The Bank of Me
A conversation with Dermot O'Riordan, partner at Eden Block, about the future of finance, governance and... maybe everything?
Hi folks, Paddy here, cofounder of Odin. We’re a European social network and investment platform on a mission to hack capitalism. We are now live in private beta. Angels, VC’s and founders can use Odin to set up an SPV at radically low cost, and invite others to participate in the deal.
Via the Odin Times we share insights and ideas from leading thinkers in European venture, as well as deal flow and access to community events.
Back in April I caught up with my friend Dermot O’Riordan to get his take on all things Web3 and DeFi. You can check out the full podcast on Spotify or Google Podcasts.
Dermot is a lawyer by training, with experience at two leading international legal firms, but now spends his time investing with Eden Block, as part of their mission to back the builders of the new Open Internet.
In this conversation we covered a fair bit of ground. The key idea? Web3 and crypto will allow us to redesign the base infrastructure of the entire financial and legal systems for the internet age.
This will put power in the hands of individuals, and allow us to create new systems that better govern the creation and distribution of value. Below I’ve summarised some of my favourite insights.
📅 Want to join our next conversation?
🎧 Tomorrow (Wednesday August 4th) at 5PM GMT / 6PM CET we’ll sit down with Jordan Wolfe to discuss his background as a founder, his experience building and exiting a real estate investment firm, and his new adventures as an angel investor focused on climate technology and life sciences.
Anyone can join, connect with other community members and ask questions.
Reimagining Capitalism
dotCommunism
In the 1990’s and early noughties, the promise of the Internet was one of free intellectual capital and open access. Many of us remember this with fondness:
This world (“dotCommunism”, as some called it) sounded great. Free music, free books, free everything.
And, to some extent, it has become a reality.
However, it didn’t quite play out the way we expected:
Free everything broke the humanity of our economic relationships. Before the internet, you always understood where something came from, you assigned value to it, agreed what it cost, and paid someone. In the Internet age, we estranged the consumer from the producer, and disenfranchised the producer as a result. Think about not just the music or news industries, but also the tense relationship drivers have with Uber or restaurant owners have with Deliveroo, Doordash et al.
It also created another problem: information overload. Our chimp brains couldn’t handle all the choice.
Ultimately, you can’t escape these two problems. Even if you’re getting something from the producer for free (or cheaper), someone still ends up profiting. In a world of information abundance and more access to products & services (from music to restaurants), curation (rather than production) simply becomes the new source of value.
As a result, platform business models have exploded and we have ended up with a small group of ‘AI overlords” in power. These giant aggregators, unassailable thanks to the strength of network effects, have created monopolies for our data and attention. They give us what we think we want, but it is not necessarily what we need.
The crypto and blockchain revolution is about cracking open these centres of power. It’s about humanising things. It puts control back in the hands of individuals and the communities that form around them.
New Power
In 2014, Jeremy Heimans and Henry Timms published a piece in Harvard Business Review called “Understanding New Power”. It remains my favourite business article of all time. Heimans and Timms explained how the internet was driving a cultural and behavioural shift towards a very new way of doing capitalism. In the new world, consumers became producers and owners…
These ideas will look familiar to any follower of recent developments in Web3 and DeFi. We can see these new technologies as the necessary infrastructure to supercharge the New Power economy:
To reach the full potential of what is possible at the top end of the Participation Scale (“co-owning”), you need a transparent, secure, trustless system for the proof of ownership and transfer of capital assets: a blockchain.
To create “opt-in decision making” and “networked governance”, you need pre-established rule sets that govern what assets move where, when and why: smart contracts. When decisions need to be made by humans rather than smart contracts, you need democratic governance systems that take into account all stakeholder needs: governance tokens, DAO’s. These systems allow trustless decision making, meaning decision making that can be scaled.
You also need a simple, secure way for users to manage and access their data and assets: a crypto wallet.
So what might this new crypto-capitalism look like?
By putting data in the hands of the user (and trust in the hands of a decentralised network of machines), the hope is that Web3 will break the information monopolies of large technology firms and the financial monopolies of banks.
