PHILOSOPHY

Galileo's Error: Foundations for a New Science of Consciousness

By: Philip Goff

You are always slightly changed when you read a book, typically through leisurely sedimentation. Ground-shifting, paradigm-forming books are rare.  I started Galileo’s Error as a consciousness materialist and ended the book compelled by panpsychism. Panpsychism is the view that consciousness is fundamental to nature, not a product of nature (dualism), nor reducible merely to low-level sciences (materialism), but somehow tied to reality's intrinsic and subjective nature. I find panpsychism compelling as it moves us further from an anthropomorphic worldview by recognizing that there is consciousness, radically simple compared to ours, all the way down. Science’s inability to say anything about the inherent nature of reality is unsatisfying (e.g., What is mass/energy/space?), and a pure materialist worldview seems like a concession to lived experience. Mary learns something new when she first sees the sky; Laplace’s Demon would not know what it was like to experience love. Panpsychism offers an elegant, if nowhere from assured, solution worth exploring.

Phillip Goff methodically walks you through all the prevailing theories in the philosophy of mind before ending on panpsychism. This is one of the best contemporary philosophy books to recommend to a friend who has never read philosophy. Spends just enough time on each subject to have a conversational understanding and easy to digest in a weekend. I found this book from the wonderful Stephen West on his podcast - Philosophize This!

HISTORY

Christendom Destroyed - Europe 1517-1648

By: Mark Greengrass

Part of the Penguin History of Europe Series

The period in European history, stretching from the Protestant Reformation to the end of the Thirty Years' War, seems remarkably relevant today. This epoch saw a rise in the power of nation-states, marked by their centralization of authority and their enhanced control over the minutiae of their subjects' lives. Just as religious fragmentation, driven by the upper echelons of society, polarized communities then, different kinds of belief systems are instigating similar divisions today. The 'release valve' for such societal differences was, at that time, the discovery and colonization of America and other territories. In our contemporary context, release for new thoughts and ideas is the internet.

Professor Greengrass's writing is as captivating as that of Will and Ariel Durant, whose historical accounts read like engaging narratives and I am sure I will talk more about in other reviews. Moreover, this book benefits from the concentrated insight of an expert deeply versed in this particular time and place.

The quote I found most memorable from the book actually comes not from Professor Greengrass, but from Henri, Duke of Rohan, who, while discussing the concept of clemency, stated:

“It is the vice of a resolution and a weakness of courage that holds us back, rather than true compassion for the suffering of others. It is thus that we often try to cover our vices with the meanest virtue, pity.”

As Jesse recently pointed out, user ownership and decentralization are not the same; we should be able to have the former without the latter. This post explores an approach that would allow crypto startups to achieve user ownership while maintaining centralized control where necessary using rebates.

A rebate is an old concept: You pay money now and receive some portion back later. Let's go ahead and make rebates tokens as well. These tokenized rebates are a potential pathway to giving users “ownership” at a company’s earliest stage.

I'd like first to qualify that everything in this post hinges on tokenized rebates not being considered securities. I am not an expert; this is just a thought experiment. However, I believe there is a starting point for an argument if we assume the following:

1. Users can never receive a rebate greater than the revenue they contributed to the company. The token cannot give the user an expectation of future profit.

2. The rebate is redeemable for a fixed dollar amount. It cannot fluctuate with the value of the protocol or be indexed to it in any way. For example, one token may equal a $1 rebate.

3. The rebate tokens confer no governance rights over the company, though users may be given revocable rights to give product feedback, make discretionary spending decisions, or other narrow-scope choices.

4. Rebate tokens would not be redeemable at the users' discretion but at the company's discretion when and if it has the means.

5. Companies that wish to be more conservative can make rebate tokens non-transferable.

Many web3 companies are already choosing to give away much more. Rebates would enable them to grant a sense of “ownership” without giving away too much upfront.

Not only that, but rebates also allow teams to keep their options open.

If a successful company wants to stay centralized, it can bear the burden of a Reg. A or targeted public offering. At the point of the offering, users have the option (but not the obligation) to exchange their $1 rebate tokens for the equivalent of $1 of common stock in the company at the stated offering price. If a company decides decentralization is the best path, it can replace a Reg. A or IPO with a more traditional token launch. Either way, if users choose not to convert, the company is still liable to settle at some point in the future (perhaps concurrent with the offering). Rebate token holders go from creditors of the protocol to owners and, after the offering, the company can continue to give users ownership by directly giving equity or tokens.

