teamsters et al ensured that a fair day’s work paid a fair day’s wages and resulted in a generation of post-World War II Americans who entered the middle class and juiced the network effect of a consumer economy.

• It was ultimately the strength of the dynamic US economy that overpowered the Soviet Union.

• And, as we are seeing today in California and in the recent federal climate legislation, this partnership between a forward looking public sector and a creative private sector continues to be critical – resulting in the positioning of the U.S. as a global leader in the transition to the next generation of cars – electric vehicles (including the production and manufacturing).

Chairperson Gensler, if we’re going to look to the history of tech policymaking, the real lesson is that the 20th Century did not become the American Century through the waving of red flags. Instead, it was government’s embrace and cultivation of innovation that encouraged builders to build for the benefit of the nation’s economic security and national security.

LBJ may have signed the Motor Vehicle Safety Act in 1966, but that same year, he also previewed the establishment of the Department of Transportation with a nod to how “[e]nlightened government has served as a full partner with private enterprise in meeting America’s urgent need for mobility.”

Much as the car was a technological inevitability, so is the next generation of the web. If we’re going to look backward for lessons on how to proceed on digital assets, let’s make sure they are lessons that lead us forward, not lessons that keep us mired in the past. And as we think about the role of digital assets and the next chapter of the Internet, the key takeaway here is that when a creative government partners with responsible builders the winner is the common good.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

**

Several weeks ago, the Treasury Department sanctioned the Tornado Cash application. We don’t profess to know all the facts of what Tornado Cash as a particular application did or didn’t do and assume it may take some time for those facts to come to light. We’re assuming, for the purposes of this post, that OFAC sanctioned no more than a piece of code based on the information publicly available to us now.

I have had many conversations about this with crypto founders who are concerned about the implications of this action and where it could lead. Regardless of where you fall on the specifics of what Tornado Cash may enable, this conversation is important and timely as advances in privacy-preserving technologies are underway that we believe will have beneficial societal impacts including increased consumer privacy, control, and ownership.

Many in the crypto community have been talking about a 1st Amendment freedom-of-speech defense. As I thought about this further, I called Eugene Volokh, a professor of constitutional law and one of the world's leading authorities on the 1st Amendment (he literally wrote the book on it). He’s also a programmer who graduated with a CS degree at 15. His response to the code-as-speech argument surprised me. That’s because despite being a self-described 1st Amendment maximalist, he thought that some of the better legal arguments might not be freedom-of-speech-based at all.

We recently hosted a Twitter Spaces on the topic with Eugene. Here is what he had to say about assuming speech protections under the U.S. Constitution for code:

• “I'm pretty skeptical of there being much by way of 1st Amendment protection for, let's say, code that you can run because the freedom of speech is tremendously important. I do generally take a pretty broad view of freedom of speech, but it really is freedom of speech. It's not freedom of action. It’s not freedom of stuff. In many ways, code looks a lot like stuff ….”

• “I do think [code is] protected by the 1st Amendment in some situations . . . distributing source code might be protected if it's the sort of thing that people will just read, think about, and talk about. But if it's something that is directly executable then, by and large, it stops communicating things, or at least communicating things to people, and starts doing things . . . so I am pretty skeptical about the prospect that one can just set up mechanisms for doing all sorts of things and have them be protected because those mechanisms operate through code.”

When asked to put himself in the mindset of the Treasury official who is coming to a novel set of questions and a very novel set of new innovations and trying to think about how they reconcile those with the Constitution, Eugene was circumspect:

• “There may be some 4th Amendment protection for certain kinds of privacy protecting technologies. And remember the 4th Amendment, unlike the 1st Amendment or the 2nd Amendment, actually specifically says that unreasonable searches and seizures are forbidden. So it recognizes that there could be reasonable restrictions on privacy. Let me offer an analogy, and this is an area where analogies are really all we have to go on here. So it turns out that there is a rule under the 4th Amendment that when a driver of a car is arrested, the police may search the passenger compartment, but they can’t search any separately locked trunk . . . let's say that's the rule. Imagine the state says, oh, all right. We just say all cars on the roads have to lack a separate trunk. They have to be SUVs or hatchbacks, or station wagons. They just can't have a separate trunk. I'm inclined to say that that might raise some pretty serious 4th Amendment problems precisely by requiring people to step away from what has been recognized as standard default privacy protections…and by banning a certain kind of technology…you're interfering with the right to be free from unreasonable searches and seizures.”

