[BUIDL Asia 2024] The minimum viable bureaucracy on Aave protocol: the ACI ethos by Marc Zeller

Transcript

[Music] hello everybody today we're going to talk about Dows decentralized autonomous organization and those are not really a great press in our ecosystem when you listen to people usually in the industry what will they will tell you about uh Dow is that they are not efficient sometime they will even tell you that they are shady less efficient than companies and even uh some people consider it as a free uh where you can do not much work and get a grant and yet this model that is quite new and quite native to uh the uh ecosystem is less than a decade old and

I think part of this reputation started because that started wrong in the etherum ecosystem so very early almost a decade ago in the etherum ecosystem uh the idea the primary mindset was was everything going to be a DA and we're going to make a DA that will found every single da in the ecosystem the name of that da was the da and you know where this is coming so in 2015 it was organized by a company called slit and in 2016 it raised 15% of all it and in June we got the Dow a and as a result we got etherium classic so it went uh it became less popular at that point and

when when you look at the industry the main model are not down the main governance model in the industry is take it or Fork it so recently ethereum got like a very important upgrade called denune with EIP 4844 and I don't remember having voted for it but I have some heat I have some validators but the the thing is that either you update your version of the the protocol or you for the protocol and you create a new ecosystem because assets mainly our ecosystem are not governance assets and there's no vote and yet outside of ethereum and Bitcoin which are a league on their own what we consider when we

look at the data is that Dow are the most profitable and the largest uh protocols and uh application in the ecosystem so Li that many people knows haval meod uh ens arbitrum they are top five in this ecosystem and they are all Dow so Dow may have that press but actually what we're going to talk about today is proof that is actually a model that can scale and is efficient and we going to take a as an example but before that allow me to introduce myself my name is Mark I'm the founder of the ACI the a Chan initiative we are a delegate

on the A and we are a service provider so we are one of the company working for the AA and if you already know us or want to support what we do and own some a asset uh we will be honored to receive your dedication to a.it if we recap what happened for a uh in the past 18 months it was extremely important period it was an extremely important period for uh Defi and Dows in general because that's when that was found the most product Market fit and if we take the a example A3 increased tvl so the newest version of the protocol by 18x the Dow Revenue cross 100 million

dollar annualized uh in 20 24 recently the pass quarter and for the vory itself and $123 million in total and the Dow net profit is now at $100 million per year which is the second largest pritable tower in the world after Mead da so the figure here and all we reach that point is what we want to share today and maybe uh all example will inspire other in the industry so the first thing is that we cut aggressively unnecessary expense and we uh restructure the uh the organization of service provider the service provider

that were not performing enough were either not renew or allowed to quit uh the the and leave the pay Road M had a restriction period like this and it's much more efficient now and the cost went down from $ 25 million a year to $18 million and as a result we have increased focus and efficiency because that's extremely important to optimize the Dow operation and to leave the mindset that a DA should be a flat organization system what is important and what we learn from the past years at our is that every healthy Dow will go to a decentralization path and that's what we presented with the ACI last year at ATC

so you can find on way side the the presentation of the four stage of The Da but where we're going to do a small recap to together a healthy Dao will always start with very few proposal usually you have a funding team a funding uh Foundation a lab that will take most of the decision and they will still be in control and a stage one da early stage da is very hard to distinguish from a company in terms of operation but as the the the protocol grow and as the the Dow mature you will have a second phase where the funding team will be hands off in terms of decision making and give the power back

to the government's asset holders this second phase is what we known uh in the avido during the year 2023 you will have a an explosion of governance we will have a lot of proposals and every single little decision will be decided by a vote which is great in terms of decentralization but which is terrible in terms of efficiency the third stage and where we enter with me and a at this point is that you will have specialized team we call that service provider in a that will have a scope will be elected to do it and will have an area of free uh execution within that scope that are defined by the token holders and that's

something I want to insist and that is important for this this obervation uh for this presentation is that we believe at the ACI that if decision making is sufficiently decentralized execution and Engineering can be concentrated in a few designated specialized ends and that's something that is important to break this mindset to say d are not company that are completely flat yes da are not company that's for sure but the execution and the implementation of things around the protocol needs to be done by specialized end if we want maximum efficiency and this de decision making uh decentralization can be tested very

