WTF is ReFi?
Happy Tuesday! Help yourself to a greenpill and recline in the privacy pool. Just sit back, relax, and let Glitch #7 wash over you.
In this issue:
Stuff that has us like 👀
Special announcements
ReFi 101: Why people still think blockchains can help save the world
1. Two things that have us like 👀
Tornado Cash, but with a bad guy filter
You’re not a hacker laundering stolen money, are you? Prove it! That’s the mechanism at the core of the (extremely technically complicated) design described in a new paper making waves in crypto-land. Co-authored by Ethereum co-creator Vitalik Buterin, it describes a blockchain-based “privacy-enhancing protocol” that would function much like the embattled token mixer Tornado Cash—but with an added layer aimed at keeping bad actors from ruining everything.
The authors define a privacy-preserving protocol as one that allows users to deposit cryptocurrency using one address and secretly withdraw it sometime later using a different address. Tornado Cash uses zero-knowledge cryptography, which effectively lets users prove who they are without revealing their identity, to keep that secret. But the system had a fatal flaw, they say.
“The critical issue with Tornado Cash was essentially that legitimate users had limited options to dissociate from the criminal activity the protocol attracted,” the authors write. Ultimately, evidence that a North Korean state-sponsored hacking group used the protocol to launder stolen crypto funds led the US Department of Treasury’s Office of Foreign Assets Control (OFAC) to place the Tornado Cash smart contracts on a list of “entities” with which Americans are prohibited from transacting. (We dove deep into the Tornado Cash saga in our last issue.)
One way around this problem, say Buterin et al., is to use another zero-knowledge proof.
The first proof would verify that a user looking to withdraw their funds has a valid deposit, just like how Tornado Cash works. Then, a second proof could demonstrate that their funds “do not originate from known un-lawful sources”—for instance, addresses known to have participated in a big crypto-heist.
Reactions to the idea have ranged from savvy head nods to thinky guy emojis to righteous indignation. Zooko Wilcox, founder and CEO of the company that develops the privacy coin Zcash, was probably the most fired up. He called the privacy pools proposal “an attempt to comply with the principle of Guilty Until Proven Innocent.” —Mike Orcutt
Milady Maker tethers itself to reality
Milady Maker’s performative anti-wokeness has, for better or for worse, made it one of crypto’s most iconic and controversial phenomena. There’s nothing in real life quite like the anime-inspired NFT project, which is probably best known for some of its members’ absurd and even bigoted memes. That’s what makes it so fascinating that the Milady phenomenon has now collided with reality. It’s also why we can’t look away now that the controversial NFT collection’s co-founder Charlotte Fang is suing three of the project’s contractors.
According to the lawsuit, the scene opens in Tokyo, in mid-April, at a crypto conference called “Remilia Con,” where fans of Milady Maker gathered to view some art, hit the clubs, own the libs, and, of course, awkwardly mingle. In other words: A classic crypto rager, thrown by Remilia LLC, the company that created the collection. But at the event three of Remilia’s employees—a developer, a creative director, and a gaming analyst—were secretly planning a corporate heist.
According to the lawsuit, the three discussed how they could take over the company. They were pissed off about their compensation, upset at being considered mere contractors—they saw themselves as co-founders—and figured that, between the three of them, they could probably get access to just about any account they wanted in the business.
So that’s what they allegedly did. Immediately, one of the developers changed the wallet address on the company's NFT platform, Digital Ocean, so money earned from sales of NFTs landed in an account they controlled. They also swiped the passwords to many of the company’s accounts, from Instagram and Twitter to Discord, Github, and Digital Ocean, and attempted to transfer login credentials to their personal accounts.
Then, one day in August, Fang and others noticed they were getting logged out of Remilia’s accounts. The funds from all the NFT sales they’d made since April—about $1 million—were transferred to a wallet Fang didn’t control. The team was logged out of social media; and the Github account they used to develop their NFTs was gone, too.
