 amazing to be here. So many people that I love in the audience. It's amazing. DevCon 3, very special time. So this talk is going to be on crypto economics programmable incentives. It should give you a nice little overview of what it is to, you know, what is crypto economics anyway. So hopefully the next button will work eventually. Alright, it worked. So programmable incentives. We have a new spell. Ethereum gives us a new spell and that is the smart contracts and that allow us to program with incentives and so this will, you know, hopefully give you an idea of where to go. So first, public blockchains have a secret sauce. There are two components to the secret sauce. The first one is open access. That means that anyone is able to deploy a smart contract or send a transaction. This is critical to the guarantees that we want to have. So this gerbil can send a transaction, this gerbil can send a transaction, even a robot can send a transaction and there's no distinction. Everyone can do it. The second key piece is trusted execution. So that means that all these smart contracts and transactions are going to execute exactly as defined. That is critical and that gives us programmable money. So programmable money. We've got our main character, this gerbil Sam, is sending a deploying a smart contract and, you know, great coder here and this is a hat token contract. So what does that mean? That means you can mine tokens by wearing a hat. Pretty simple, pretty simple stuff. That is the programmable money. Now these other gerbils, they see the smart contract. They're like, oh, that looks pretty cool. I should, I should, you know, maybe, maybe I'll, I'll mine some of these tokens. Now that's the programmable incentives. We're like incentivizing these gerbils to do whatever. So they see the smart contract, boom, they start wearing hats, right? This is a pretty magical thing. This, this gerbil right here, Sam, didn't know these other gerbils, just uploaded some code that code was able to be verified and cause the wearing hats. Amazing. So when we have programmable money from public blockchains, that gives us programmable incentives. And when you have programmable incentives, you can program people. It's pretty crazy, pretty crazy stuff. And it's a little bit scary. Like, program people? Not necessarily the thing that, it's a little bit too much power, almost. So what we want to do is we want to program good outcomes. This is critical. If we're going to be using our new found crypto economic powers, we need to program good outcomes. So how are we going to do this? Well, we can use crypto economics. So crypto economics can give us the ability to say, okay, these are our incentives. This is going to be the outcome that they will produce, or at least give us some certainty around this outcome. And the kind of technical definition is the application of economics and cryptography to achieve security information goals. But I'll give hopefully some insight around what that really means. So first quote from Vitalik, you can't reason about blockchain consensus protocols without thinking about economics. This is fundamentally a core component of what makes the blockchain special and what makes these systems work. It's people. We're talking about people working together and cooperating. We have two nice things in our tool belt. Cryptography, I'm going to spoil it. Economics is the second one. But first we'll start out with cryptography. So we've got hash functions. We've got digital signatures. We've got Merkel dags. We've got ZK snarks. So these are just a few of our of the many tools that we have to work with incentives. And this is the next part, economics, the incentive stuff. So we've got tokens, voting rights, etc. And what we can do is we can combine all of these things in our utility belts to create crypto economic mechanisms. So I personally work on Casper. This is what I spend most of my time on because it's the first most interesting application of crypto economics, in my opinion, but there are many, actually, okay, not most interesting. The most interesting one is out here somewhere and I don't even know about it. So this is crypto economics, right? So in Casper, we use hash functions, digital signatures, tokens, voting rights to create a cool protocol. So this is an overview of, you're not going to learn Casper here, unfortunately. There's a few other talks which let you do that. And there's also stuff online. There's a whole bunch of literature. But you can see here that we're creating new blocks. And each block has a prefash, right? So okay, there's the hash. We've also got tokens. The blockchain is giving out the validators tokens. Okay, there's our token incentive. And we've also got these validators, see at the bottom. They are voting on the next block. So there we have voting. So all of these protocols kind of use a combination of these core tools. And if you squint hard enough, squint a little bit right now, you can see they're actually those gerbils from, you know, the first few slides. They're all just these people. We don't know them. We're coming up with economic rules. They're playing the game, and it's causing a good outcome. It's gerbils all the way down, folks. Gerbils all the way down called the tech. So here's some good outcomes, and there's some bad outcomes, right? So we want to promote the good outcomes, and we want to discourage the bad outcomes. That means we want trusted execution, the first two things that we had in the first few slides, the blockchain secret source. There's also open access, which allows us, you know, everyone can send transactions. And we have fast finality and a number of other things. And, you know, I'll give a there's some other talks that you can learn really about this stuff. So that is just one of a huge number of crypto economic mechanisms. And to be honest, it's relatively boring compared to what is possible. So the potential for these mechanisms is humongous. I'm like, very excited to see what comes out. So I'm going to give an overview of an automated market maker contract. And so this is something that Vitalik came up with. And I think it's a really nice simple mechanism, which can give a little bit of a foundational intuition for what these