• “If the government wants to, for example, search inside your car…then it needs probable cause. But of course if they just look in through the windows, why that's not a search. That's … just looking at things that are in plain view. The state says we're going to insist that cars be made out of glass— let's say transparent materials—so that more will be in plain view. Of course, we still will need probable cause in order to actually look inside for the things that aren't visible from the outside, but we'll just require a lot more to be visible from the outside by requiring the cars be made out of transparent material. That too, I think, would pose some … likely 4th Amendment problems.”

• “When we try to extend the analogy to modern electronic technologies, that's hard to tell. But I do think that this highlights that there are some limits, I think, to what the government can do to interfere with privacy protective technologies.”

What Eugene casually shared top of mind that day caused me to return for a moment to my legal roots. For those who don’t know, I was a Supreme Court clerk, then a constitutional lawyer turned prosecutor. I litigated countless 4th Amendment challenges and know from experience that this area of law is particularly dynamic, not to mention fact and jurisdiction-dependent, and this argument definitely merits further analysis. The Supreme Court has made clear that the 4th Amendment needs to keep up with emerging technologies – holding, for example, in a recent case that the amendment limits the ability of law enforcement to track location through cell site data obtained from a provider, something that was previously viewed as falling outside a user’s expectation of privacy.

Aside from the 4th Amendment the OFAC action raises other legal issues that are not being widely talked about in the crypto community. OFAC took this action based on a federal law that gives Treasury the power to block the property of bad foreign actors (think the North Koreans or international arms dealers). But that federal sanctions law was likely not intended, and may not encompass, the power to block access to open-source software applications, which are not the property of anyone, much less foreign actors.

And recall that the Due Process Clause requires that the government give people fair notice before taking actions that deprive them of their property or could even expose them to criminal sanctions. Treasury’s action here, relying upon a decades-old law, therefore raises some pretty interesting constitutional and statutory questions. That’s why we’ll be going deeper on this topic with a full analysis we’ll release later this month.

In the meantime, consider this:

• First, this involves several unsettled areas of law that will take many years to shake out. And even then the vehicle(s) that winds its way through the court system will not necessarily be of the crypto community’s choosing. It will likely be the government who chooses the vehicle and the facts. And as a former judge I worked for was fond of saying “bad facts make bad law.”

• Second, if you’re building privacy preserving tech in crypto, it’s worth familiarizing yourself with other relevant aspects of the law aside from hanging your hat on one amendment related to speech.

• Third, speaking of laws, Tornado Cash is yet another reminder that we are going to need new rules for bleeding edge technologies. For a long while the crypto community has focused on the executive branch and agencies. However, in this next chapter the other two branches of government, the legislative and the judiciary, will feature prominently. On the legislative side, if you are a developer, a founder, or someone who cares about web3 and products that protect privacy for the average person, it is important to engage in the process and make your voice heard. As we saw with the Infrastructure Bill, the crypto community can have an impact on these outcomes. For the judiciary, it means the industry has to turn up its efforts with more thought leadership that reaches a different sort of audience including legal academics through scholarship, contributing to journals, filing amicus briefs, and much more.

• And finally, we’ve been talking about this from a US-centric point of view. We know that web3 is a global community. However, the United States has historically played a leading role in setting policy and creating laws that many jurisdictions around the world will look to as a model.

These are serious issues. They will require serious leadership. Many of the founders we back have chosen to work in web3 precisely because they understand the need for digital systems that can broaden access to innovation while protecting user privacy. We see some signs of progress that the United States is moving in the right direction. That said, if indeed the government sanctioned an open-source blockchain application, that would raise serious legal questions that demand further conversation. We look forward to sharing our continued thoughts on this topic.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

Developer interest in web3 has grown massively over the last few years. Web3 monthly active developers are at an all time high with more joining in 2021 than any year prior. This level of developer interest has grown through multiple cycles, bringing with it innovation across numerous ecosystems and use cases. New blockchains like Polygon, Solana, NEAR, and Aptos have emerged alongside new use cases like DeFi, NFTs, and gaming.

New networks and use cases inject vibrancy into the web3 ecosystem. However, they also introduce greater complexity for builders in the form of new virtual machines, programming languages, standards, and best practices to consider. In just a few years, new programming languages like Rust and Move have emerged alongside Solidity, and new techniques like gasless minting have become best practice. We anticipate that as innovation and developer interest in web3 continues to grow, so will this complexity.

