Crisis of Confidence in the encryption field and self-regulation revolution

Compilation: Loxia

Lemon Problem and Trust Crisis

Today I don't intend to talk much about technology, what I want to discuss is a social issue we are facing in the field of encryption. The title of this speech is "Social Consensus and Self-Regulation". I'd like to start by asking if anyone has heard of the "lemon problem"? Does this term ring a bell?

Well, not very impressed, not very much.

So, in American slang, 'lemon' refers to an unreliable car, and it's a car that you didn't know would be unreliable beforehand. I'm not too sure about the origin of this word, but 'lemon' is what it means.

Well, good cars, reliable cars are called "peaches". I didn't know this before, I found out by checking, it's quite cute.

The 'lemon problem' is basically a problem for used car dealers. When you go to the used car market, it looks a bit like this, feels a bit deceptive, because you don't know if the car you're buying is a 'peach' or a 'lemon.' This is also a big problem in the current crypto field - everything may look like a 'peach,' but many protocols are actually 'lemons'.

So, when you buy a car or use a protocol, there is a certain probability that it is a "peach", and there is also a certain probability that it is a "lemon". So how much are you willing to pay for this? What is the weighted average price you are willing to pay for something that may become a "peach" or a "lemon"?

What price are you willing to pay for this? This is like some kind of weighted average, we can all internalize this concept - a certain 'lemon' probability multiplied by the value of 'lemon', plus the 'peach' probability multiplied by the value of 'peach'.

You might instinctively think that the price you are willing to pay is somewhere between the price you would pay when you know it's a 'peach' and the price you would pay when you know it's a 'lemon'. So why is this a strange dynamic and why are we talking about fruit?

So, what incentive does this have for used car dealers? What is your incentive if you know that everyone will pay a price between 'peach' and 'lemon'?

Your incentive should be to only sell 'lemon', right? If people are willing to pay a higher price than 'lemon', you have no reason to sell 'peach', you can sell 'lemon' directly to them.

This is often referred to as a scam.

Well, I'd like to pause for a moment. This is a big problem that the crypto field is facing today - the Lemon problem.

Well, today's dynamics in the cryptocurrency field is that due to this lemon issue, the probability of 'peaches' has actually decreased. Fewer and fewer people are willing to grow 'peaches' because they are very expensive, while 'lemon' distributors are entering the market because they think, wow, I can directly sell 'lemons' to those who are willing to pay a higher price for my product than its actual value, because they are misled to think it's 'peaches'. Overall, the willingness of users to participate in the ecosystem has decreased, which is reasonable.

Now I can hear some of you in my mind, or the imagined interlocutors, saying: "This is the cost of unlicensed, we must accept the pros and cons, just like the 30% discount in the crypto field, you know this is reality."

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

When our trust decreases, 'peaches' are less likely to win over 'lemons'. If 'peaches' leave the market, we are left with only 'lemons', which is not a good place to be.

So we need to somehow help consumers identify "lemons", and I would say that if we don't, Gary will — in fact he's already worked hard — so that's why I'm pushing for some form of self-regulation if we want to keep the spirit of what we're growing in the crypto space and solve the lemon problem.

Let's compare this to something well done, which may be controversial.

Casino Mode: Building a secure and fair trust mechanism

Okay, what am I saying?

So am I saying that the encryption field is just a casino?

No, I'm saying that the crypto field is not even as good as a casino,

We need to do at least as well as the casino. If cryptocurrencies can do,

We need to do at least one thing well in the casino business,

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

The casino is known for its fairness and security, and they promote this vigorously. Why do they do this? They spare no effort to prove that the casino is not manipulated, except of course in ways that it obviously is.

Let me give you a few examples, this is an automatic card counting machine.

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

They want to prove to you that you have not been deceived, except of course in the way you were deceived structurally, but they want to prove to you that this is verifiable randomness.

They ban cheaters and share cheater information with other casinos. Why are they willing to join forces to deal with cheaters? If I were the Flamingo Casino (a casino in Las Vegas) and I found a cheater, why would I share this information with the winners?

They have these dice calipers to ensure the dice weight is even, all of this is to convince consumers that you are not being cheated, you are playing fairly, even though the odds are not in your favor, you will not be cheated or deceived.

The government and casinos actually invest together to make the casino safe. We forget that the casino is very legal and growing rapidly. Did you know that Ethereum is expected to generate $2 billion in transaction fees this year, while the global casino industry will generate $300 billion in revenue.

Marketing security is a very successful way for the casino to cooperate with the government, convincing them that it is beneficial for everyone to make this thing safe.

Okay, how does this work? This is a virtuous cycle, where higher trust equals more users equals investment and fairness and security,

So we need to do this in a decentralized way. We know a fact, the three letters I didn't hear in any conversation this week - FTX, no one is talking about it, we like to pretend it's just a nightmare, you know, the bad guys really eroded the trust of the entire ecosystem, not just the people they targeted, but everyone.

Zero-knowledge proof-driven self-regulation and social consensus

But we have the technology to prove security and legality, we just need to adopt it at the societal level, so the necessary wave this week - zero knowledge, right? This is a word we all know.

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

The problem lies not in the technology. We keep attending these conferences, keep talking about technology, but the actual problem lies in social consensus and ideology.

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

So I think we are very extreme in ideology, either completely unlicensed or completely licensed, black or white, either this or that.

But in fact, there is a very wide spectrum of social consensus between them.

Let me give you an example. What ZK and ASIC will ultimately study is what can be unlocked - this is simply the curse of ideology. You know that only a third-party identifier who can prove the legitimacy of funds can enter a pool. This can be both permissionless and permissioned. I can set up a pool with these rules, and you can choose whether to enter, so we have this concept of voluntary paternalism.

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

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

The goal here is to still allow users to express their preferences in various protocol designs. This is not to restrict freedom, but to give users more choices than what I am currently saying.

So ZK implements this permissionless feature at the underlying layer, while providing permissioned social consensus at the application layer.

These are just more examples. You know, there are many discussions about reserve proof, anti-phishing, choosing to join compliant pools, and legal fund proof.

But all this is to say that we need to turn zachXBT into ZK, and we need to use mathematics and social consensus, not trust or centralized compliance.

So in summary, we need ZK to unlock the three major improvements.

First of all, we need to maintain user choice while allowing self-regulation and compliance. As a community and ecosystem, we have not really discussed self-regulation, we just hope and pray that others will not notice.

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

We don't want to try to impose ideology on users, let's give them the choice of where they want to go, that's ultimately what this space is about, it's about freedom, it's about autonomy.

Finally, we need to improve security, we need to make it reliable, we need to make encryption a necessity, not an option. We forgot that the government is supposed to be composed at least allegedly of voters, why were Uber and Airbnb illegal and now legal? Because someone walked up the steps of Congress and said, 'You can't take away my Uber unless you kill me.' Someone did that, individuals did that, I don't know if you remember that.

One way we make crypto a necessity and integrate it into our economic life is to ensure it is reliable and secure, and we support our users.

This is how we turn 'lemon' into 'peach'.

This issue brings a video from BlueYard Capital published on Youtube titled 'Jon Wu (Aztec) @ If Web3 is to Work... A BlueYard Conversation'.