systems can do and how maybe to to build them. So first, if I were sitting down and like wanting to create a project on Ethereum, I would say, okay, first I need to design a mechanism. Easier said than done, but let's assume we did it. Analyze some incentives. So okay, my mechanism has these people playing in it. I'm going to see, okay, this will happen and that person will, you know, react accordingly, and then make a website and logo, publish analysis, observe the behavior and record findings. So this is honestly very similar to the like scientific method. We have a hypothesis that we come up with, we test our hypothesis and we iterate. And this is like how we can actually further the like science of these protocols. Super exciting. So here's the the market maker example. We are first we have our main character, a rich gerbil has 100 ETH and 1000 UNI. The rich gerbil will deploy a market maker contract to the blockchain, send it to the miner. The miner will mine that transaction and create an market maker contract. So this market maker has 100 ETH and 1000 UNI in it and allows us to send ETH and receive UNI. That's the whole point. So it's really just like a decentralized exchange kind of. So the way that this works is you see those numbers on the right hand side. That is the invariant 100,000 is the invariant. So this is what calculates the exchange rate from ETH to UNI or UNI to ETH. So we've got these gerbils. Once again, they don't know anything. They're just watching the blockchain. They see it and they're like, Well, I want to I want to trade my ETH for UNI. So one of them sends an ETH to the contract. And now we have 101 ETH in our contract. But we don't know how much UNI we should have so that we equal 100,000, right? We always want to keep that 100,000 constant. So we recalculate, we do 100,000 divided by 101, and we get 990.09. So this is how much UNI we will have after that transaction is sent. And what we'll do is we'll send the excess UNI to the person sending the ETH. So this is like a super easy exchange, right? I sent one ETH, I got back 9.01 UNI. Cool. And I also give a little fee to the market maker. So they have a reason to actually put up this money. So we've got an exchange rate before and an exchange rate after. And we can actually see, you know, the more ETH you send, the more expensive UNI will be the more UNI you send, the more expensive ETH will be. So this is our really simple mechanism. It doesn't require a token, it just, you know, executes exactly as defined. Great. So now let's analyze incentives. This is a critical part, right? This is where the actual crypto economic learning is going to come in. So this is a participation incentive overview. So you can analyze tons of incentives for, you know, all day, but this is, you know, one example. So the exchange creator is a key player, right? They're going to be the front, they're going to front the tokens, and they have this passive fee income, which they'll receive for creating the market, but they'll also have this capital lockup cost. They'll also have to maintain a 50-50 hedge of those tokens. So when you create one of these markets, what's going to happen is it's going to always equal out. You're always going to have this 50-50 hedge. You also have the token buyers, they're pretty simple. They're just, you know, sending transactions. The only downside for participating is, you know, the exchange fee. And then we have the token arbitrageers. So these guys play an important role in keeping our exchange rate correct. So what they'll do is, if they see the prices, you know, out of whack versus another exchange, they'll buy some tokens here and sell them over there and call it a day, right? Make some easy profit. So here are some open questions that may or may not have good solutions that, but we can get closer and closer to, you know, better and better justifications. So first, fees. Is it a raise to the bottom? Well, it'll probably, you know, hit some equilibrium based on the cost of capital, et cetera. But, you know, we can kind of like model this out and play around with it. We can also say, oh, is it worth it in the first place? Like, what tokens is it worth it for? So if you think that one token is going to just go plummet, then you probably don't want to create an automated market maker for that token. We can do some analysis there. So what kind of market depth do buyers need, right? So we, depending on how much, how many tokens are fronted in the first place, the exchange rate will change more or less. So if you have more tokens in the beginning from the exchange creator, the more tokens the people can buy before the exchange rate gets out of whack. And how closely will these arbitrage, how closely will the token price match other exchanges? Basically, like, what's the cost of this arbitrage? And you can come up with like models for this and, you know, there's a million things that I haven't even thought of. But what we can say is we can say, okay, if these incentives hold true or these assumptions hold true, then our market maker will act within, you know, as we expect, within these bounds. And that is going a long way because that gives us a real hypothesis, something that we can test, something that we can iterate on. Also, will it promote good outcomes? We cannot forget that we're trying to build a better future. So some good outcomes, right? We've got easier exchange and trustless trades, but there are also some bad outcomes. Maybe no KYC, right? So maybe you want a KYC, your token holders. Who knows? Another thing is now we just deploy to production, right? We actually see if this thing works. So to go live, super simple, code it up in Viper, shout out to Viper, open source it, put it on etherscan, verify your smart contract, and publish it. You know, this is, this is something that everyone has access to. Every single developer can make a website, code up a smart contract, post on Reddit. Not hard. Anyone can deploy a smart contract, which can hold millions of dollars. This is something that just wasn't possible before. We are entering a new space where we have the capability to just re-create financial systems and anyone can do it. It's pretty crazy. So in our, you know, our little gerbils, they're