Imagine the following:

At launch, XYZ announces users must pay protocol fees in ETH or USDC. Users will receive rebate tokens based on the USD value of the fees paid, with rebate tokens each equal to a $1 claim on the company, redeemable when determined by governance. 

The XYZ team decides initially to rebate 100% of protocol revenue via tokens. They intend to reduce rebates to 90% after three months, 80% after six months, and so on. This has the intended result of favoring earlier users over later ones.  

Fast forward a few years. XYZ is successful, and users have accumulated a number of rebate tokens. The company has matured to the point where it can bear the burden of a public offering. The company prepares the necessary offering under Reg. A, limiting the offering to the company’s customers. Rebate-token holders are then given the option (but not the obligation) to settle their $1 token claims for $1 of the company’s equity at the offering price. Now, users truly are owners.

A potential downside of rebate tokens is that users may lack psychological ownership if they do not have any governance rights. To guard against this and build engagement, rebate tokens can still serve as a product feedback mechanism or confer limited governance control over the company’s charitable giving.

Today's many tokens are hard-to-value, highly speculative assets with insufficient disclosures. By contrast, rebate tokens protect retail investors because they are purposely non-speculative and provide a limited owner's benefit when redeemed for real equity in the future. Rebate tokens keep founders in leadership roles without heightened regulatory risk — while unlocking user ownership's flywheel. Moreover, they are easily replicable in the traditional world, which could help onboard more companies into crypto.

I would love to hear thoughts and criticism from those more knowledgeable than me.

P.S. I had to try out Mirror’s new Sub to Mint function (see below).

https://opensea.io/assets/ethereum/0x010973A87eeb75672AE6A0c499a0444F87205AC9/0

Most current token designs grant governance power and some claim on the future prosperity of the protocol. This appreciating token ownership concept is powerful because it is a claim on protocol growth, regardless of the owner's actual future or sustained value. Outside of crypto, the risk of giving appreciating rights (e.g., stock or stock options) to stakeholders is managed through an interpersonal trust or legal contract and has understandably been limited to employees, investors, and the like. Each can be assumed to be long-term value aligned with and value-providing to the issuing company. A protocol has no contract or relationship with each of its users. Without some greater assurance, protocols are likely giving away too much on faith.

The counterpoint to appreciating ownership is one that is only historical and provides no claim on future growth or productivity. Cooperatives utilize a unique form of ownership structure called patronage capital. It allows members to share in the current year’s profit of the cooperative based on each member’s revenue contribution. Unlike traditional forms of ownership, such as stock or equity, which provide a claim on future growth or productivity, patronage capital is only a claim on the income of that single period, not a claim to anything in the future.

For example, if a cooperative has total revenue of $100 and a net income of $10, a member who contributed $10 of the protocol's revenue during a period would be entitled to $1 of income for that period. Still, they have no rights to the income of future periods. This form of ownership is backward-looking, based on a member's past actions. This historical conception is more appropriate for normal users doing normal user things. It rewards users for their past actions but requires them to stick around continually to be relevant.

Appreciating tokens that grant an interest in perpetuity are not to be avoided; they are another tool and one that is more appropriate for stakeholders where there is a high assurance about the long-term value they are providing. Initially, this type of ownership may only be appropriate to insiders (founders, employees, investors) but eventually may broaden to other stakeholders (i.e., users with demonstrated loyalty) over time. To understand what a hybrid model may look like in practice, consider the following token design for ABC Protocol:

ABC’s founders determine the best on-chain metric of measurable value to be fees paid by the protocol users. At the end of each accounting period, the protocol calculates net income and generates one token for each dollar of income. This token is called ABC(Period X) token. It represents a $1 dividend claim on the protocol, redeemable at the discretion of governance, with preference given to tokens issued in earlier periods. Period tokens are issued at the end of every calendar year using the same process. Once the protocol has excess cash flow, governance can decide to retire period tokens, in order of issuance, by allowing the period token to redeem a $1 equivalent of stablecoins from the protocol treasury. 