As a result, developer tools that simplify this complexity will be immensely important in bringing the next million developers into the ecosystem. Thirdweb offers a full stack of useful developer tools including pre-built and audited smart contracts, SDKs, and dashboards to help developers create, deploy, and manage their web3 apps. Thirdweb already supports six different blockchains (with more coming soon) across multiple programming languages. In addition, thirdweb offers a comprehensive UI component library and auth solution to make it simple for front end developers to build beautiful user experiences on their smart contracts. Once contracts are deployed, thirdweb’s dashboards and analytics tools ensure that every developer can monitor their smart contract’s onchain activity. By offering an end-to-end solution from creation to post-deploy management, thirdweb saves developers time and costly errors.

Great developer tooling is nuanced and requires an experienced and thoughtful team to get right. Furqan and Steven are an exceptional duo with the right track record to tackle this problem. Furqan has prior, proven experience building a developer platform as the former co-founder and CTO of AppLovin. His approach and passion to building product is evident; in deciding which initial features to build into thirdweb, he spoke with 500 potential customers to fully internalize their needs. Steven is an expert in community building as the former founder and CEO of Social Chain. The thirdweb community truly shines as an authentic and passionate place for builders to share ideas and help each other. In fact, the result of this community-first ethos is the reason why the platform is open source, 100% on-chain, and every smart contract deployed using thirdweb is 100% owned by the creator’s wallet.

Today, we’re proud to announce that Haun Ventures is leading the Series A in thirdweb with participation from other investors including Coinbase Ventures, Shopify, Protocol Labs, Polygon, and other strategic angels. We’re long term supporters of the web3 developer ecosystem and are excited for thirdweb to make web3 development more accessible. Welcome thirdweb!

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

This season, the Supreme Court is producing a plethora of headlines and national controversy. Amid the firestorm and fallout, it would be easy for technologists to overlook a recent decision concerning the authority of the Environmental Protection Agency (EPA) to regulate carbon emissions. That would be a mistake.

At first glance, West Virginia v. EPA seems to be about nothing more than a set of effectively obsolete emissions-reduction regulations from 2015, known as the Clean Power Plan. But, upon closer inspection, this case is the latest in a series of judicial decisions that are fundamentally changing the rules of the game for regulatory agencies across the federal government. Setting aside the merits of the Court’s decision, it’s important to map the potential implications of this sea change for technology policy.

First, some background: West Virginia v. EPA involved a group of states and power companies challenging the legality of the 2015 Clean Power Plan, which set nationwide carbon dioxide emissions standards for power plants and required plants take steps to meet them. In its simplest form, the dispute boiled down to whether Congress, in passing a particular statute 50 years ago, properly gave the EPA authority to establish the Clean Power Plan in the first place.

At the top of the Constitution, Article I, Section 1 reads: “All legislative Powers herein granted shall be vested in a Congress of the United States.” Over the years, Congress has passed a range of statutes setting up federal agencies like the Food and Drug Administration (1906), the Federal Trade Commission (1914), and the Securities and Exchange Commission (1934). At the same time, the Supreme Court has decided a number of cases interpreting Article I, Section 1. In the early 20th century, these co-developments culminated in a legal theory called the nondelegation doctrine, which says that, “Congress is not permitted to abdicate or to transfer to others the essential legislative functions with which it is thus vested.” Put simply, Congress must make the law (pass statutes), and agencies must execute that law.

Of course, it turns out to be a bit more complicated than that: Congress sometimes passes laws with broad language or loosely defined terminology; other times, Congress explicitly directs federal agencies to create regulations with more technical details down the line. The complexity of our society and economy have caused courts to interpret the nondelegation doctrine liberally over the past hundred years — and to largely defer to agencies on the grounds that they possess more specialized knowledge of certain subject matter within their domain. As the dissent explained in West Virginia v. EPA:

Members of Congress often can’t know enough—and again, know they can’t—to keep regulatory schemes working across time. Congress usually can’t predict the future—can’t anticipate changing circumstances and the way they will affect varied regulatory techniques. Nor can Congress (realistically) keep track of and respond to fast-flowing developments as they occur. Once again, that is most obviously true when it comes to scientific and technical matters. . . . Over time, the administrative delegations Congress has made have helped to build a modern Nation.

In practice, agencies in the executive branch such as the SEC, CFTC, and many others have played an increasingly consequential role in shaping freestanding bodies of regulation. Collectively, these rulemaking agencies are sometimes referred to as the administrative state.

The expansion of the administrative state in the 20th century hasn’t been without its critics among academics and jurists, including some current members of the Supreme Court. These critics have produced another legal theory: the major questions doctrine. The major questions doctrine says that Congress must make a clear statement if it wants to give an agency authority to make decisions of “great economic and political significance.” This doctrine is emerging as an important force in the world of administrative law by breathing new life into the nondelegation doctrine.

