Expansion Cross-Post: Arbitrum’s Future as a Digital Sovereign Nation | AJ Warner

Transcript

We need to think about how do we embrace more to bring on better human capital in specific verticals. Um once we do that, once we have that ability, we are going to be able to execute and respond to the needs of our builders and our users much more effectively, right? We're not going to be pulled in a million different directions. If we want to think about how do we help grow the DeFi category, what can we offer to early stage projects that we don't offer today to make them embrace arbitr authority mandate responsibility and they have funding to do those

things? The operational efficiencies will go through the roof. Hey everyone, quick shout out to today's sponsor, Namata. Namata is currently entering phase three of their mainet rollout. So, make sure you check it out by following the link in today's show notes. We'll talk more about Namata later today, but for now, let's get started. Hey everyone, quick disclaimer before we get into today's episode. Nothing said on Bell Curve is a recommendation to buy or sell securities or tokens. This podcast is forformational purposes only, and the views expressed by anyone on the show are solely our opinions, not financial advice. Our guests and I may hold positions in the companies, funds, or projects discussed. Hey everyone, this episode of Bell Curve is a crossover with expansion. This week we were joined by AJ Warner, the CISO of Offchain Labs

to discuss his vision for Arbitum as a digital sovereign nation, Arbitum's business model, and how the new opco structure will drive operational efficiency. Enjoy. All right, everyone. Welcome back to another episode of Expansion. Today, I'm joined by AJ Warner, chief strategy officer at Offchain Labs. AJ, welcome, man. Hey, Michael. Thanks for having me. I really appreciate it. Me too, man. I'm really excited. We've got a lot to discuss here today and I'm pumped about this because I think there's going to be a little something for everyone in this episode. We're going to be talking about this very bold and ambitious vision that you're unveiling for uh the Arbitum DAO today. Uh and there's some very interest I think you've done some very interesting work and I had a lot of aha moments reading your own personal take

on just how to think about L2s versus L1's and this uh strategy for how you're viewing arbitum on a long-term basis. And then there's also uh a real mechanical shift um which is going to operationalize that vision in a super interesting way as well. Um and I would love to start first with the fun stuff kind of the long-term vision. Um, and you know, you wrote this you wrote this post on X uh last week um talking about arbitrum as a sovereign digital nation. And I want to get to that part of the vision, but before we get there, can you kind of just give us a state of the union about there's a there's a long discussion, including myself. I've had it on this podcast um about how to think about L1's versus L2s and how should we categorize these different things, these protocols. So, can we just start there?

And how do you think about those two uh differently? Yeah. No, 100%. So um I think it's a really interesting and smart place to start because I think a lot of the conversation is actually going to flow from those differences and what Dows and communities and ecosystems can do as a function of the economics of these ecosystems. Um but the place to start is obviously I think in many ways and even if you look at like arbitrum chains like people like to say I can't remember who coined it. chains and bridges in some ways, right? And different blockchains depending on their architecture um have different setups and arbitrum, you know, to the average user um and this is the way it should be. And even the average developer, it

doesn't really matter that much that it's an L2 versus an L1. It looks like a blockchain, it acts like a blockchain, it feels like a blockchain. We can talk about like fragmentation of liquidity and those kind of things which a million people talk about. But fundamentally like L1's and L2s both fragment liquidity across you know a world where there's hundreds of chains that exist. Um there are some big differences though between L1's and L2s from my perspective in terms of how to think about them from an economic perspective. When you look at L1s and you know this is true largely of all the major ones Ethereum, Salana, Sui, Aptos, anything that basically operates on a proofofstake model. Part of that fundamental vision is that you have people that stake with

validators or they, you know, delegate to somebody else who's going to stake on their behalf and they're earning some form of yield on behalf of that. Um, in Ethereum, basically the overwhelming majority of that yield comes from transaction fees. Some of it gets burned, some of it doesn't. You might be slightly inflationary, slightly disinflationary, but the general thesis and point is that the transaction fees that are generated by the protocol flow directly to the stakers of that protocol. Um, and that's because it's really important for security purposes that you have people that are going to be staking and validating the network and are rewarded for doing so. Um the effects of that though are that the protocol doesn't actually retain any of

its income or revenues in any meaningful way. So the way that they typically and historically have grown is that they have a foundation that operates alongside it or there's aligned organizations and entities that are focused on the growth of the blockchain essentially. But they also don't have governance. Some people in many ways view that as a positive because if you want to have a fork instead of relying on a governance vote you can rely on sort of the validators to execute that. Um but they don't have sort of this concept of a DAO governed treasury in the sense that an L2 can have. Um I'll talk about L2s and then I'll talk specifically about arbitrum. But the the the key thing about an L2 and what makes it unique, especially, you know, we'll

talk about L2s that sell out to Ethereum is that they derive their security from Ethereum. So that's true both for ZK roll-ups and optimistic roll-ups, arbitrum being an optimistic rollup. And what I mean by they derive their security from Ethereum is that they don't have their own validator set. the validator set that is adjudicating the finality of transactions um is the Ethereum set of validators and arbitum and other L2s pay Ethereum for that security. Um there's obviously a ton of you know conversations in the in the ecosystem right now of whether L2s are sufficiently paying enough to Ethereum or they're not sufficiently paying enough. I think that's orthogonal to the conversation. But what it does allow is

that today L2 transaction fees are basically 90% plus gross profit margin businesses. They don't need to distribute to token holders, stakers, validators the same way that an L1 does. Um, and then in many ways to me the question of whether an L2 should or should not be returning funds to token holders in the form of transaction fees is a function of whether you have a better thing to do with them in the form of reinvestment and growth. Um, and in Arbitram's case um I think that that's really important and the answer is a resounding yes and we'll talk about that in a little bit.