In a panic, Fang tried to contact the three employees, suspecting their involvement. No response. About a week later, Fang received a letter from the trio’s lawyer, containing what was more or less a ransom note: hand over 80% of the business, plus varying amounts of compensation for the three, provide board seats that would give them a controlling stake, and appoint each of them executive officers—and then would they relinquish the company’s assets.
They gave a deadline of three days. Fang missed it. Minutes later, the company's digital server, which hosted Remilia’s NFTs, shut down. The remaining funds moved to an account Fang didn’t control. Later that day, a post appeared on the Milady Maker Twitter account, with an image identical to the one that was on the ransom note: an informal sign saying “comply, or else.” Fang’s lawyer convinced the adversaries to put the server back up—but Fang still did not have control of it. And that’s how it’s been for about three weeks now.
The situation is apparently dire enough that Fang has chosen to reveal their real name (Krishna Okhandiar) as well as the identities of the three defendants by bringing a lawsuit in a real court of law. In a Twitter post, the defendants argue that they were co-founders, not contractors. “Remilia is, and always was, a collective,” they wrote, adding that “Fang is promoting a false narrative untethered to reality.”
Now a court will decide who is right. Either way, though, a big part of the Milady brand and mystique was that it was, to borrow some language, “untethered to reality.” That seems like history now. —Sam Venis
2. A plug for a new SBF podcast—and an appeal to your heart
Two quick announcements before we jump into the feature:
Lucy helped make a podcast about SBF! That’s right! I spent part of this summer digging deep into my crypto contact book, helping Universal and Project Brazen finish gathering the material to tell the story of FTX and Binance’s empire-ending showdown. The first episodes of Crypto Kingpins are out today—a timely refresher ahead of the disgraced wunderkind’s trial, starting October 3rd. —Lucy Harley-McKeown
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3. ReFi and the regens, explained
They believe blockchains can help save the world. Can their message break out of the crypto bubble?
By Lucy Harley-McKeown
On a cloudy east London morning, people are sat in a circle in a warehouse with their eyes closed, listening to a meditation led by a woman with a microphone. She instructs them to lift their hands to their hearts, to stretch their arms out and to form a cup. “Imagine the cup is filling up, overflowing, overflowing with love,” she says. The incantation goes on for about 10 minutes.
This is “Regens Unite,” a two-day-long gathering centered around ideas about climate action, building “community,” and challenging the status quo—all with a distinctive crypto tint.
The walls of the warehouse are strewn with Post-it notes and affirmations, including a “covenant” encouraging participants to create a space that supports “vulnerability and intimacy.” On the agenda is a workshop called “how to design a revolution,” a session on the “circular economy of vibes,'' and an interactive workshop designed around “creating a human ecosystem connected by touch.”
On the side lies a book by Kevin Owocki called Greenpilled: How crypto can regenerate the world—greenpilling is the eco version of a term taken from the 1999 film The Matrix, where Keanu Reeves’ character is invited to have his life forever changed by casting off a veil of deceit and seeking truth.
For those well-versed in climate activism and social movements, this kind of touchy-feely scene will be familiar. The drive to reset what humans have done to the Earth isn’t a new one, and neither is the idea that blockchains could be the solution.
Regenerative finance, or “ReFi,” has, for years, seen the potential of this tech as infrastructure to move money around and fund projects that are good for the world—and which otherwise may not have happened. Crypto people have even defined the term “regen” as a virtuous mirror to “degens” (a shorthand for “degenerate,” which refers to those who are involved in high-risk, speculative trading or investing in cryptocurrencies—in other words, the ones who made a name for crypto as a casino in the first place).
But those who aim to use blockchains for good have, over the years, largely toiled in obscurity while headlines rightly focused on blockbuster crypto hacks and evidence that much of such tech is still hugely energy intensive.
Some progress has been made, certainly. In September last year, one of the most established blockchains, Ethereum, completed a long-planned upgrade that reduced its electricity use from an estimated 23 million megawatt-hours (MWh) per year to just over 2,600 MWh per year. Infrastructure has also been created that has demonstrated new ways to allocate pooled financial resources, presumably towards projects aimed at doing good.