easily with one simple question can the Dow fire someone and if you take anybody from a protocol and you cannot fire him you don't have the power because it's a very simple and basic concept if you are the boss you have the ability to fire someone at the AV on the Mead you can take anybody any service provider and just cut their stream don't uh stop paying them don't renew them and if they want to work for free they they will do it if they want but usually people if they are not incentivized and part of the payroll they will just leave uh the the operation and Stage stet out reach that point point where anybody even the the initial

funding team can be fired by the governance toen order and when you reach that point that's what we consider St Tre out and we have a checklist for that the first thing is that your delegate the one making the decision should be decentralized and chosen by the actual token order chosen by actual people that spend some money and have skin in the game to uh acquire your governance token and have a vested interest in the success of the protocol the second thing is that the protocol should be able to pay his own bill and for that you need to reach a specific amount of project Market fit and uh to incentivize your delegate and make sure the dowo itself and not some VCS or some funding team

are paying the bills otherwise Independence is harder to achieve and the last thing is minimized governance because when you have uh dozens of of AIP so in a uh in the the a concept votes per month nobody will be able to follow what you do because if you have two vote per day uh nobody everybody that is working a 40 hours a week job will not have the ability to track what is happening so that's why specialization and service provider will reduce the amount of vote and increase the efficiency to what we call governance added value proposal focus on the vote that are the most

impact ful and important for the protocol and the da that will have biggest impact so how do we measure the a success we have a divers set of incentivized delegates so the ACI created a program called orbit that will pay directly delegates and make them professional actors of uh the ecosystem pay directly by the net profit of the protocol depending on kpi so the amount of vote and delegation they have the participation they have so we have a Tracker to do that and anyone can and will be fired if they are support and that's why we created a system and an ecosystem where performance is expected

and encouraged by the system itself and that's a big difference and something that I want to point out an efficient Dow cannot slow rug compared to a traditional company that will raise the amount of money or some some project that did Ico and raiseed 2,000 heat 2,00 HS they already have the money so they don't have downside of not executing or not delivering what they do in a efficient Dow if you are a service provider and you are underperforming you your stream will be cut and uh you have an incentive to actually per for so another thing that you should look for the success of the Dao in terms of decentralization and decentralized uh

uh decision making is the diversity of the opinion if your da is 100% yes vote all the time and everybody is just a pet saying yes to everything that's usually not a great sign but it's not binary it's normal that 90 or 95% of the decision of a protocol are not not controversial and doesn't create a lot of debate but this ability to generate debate and generate uh discussion within the D are both expected and welcome in decision making if you want uh an efficient da and a decentralized DA and hav da is the second most active da in the world just after arbitrum and and

just around the Meer da so let's do a recap of the what the the stage we reach and uh What uh what are the the current statute of the Avid the da is net profitable and ready to redistribute Revenue so the product itself from product Market fit as a net profit use that net profit to cover the service provider cost and this Revenue to cover service provider cost and create a revenue on top of that the a is one of the top ranking Revenue maker of the industry alongside Bitcoin obviously uh ethereum obviously and

makeal governance is structured by solid framework so there's a clear ID and a clear expectation of what should happen for any kind of decision what are the the the different way to do things and how it's organized we have professional compensate delegates uh through the orbit program that was created by the ACI funded by the A and know it's an official a program and the governance itself value diversity and Independence and you don't have any single actor with uh more than the Corum or the ability to uh concentrate the decision making so now that we presented da in general and

the have example uh it's time for us to talk about the next logical step for the Avid that happened in the past two weeks so it's brand new uh we created with the ACI the concept of Merit which is a new program that redistribute the Dow net profit to growth and revenue because the Dow is profitable we incentivize to the Merit program the action that are the most beneficiary for the protocol usually protocol in the blockchain ecosystem will do incentive by subsidies and what we learn from history of subsidy is that they are great to start but if you create a system that only rely on subsidy usually uh it's not

great in the long term so we replace all kind of uh subsid with actual U incentive that come from uh net economic activity of the protocol so where does the yield come from in the Merit ecosystem it's the if you already use a credit card you know it works actually because the Dao is making a profit on every single borrowers but only the borrowers of it and go which is the a Native stable coin are rewarded so every user is is contributing but only some of them that are making the most interesting and the most profitable AC for the protocol how we worded on this