But this difference between L2s and L1's is largely a function of this. And I think it opens a huge space for L2s to have a lot more creativity and ambition in what they want to accomplish that is owned by the token holders than an L1 does. And if you just think about sort of, you know, investment and valuations and and the economics of this, if you're not doing something like this and you're not reinvesting in growth, the opportunity costs for L2s versus L1's is actually a really bad value proposition for an L2 because if SUI or Salana are paying 10 or 8% to stake their token and

there's no mechanism to do that on an L2, then why would sort of your prioritization as a capital allocator be to hold an L2 asset? And the answer must be either that the transaction fees are more and they're returned or that you believe in its ability to reinvest and return to um the token holders ultimately. Um and that I think is very much the vision of what I'm trying to build with arbitrum um as a digital sovereign nation and how I think sort of that vision comes to life. It's it this and we'll talk about it more I'm sure down the podcast is how do we make sure that we can acrue value

that goes to token holders and the big thing that makes arbitrum unique here that makes this vision work is the community's ownership of its assets because the whole thing doesn't work unless the actual value accuses back to token holders. So when we sort of decentralized arbitum as a protocol, we gave the arbitum community and token holders authority of the assets and authority over the technology. What I mean by that is all network fees, all transaction fees, they acrew onchain to the token holders. You can't get the funds out of the treasury without a vote of the token holders. any protocol changes about increasing the amount of

revenue or fees that you want to charge users to use the network. All of these things are controlled by the token holders. And it's really important because now you have that authority upon which you can build what I call business units on top of it and continue to reinvest. And there's a dual mandate there that I think is really critical. The dual mandate is how do we make sure we can continue to invest to support builders and how can we do it sustainably and how do we also make money. So it's invest in builders and also make money for the DAO. And the reason those things are really important it's because that will continue to compound and continue to grow the vision that we're trying to accomplish. Um

because without that I think it's much more challenging to understand what is the long-term ambition of what we're trying to accomplish beyond just providing scalable blockchain resources um to people. This episode is brought to you by Namada. Namata is the shielded asset hub rewarding you for protecting the multi-chain. Shield your data across any asset and any chain and get shielding rewards for helping strengthen data protection for everyone. To learn more, follow the link in the description below. Today's episode is brought to you by Ledger, the global leader in digital asset security. Celebrating 10 years of innovation, Ledger is trusted by 7 million users, secures 20% of the world's digital assets, and remains the most secure hardware wallet for your

crypto and login. Follow the link in this episode's show notes to grab your ledger today. There's a lot there. I want to unpack. I want to actually return uh to something that you said at the beginning, a key difference between L2s and L1's being this ability to allocate capital. And uh this was actually a um a big realization that I had when I was thinking about originally trying to reason about L1's and how to view the token. And this is why for a long time come to the conclusion that these things are mostly commodities. um because you're lacking this and actually there's a there's a great chart a guy named uh oh my gosh I'm blanking his last name uh Julian from head of macro at Fidelity uh digital assets he he showed me this chart go of returns of

different asset classes going back to going back in the late 1700s and you've got equities bonds yield bearing cash gold precious metals and equities clobbers everything else and the reason for that is because you can compound capital. So you can take capital and then you can reinvest it into uh the places where there are the highest returns. And so equities over times just dominates everything. It was a huge light bulb moment for me because I realized at that time that L1's do not have the ability to do that, right? There's no coordinating entity. Yes. And at the L2 layer, what I heard you say is actually that's a that's a massive advant there are some advantages, right, on the L1 side of things of being incredibly neutral and there's it's

actually a design decision of Ethereum as opposed to something like Atom which actually does have some sort of treasury to not allocate that, right? That's why they just burn that u those those funds. But yeah, I mean it's a really exciting opportunity for L2s in general as being an allocator of capital. It's an absolute superpower and I think that like I think part of this is that you know there's so many L2s and a lot of them have different visions and maybe they have different mandates like arbitum I think and we can talk about like what how I think about that mandate in a second but it's one of the biggest challenges of the L1 business model because we just the industry hasn't been around long enough in my opinion to see it play out but what happens is is basically every L1 and historically

almost every L2 and even arbitum largely the way that they're funding growth is through um inflation of the supply of their native token assets, right? And in Arbitum's case, the way I view that is just because that's what you do when you're early stage and as you're growing and building. And I actually don't think it's a bad thing. I think that it's two sides of the same coin. Some people will say it's reinvestment and some people will say it's inflation. And the delta is a function of how much you believe in the growth story. Right? If you don't believe in the growth story, you call it inflation. If you believe in the growth story, you call it reinvestment. But L1's don't naturally have that mechanism because, you know, one of the things I

did in the piece was I compare it to like a REIT. And I'm I'm a former real estate finance lawyer, so maybe that's part of the reason. But in reality, most REITs, they have to by by tax code pass, I think it's like 90% of um income to holders. That's why REITs pay out huge dividends and they get, you know, tax advantaged um structures, but when they want to grow, they have to raise new capital and issuing shares, right? And if you're an L1, you don't have that mechanism unless you're going to continue to tap into sort of an existing issuance supply over a one-year, 5year, 10 year horizon, that works. But if the foundations don't have, you know, mechanisms to earn additional capital in in the future, it actually eventually has to sort of run

out like it's just the law of physics in some ways, right? So I do think though that you will there are some wellresourced foundations that are figuring out solutions to this whether that's you know adjacent products or you know subroducts that they build. But I think it's a fundamental distinction that L2s have as a benefit over L1's. Okay. and the the analogy. So if the analogy that you use for L1's is REIT where you have to pass through most of the income as dividends which is the MEV the uh REV right that you see get passed through to and plus inflation rewards that you see get passed to L1 stakers L2s the analogy that you used actually was like an oilrich nation right where you had a very high gross margin