But looked at another way, these feats amount to: 1. solving an environmental problem that crypto itself created and 2. coming up with a fancy algorithm that is so far only being used by crypto’s most devout believers.
The question remains as to whether the regen community is finally gaining momentum in its quest to build tools that can deliver large-scale benefits—or whether it’s just another (green-colored) crypto bubble.
“Public goods”
As 2022 was closing out and people were taking stock of the catastrophic year crypto had had, Owocki, the Greenpilled author, mused in an op-ed that 2023 was “ripe to be the year of the regen.”
Owocki, a Boulder, Colorado-based, long-term crypto optimist, was then five years into building Gitcoin, a platform aimed at supporting open-source software development through grants and other financial mechanisms. In a year where multiple companies went bankrupt, Sam Bankman-Fried sucked tens of billions from customers’ exchange accounts, and there were more hacks than any year before, Gitcoin’s mission had never seemed more urgent.
“Degens came to Web3 seeking financial upside. Regens are those who are working or building in regenerative cryptoeconomics. They have a long-term view on how Web3 can be good for the world, but not just in the financial sense,” he wrote.
Gitcoin has so far distributed more than $50 million to over 3,000 projects building so-called “public goods.” According to Gitcoin’s website, the meaning of the term (at least in a crypto context) is derived from work by independent writer and technologist Toby Shorin, Laura Lotti, a researcher of blockchain cultures, and blockchain researcher Sam Hart. Shorin, Lotti, and Hart also co-founded Other Internet, an applied research organization working on studying and building what they call social technology which is committed to creating a “better world.”
Gitcoin uses what some might think are rather wooly terms to describe what a “public good” is, saying it’s “anything that is both non-excludable and non-rivalrous, that is, people can’t be barred access, and one person’s use doesn’t degrade another’s.” Owocki has also said that public goods should create universally better outcomes for society and are relative to the values of the communities they serve.
This definition—of being relative to the communities they serve—begs the question of whether one can define a community in any way they want, and then fit the “public good” that needs funding to what they say they need. The term implies a potential reach beyond crypto folks, and an aspiration to address systemic problems that cause failures in things like climate policy. Some might say, as a term, it bites off more than it can chew.
Though the platform has matched funds for public health-related projects and to support a “Crypto for Black Lives” campaign, the vast majority of what Gitcoin has funded has been fairly typical crypto stuff. Examples include the open source crypto tumbler (and enemy of the US Treasury) Tornado Cash, “layer 2” blockchain network Optimism, and crypto policy lobbyists Coin Center.
Gitcoin allocates this money through quadratic funding, a mathematical approach to deciding how to financially back projects. Originally developed by Ethereum co-creator Vitalik Buterin, Harvard economics scholar Zoe Hitzig, and economist Glen Weyl, quadratic funding invites the public to make donations (big or small) that act as votes on where to send funds. It uses blockchains to reduce the risk of system manipulation and ensure equal and open distribution. This is because blockchains are theoretically tamper-proof due to the way they are structured. They are also public, which means anyone can see any transaction that has occurred.
Through this method, the number of donations a person or project gets matters more than the amount of the donation itself. Gitcoin uses quadratic funding to award grants by matching small donations with larger amounts from a pool of funds—given by organizations, individuals, or repeat donors. So a project with 50 donations of $1 will have a better matching estimate than one with three $100 donations.
But if quadratic funding makes the process of allocating funds more equitable and less dependent on centralized decision-making—as opposed to say, a program officer at a large foundation who decides how to dole out their budget each year—there’s still the question of where the money comes from in the first place. In August, Gitcoin drew ire from its community for “greenwashing” as it announced a partnership with Shell, in which the fossil fuel giant would contribute about $500,000 to its grants program as well as backing a hackathon.
