Making cryptocurrency a necessity and integrating it into the structure of our economic life involves ensuring it is reliable and secure, while also supporting our users.

Compiled by: Loxia

The Lemon Problem and the Trust Crisis

Today, I don't intend to talk too much about technology; instead, I want to discuss a social issue we face in the cryptocurrency space. The title of this talk is "Social Consensus and Self-Regulation." First, I want to ask everyone, has anyone heard of the "lemon problem"? Does that term ring a bell?

Well, not really, not much.

In American slang, a "lemon" refers to an unreliable car, specifically one that you didn't know would be unreliable beforehand. I'm not quite sure about the origin of the term, but that's what "lemon" means.

Well, a good, reliable car is referred to as a "peach." I didn't know this before; I found out through research, and I think it's quite cute.

The "lemon problem" essentially pertains to used car dealerships. You go to the used car market, and it feels a bit deceptive because you don't know if the car you're buying will be a "peach" or a "lemon." This is also a significant issue in today's cryptocurrency space—everything may look like a "peach," but in reality, many protocols are "lemons."

So, when you buy a car or use a protocol, there is a certain probability that it is a "peach," and a certain probability that it is a "lemon." What price are you willing to pay for that? What is the expected value weighted average price you are willing to pay for something that could be a "peach" or a "lemon"?

What price are you willing to pay? It's like some kind of weighted average; we can all internalize this concept—there's a certain probability of it being a "lemon" multiplied by the value of the "lemon," plus the probability of it being a "peach" multiplied by the value of the "peach."

You might intuitively think that the price you are willing to pay lies between the price you would pay if you knew it was a "peach" and the price you would pay if you knew it was a "lemon." So, why is this a strange dynamic, and why are we talking about fruit?

So, what incentive does this create for used car dealers? If you know that everyone will pay a price between "peach" and "lemon," what is your incentive?

Your incentive should be to only sell "lemons," right? If people are willing to pay a price higher than that of a "lemon," you have no reason to sell "peaches"; you can just sell "lemons" to them directly.

This is often referred to as a scam.

Well, I want to pause here; this is a significant issue facing the cryptocurrency space today—the lemon problem.

Well, the dynamic in the cryptocurrency space today is that due to this lemon problem, the probability of "peaches" has actually decreased, and fewer people are willing to cultivate "peaches" because they are expensive, while "lemon" dealers flood the market because they think, wow, I can just sell "lemons" to those willing to pay a price higher than its actual value because they are misled into thinking it's a "peach." Overall, the willingness of users to participate in the ecosystem has decreased, which is quite reasonable.

Now I can almost hear some of you, or the imagined interlocutors in your mind, saying, "That's the cost of being permissionless; we have to accept the good with the bad, just like the 30% discount in the cryptocurrency space; you know, that's just the reality."

But this is not a one-time cost; the lemon problem is not a one-time cost; it is actually a death spiral.

Because as our trust decreases, it becomes harder for "peaches" to outcompete "lemons," "peaches" exit the market, and we are left with only "lemons," which is not a good place to be.

So we need to find a way to help consumers identify "lemons." I want to say that if we don't do this, Gary will—he's actually been working hard on it—so that's why I'm pushing for it. If we want to maintain the spirit of our development in the cryptocurrency space and address the lemon problem, we need some form of self-regulation.

Let's compare this to something that has been done well, which might be controversial.

Casino Model: Building a Trust Mechanism of Safety and Fairness

So, what am I saying?

Am I saying the cryptocurrency space is a casino?

No, I'm saying the cryptocurrency space is even worse than a casino.

We at least need to do as well as casinos do. If cryptocurrency can work,

we at least need to do the things that casinos do well,

I think it's worth looking into, and that's what I'm going to talk about next.

Casinos are known for their fairness and safety, and they heavily promote this. Why do they do this? They go to great lengths to prove that the casino is not rigged, except for the ways in which it is obviously rigged.

Let me give you a few examples; this is an automatic card counter.

Well, why do they do this? Why do they switch to this instead of having the dealer deal cards manually?

They want to prove to you that you are not being cheated, of course, except in the ways that you are structurally cheated, but they want to show you that this is verifiable randomness.

They ban cheaters and share information about cheaters with other casinos. Why are they willing to unite against cheaters? If I am the Flamingo Casino (a casino in Las Vegas) and I discover a cheater, why would I share this information with the winners?