commodity and then you reinvested the gains there into demand um into demand something drive demand so break down that analogy because I could see a lot of analogies is here one more like an investment management company or something like that you chose uh digital sovereign nations so why and the reason I chose that is because you know when you think about sort of commodity-rich countries jurisdictions what whatever it is um the thing that they have is to they have a like you know there's a lot of oil in the world but the reason why like Dubai and Saudi Arabia make a lot of money off of it is because their ability to extract it from the earth is cheaper than everyone else Right? So if you have a commoditized asset and it's cheaper for you to

um to provide it to the world then you will make more money. Um and when you think about sort of arbitum and the way we've designed it and this is a critical input into the design decision around sort of the orbit product strategy which is our ability to launch chains. It is extremely easy and cost-effective for us to have the demand for our block space continue to grow and grow and I like to say I think you know arbitum has the best execution environments as a product and that is our oil right and when you know if when I look at like um you know

if you take Dubai for a second people don't say oh Dubai is an incredible incredible example of like economic prosperity as a function of the fact that they sell a lot of oil. They sell a lot of oil and then they've managed to turn that into real estate and other forms of investment that is bootstrapped off bootstrapped off of the fact that they have that ability to sell a lot of oil. And for me that's like a completely different perspective in how I think about block space. It means that block space for an L2 as you grow your profit margins and as you grow the amount of cash that's flowing into your treasury, L2s are not selling block space as an end in itself. They're selling

blockspace as a means to what I call expand their economic zones of opportunity. Um, and those economic zones of opportunity are the builders that are using this technology, the consumers that are using this technology and finding ways to support them and finding ways to make sure that you not only can do that sustainably, but you can also generate revenue off of it. Um, one example of this I think is actually like the GCP, the gaming catalyst program. And I think it's a really interesting case study on how to think about this.

Let's just assume there's a lot of people who think like web 3 gaming sucks. It's never going to work. But let's just assume for argument sake that it's a good idea to invest in gaming. I personally think it is. I think that like gaming and finance are the two verticals right now that can bring in tens of millions of users and billions and billions of dollars into crypto. Um like net new. So let's just assume that that's the case for the sake of this argument. There is no world in which gaming being successful is going to be like you're generating tons and tons of transaction fees. And the reason for that is because there's nobody in this product cycle that wants to pay a lot of transaction fees. Like gaming chains are

launching their own chains using Orbit. And I think we have almost two dozen today precisely because they don't want transaction fees to be high. They don't want noisy neighbors. They don't want me. They want to abstract it from their users. So, they just basically like almost wish it didn't exist, right? So, if I'm arbitrate, I have two options. I either don't do it in a sustainable fashion or I insist that transaction fees are implemented into the user product in order to be able to make money off of that. But like neither of those are optimal to me. The optimal mechanism to do that is actually and it goes back to what I mean by expanding economic zones

of opportunity. If we have hundreds and hundreds of games using arbitrum and we have a pool of capital managed by competent people who know the space and know the industry and they can pick we want to invest in this game. All of these chains and ecosystems would love to align with arbitr. They would love to take that capital and help grow it. And the only way to make money in gaming and this is true of web two gaming and web 3 gaming is like marketplaces, inapp purchases and economies. So why should an arbitrum's business model be flexible enough to ensure that we can earn off of that? So the reason why blockspace is important is because if they're not using arbitrum

as a from a blockspace perspective, they're not going to want to work with you across these other dimensions at the application layer. It's like if you don't need oil, there's no reason for you to talk to the sovereign wealth funds in Dubai and Saudi Arabia. But if oil is critical to your business and you're trying to find the ways to align with these suppliers of oil, they become really critical partners in your path for growth. And that's what I mean by turning arbitrum into a digital sovereign nation. I want arbitrum as a partner for all these builders and all these developers to be a critical partner in their path to growth and success because they're using arbitum as a technology.

Okay, let's talk a little bit about business model here. You outlined some of this in your in your article. You talked about a couple of critical success uh metrics or factors that you could look at including uh stable coin, DEX volume, etc. Um can you maybe maybe can you compare um the business model here of kind of the the orbit stack plus arbitum one uh compared to something like you know I think you were alluding maybe to optimism's business model in your um in your uh post which looks a little bit more like a bundle uh to me um and maybe some of the challenges there like pros and cons like could you just kind of outline the business model of arbitration in comparison? Yeah.

Yeah. There's actually like a really I think been a huge So, you know, optimism and arbitrum I think is like one of those like competitions for like the last five years that everybody in crypto is sort of like very Red Sox Yankees. Exactly. Like it's very But what's actually been interesting I think is there's been a very significant divergence in the last 12 to 18 months in terms of how we think about this. And you know, I'd obviously love their perspective. I've done a podcast actually with Ryan Wyatt from them in which we kind of went back and forth on like some of these distinctions. Um, the way I personally view Optimism's business model and strategy is they're much more focused on horizontal scaling and uniformity of the super chain and

their business model being layered around um transaction fees they can earn as a function of the value proposition of interoperability, right? And that's like the model. And in that model, the end state is having more block space for the purposes of generating more transaction fees. In that model though, the downside is is that it's much more restrictive and constrained in terms of like what you can do with the abundance of block space. So for me, if somebody wants to launch an L3 on top of Bass or if somebody wants to launch an L2 on top of Ethereum or an L3 on top of Arbitrum one, if they're using my technology and they're really good builders, I want to

find ways to be supportive of them because I view Blockspace as an end in itself to be a business partner, right? for them, they need you to sort of join this, you know, governed by the OP stack superchain thing in order for their business model to be successful, right? So again, even though the stack might be open- source and you can launch like OPBNB, it's actually not relevant and it's not something that they're going to invest in and support per se because it's exogenous to the business model. And the downstream effects of this are I think sort of how widespread you might see people taking the stack. So recently for example um you know on the orbit stack one of the most in demand features

we have is custom gas fee tokens and the reason for that is because a lot of people want like utility for their token or as an easier experience for like abstracting fees away or subsidizing fees on behalf of users. So when we had like a 100 orbit chains, I think like 75 of them are using custom Gatsby tokens. And I think it's a great feature because I want builders to do whatever they think will make their product more successful. OP deprecated it. And the reason for that is I think because it doesn't fit well within the super chain. It just adds unnecessarily complex um components. So I think their business models become much more about maximizing transaction fees and less about what's happening at the application layer of these. Right.