Applying the major questions doctrine, the Supreme Court in West Virginia v. EPA held in a 6-3 decision that Congress had not provided clear authority for the EPA to pursue the Clean Power Plan. Nationwide energy production and usage is a matter of “great economic and political significance,” the majority explained, which would have required Congress to unequivocally empower the EPA to implement this particular regulatory program. Moreover, the Court reasoned, the Clean Power Plan proposed by the EPA was similar to regulatory schemes that Congress “had already considered and rejected numerous times.” Overall, the Court highlighted its skepticism towards the notion that a regulatory agency could “discover in a long-extant statute an unheralded power representing a transformative expansion in [its] regulatory authority.” (The three dissenting members of the Court explained how they would have interpreted Congress’ language quite differently and criticized the majority for “announc[ing] the arrival” of the major questions doctrine, which it saw as unprecedented and “tougher-to-satisfy.”)

This majority decision indicates that, at the highest levels, the federal judiciary is increasingly scrutinizing aspects of federal agencies’ plans and rulemaking in the absence of clear congressional action. Although West Virginia v. EPA tackled the enduring problems of climate change and national energy supply, nowhere is this jurisprudential evolution likely to prove more consequential than the regulation of emerging technologies such as web3 — the platinum standard of an industry defined by “fast-flowing development.”

Even at this early stage, web3 is already demonstrating its potential to have “great economic and political significance” by changing Americans’ relationship to technology and capital. Recent polling data shows that over 20% of Americans have now invested in, traded, or used digital assets. The web3 sector is poised to reshape the business model of the internet, along with trillions of dollars in market capitalization; it may likewise transform the landscape of public goods funding, governance, and capital formation.

Moreover, web3 is a fundamentally different technology paradigm that sometimes transcends the policy objectives underpinning existing regulatory regimes. To take one example: traditional financial regulation seeks, among other things, to correct information asymmetries between insiders and the public with the goal of putting everyone on equal footing. For web3 projects — many of which are open source and designed to replace corporate intermediaries to ensure that everyone is on equal footing from the outset — the appropriate regulatory architecture is less clear. It is no wonder that Congress has already considered and failed to enact a number of statutes relevant to web3: the Online Market Protection Act of 2014, the Managed Stablecoins are Securities Act of 2019, and the Crypto-Currency Act of 2020, among others.

With the highest court in the land endorsing an expansion of the major questions doctrine, federal agencies will likely take pause. Hermeneutic interpretation of old statutes motivated by old policy objectives has become a less viable path for sweeping regulation of novel technologies that present novel policy questions. Agencies can and should advance regulatory clarity by focusing on issues clearly within their purview, but they may become more careful when Congress has already considered and rejected a proposed regulatory regime. Market participants, litigators, and regulators alike will probably find themselves taking a second look at whether the text of a given statute unambiguously authorizes an agency to take broad measures.

The corollary is that Congress needs to speak clearly in any legislation that grants federal agencies major regulatory or oversight authorities over a new sector. In some instances, Congress may decide that new technologies should still be governed by old rules — but they must explicitly say so. In other instances, they may define a new policy architecture that is fit for purpose, rather than attempting to shoehorn technological breakthroughs into century-old statutory frameworks. Either way, greater statutory and regulatory clarity will benefit all involved.

These political and legal dynamics dramatically increase the importance of the web3 legislative proposals that will likely come before Congress next year. Many leading indicators of future legislative activity are hopeful. Several recent examples of legislation introduced in the Senate (by Senators Stabenow, Boozman, Lummis, Gillebrand, Toomey, Sinema, Warner, and Portman), along with an anticipated stablecoin bill in the House (that will likely be authored by Representatives Maxine Waters and Patrick McHenry), all offer evidence of meaningful bipartisanship, real consultation with stakeholders, and thoughtful efforts to realize the potential of web3 technology. Web3 is the rare domain where Congress could actually deliver bipartisan statutes that match the moment.

As we know from the last century of innovation, well-crafted legislation can empower effective regulation, with vast benefits for American economic prosperity, global influence, and consumers. But successful statutes from the past are not the only roadmap for the future, particularly when it comes to web3, nor is piecemeal rulemaking and enforcement the path to mission-critical policy for the next generation of the internet. Ultimately, we'll need new rules to help govern these new tools.