The Bank of Me
The Bank of Me will be be a distributed store of all of humanity's data, and a digital representation of all of our real world assets - money, property, qualifications, identity documents - anything you can think of that will be useful in the world of online commerce and finance. It will be owned by everyone and controlled by no-one. You will have total, unlimited control over your personal data, your money (ultimately just another form of data nowadays) and how you access services (financial and otherwise).
For example, rather than all your user information and relationships being Facebook’s property and sitting on Facebook’s servers, they will be your property and sit on a blockchain. Likewise, rather than all your money and investments sitting in custody with your bank / asset manager, you will exercise direct control over them. Only you and people / entities you permit will have access to this information.
This in itself doesn't sound terribly exciting (I know, I sound like one of those blockchain companies that try to sell blockchain itself as a benefit 🤦). But it will open up a whole host of opportunities:
Fairer wealth distribution
When much of the admin, back office cost and complexity involved in storing information and moving it around is automated through a network of computers, and good decision making is open-sourced by communities of humans, it creates potential for a much more equitable distribution of wealth.Better alignment of societal needs and business outcomes.
It will be possible for businesses to be owned and governed by communities of customers and workers, rather than just boards of directors, large investors and management teams. This could lead to better outcomes more aligned with things that the community decide they value - eg. lower carbon, or more ethical treatment of workers. Imagine Uber, but owned and governed by the community of drivers and customers (Drife), or AirBnB, but owned and governed by the community of landlords and renters (Dtravel).More opportunities to become independently wealthy
Through the combination of no-code software, automation and blockchain incentive systems, creators and solo capitalists will be able to coordinate, mobilise and monetise large communities single-handedly. We will probably see a one-person billion dollar company in our lifetimes. People have been talking about this for a while - blockchain will probably accelerate it.More economic growth
Going back to my previous discussion on gaming and the metaverse with Parin from Lego Ventures, the fact that we can create and distribute infinite numbers of unique assets in infinite numbers of digital worlds (the “metaverse” you keep hearing about) opens up serious new avenues for economic growth in a physically finite world where lots of work has been automated by machines.
Let’s be clear - this isn’t dot-communism. People need the opportunity to strive for more, and there is always going to be inequality.
However, there is a strong sense that the current system is not really equipped for our needs. Large tech companies and financial services monopolies have become extractive, not additive. Capitalism is failing to address some of the world’s most pressing issues (particularly income inequality, climate change and automation (see “Moore’s Law for Everything”)).
The promise of Web3 is one of addressing these issues by putting power back in everyone’s hands.
How can you help build (and profit from) the coming revolution?
What are the areas to focus on?
The Eden Block Investment Thesis
In a nutshell, Eden Block’s thesis is that Web3 and De-Fi will allow us to completely redesign:
Coordination amongst humans (how we interact and are rewarded).
Coordination amongst machines (how they interact and are rewarded)
How 1 and 2 interact.
Together, these factors mean we can reimagine the fundamental systems for commerce, finance, government… pretty much any sort of value coordination system you can imagine.
Broadly, their investments fall into one of four buckets:
1. Web3 (infrastructure, data and privacy)
You can think of Web3 as a catch all term for the new trustless internet architecture that everything is going to run on. It’s not controlled by anyone and it operates on blockchains. I’m going to quote Max Mersch and Richard Muirhead from Fabric Ventures here. They defined Web3 quite nicely in this article:
“With Web 3.0, women, men, machines & businesses will be able to trade value, information and work with connections they don’t know or yet explicitly trust, without an intermediary. The most important evolution enabled by Web3.0 is the minimisation of the trust required for coordination on a global scale. This marks a move towards trusting all constituents of a network implicitly rather than needing to trust each individual explicitly and/or seeking to achieve trust extrinsically.
This all sounds quite technical and you’re probably bored of reading the words “trust” and “trustless”. But think about your day to day life and the organisations who act as trusted intermediaries for you. You won’t need any of them any more. No banks. In many cases no companies. Perhaps, one day, no governments. All Watched Over By Machines Of Loving Grace.