So they've done a really good job sort of getting distribution partners like um Coinbase and I guess like Kraken and and Uniswap for example, but at the application layer there's less of a connection I would say between optimism and like an application deployer on base for example because Coinbase is their primary sort of chain relationship for us though who's building on these things is like super important to me because if I can then align with them like they're using technology they love using arbitr That's like ideal for me, right? So when we had for example um GDC the gaming developer conference was was last month.

We had um a booth there and some of the games were building on arbitrum one but like other side was there building on APC chain and we had games that were building on top of Z and proof of play is building its own orbit chain and for me finding ways to invest and align with all of these chains at the application layer get them exposure are critical components in this broader vision of yes like I want to um make sure you consume our block space but not as an end itself but as a means to a broader end. Um in terms of specifics of the economics there's also some differences that sort of map into this one is um so for um optimism in order to use the technology stack it's open source but in order to

join the super chain it's much more restrictive like OP will govern your um upgrades and security of your chain and you have certain like you can't use custom gas tokens for example on arbitram if you want to settle to arbitrum one it's free you don't have to pay anything. But if you want to use the technology stack anywhere, uh you give 10% of your profits. But you can do whatever you want because if you want to use custom gas tokens, you want to add, if you're an RWA issuer, you want to add KYC and compliance into your node software like Kinto and Rails are doing, like whatever you're doing, you can do with the stack because we want to make sure from a product perspective, you're enabling it to be as successful as possible for us to find opportunities to continue to reinvest. M okay. Uh you

know so that that exactly that breakdown uh you'd be maybe happy to know AJ we talked about this on expansion with Jillanuma maybe a week or two ago and basically you said exactly what you just described as a divergence in the value proposition between the two business models and uh for different builders. So very cool. I think it's kind of feels more like a complimentary set of offerings. Yeah, I think I think it's interesting to see how that's sort of evolved and Jill and are fantastic. I think they they they're both in positions to really see these distinctions in business models like succinct and espresso. Namata is the shielded asset hub rewarding you to protect the multi-chain. Built to give you full control over sharing your personal information, Namata brings data protection to existing assets, applications, and networks. Namata ends

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touchcreens, making it easier and safer to manage your assets. Alongside Ledger Stacks and Ledger Flex, they have also launched the Ledger Security Key app, offering a safer alternative to traditional password management. Follow the link in today's show notes to get started with Ledger today. Well, it's good to hear that you validated our speculation uh on the roundup. So, that's great. Um but yeah, I think it's and that's that's cool to see like the very complimentary uh kind of sets of offerings. Um, so can you uh can you walk us through maybe just some of the um maybe to round out uh the sort of the end of your post here and the conclusion and then I want to what I want to do is get the connective tissue towards how this your particular vision for arbitum uh dovetales with this change in the

operational setup uh that we're introducing to the Dow. So c can you kind of land the plane on a just like what are some of the metrics that you looked at historically you know stable coin issuance uh you know dex volumes that sort of thing and then help us land the plane on this part of the vision then we'll get into what we're actually changing here. Yeah. So the way I think about this on this part of the vision and how we can make sure and again arbitrum is not perfect. I think there's certainly categories that arbitrum can improve significantly on like one I think is in particular is on the consumer side and some of the early stage speculative creative experimentation that you might see in crypto. I think like Salana's done a really good job with that. Um I think

Bass has done a pretty good job with that as well. I think that's certainly an area of the Arbitum ecosystem community and all of us could improve on. Um but when I think about arbitrum as a product and the demand for it as a product I think about um arbitrum one and arbitrum orbit and you know I had this section of the of the and I don't think most people understood it so it probably wasn't written well. Um when people ask me like what arbitum is historically the first thing I would say was it was layer two on top of Ethereum and I think like others who are building their own chains like oh it's a stack that we can use to launch a blockchain and it actually arbitum I think is neither and it's actually both and when I say it's both I

mean that arbitram the goal of arbitramim from a product perspective is what is the best execution environments we can offer for your stated purpose. So if you want your own chain like arbitum orbit should be the best thing for you to launch your own chain and if you want to be on a public chain arbitrum one should be the most liquid credibly neutral secure and decentralized environment for you to be able to do that and to me it's a complimentary product because people are going to go in their journey and start on arbitrum one and then move to an orbit and the things that I look at to see if arbitr one is succeeding on those dimensions is things that make sense to

be on public chains and obviously I think the overwhelming majority of DEX volume trading is going to happen on a public chain. I think the overwhelming majority of lending activity on like something like a or fluid or compound is going to happen on a public chain. Um and that's why like I track these things. So, you know, people there's often like a joke um that like arbitum is like the hyperlquid bridge. I'm sure you've seen that. I think every blockchain would love to be hyperlquid's bridge, right? People like to point to it as agility, but when I think about arbitum as a product, that's actually amazing. like

Hyperlquid like Jeff Julian they chose arbitum because for them they wanted to source liquidity from what they believed was the best liquid credibly neutral secure and decentralized environment and that for them was arbitr USDT0 says we want to launch an interoperable version of USDT that can be everywhere and we need a hub an economic hub and they chose arbitrum that to me is the role of arbitram what are things that should be on these public environments secure decredly neutral decentralized and liquid. So when I look at sort of arbitum outside of Ethereum being the leader in unis swap x volume that to me is a very

strong signal right unincentivized a very strong signal because that means we're satisfying what we're trying to accomplish on the arbitum one barbell side of the barbell of the strategy and then when I see the growth of orbits and again I think that like some of the sexier orbit um chain names are probably using the op stacks still but arbitrum is enabling ling hundreds and hundreds and hundreds of chains. I don't view them as chains. I view them as opportunities to align with builders and developers. And we're seeing tons of experimentation with AI, tons of experimentation with advanced DeFi strategies, gaming, etc. So that's what I mean by like this strategy of working.