If this protocol were a pure cooperative, ABC(Period X) tokens would be distributed like patronage capital pro-rata to each user based on the value of their fees paid into the protocol. This model leaves nothing for founders, investors, or the like whose value is not captured directly in protocol revenue. The objective of the ABC protocol is also to redistribute profits to these stakeholders.

ABC’s founders accomplish this by issuing a second token to themselves, their employees, and investors. Each ABC(Appreciating) token is a claim on 0.0001% of ABC(Period X) tokens each accounting period (year) in perpetuity. ABC has a required insider reserve of 25%, so at protocol launch, 250,000 ABC(Appreciating) tokens are distributed to founders, early employees, investors, and future employees. ABC protocol is also set up so that governance can issue up to 250,000 more ABC(Appreciating) tokens to distribute to others providing value outside protocol fees post-token launch.  

Each time ABC(Period X) tokens are generated, ABC(Appreciating) token holders are allocated their claim percentage. The residual is allocated to users based on their proportionate share of fees paid into the protocol, similar to a patronage dividend.

Normal users of the ABC protocol earn historical ownership by using it; they do not profit from token ownership but are guaranteed the lowest costs to use the protocol through patronage dividends in the form of period tokens. At the same time, founders and investors continue to have the significant upside of appreciating tokens to incentivize growth outside the direct measurable value metric.

Suppose a hybrid model includes a token tied to a specific period or milestones like the ABC(Period X) token. In that case, it allows for the continual renewal of governance and greater assurance that a protocol is always close to its current users. A protocol can achieve this by tying governance to the period/milestone token and setting governance power to decay on some schedule. Resuming our example of ABC Protocol:

ABC founders designed a protocol where governance power decays over time and ABC(Period X) tokens are the governance unit of the account. ABC protocol is initially set up such that the ABC(Period X) tokens’ governance weight is based on a declining geometric series dependent on the age of ABC(Period X) tokens. In year Y, ABC(Period Y-1) tokens are given ½ the total weight, ABC(Period Y-2) tokens ¼ the total weight, and so on. As time passes, each historical period’s governance power diminishes, but the $1 dividend claim remains the same.

To be clear, this is one of many approaches to the following questions:

1. How do we give users ownership sustainability over long time spans?

2. How do we design tokens that allocate ownership effectively?

3. How do we keep current users governing the protocol?

There are already teams out there thinking and implementing answers to these questions thoughtfully. For example, Goldfinch is paying membership rewards and giving additional governance power to token holders who demonstrate long-term loyalty by locking up tokens and financing capital value to the protocol. The Canto network is gearing up to launch Contract Secure Revenue, where developers can opt-in to earn a percentage of gas paid to the network when users interact with their smart contracts.

There are more nuanced advantages to this model as well. The legal classification of period tokens may be advantageous to founders. Period tokens are fixed cash claims on the protocol, not a claim on its future expected performance or its founders. We can also be assured the distribution of period tokens to normal users is never in amounts greater than the value (fees) they provide to the protocol. There can be no expectation of profit either before the period token is extant or afterward, and there are no future additional dividend rights. This fact pattern could reduce, but not eliminate, the risk of period tokens being considered a security. There is no diminished risk in relation to appreciating tokens in this structure, but this may allow founders to distribute historical ownership to the community via period tokens much earlier and let the community issue appreciating tokens to non-insiders after the protocol is fully decentralized. 

Users have to come and stay for the product. Ownership should be an enhancing part of their experience rather than the whole of it. A hybrid model is not the best model for bootstrapping new users because there is no expectation of outsized future profit, it does not excite the same type of greed, but I believe is sustainable in the long run and does a better job of keeping protocols governed and owned by their users.

Token design is in its Precambrian, single-celled state. At Variant, we want to work with individuals and teams building sustainable protocols that will last to mainstream adoption. Please contact us if you are thinking deeply about alternative governance systems.

Big shout out to Nathan Schneider (@ntnsndr); Li Jin (@lijin18); Jesse Walden (@jessewldn); Spencer Noon (@spencernoon), and Alana Levin (@AlanaDLevin) for the help and ideas.

I am the COO of Variant. Our disclosures apply to this essay.