The main challenge right now is that we are still incredibly early in the development of this technology. The infrastructure to make everything work and run securely isn’t anywhere near as advanced as it needs to be. Stuff we take for granted in the world of Web 2.0 is way more complicated in Web3. It’s like accessing the internet in the early 90’s. For example, look at how difficult it is to start playing Axie Infinity, the Pokemon-style blockchain game that allows its players to earn as they play:
This is an awful user experience.*
A lot of the investments Eden Block makes focus on things that just allow developers to build more cool stuff more easily - the picks and shovels for the blockchain gold rush. Biconomy, for example, are on a mission to simplify blockchain transactions. Nym, are building privacy infrastructure. These improvements are what will put the underlying technology in the hands of more people, which is crucial to its ultimate success.
*Interestingly Axie Infinity is growing like crazy in spite of the shitty UX - see Packy McCormick’s piece, where I pulled the above information from.
2. DeFi (the financial services ecosystem of Web3)
DeFi gives you all the services of “tradfi” (banking, lending, asset management, etc.) but strips out a lot of cost and puts power & data in the hands of users. Digitally native assets means assets that can be programmed and that other computers can interact with. This means no need for custodians, big banks, accountants, or sometimes even lawyers. Things can be automated through smart contracts that never stop working. Human error during information inputs is also vastly reduced, so you don’t end up with royal f*ck ups like Citigroup accidentally wiring $900 million to Revlon’s creditors.
You can also have more of a say in the way that the service providers themselves are run. Since it is so easy to pull assets out and move them around whenever you want, it is in their interest to keep you happy and let you influence company governance.
What does this look like in practice? Well, through a platform like Compound or BlockFi, for example, you can lend your money to others and earn interest (up to 7.5%). This is the same way your current account provider makes money from you at the moment. You can also take a loan out against your own assets (eg. your house, your USDC, BTC or ETH) and use the money you’ve borrowed to make more money (or lose more of course).
But much wilder things are possible. If you wanted to really up your game, you could go create permissionless, professional-grade, margined futures markets and make fully decentralised, end-to-end trades on a platform like Vega (Eden Block portfolio co.). The mind boggles.
3. Bridges to the real world
Supply chains make the world work, as the shipping container crisis shows only too well, but they are incredibly complex and opaque. There is an opportunity to use blockchains to track things like provenance, driving transparency.
This area is quite tricky, because we are dealing with physical (real world) things, meaning a lot of stuff is happening “off chain”. This reduces our ability to trust in the information stored on the blockchain any more than a “centralised” record. It also limits the ability of smart contracts to automate transactions, because they are reliant on unknowns in the real world.
But there are interesting applications in digital supply chains too. Think about things like tracking royalties for the music industry, or other types of intellectual property. As more content exists purely online, this becomes much more possible.
4. Digital communities
Traditional boundaries between creators — artists, musicians, etc — and their fans, as well as companies and their employees, are breaking down. We all want greater agency and participation in communities based on shared values. These interactions will increasingly happen online.
Eden Block see NFTs, social tokens, DAOs, and other community-focused platforms and tools converging to enable the next generation of communities and creators to thrive. Creators and employees will be empowered to maintain independence and to earn a livelihood outside the confines of traditional business models and company structures.
Colony Network, a low-code DAO framework and Eden Block portfolio company, is a great example of this part of their thesis. Colony's technology provided the framework for the recent decentralisation of Shapeshift, the previously centralised crypto exchange that would most likely be a unicorn in equity terms if it hadn't decided to decentralise itself.
What does all of this mean for startups and venture capital?
A lot of money will be made - and lost - investing in Web3 and DeFi.
What is perhaps more interesting to consider is how it will affect the way we run our organisations and live our lives.
As Dermot notes, organisations are, at their core, governance and incentive structures designed to coordinate a narrow group of stakeholders (founders, employees, investors) in a narrow number of ways (mainly financially).
Web3 will allow us to expand this concept to include other stakeholders like customers, fans and (crucially) machines. It will allow us to create flexible rules around how all these stakeholders interact, and what governance rights they have. There will be opportunities to re-think the way decisions are made that might seem quite radical.