The reason why I say arbitum is neither a blockchain or a stack is because of what we've been discussing to date. It's a very incomplete version of the story. Arbitum is the collection of stakeholders that have the ability to invest, grow and build out everything that's on top of these. So when I want people to think about arbitrum, the same way that when you think about Dubai, the first thing that comes to your mind is not oil. It's that it's an incredible environment to find liquidity. It's an incredible environment to find business leaders, etc. That's what I want on a digital level. arbitrage room to be that collection of builders that are tied together not by geographical space but by an alignment about this vision of

what we're propelling forward and that doesn't involve per se block space. It's a function of that being the input that allows the rest of the engine to operate. Does that make sense? It it does. And here one question that I have for you maybe we can now dovetail into um you know this idea of the opco and maybe who the stakeholders are in the arbitum ecosystem today. Um, one, well, here here's a question that I would ask you because I I really like this framing of being an allocator of capital and maybe one if I was trying to think of play devil's advocate here or come up with a little bit of push back would be you know originally the investors in arbitum allocated capital because you know we think you guys are great uh

however you want to like ex harvesters of the Ethereum block space um and you know builders of technology in general like builders of the arbitum one and the stack etc. Um and this actually the competency shift here a little bit is to be allocators of capital into different sectors or businesses etc. So you know what would you or do you disagree with that framing or or or what I understand the question but I understand the question but I'll actually I'll explain to you why I disagree with it in some sense. Okay. Um so like I said when arbitrum started it was a technology stack. it was an L2 scaling solution to scale Ethereum.

And I think you know offchain labs and then obviously now it's the DAO with offchain labs being sort of like a core developer um has I think delivered on that mandated mission right and the reason why I'm not advocating that offchain labs should pivot from being the developers of this or even take on a second role to now be capital allocators on behalf of the DAO. I actually think that's a mistake and the reason why we have built this structure where like I said in the beginning the authority of assets and control of the purse sits with the DAO because there are entities and organizations that could be formed that are much more competent for these

complimentary things in the ecosystem that offchain labs could ever be right so I'm not here advocating or recommending that offchain labs should say arbitum dow give us the treasury let us allocate and become capital allocators. What I would recommend, and we've seen early versions of this with the GCP and with step to some degree, and we'll talk about why to some degree in a second, is I would love if there were more organizations and entities that were working for the arbitrum DAO in complimentary roles to what we're doing. Offchain Labs is really good at product research and engineering and to

some degree also business development for growing people to bring them into the arbitum ecosystem. I'm not a capital allocator and that's not my strength and we should find people who will be joining the arbitum ecosystem and what I call like this concept of an arbitum aligned entity has three main prongs. One, you have to be competent to do the role. Arbitum success should be missionritical to your success and you should be focused on winning at the vertical that you're doing. Right? So arbitum as a concept might become a capital allocator, but that's because the original mandate of offchain labs I think is leaving the majority the overwhelming majority of chips on the

table in terms of how arbitum could capitalize off of it. Right? So again, it's not about a pivot. It's about an extension of how do we continue to generate and capture value as a function of the genesis kernel of what arbitum was, which is a really good execution environment. So when Offchain Labs contributes its components as a core developer, our goal is to make the oil in this as easy to get out of the ground and have as much demand for its consumption as possible. Arbitum everywhere because if arbitum is everywhere, you can bring in other organizations, right? And to some degree, the GCP is doing this in gaming

and entropy has been doing this as part of their mandate. The step team has been doing this. Let's find all of these different ways to increase demand for our resource which is execution environments and block space while simultaneously continuing to grow and capture more value. Does that sort of answer your question? It does. All right. I want to I want to also get into now what the current like what the what is the status quo look like in terms of the governance of arbitum and the different entities which are involved. I also I think it maybe bears mentioning at the launch of the DAO, one thing that arbitum did very differently is give a much greater degree of ownership to the DAO than other organizations in crypto

have. And I say this, I don't know if people are following along. I've got my arbitrum swag on here. Uh Blockworks was a a delegate of arbitrum from the TGE. So we've been um you know in the trenches and definitely big supporters. But yeah, I don't think people realize the degree of control that was handed over. It was pretty unprecedented I would say at the time and even still it's still no one's done it since. I think some people might not have done it since because of some of the the gray hairs on my head from that off the ground but um it's actually the bedrock of the vision because none of this works if you can't look on chain and see that the residual owners of these things are arbitrant token holders. Otherwise, it's

a meme. And I think that's one of the challenges that we've historically seen is that people don't understand the value proposition of what's happening. They think it's a meme. But when you give that ownership on day one, ever since the Arbitum Dow launched the um outside of sort of even the Arbitum Foundation, like the level of control over the Arbitum Foundation that arbitrum token holders has is incomparable in terms of that level of control that anybody else has, but like three and a half billion tokens sitting in the onchain treasury. every dollar of transaction fee revenue net of what's obviously paid to Ethereum into the Dow's treasury. The Dow has started deploying that last month. I think