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Dr. Tomicah Tillemann is the Chief Policy Officer of Haun Ventures. He previously served as Global Head of Policy for web3 at Andreessen Horowitz, Chairman of the Global Blockchain Business Council, Senior Advisor to two Secretaries of State, and on the professional staff of the Senate Foreign Relations Committee. He holds degrees from Yale and Johns Hopkins.

JP Schnapper-Casteras is a Nonresident Senior Fellow at the Atlantic Council and the founder of Schnapper-Casteras, PLLC, a boutique law firm advising frontier technology companies on regulation and litigation. Previously, JP practiced at the NAACP Legal Defense Fund and in the appellate practice of Sidley Austin LLP. He is a graduate of Stanford Law, Stanford University, and Harvard Kennedy School.

James Rathmell is the General Counsel of Haun Ventures. He previously served as Crypto Counsel at Andreessen Horowitz and, before that, practiced corporate securities law at Cooley LLP. He holds degrees from Stanford Law, Stanford Graduate School of Business, and Columbia.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

By Chris Ahn

Startups obsess over how to achieve product-market fit and business model fit, but they rarely discuss business-governance fit. Web3 has brought renewed attention to this formerly overlooked concept that certain governance models are better suited for specific projects.

Choosing the right governance model is relatively straightforward for non-crypto-native projects because the tradeoffs are well known. Even a non expert can answer whether a project would benefit from being public or private, or for-profit or non-profit. For crypto-native projects, the decision is more complex because they must consider a new axis: decentralization.

Decentralized governance allows anyone to contribute without securing permission from a central authority. Like historical governance parameters, decentralization has distinct tradeoffs. Contrary to common belief, it’s a tool that can benefit some–but not all–web3 projects. Web3 founders should weigh whether their project might benefit from decentralized governance.

Historical governance models

Historically, governance decisions were based on two considerations: for-profit vs. non-profit and public vs. private.

• Public for-profit companies like Apple have a distributed shareholder base that elects a board of directors by which it is governed.

• Private for-profit companies like Fidelity have a concentrated shareholder base and are historically family owned.

• Public non-profit entities like public universities and hospitals are governed by a board in which more than 50% of its directors must be unaffiliated with the organization. In addition, profits cannot be distributed outside of the organization.

• Private non-profit entities like the Gates Foundation usually have a limited number of donors and need not have outside board directors.

The most notable feature of these historical governance models is that people can only contribute with the proper permissions, typically via employment. Apart from open source projects (which generally do not operate as formal organizations), it’s not possible for someone to simply contribute to a project. To contribute to (aka work for) Apple, Fidelity, a university, or the Gates Foundation, you must first make a serious effort to be trusted by becoming an employee.

When MakerDAO decided to hold its first ever public MKR vote in 2018, it kicked off an experiment in decentralized governance. Since then, some of the most prominent projects in web3 have adopted decentralized governance, including Uniswap ($7.4 billion), Compound ($521 million), Aave ($1.4 billion), Curve ($4.1 billion), and dYdX ($2.0 billion). These five projects alone account for over $15 billion in fully diluted market cap (as of July 25, 2022), and many more valuable decentralized projects will emerge.

The significance of business-governance fit

Choosing the right governance model is a critical decision for founders because the proper fit can act as a strategic advantage. Governance communicates two key signals about an organization:

• Commitment. When a business chooses a governance model, it conveys the objective of the organization. Consider the difference between Facebook Messenger and Signal. Signal’s status as a non-profit strengthens its value proposition as a user-first, privacy-preserving service because it’s clear that it serves no ulterior motive. Many users trust and are loyal to Signal for this reason. Even with feature parity and strong network effects, one dimension on which Facebook Messenger can’t compete with Signal is mission.

• Decision-making. Each governance model comes with its own decision-making framework that determines who makes decisions at every level. For example, public organizations ultimately answer to a board of directors that represent a broader shareholder base, while private ones answer to its majority owners. The decisions made at board meetings tend to be high level, and strategic and tactical decisions to execute on high-level direction set by the board are left to employees.

Why decentralize?

Decentralization is a unique governance mechanism because it invites anyone to contribute without permission. So why would an organization want more proverbial cooks in the kitchen when that can slow down and sometimes paralyze it from moving forward? Using the same framework as above, decentralization communicates the following:

• Commitment. It signals the desire for maximum alignment with an organization’s community of users. In historical governance structures, the maximum a user can contribute to a project without becoming an employee is by providing product feedback in designated channels or by voting on specific shareholder resolutions. Because decentralized governance invites anyone to contribute, decentralized projects make a concerted effort to directly involve their communities in what and how they develop.