The DAO (decentralised autonomous organisation)
A DAO is a bit like a new take on the joint stock corporation. It’s a body of stakeholders cooperating and agreeing a system of management to get work done and make decisions. The core difference is that in a DAO, some (or even all) of the management decisions can be made by pre-agreed lines of code and executed by smart contracts. You might not even need a management team at all. This can potentially reduce bias and improve decision-making efficiency. It can also create very different types of organisation:
“You can be a human, you can be a machine, you can be a raspberry pi, you can be a fridge — the DAO doesn’t care. If you send valuable information, you’re a first-class citizen.” Source
Via a DAO, a group of users can come together to make decisions based on a combination of encoded rules and voting. Members of the DAO can be rewarded for work done with various incentives (in the form of cryptoassets), a simple way of demonstrating their commitment to the organisation’s goals and aligning the interests of the group. They can come and go as they please and work as they please. The organisation becomes more akin to a school of fish or an ants nest - there is not top down governance, but the group achieved goals through a coordinated, self-regulating system.
Sceptical? Just think of all the incredible things that have already been built already through community and open-source, from Wikipedia to the Linux operating system. Now imagine you could incentivise the contributors financially, at scale. It seems like some great startups can and will be built by DAO’s.
Interestingly, the original DAO was a VC firm. When we first launched Odin, I was convinced that this was the future of VC. But I’m not so sure. There are a number of reasons running a VC firm through a DAO at any sort of scale (i.e. beyond Dunbar’s Number - 150 people) might prove problematic:
You need to make good decisions really fast to get into good deals. This is potentially hard to coordinate with lots of decision makers.
Venture doesn’t scale very well because it is an incredibly people-centric business. It is about relationships and understanding human character. This is best achieved through deep one to one interactions.
VC is not a business driven by consensus - the market (supposedly) rewards contrarianism and seeing value where others don’t (I’m not so sure on this front - just ask any family office or tier two VC what they do when they hear that Sequoia have offered a company a term sheet.🐑🐑🐑🐑).
Business decision-making generally tends not to be democratic. Devolving mission-critical governance decisions to a community could be cumbersome and may lead to worse outcomes. Success stories like Linux might be outliers rather than the norm.
Founders don’t necessarily want 10,000 people in a DAO looking at their pitch deck, or indeed as shareholders they need to manage and deal with day to day.
That being said, all of the above problems are potentially solvable through good system design. Could the next LowerCase Capital be a DAO? Perhaps. The highest profile investment DAOs are pretty active these days and are managing significant amounts of capital. To name a few:
The LAO (managing $39m);
Metacartel Ventures (over 20 investments, AUM is unclear),
Flamingo DAO (focused on NFTs and managing roughly $20m),
PleasrDAO (came together initially to buy the NFT commemorating the Uniswap V3 launch, and has since scaled up- as per the investment thesis here from Mechanism).
Active crypto venture capital funds have invested into Flamingo DAO and Pleasr DAO. It will be fascinating to see how investment DAO’s and DAO’s building startups perform in the coming years. I am certain some of them will be very successful - there is certainly power in numbers and wisdom in crowds, provided the right systems are in place.
Regarding governance and investment decisions I believe that, on the balance, deferring to a smaller number of people with deeper knowledge and experience (the traditional way of doing venture) is probably smarter. But this doesn’t rule out DAO’s altogether - they can still be an effective way to collect capital, reward deal sourcing and vetting, make key decisions based on rules when people are in disagreement and much more.
Anyway, I might turn out to be very wrong.
When the Bank of Me is investing, anything is possible.
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Further Reading
Defensibility in the time of DeFi and Culture eats capital for breakfast are two great pieces worth digging into by Dermot himself
Understanding New Power by Jeremy Heimans and Henry Timms
All Watched Over by Machines of Loving Grace by Richard Brautigan
Why Decentralization matters - Chris Dixon
Power to the Person and Own the Internet, two of my favourites from Packy McCormick (NotBoring), who has written several excellent pieces on the subject of DeFi and Web3.
What is Web 3.0 & Why It Matters - Fabric ventures
A Beginner’s Guide to DeFi by Sid Coelho-Prabhu
DeFi Orientation - Nate Eliason
What is a DAO? by Mary Finnegan