using the site, going live. This is a loading screen because they're like using it. Anyway, and my, my friend even, like in a weekend, coded this up and made a little website. It's super simple. Anyone can do it. So learning from mistakes. This is a key point, right? We created this thing, but now let's learn from it. Oh wait, what's happening? Oh my god. Oh geez, minor front running. What happened? So that guy looks a little scary. I'll give him bunny ears. So our incentives from the previous thing turns out it was incorrect. We didn't really reason about it properly. We forgot about the minor front runners, right? These, it's super low risk profit. So essentially what happens is a minor receives a transaction. It's a huge buy order. They say, oh, well actually let me slip in my own transaction before that. Play the buy order on top of it and then sell for, you know, a quick profit, right? So they can make, just like print a little bit of money, right? And that's crazy. And that's something that we didn't necessarily account for. And so people would not know about this if we weren't sharing our findings. So maybe we can disincentivize this somehow, right? Well, let's think about it. Okay, well maybe we can have a flat rate per block. I mean, not really, it kind of mitigates the problem, but it's not great. Maybe trust your transaction ordering Oracle, or just accept it as a minor tax. A minor tax. So now we want to adjust our previous models, right? Now, another thing that we may not have expected. Okay, so we thought these token arbitrageers were going to arb our system. Well, it turns out they automated themselves away. Now they're just bots in hats. And this is something that can, that is actually very normal. What we're going to see is we're going to see these crypto economic mechanisms deployed. People are going to start out playing the game themselves. And then they're going to be like, oh wait, I can just automate what I'm doing away and it'll run on its own. And so this is both really cool because like, oh, automation efficiency, but also really scary because it's like, oh bots own all the money. Kind of scary. So once again, good outcomes, bad outcomes, we need to think about these things. So maybe bots get richer. It's not rich get richer, bots are getting richer. And we have minor front running that we didn't consider previously. So important step, we have to share our findings, right? We've got all this information and all the people need to know. So gives people ideas, helps everyone out, spreads the love, really good. So we have the opportunity to create a brighter future with these incentives programming. Really exciting, more equitable world. Superpowers for makers, right? The magic spell that we have, these smart contracts, these programmable incentives, we can use them to really reshape what the world looks like financially. And we've got these tools to do it, right? We have Ethereum, we've got IPFS swarm, you know, torrenting, etc. And way more, of course. And not just our superhero, but like our main character, everyone can do this. Every single person in this room. So incentives drive behavior and open access to programmable incentives sets the stage for radical change, right? This is a really unique moment in history. So this change can be good or this change can be bad, right? We can program incentives which promote cooperation and, you know, equitability and, you know, general happiness. Everyone's go lucky. Or we can create incentives which prop up a few people and give them way more power than they already have, right? This is like kind of terrifying. And we've got bots that could, you know, not only could it be people that are propped up, it could be bots that are just running our lives. And because I have, you know, a little extra time, I'll give my theory. So I'm really into this idea of like AI, ethics being built out of robust crypto economic mechanisms. So essentially, if we do have like super powerful AI, maybe we can actually defend against that by creating economic systems that they play in that promote good behavior, right? So if we have kind of bad incentives, then our AI just playing the games just as defined are going to cause even more havoc than previously. So anyway, we've got these big problems, you know, energy markets that we can, you know, mitigate with carbon credits or any other cool incentive structures. We've got financial tools that currently people don't have access to, but we can, you know, create decentralized exchanges so that they do. We can also reward content creators with, you know, more interesting incentives than, you know, just like maybe patronage or even cooler stuff like curated lists that, you know, you want to get on or whatever. There's so many options when you unlock this ability to program incentives and you've got, you know, tons of people who may or may not have identification can give them some decentralized identity or network neutrality like let's make some mesh networks be awesome. So we need to design mechanisms, test them in the real world and share our findings and do that over and over on a large scale every single one of us and we have to make sure that we are promoting positive outcomes all along the way, right? This could go really well or it could go really badly, probably not in between, but maybe in between. Let's be real, it'll be a mixed bag. So it's up to you to, you know, make this a reality. This is a nice photo of the crew. And we can all be, you know, superheroes but with great power comes great responsibility. We have to be able to, like, do this in a sensible way. We need crypto economics so we know what the actual outcomes of our incentive mechanisms are going to be. We also need, you know, good ethics so we know that our crypto economic mechanisms are actually going to achieve good outcomes. But we can also be super villains, right? We can also program some evil green goblin people to take over the universe and own our souls more than they're already owned, right? Like, this is, this is very real and very possible and, you know, super exciting, but gotta, gotta consider it. So I'm Carl Dateck and that was an introduction to crypto economics. Programmable incentives. Thank you so much.