• Decision-making. Decentralized governance hands over decision-making and execution powers to its community at every level. The community decides on which changes to implement by voting on proposals. It can also propose and execute improvements, including detailed product enhancements that would otherwise lie in the hands of employees.

In many ways, the case for decentralized governance is similar to the case for a public permissionless database (e.g., the blockchain). Although the latter is slower and more costly than its centralized counterpart, there is one aspect—permissionless participation—that is uniquely different, and that unlocks a net new value proposition that wasn’t previously possible.

The most common criticism of decentralized governance is that more participants mean a less efficient organization. This criticism is undoubtedly true. An organization with five decision makers has 10 possible communication channels, while an organization with 100 decision makers (20x increase) has 4,950 (495x increase). Getting people aligned becomes exponentially more burdensome with more people––hence why in politics, dictatorships make decisions more quickly than democracies, and in business, private companies are more nimble than public ones.

One way to justify decentralized governance is to answer the question: do organizations that optimize for a diversity of perspectives deserve to compete alongside organizations that optimize for fast decision-making? For those fortunate to live in democracies, the analogy should resonate. Sometimes the axis to optimize for is not speed or cost, but broad representation. Doing so can produce results that are far more durable and valuable than projects built for speed alone.

Choosing decentralized governance

Just as not every for-profit organization aspires to be public, not every web3 project needs to be decentralized. The organizations for which this governance mechanism would represent a strategic advantage are protocols. Protocols are credibly neutral projects that aspire to solve the same needs for its users for as long as possible. Three characteristics about protocols stand out:

1. Dependability. When products look to leverage protocols, the most important consideration is dependability. Will the protocol credibly serve the purpose I need it to 100 years from now as it does today? Will I have any input into potential changes? For a protocol, choosing decentralized governance shows it intends to be maximally aligned with those who are looking to build products on top of them and provides a direct path for these builders to have a say in the protocol’s development.

2. Small product surface area. Protocols are designed to be lowest-common-denominator abstractions that other products can leverage. As a result, they tend to have small product surface areas. This is desirable for decentralized governance because such decision-making is already complex with only a single product feature; additional product surface area makes decision-making exponentially more complicated.

3. Standardization. A successful state for a protocol is to become a standard with network effects. Every incremental product that builds on a protocol makes the value of doing so more compelling for the next one. Decentralized governance helps protocols become standards by providing products with skin in the game to convince others to join.

In addition, decentralization is not a binary choice, but rather, a sliding scale. Protocols should choose how much decentralization is strategically the right amount for them since it comes with clear trade-offs in execution complexity. This can be done by deciding what level of decision making will live with the community versus a pre-defined (sometimes elected) team.

It may be controversial, but non-protocol web3 projects may find decentralized governance unhelpful. As a non-protocol, the project’s objective is growth. Growth occurs by servicing more users and different use cases with additional product functionality. As a result, the product surface area will become larger and eventually unreasonable to govern across many decision makers.

Towards a Lego block future

Choosing the right governance mechanism is a strategic advantage for any organization, and deciding to decentralize is no different. Today, protocols represent the best type of project to take advantage of the strengths of decentralized governance.

It’s possible to imagine a world where modular Lego blocks of decentralized protocols built on one another will exist alongside monolithic apps. This alternative universe will be difficult to create and riddled with failed prototypes . But, it’s an exciting experiment in which to participate – an alternative built for the community, by the community, and maximally aligned with the interests of users.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

Crypto technologies are driving a transformation of the global financial system that has only just begun. DeFi Summer was less than two years ago. Since then, a flurry of builders and participants from around the world have entered the space to innovate with the goal of building a peer-to-peer financial system that is characterized by more inclusivity and transparency.

DeFi (decentralized finance) has the potential to remove key structural obstacles to building wealth that have been root causes of inequality for centuries. We believe these technologies could present meaningful competition to legacy players and expand access to economic opportunity for more people around the world. At the core of DeFi is the ability for anyone with an internet connection to borrow or lend crypto assets without an intermediary. With time, we believe this could be the key to unlocking financial services for the unbanked.

As with any new innovation, approaches to DeFi protocols vary and activity in the space over the last few years has produced many important technical, structural, and social lessons. We have been very interested in a new generation of DeFi builders who are bringing a deep knowledge of financial markets and crypto-native technical skills to the task of moving DeFi into its next chapter.