Kyle Weiss, executive director of the Gitcoin Foundation, conceded on Twitter that the team had “fucked up” and “moved too quickly” with the partnership; but added that because grants are issued through a quadratic funding matching pool, Shell can’t control the outcomes of its donation. “Them getting to share the spotlight with our brand is not worth the money,” he added.
Shortly after the brouhaha, Owocki, who had stepped back from Gitcoin leadership in June 2022, announced his intention to return in some capacity. “I am hoping that through synthesis between… varying groups, I can find a way to provide value,” he wrote. The matter of whether Gitcoin will give the money back to Shell is still in discussion in its governance forum.
Alongside larger ethical debates about where public goods funding comes from, some have argued that quadratic funding potentially encourages groupthink. This has become more important as Gitcoin has grown. Buterin has pointed to tweaks to the algorithm where votes are ranked as a remedy to this.
“I think a key innovation in some of the more modern algorithms is in not just doing ‘one vote per person,’ but ranking two people's votes more highly when they both support a particular project if those two people normally do not agree,” he tells Glitch. The community notes algorithm does this, as does a thing called pairwise-bounded quadratic funding.
“In addition to penalizing large tribes that agree on everything, this mechanism also penalizes bot farms and other forms of collusion,” Buterin adds. “So I hope to see more research in this style of algorithm!”
Besides quadratic funding, another ReFi mechanism that has been successful in its early stages, according to Buterin, is Optimism’s “retroactive public goods funding.” The idea, which he also helped come up with, is to fund projects not based on their potential success, like the typical venture model, but on their demonstrated success. “The core principle behind the concept of retroactive public goods funding is simple: it’s easier to agree on what was useful than what will be useful,” Buterin wrote in a 2021 Medium post.
A regen’s work is never done
Although Gitcoin has already gone some way to demonstrating how blockchain could be used to do philanthropy in a different way, in strict dollar terms it's still a tiny player; the $50 million it has doled out over five years is dwarfed by venture funding in crypto, which totalled $29 billion in 2022 alone, according to a report by Blockdata.
“By necessity, the ecosystem is going to have to mature and develop an immune system against the bad guys. I think regen is a pretty strong counterexample to some of that stuff, but it's very small. I mean, we're like a split pea in a pool,” Owocki tells Glitch.
But for ReFi to break out, normies have to see it as something other than just another novelty that might suddenly collapse the way everything else in crypto seems to. Activists will need to learn how to use the tools and, crucially, how to adapt them for their own purposes. Until then, it is not much more than a cool idea to contemplate at conferences.
As the day ended in east London and the closing circle was called, many of the attendees of Regens Unite still seemed bemused about the potential for web3 or blockchain as a vehicle for change. While there were some sessions on the potential of DAOs and intros to web3 for the uninitiated, the event seemed to be more about building solidarity and a community of like-minded people through which projects could flourish, instead of a forum to geek out on the tech.
The disparity between the crypto enthusiasts and the normies in the room was palpable, and it exposed a flaw in ReFi’s big mission. If these well-intentioned blockchain projects aren’t able to capture the hearts and minds of climate activists, they face an uphill battle in having the impact and uptake they need to make a genuine difference in the wider world. It doesn’t matter how demonstrably innovative the tools are if they can never break out of the crypto echo chamber.
Even so, the architects of ReFi are optimistic. Owocki sees what he calls “proof of virtue” (a play on the term “virtue signaling”) as a selling point: “Instead of using social media to talk about causes that you care about, actually putting money where your mouth is, and cryptographic proof of your virtues when you either contribute to a round on Gitcoin grants for something that's virtuous or you support it in some other way.”
“There are a lot of things that are possible in this space and we won't really know until we try and see which ones work,” he says. Now that the sting of last year’s market debacle is starting to wear off, perhaps the time is again ripe to convert skeptical outsiders.
“The ReFi space seems much stronger today in terms of what it's actually accomplishing than it was five years ago, when it was still mostly ideas,” says Buterin. “Though it's true that the 2020-21 bubble and then the 2022 crashes and collapses took away the spotlight from these parts of crypto; but I feel like attention is coming back.”