Entropy put up a proposal to take 7500 ETH and to start investing it into DeFi applications on Arbitum. I think they're working with Fluid, a Lido, Camelot, um a bunch of others. All of that works. Like foundations can do this. But what happens is when foundations do this is they're just compounding and extending their mandate runway and treasury for them to continue to be that arm. They're not returning it into the D. I mean they technically could but there's no like legal obligation to do so. So all of this works and is a function of that at the genesis arbitrum doing this differently. um and the state of the Dow and yeah, interrupt me if I'm not fully

answering your question. I think I think this is but like of course correct me if I'm not. Ever since then, I think arbitrum has gone through like you know and I should have said this in the beginning but I'm going to definitely explicitly say it now. A lot of this I think is the responsibility and fault in many ways of offchain labs um and the arbitrum foundation in the sense that we were extremely handsoff over the last two years allowing the DAO to form its own identity its own mandates its own missions and sort of self-govern and it's been healthy because you get incredible organizations like the entropy guys they're working full-time for arbitr guys they were they came out of this sort of whole kernel of

experimentation of DAO ownership because there's no other ecosystem that allowed anyone to do that. If I did it again, we probably would have tried to find a better balance of doing this with Offchain Labs and the Arbitum Foundation being in a position to sort of help steer the direction. Um, but what's happened is I think we went through a few phases. The first three to six months of arbitram there was basically gridlock because we went from top down to control to like what the hell should we do? Mhm. Then there was I would say um like the start of doing things in getting things done mode, but it was like a little more chaotic and now things are working, things are

happening, there's a ton of initiatives, but there's like operational inefficiencies associated with it. And I think that there's um two components of this um and like the forum post sort of um you know goes into it a little bit that the foundation posted is um you have right now there's too much demand on delegates. Yeah. in the sense that whether it's should we sponsor an event or should we turn on time boost which is this like revolutionary new business line for the DAO that can introduce like AB and C um consequences delegates need to read everything they need to vote on

everything and you get delegate fatigue and what's I think been happening is a lot of the best stakeholders and inputs of feedback come from builders and people who care about arbitr because it's critical to their organization success and these people don't have the time to do all of this work, right? they need to be helped to make decisions and we've seen that the delegates has you know and these these versions of delegates are absolutely critical I think to the success of arbitrum like L2B and others but delegates are becoming these almost like and block works research for example like these

organizations that are like designed specifically to understand governance and understand the ramifications of decisions but they're not like necessarily per se stakeholders in arbitrum success and I think we need to find a ba a balance between those so that we're getting the advice and guidance and feedback from delegates both on a governance perspective but also from a product perspective. Um the way I think to solve this is to reduce the amount of um decision-m that delegates must make.

To me, the red line drops at delegates need to control the power of the purse in any system because otherwise you run into a lot of the problems that I think we see in typical foundation structures and two they need to maintain control of the protocol. Arbitum should not be able to be upgraded without the token holders agreeing to. When I say arbitum, I mean arbitum one, the tech stack, I mean the the public blockchain governed by the DAO and funds should not be able to leave the Dow's treasury without the token holders. But once that's happened, we need to introduce more operationally efficient structures to win. Right?

We're not going to get to this place where we're a digital version of Dubai without ruthless and relentless relentless ability to execute. So that's what I think the role of OPCO is intended to sort of facilitate the introduction of. Right. So we have OPCO for those little less familiar with the arbitrary DAO. It's this newly formed entity. I actually was elected last week to join its um committee of oversight. So I'm very excited to be in that role and sort of out exactly to get this off the ground.

Um, and the goal of that is to be this control panel that's responsive to the DAO and also has the ability to work with other arbitum entities who are contributing to make sure that they are doing their jobs to the best of their abilities to help arbitrum succeed and those organizations um, Offchain Labs, Arbitum Foundation, GCP, Opco go entropy all of these different organizations they need to have their mandate their roles and responsibilities of what they're doing they need to be accountable both the token holders and the opco to ensure that they're doing it properly there

need to be mechanisms and corporate governance to make sure that this can be successful but they need to be able to operate ruthlessly to win and I think what's happened historically is vendors and I think Blockworks has done some of this work for the arbitr as well have been put in a decision tree where they need to make decisions that are either operational strategic um or uh in on behalf of the DAO and that's not a place you should be putting vendors in. Right? So Trail of Bits for example is the auditor of the arbitum protocol for offchain labs. Trail of Bits does not tell us when to launch a feature. They tell us these are the

risks. This is what needs to be fixed and this is what you should do. If we asked Trail of Bits when should we launch it, it would be an unfair request. So I don't think that like this concept of having a lot of vendors contribute to arbitrum is a bad thing. But what they need is to be reporting and have a scope of work from what we call an arbitral identity instead of directly from delegates. is now instead of having one source of truth and one source of feedback there's a hundred which leads to gridlock inefficiency and frustration. So I think that's actually a really critical point and the second critical point and goes back to the question you were asking about like offchain labs being a capital allocator

etc. There should be an embrace to have as many arbitum aligned entities as makes sense. So what I mean by that is if you think about the GCP and what success looks like for them, it's very different than the Arbitum Foundation, right? The Arbitum Foundation is a steward that's supporting in certain capacities events devril um grant programs, etc. They have certain KPIs as supposed to hit and that's like their role and responsibilities and their employees should be compensated commensurate with those structures. If you have the GCP and you want to hire the best gaming fund investor talent or we build a DeFi fund that's going to be

doing that, their compensation structures should look different because you want to attract the talent that is going to be doing specific roles and align those entity organizations to try and maximize what their KPIs are, right? And if you want to build a fund and you don't have carry because these things don't work. So this is not like a a club of like these are the people that are running this. I want the DAO to think through and get business plans and think through its strategic goals and operate to find the best talent to do these things. And again, it's unique. It's ambitious. Um, but I think if we want to get to this digital sovereign nation in a way that's ruthlessly effective and supportive of builders of the