They have these dice calipers to ensure the dice are evenly weighted; all of this is to convince consumers that you are not being cheated, you are playing fairly, even though the odds are against you, you are not being deceived or scammed.

Governments and casinos actually invest together to make casinos safe. We forget that casinos are very legitimate and rapidly growing; you know, Ethereum is expected to generate $2 billion in fee revenue this year, while the global casino industry will generate $300 billion in revenue.

Marketing safety is a very successful way for casinos to collaborate with governments, convincing them that making this thing safe is beneficial for everyone.

Well, how does this work? It's a virtuous cycle; higher trust equals more users equals investment and fairness and safety,

So we need to do this in a decentralized way. We know a fact that I haven't heard in any conversation this week—the three letters—FTX; no one is talking about it. We like to pretend it was just a nightmare; you know, bad actors really eroded the trust in the entire ecosystem, not just for their targets, but for everyone.

Zero-Knowledge Proof-Driven Self-Regulation and Social Consensus

But we have the technology to prove safety and legitimacy; we just need to adopt it at the social level, so this week’s necessary wave—zero-knowledge, right? This is a term we all know.

We have the ability to prove integrity, to prove identity, reputation, and the integrity of computation.

The problem is not with the technology; we keep attending these conferences and talking about technology. Part of the problem is actually with social consensus and ideology.

We know we have the ability to create new forms of social consensus around protecting applications and users, and we need to accept that this is something we must do; we need self-regulation before we can be regulated by others.

So I think we are ideologically very extreme, either completely permissionless or completely permissioned, black or white, either this or that.

But in reality, there is a very broad spectrum of social consensus in between.

Let me give you an example; what ZK and ASIC will ultimately study can unlock—this is the curse of ideology, you know, only those who can prove the legitimacy of funds can enter a pool. This can be both permissionless and permissioned. I can create a pool with these rules, and you can choose whether to enter, so we have this concept of free will paternalism.

Someone, somewhere, like the social consensus in this room, will decide this is how we operate safely, and then users decide what they want to do, rather than us being completely black and white. If there is any permission, even if it is social, even if it is democratic, we cannot allow it.

Another example is the concept of decentralized clean providers that Vitalik and our co-founder Zach Williamson have been researching. This is a social graph where individuals prove the legitimacy of their funds and transactions, and they observe behaviors and say, "This is not something we want to be associated with." This is very different from centralization and very different from censorship; it is a democratic form of social consensus where we all say we will not tolerate certain behaviors in our ecosystem.

The goal here is still to allow users to express their preferences in various protocol designs. This is not about limiting freedom but giving users more choices than I am currently articulating.

So ZK implements this permissionless aspect at the foundational layer while providing a permissioned social consensus at the application layer.

These are more examples; you know there has been a lot of discussion about proof of reserves, anti-phishing, opt-in compliant pools, and proof of legitimate funds.

But all of this is to say that we need to turn zachXBT into ZK; we need to use mathematics and social consensus rather than trust or centralized compliance.

So to summarize, we need ZK to unlock three major improvements.

First, we need to retain user choice while allowing for self-regulation and compliance. We as a community and ecosystem have not really talked about self-regulation; we just hope and pray that others won't notice.

We will not achieve our goals if we allow this to happen; Web3 will not succeed. We need to prove to someone that we are taking care of each other and our users, so we need to demonstrate to users that we, as a community, are supporting them.

Let’s not try to impose ideology on users; let’s give them the choice of where they want to go. Ultimately, that is the meaning of this space; it is about freedom and autonomy.

Finally, we need to enhance security; we need to make it reliable. We need to make cryptocurrency a necessity rather than an option. We forget that governments are at least supposedly made up of voters. Why were Uber and Airbnb once illegal and are now legal? Because someone went to the steps of Congress and said, "You can't take my Uber away unless I’m dead." Someone did that; individuals did that. I don’t know if you remember this.

One way we can make cryptocurrency a necessity and integrate it into the structure of our economic life is to ensure it is reliable and secure, and that we support our users.

This is how we turn "lemons" into "peaches."

This issue features a video from BlueYard Capital published on YouTube titled "Jon Wu (Aztec) @ If Web3 is to Work… A BlueYard Conversation."

Original video link: https://www.youtube.com/watch?v=o17GnPJXxgU&t=244s

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