and we had uh a program that allowed a lot of user to come back into a uh through the Merit program and all the protocols are net borrowers in a and contributing directly to the uh Merit ecosystem uh the go Merit bject uh we're going to go quickly on this is paid by the Dow Revenue uh with the go uh stable coin itself around $5 million for 40% of the world budget and the rest is financed by the old stable coin borrowings so it's a system that only use net profit and is sustainable for the long term the now voted for me for the next 90 days but it's the mindset was to make it a permanent program so we

shall see what the the people vote in the future uh it's it's funny this slide it's obviously three bird with one stone otherwise it will not be very efficient but uh the Tre success factor of Merit is is it increase a trting n incentivized user B that are the most profitable for the Dow it killed some vampire layer that were existing on top of a and it was very successful at that in 10 days 30% of uh Layer Two on top of a that was uh not synergic called uh were left this protocol and went back into a and it prepare the grounds for the F switch and that's the the next topic we're going to talk about together

F switch is something that is very popular in in crypto at this point there's been a lot of discussion around Unis swap on a there's no concept of Fe switch or no need for Fe switch because from day one the a protocol is actually making a road we have the concept of Reserve Factor so everybody that is borrowing on a are paying part of the interest fee directly to the a treasury and the a treasury made already more than eight figures of Revenue what we consider the fish switch in the context of the Avid is the profit sharing so or do we re uh switch the revenue uh distribution uh to the actor of the Dow so the current stage is that the a revenue is strong and growing 2023 as I

said said earlier was a very good year for the a the net profit is 5X the current Dow operational cost and there's no remaining Bal neck preventing stickers from being rewarded by net profit so what are the situ what is the situation right now we have the concept of the safety module which is taking on AI that currently represent half a billion dollars of deposit the current profit is $100 million so basic ma if all the profit were distributed to the safety modu right now the net APR will be 20% all of that paid in it well wrap it for smart contract reason and go the stable coin of a what we propose at the

a is to have a consensus solution so in between the current situation which is Distributing zero and distributing everything we have a proposal that we are sharing here today and will reach the governance form in the in the next few hours that proposing a cons solution and stay long-term oriented the first thing is that the safety module is currently subsidized by the a asset which is the governance asset of a we propos to stop that as soon as possible and completely to zero to distribute zero have a native asset to the safety module and replace that 100% with it and go yield and Merit was the testing the ground for this and Merit was a good

success so uh we think it's the next step to do that and the current cost is on the screen uh I will not detail everything but to to say 30 it's around $36 million per year if we want to maintain exactly the same me than now so this is the proposed project that we will uh share to govern this week and uh we want to start what we call the real yield era of the A and of Da in generals uh cut all a distribution and subsidy and create only uh yield on the safety module from net profit of the protocol this proposition uh will leave $45 million net profit

buffer to make new investment and uh we know that bull markets are not forever so most likely at some point the market will correct and the revenue will go down uh so it's important to keep a buffer and that's our proposition what's next for the a uh protocol is uh the next big thing for us will be the crush and go so go is the native stable coin of the protocol and stable coin are great and part of the future of decentralized Finance but do we really want to pay $20 transaction fee to pay a boba I'm not sure that's very efficient so the future of that is layer to stable coin usage and the way we design this and that's something that

is currently being vote on by the da is to use the infrastructure of ccip from Shen link so cross shed interoperability protocol and have collateral on layer one where there's the most security and the most liquidity we have around 10 billion in ethereum layer one and allow people to Min their go directly on Layer Two what we purose with the ACI is to start with the arbitrum network the arbitrum layer 2 which is one of the largest layer 2 Network and start it with Merit so allow people to get incentive and a safety module on Layer Two so it's more accessible to everybody and couple that with the AR reward

incentive program so that's the the next big step and that's quite uh quite exciting for us thank you for your time that's all the time I have uh for today uh if you want to catch up with what we did at the ACI and want to follow what we do uh we will be more than happy to have you visit our website aan.com and we will be here all week and if you want to discuss uh that will be an honor to to meet you guys I want to say a special thank to Erica and Jun for organizing everything that's our first conference in Korea and it was an honor thank you h