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Morpho is the first and only DeFi protocol Coinbase has integrated directly into their main app, giving millions of users access to borrow against their Bitcoin on Coinbase. Just as web 2 companies like Google, Amazon, and Meta were built on internet protocols, the largest financial companies of the future, such as Coinbase will build on decentralized protocols like Morpho. Whether you're an individual fund, fintech, or institution, Morpho is for you. Follow the link in today's show notes to try Morpho today. So, I think that and again, just for for listeners who might be a little bit less familiar with the arbitum ecosystem, these this list of like stakeholders. So there's obviously the foundation, there's offchain labs and you know I heard you said it's product and engineering and and that type of thing and then entropy which uh

as you mentioned those are ex block works guys and I feel like they're kind of historically been almost project management and coordination a little bit the introduction of strategic proposals etc. roughly um the GCP which is the gaming fund which um ced roughly around 200 million or 250 million orb I believe. Yeah, I think it was 225 if I remember correctly. 225 to go bring uh and and you know my uh my memory as well and maybe to do a little bit of a history lesson or or talk about you know Blockworks's involvement here in the beginning is um we also kind of saw this was pre- entropy obviously and the GCP but saw there were multiple different stakeholders there that just needed a little bit of um there needed to be more

tech not not like steering just connective tissue and getting people on the same page right like that's there's a huge amount of value to getting people on the same page um and that was actually the beginning of what we originally called the arbitum coalition which became the ARDC which is still a structure that exists to this day. Um and then entropy uh I think also was sort of involved in uh you know trying to make things run a little bit more connectedly and now I think this opco structure is sort of this the culmination of it it's the culmination of a long series of you know identifying this this yeah and again I think what's critical about the opco is it's responsive to the delegates and it's responsive to stakeholders and you know

I want the overlap of stakeholders and delegates to continue to converge. Um, and and this is about taking all of the feedback and all of the stakeholders and channeling it through a control panel that can then disseminate it to like worldclass operators at what they're accomplishing. Yeah. And I think that I think the opco is going to be such a zero to one moment. Again, hopefully it's executed properly. if it's executed properly and and you know I'm so passionate about and that's why I joined the joined the oat to me it's absolutely critical as this like quarterback control panel to continue to understand all the ambition because if you don't

have you know arbitum foundation and offchain labs work very closely together right but if you don't have that connective tissue through GCP and other initiatives that are all responsive to the Dow it's just going to be chaos, right? You need to have resources talking to each other. You need to have capital flowing, right? We need to get to a place where we can say this becomes this is a shift in strategic priority and that is well, who's picking it up? And I think the opco is going to be a critical player in managing all of this again in a way that's responsive to stakeholders, not in a way that's centralizing. And I think that's like an absolutely critical

perspective. One thing uh I also draw an analogy here as well to Dows that are like I think there's an analogy here to be drawn to some of the older Dows like Maker or currently Sky and relatively close with some folks um who are in that ecosystem and actually if you remember back in the day there was a there was a foundation at uh at maker and then they dissolved and there was actually a period of probably similar to when uh the analogy would be to when offchain labs and the foundation handed over seated an enormous treasury and complete ownership and control to the Dow. It's kind of like what comes next and I talked to a couple of uh people who are in that ecosystem. They said there's like this period of growth, right, which is and eventually now there's this sort of uh

network of companies that contribute to the to sky. There are stars that are spinning up. You kind of figure it out. And this is actually analogous to there's a there's a pretty famous hump around 50 people in a company as well where your the be whatever org structure you've set up to get from zero to 50 completely breaks down. You have to rethink everything and you spend more time thinking about how the company runs and actually the product that you're shipping. Uh so it's very natural. One thing it it's a small thing but I'm uh asking this question as a I forget if I've ever told you this but before block works I was in consulting and we specialized in procurement um and uh you know one thing from the I think that it's always been a little bit challenging between the vendor DAO relationship is what the procurement

process looks like and who your counterparty is actually in the original scoping of the uh in the original scoping of the AR what became the ARDC the reason there's an advocate role was actually me saying you need to be accountable to someone, right? Because if you're accountable to no one, you're accountable to everyone and it's impossible to you're serving not even two masters, right? You're serving many. And you know, I think one of the other challenges potentially of Yeah, the challenges go both ways. So there are lots of vendors out there who don't have the Dow's best interest at heart and they're like the looters of the DAO, right? And it's I totally understand why people are really sensitive to that because lots of negative history of that being the case. Um the the challenge from the vendor side of things is sometimes when you're trying to price a

service towards people that have no idea how to price that service and you're kind of selling towards someone that has no experience with procurement, right? So does does this new structure does it enable like easier counterparty? Yes. The answer is is that vendors are not going to be in this structure working directly for delegates. So let's say for example like I said right when offchain labs needs an audit we don't ask the DAO to find an audit for the next version of Nitro we have trail of bits as a contract with us to do it if somebody let's say the arbitrum foundation or entropy wants to run a grants program they should run RFPs to figure out who are the best resources

that can augment their in-house resources to make it the most effective program possible they should scope of And that's the answer, right? And that's why a lot of vendors that I've spoken to about this and the foundation has spoken to about this, they actually embrace this because organizations, they need vendors, right? Like most companies use vendors for specific services that don't make sense to staff full-time and are better with vendors, but the vendors look bad if they don't do a good job. The consumers, the purchasers of the services are frustrated if it's not done efficiently. So this is actually intended to be a mechanism to have more vendor participation where appropriate in the arbitrum ecosystem not less. Um

and I think that I hope that bears truth because every time a vendor works they'll be scoped and reporting to sort of an entity that is asking for their services. Yeah. As opposed to the down cells. it it resonates deeply and you know it it's even it's funny you know like Jason my co-founder and I Jason Jason are in you know a co-CEO model right and even with the two of us I mean Jason I lived together we started Blockworks we were friends before we I probably talked to him more than any human I've talked to my entire life at this point uh so we're very in sync but even reporting to two different people right like sometimes Jason wanted one thing I wanted the other thing it causes confusion you know amplify that by a hundred you know when a bunch of

