Starting from the 'Lemon Problem,' explore the self-regulation of the Web3 ecosystem through Zero-Knowledge Proof.

Compilation: Loxia

Lemon Problem and Trust Crisis

Today I don't plan to talk too 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'. First of all, let me ask, has anyone heard of the 'Lemon Problem'? Does this term ring a bell?

Okay, not quite impressed, not much.

So, in American slang, 'lemon' refers to a car that is unreliable, and it is a car that you did not know would be unreliable beforehand. I'm not 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, 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, feeling a bit deceptive, because you don't know if the car you are buying will be a 'peach' or a 'lemon.' This is also a big problem in the current crypto field - everything may look like a 'peach,' but in reality, many protocols are 'lemons'.

So, when you buy a car or use a protocol, there is a certain probability that it is 'peach' and a certain probability that it is 'lemon.' So, what price are you willing to pay for this? What is the weighted average price you are willing to pay for something that may become 'peach' or '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 intuitively think that the price you are willing to pay falls between what you would pay when you know it's a "peach" and what you would pay when you know it's a "lemon". So why is this a strange dynamic, and why are we talking about fruits?

So, what incentives do these have for used car dealers? What is your incentive if you know that everyone will pay a price between 'peaches' and 'lemons'?

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

This is usually referred to as a scam.

Well, I want to pause for a moment, and this is a big issue facing the cryptocurrency field today - the Lemon problem.

Well, the dynamics in the field of cryptocurrency today is that, due to this lemon issue, the probability of 'peaches' actually decreases, fewer and fewer people are willing to grow 'peaches' because 'peaches' are very expensive, and '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 believe it is '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 interlocutors in your imagination say: 'This is the cost of unlicensed, we must accept the pros and cons, just like the 30% discount in the cryptocurrency field, you know this is 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 beat 'lemons', 'peaches' exit the market, we are left with 'lemons', which is not a good place.

So we need to help consumers identify 'lemons' in some way, I mean, if we don't do this, Gary will - in fact he has been working very hard - so that's why I advocate, if we want to maintain the spirit of our development in the field of encryption and solve the problem of 'lemons', we need some form of self-regulation.

Let's compare this with something well done, which may cause controversy.

Casino Mode: Building a secure and fair trust mechanism

Okay, what am I saying?

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

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

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

We need to do at least what a casino does well,

I think it's worth a look, 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 are obviously manipulated.

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

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 have been 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 unite to deal with cheaters? If I am Flamingo Casino (a casino in Las Vegas) and I find a cheater, why should I share this information with the winners?

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

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

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

Okay, how does this work? This is a virtuous cycle, with higher trust leading to more users, which in turn leads to investment, 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 talked 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 the security and legitimacy, 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 technology. We keep attending these meetings, keep discussing technology, but some of the issues actually lie 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, and only then can we be regulated by others.

So I think we are very extreme in ideology, either completely unlicensed or completely licensed, either 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, ZK and ASIC will ultimately study what can be unlocked - this is simply the curse of ideology, you know that only a third-party identification token holder who can prove the legitimacy of funds can enter a pool. This can be both unlicensed and licensed. I can establish a pool with these rules, and you can choose whether to enter, so we have this concept of voluntary paternalism.

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

Another example is the concept of decentralized clean providers that Vitalik and our co-founder Zach Williamson have been studying, which is a social graph where individuals prove the legitimacy of your funds and transactions, observe behaviors, and say this is not something we want to be associated with. This is very different from centralization, very different from censorship, and it is a democratic form of social consensus, where all of us 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, not to restrict freedom, but to give users more choices than I am saying now.

So ZK has implemented this permissionless feature at the underlying level and provided permissioned social consensus at the application layer.

These are more examples, you know there are many discussions about proof of reserves, 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, rather than trust or centralized compliance.

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

First, we need to allow self-regulation and compliance while retaining user choice. 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 reach our goals, if we allow this 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 we as a community are supporting them.

We don't want to try to impose ideology on users, let's give them the freedom to choose where they want to go, this is ultimately the meaning of this space, 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 rather than an option. We have forgotten that the government is at least claimed to be composed of voters, why were Uber and Airbnb once illegal and now legal? Because someone walked up the steps of Congress and said 'You can't take away my Uber unless I'm dead,' someone did that, individuals did that, I don't know if you remember this.

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

This is how we turn 'lemons' into 'peaches'.