As we set out to understand and research new players in the space, we were introduced to Euler, a next generation DeFi protocol for permissionless borrowing and lending of crypto assets. Euler is led by an exceptionally talented, experienced team, including alumni of Oxford University’s doctoral program, Goldman Sachs, and the Federal Reserve Bank of New York. Euler has taken a unique approach to addressing the risks associated with lending and borrowing crypto assets which we believe represents a meaningful step forward for the DeFi ecosystem. While incumbent DeFi protocols have made trade-offs between permissionless asset listings and capital efficiency, Euler has developed a nuanced strategy for risk management that we believe enables the best of both. Additionally, Euler has implemented improved mechanics around liquidations which we expect will facilitate the maintenance of healthy markets without being overly punitive to borrowers.

We believe that DeFi borrow/lend volumes will significantly expand in the coming years as new entry points and improved user experiences make the category more accessible. The first generation of DeFi protocols were not designed to handle risks associated with illiquid or volatile assets and have largely relied on permissioned listing systems as a result. In the Euler white paper, the team details how the protocol addresses these challenges while preserving the DeFi ideal of permissionless listing with risk-based asset tiers to protect the protocol and its users.

Today, we’re proud to announce that we are leading a funding round to diversify the Euler DAO treasury, with participation from other investors including Variant, FTX Ventures, Coinbase Ventures, Jump Trading, Jane Street, and Uniswap Labs Ventures. We’re very excited to support the Euler protocol and meaningfully contribute to the DAO’s governance. Welcome Euler!

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

Haun Ventures is leading Zora’s latest fundraise to accelerate the growth of one of web3’s most important protocols. The future of the internet needs Zora—a hyperstructure that can “run for free and forever, without maintenance, interruption, or intermediaries.”

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Haun Ventures is dedicated to backing teams building a better internet. That means a web defined by more opportunity, creativity, security, and accountability than the version of the web that came before. Non-fungible tokens (NFTs) are a core building block that are central to the future of the web. We believe NFTs will produce a new generation of creators and makers who will enjoy more equitable economics thanks to a web built with better incentives that fairly values the contributions of those who create the culture. We also see web3 innovations like NFTs as a positive force for openness and decentralization in a web currently weighted too heavily toward centralized, opaque gatekeepers.

The future, in some ways, is already here thanks to what founders Jacob, Dee, Tyson, and the incredible team at Zora have built. Zora is an open protocol that makes it possible for anyone in the world to launch independent NFT collections, marketplaces, and experiences. We have only seen the tip of the iceberg of NFTs in web3 and believe Zora will become one of the most important protocols (and DAOs) as the NFT ecosystem and associated use cases meaningfully expand in the years to come.

Zora has already established itself as a key figure in the web3 / NFT zeitgeist, with close relationships with leading DAOs and specialized marketplaces, a popular online community publication, and well-attended weekly workshops led by Latasha, their talented Head of Community. As web3 expands and NFT use cases along with it, we believe Zora is well-positioned to become a critical layer in the web3 creator ecosystem.

Today, we are proud to be backing Zora during the next step in its journey: Zora Labs, the company building open developer and community tools, and the Zora Protocol, the DAO-governed hyperstructure. Taken together, this combination of open, permissionless protocol and tooling will enable and empower a new wave of creators and communities.

Jacob described our team as “venture contributors” and we have every intention of living up to that distinction by contributing to the growth, culture, and success of the Zora ecosystem. We feel deeply privileged to be along for the ride. Welcome Zora!

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.

Today, we’re introducing Haun Ventures, a firm designed from the ground up to help founders build the next generation of the internet. We’ve raised $1.5 billion in capital to support the growth of web3. We’ll invest through two platforms: a $500 million early stage fund and a $1 billion acceleration fund.

My path to web3

My road to crypto and then to venture was unconventional. I spent over a decade at the U.S. Department of Justice prosecuting organized crime, murders, public corruption, prison gangs, white collar crime, and money laundering. In 2014, I created one of the government’s first cryptocurrency task forces. In the course of that work, the vast potential of these technologies quickly became clear. Like any tool, they could be used for good or for bad, but we had just started to scratch the surface of the good.

After leaving the government, I collaborated with some of the most amazing builders and investors in the space, including Brian Armstrong, who recruited me to the Coinbase board in 2017. There, I met my friend and former partner Chris Dixon, with whom I launched and scaled one of the earliest and largest dedicated crypto venture franchises in the world. Working with founders over the years brought out my own entrepreneurial spirit, and I started to think about building something new based on my experience. Specifically, I have always seen value in connecting the crypto world to different audiences – whether across government, academia, business, or otherwise – to facilitate greater understanding of the benefits of this nascent tech. All of this led to the launch of Haun Ventures, a firm built to uniquely serve the teams building the third generation of the internet, or web3.