internet strangers and there are more people, right? So, having one counterparty and even like a point of con like that type of thing is so nice. Uh it's so it's so good from the vendor perspective as well. It's a massive massive improvement I would say. Uh it's just how Dows work in general. So, yeah, my two cents. There you go. very supportive. Um, okay. One other thing I'm I'm curious about as well is uh okay on the So, let's talk about some of these um you know in our in our final kind of minutes here. I want to I want people to understand some of the challenges that so we've talked at kind of high level uh of some some of what the challenges that this solves like the OPCO is kind of the connective tissue here but let's talk about like the maybe

like the vendor selection and the RFP process is one but let's talk about some other concrete operational improvements that you see coming out of this. So we can leave the people with something solid and then let's end on kind of a high level. I just love to get your sense of like what's coming down the pipe the next 12 months from our Yeah. So um so operationally again I think there's two goals here. One is the mechanism of getting feedback from stakeholders I think has been broken in many ways because the demands on them are too high right like the amount that you ask in arbitum of its delegates and like the delegates who are involved are incredible like the amount that's asked of them is astronomical um and it doesn't need to be in order

for arbitum to remain decentralized as an organization we need to introduce operational efficiencies because I want more feedback. Offchain Labs wants feedback. GCP wants feedback from the people who will benefit or be hurt by decisions that are made from either a product perspective, an investment perspective, etc. Some of those people, some of the most important of those people are just too busy to give it if it requires dozens of hours of work a week. I see it from builders all the time. I've asked people, get involved in the arbitration now. They're like, it's just it's too consuming. I've got my business that I need to run. So, we need to figure out a way that we can be getting that feedback from delegates, investors, stakeholders

in the most absolutely effective way possible that will improve arbitrage, right? Even things like debates about whether the GCP should be funded, debates about whether um you know we should be deploying millions of dollars of ETH into DeFi to compound its growth and support builders. I want the most aligned arbitration from stakeholders to be in those conversations. So if we can reduce the amount of decision-m that they must make, we can get better guidance from them. So that to me is an absolutely missionritical thing that will come out of this. The second is and it's sort of the thing that enables the first is we have

organizations that love arbitum and wanted to win. Offchain labs breathes arbitum. The arbitrum foundation does too. I've worked with the entropy guys, GCP. Everybody in the things that they are doing are focused on making sure they can do the best possible job for arbitrage to win. We need these organizations to all work well together to not have overlapping mandates. That's I think a key role in the opco. We need to think about how do we embrace more to bring on better human capital in specific verticals. Um once we do that, once we have that ability, we are going to be able to execute and respond to the needs of our builders and our users much more

effectively. Right? We're not going to be pulled in a million different directions. If we want to think about how do we help grow the DeFi category, what can we offer to early stage projects that we don't offer today to make them embrace arbitr authority mandate responsibility and they have funding to do those things, the operational efficiencies will go through the roof. So that's what I really think will happen over the next 12 months. I want better feedback loops. Again, I'm going to reiterate because it's absolutely the most important thing. None of this works if the DAO doesn't become the ultimate source of authority. When I say the DAO, I mean

they maintain control of the protocol and they may retain control of the power of the purse. But what they need to do is, and again, you need control structures. And if you read like the arbitration's bylaws or the GCP's bylaws, you can understand all of the thought process that goes into this. You need to let people build have accountability to the people to the token holders whether directly or indirectly whatever is most appropriate usually indirectly through like a a subboard like GCP as a committee and let them build and let them operate and let them execute and the more that we can streamline this and build confidence in this vision the better talent I think we will be able to attract because people

who have endless opportunities Um, you know, I'll just use this as an example, like if we if we went down the path, and this is one that I would love for the Dow to explore. If we went down the path of thinking about how do we build somebody who can actively manage funds to deploy into DeFi, um, I want the best person in the world to do that. That person is not going to come and do that in a den of chaos because they have hundreds of opportunities that they can pursue. they can get capital from anywhere. That person will come when they have confidence. Again, it's not about not having control mechanisms to do whatever you want. Nobody has control mechanis even CEOs like you like you

have a board still, right? There's all of these different control mechanisms that are in place to ensure that people are doing their jobs effectively. If people have those control mechanisms in place, we don't have to reinvent this just because ownership of arbitum is decentralized. What we need to do is allow them to streamline efficiency of working. And I think if we get all of this in place, we will be able to attract to our vision an immense amount of um, you know, opportunity and human capital. I agree, man. AJ, this has been a ton of fun. And if there are people who are out there, organizations perhaps or individuals

that find this to be an appealing structure uh or want to learn more or just want to figure out how they can contribute to the Dow and get involved in this vision, what's the best way for them to do that? Great question. So, OPCO is not stood up yet, which would be the answer once it's like stood up. Yeah, please reach out to me in my capacity at offchain labs or my capacity on the oat. The Arbitrum Foundation is a great resource, but you can find me Arber Foundation and as we're all building to get this OPCO stood up on behalf of the DAO, I think that um yeah, I would love to speak with anybody who wants to get involved. Awesome. And we don't want to volunteer without his permission, but I saw Patrick McCory made it on there as well. So, uh yes,

Patrick and then um Fristen from Tally is is sort of the oat and then we have a mandate to add two additional members. Nice. um as well. So, we're going to be convening soon to start thinking about how to how to best find complimentary folks. Excellent, sir. All right, AJ, it's been a pleasure as always chatting. Awesome. Love to do it again soon, my friend. Thank you so much. Yeah, this was great. Appreciate it. Take care.