Compiled by: Loxia
Lemon Problem and Trust Crisis
Today I'm not going to talk much about technology; I'm going to discuss a social issue we face in the crypto space. The title of this talk is 'Social Consensus and Self-Regulation'. I want to first ask everyone, has anyone heard of the 'Lemon Problem'? Does this term ring a bell?
Well, not really a strong impression, not really.
So in American slang, a 'lemon' refers to an unreliable car, and it's a car that you don't know will be unreliable beforehand. I'm not quite sure of the origin of the term, but that's what 'lemon' means.
Well, good cars and reliable cars are called 'peaches'. I didn't know this before; I found out and thought it was quite cute.
The 'Lemon Problem' is basically a problem for used car dealers. You go to the used car market, and it feels a bit like a scam because you don't know whether the car you're buying is a 'peach' or a 'lemon'. This is also a big issue in today’s crypto space—everything seems 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 a certain probability that it is a 'lemon'. So what price are you willing to pay for this? What is the expected value weighted average price you are willing to pay for something that could be a 'peach' or a 'lemon'?
What price are you willing to pay for this? It's like some kind of weighted average; we can all internalize this concept—there is a certain probability of 'lemons' multiplied by the value of 'lemons', plus the probability of 'peaches' multiplied by the value of 'peaches'.
You might intuitively think that the price you are willing to pay lies between the price you would pay if you knew it was a 'peach' and the price you would pay if you knew it was a 'lemon'. So why is this a strange dynamic, and why are we talking about fruit?
So what incentive does this create for used car dealers? If you know that everyone will pay a price between 'peaches' and 'lemons', what is your incentive?
Your incentive should be to only sell 'lemons', right? If people are willing to pay a higher price than for 'lemons', you have no reason to sell 'peaches', you can sell 'lemons' directly to them.
This is often referred to as a scam.
Well, I want to pause here; this is a big issue faced in the crypto space today—the lemon problem.
Well, the dynamics in the crypto space today are that due to this lemon problem, the probability of 'peaches' has actually decreased, and fewer people are willing to cultivate 'peaches' because 'peaches' are expensive, while 'lemon' dealers flood the market because they feel, wow, I can sell 'lemons' directly to those willing to pay a price higher than its actual value because they are misled to think it's a 'peach'. Overall, the willingness of users to participate in the ecosystem has decreased, which makes sense.
Now I can almost hear some of you in your minds, or the imagined interlocutor saying, 'This is the price of permissionlessness; we have to accept the good and the bad, just like the 30% discount in the crypto space; you know, that’s the reality.'
But this is not a one-time cost; the lemon problem is not a one-time cost; it is actually a death spiral.
Because when our trust decreases, 'peaches' are harder to outperform 'lemons', 'peaches' exit the market, and we are left with 'lemons', which is not a good place.
So we need to help consumers identify 'lemons' in some way. I want to say if we don’t do this, Gary will—he’s actually been working really hard—so this is why I push for it; if we want to keep the spirit of development in the crypto space and solve the lemon problem, we need some form of self-regulation.
Let's compare this with something done well; this might stir controversy.
Casino Model: Building Trust Mechanisms of Safety and Fairness
Well, what am I talking about?
So am I saying that the crypto space is just a casino?
No, I mean the crypto space is even less than a casino.
We at least need to do as well as casinos do. If cryptocurrency can work,
We at least need to do well what casinos do,
I think it's worth looking into; that's what I'm going to talk about next.
Casinos are known for fairness and safety, and they promote this heavily. Why do they do this? They go to great lengths to prove that casinos are not rigged, other than the obvious ways they are rigged.
Let me give you a few examples; this is an automatic card counter.
Well, why do they do that? Why do they switch to this instead of letting the dealer deal manually?
They want to prove to you that you are not being deceived, of course, except for the ways in which you are structurally deceived, but they want to prove to you that this is verifiable randomness.
They ban cheaters and share information about cheaters with other casinos. Why are they willing to unite against cheaters? If I am the Flamingo Casino (a casino in Las Vegas) and I identify a cheater, why would I want to share this information with the winners?
They have these dice calibrators to ensure the dice are evenly weighted, all to persuade consumers that you are not being deceived, that you are playing fairly, even though the odds are against you, but you won’t be cheated or duped.
Governments and casinos actually co-invest to make casinos safe. We forgot that casinos are very legitimate and fast-growing; you know, Ethereum is expected to achieve $2 billion in fee revenue this year, while the global casino industry will achieve $300 billion in revenue.
Marketing safety is a very successful way casinos work with the government, convincing them that making this safe is beneficial for everyone.
Well, how does this work? It’s a positive feedback loop; higher trust equals more users equals investment and fairness and safety.
So we need to do this in a decentralized way. We know a fact that I haven't heard in any conversations this week—FTX; no one is talking about it, and we like to pretend it was just a nightmare, you know, that bad actors 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 legitimacy; we just need to adopt it at the societal level, so the necessary wave this week—zero knowledge, right? That's a term we all know.
We have the ability to prove integrity, to prove identity, reputation, and computational integrity.
The problem is not with the technology; we keep attending these conferences and talking about technology. Part of the issue is actually with social consensus and ideology.
We know we have the capacity 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 to self-regulate before we can be regulated by others.
So I think we are ideologically very extreme; it’s either completely permissionless or completely permissioned, black and white, either this or that.
But in reality, there is a very broad spectrum of social consensus in between.
Let me give you an example of what ZK and ASIC will ultimately research to unlock—this is simply the curse of ideology, you know that only third-party identification token holders who can prove the legitimacy of funds can enter a pool. This can be both permissionless and permissioned. I can create a pool with these rules, and you can choose whether to enter, so we have this concept of libertarian paternalism.
Somewhere, like in this room, social consensus will decide this is how we operate safely, and then users decide what they want to do, rather than us being completely black and white; if there’s 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; it's a social graph where individuals prove the legitimacy of your funds and transactions, they observe behaviors and say this is not something we want to be associated with. This is very different from centralization, very different from censorship; it’s a form of democratic social consensus in which we all say we will not tolerate certain behaviors in our ecosystem.
The goal here is still to allow users to express their preferences in various protocol designs; this is not to restrict freedom but to give users more choices than what I am stating now.
So ZK has achieved this permissionless implementation at the base layer while providing a permissioned social consensus at the application layer.
These are more examples; you know there is a lot of discussion about proof of reserves, anti-phishing, opting into compliant pools, and proof of legitimate funds.
But all of this is to say that we need to turn zachXBT into ZK; we need to use mathematics and social consensus instead of trust or centralized compliance.
So to summarize, we need ZK to unlock three major improvements.
First, we need to retain user choice while allowing for self-regulation and compliance. We as a community and ecosystem haven't really talked about self-regulation; we just hope and pray that others won't notice.
We won't reach our goals if we allow this to happen; Web3 will not succeed. We need to prove to someone that we care for each other and take care of our users, so we need to prove to users that we, as a community, support them.
Let's not try to impose ideology on users; let’s give them the choice of where they want to go, which is ultimately what this space is about—it’s about freedom, it's about autonomy.
In the end, we need to enhance security, we need to make it reliable, we need to make crypto a necessity rather than an option. We forgot that the government is at least supposedly made up of voters; why was Uber and Airbnb once illegal and now legal? Because someone went to Congress and said, 'You can't take my Uber away unless I’m dead.' Someone did this, individuals did this; I don’t know if you remember this.
One way we make crypto a necessity and integrate it into our economic life structure is to ensure it is reliable and safe, and that we support our users.
This is how we turn 'lemons' into 'peaches'.