Web3 has expanded beyond its financial origins — it now provides the technological building blocks to power the next iteration of the digital world

We think of Bitcoin as the original breakthrough that launched a thousand experiments. This first implementation of digital, decentralized consensus unlocked countless novel approaches to network-incentive alignment and non-sovereign stores of value. The decade since its invention has been characterized by a flurry of innovation across the infrastructure layer of web3, notably including the launch of Ethereum, a blockchain for deploying and running decentralized applications. This, in turn, ultimately made way for globally accessible financial use cases and the “DeFi Summer” of 2020.

Now, crypto has expanded far beyond financial use cases, touching gaming, art, media, and content. The web3 projects that emerge over the next decade will be even more expansive, applying the breakthrough mechanisms of the last decade to every industry from transportation and commerce, to fashion, sports, music, and more. We think consumer demand for digitally-native experiences and goods will continue to increase. As more people embrace these products, there will be a shift in individuals’ expectations for greater control of their personal data and a new generation of creators will demand and enjoy better economics. We think open platforms will win through loyalty, transparency, and trust by delivering better incentives than the walled gardens that came before.

We’re energized by the opportunity to invest in every layer of the web3 tech stack, and will back projects in their early stages as well as when they are ready to accelerate growth.

Building a different kind of firm for web3

We believe the next generation of the internet will naturally produce a new generation of investors. Firms built for this moment need to be what one of our portfolio founders characterized as “venture contributors.” This goes beyond asking how to be helpful — it’s about being an active, committed participant in the community and operating in a way that advances the values of web3. Many crypto-native firms have been built this way from day one and other firms entering crypto will need to cross over. Beyond providing capital, we will contribute to web3 in two specific ways to start and plan to layer in other capabilities as we learn and grow.

First, we’re helping founders deliver system change. As a community, we are engaged in a grand experiment to build new incentive structures for the web that can increase trust, transparency, privacy, and opportunity. To create a new internet that is an improvement over our current tech paradigm is a hugely ambitious project. It not only requires brilliant technologists to build but also experienced operators who can responsibly shape public opinion, policy, and the broader systems that power our society so that web3 can fulfill its potential. We will partner with our portfolio to lead a global campaign for web3 that combats misperceptions, engages policymakers, highlights positive use cases, and wins the hearts and minds of leaders across all sectors. We believe this approach will help lay the foundation for the web3 projects we support to reach a billion+ people worldwide.

Second, we’ve baked community participation into our practices from day one. As an early investor in the space, I’m proud of the groundbreaking program I helped develop to delegate governance rights and tokens to civil society groups, universities, and non-profit organizations. Haun Ventures will continue to broaden the array of voices involved in this ecosystem. We will build playbooks and share insights as we go that help set new standards for how venture firms can participate in web3.

We’ve assembled a world class team of leaders that have deep experience in very specific areas (inside of crypto and out). They are all-in on crypto and have already had a positive impact on how web3 is viewed throughout the world.

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My path to this moment certainly wasn’t a traditional one. In many ways, I didn’t fit the mold. The mentorship and support of so many people, far too many to name here, helped me step outside my comfort zone and turn not fitting the mold into an asset. I’m incredibly grateful to all of them. As web3 grows to touch every aspect of our lives, we’ll need more voices and perspectives of those who break the mold.

I’m also thankful to the founders I’ve had the privilege of working with over the years who have been so encouraging of my decision to start this firm. Finally, I want to thank our limited partners. Our focus on system change was a key consideration in selecting our LPs – true strategic partners who are all-in on the vision for web3 and willing to leverage our combined capabilities to drive impact.

We’re committed to building a web3 ecosystem that future generations will admire. This is an exciting first step, but the real work begins now. We’ll have more to share as we continue to build our team and make investments.

This post is for informational purposes only, and does not constitute a recommendation to buy or sell securities or to pursue any particular investment strategy. This post should not be relied upon in evaluating the merits of any investment or any particular investment strategy. You should consult your own advisers as to business, financial, tax, legal, and all other related matters concerning any investment. The views expressed in this post reflect the current opinions of the authors and do not necessarily represent the opinions of Haun Ventures Management LP or its affiliates. Certain information in this post may have been obtained from third-party sources, including portfolio companies of Haun Ventures. While taken from sources that the authors believe to be reliable, Haun Ventures has not independently verified the accuracy of such information. Content is as of the date posted and subject to change without notice. Haun Ventures makes no representations about the enduring accuracy of information or its appropriateness for any given situation. Please see https://www.haun.co/disclosures for additional important information.