Starting from the "lemon problem," explore the self-regulatory way of Zero-Knowledge Proof to achieve the Web3 ecosystem.

Compiled by: Loxia

Lemon Issue and Trust Crisis

Today I don't plan to talk too much about technology, I want to discuss a social issue we are facing in the field of encryption. The title of this speech is 'Social Consensus and Self-Regulation.' First, I would like to ask, has anyone heard of the 'Lemon Dilemma'? Does this term ring a bell?

Okay, not very impressed, not very.

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

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, feels a bit deceptive, because you don't know if the car you're buying will be a 'peach' or a 'lemon'. This is also a big problem in today's crypto space - everything looks like it could be 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 a 'peach', and there is also a certain probability that it is a '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 a 'peach' or 'lemon'?

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

You might intuitively think that the price you are willing to pay is between the price you are willing to pay when you know it is 'peach' and the price you are willing to pay when you know it is '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 '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.

This is often referred to as a scam.

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

Well, the dynamics in the cryptocurrency field today 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. Meanwhile, lemon distributors are flooding 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'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 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, and we are left with only 'lemons', this 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 that if we want to maintain the spirit of our development in the crypto field and solve the lemon problem, we need some form of self-regulation.

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

Casino Mode: Building a secure and fair trust mechanism

Well, what am I saying?

So am I saying the encryption field is a casino?

No, I mean the cryptocurrency field is not even as good as a casino,

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

We need to do at least something well in the casino,

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 safety, and they are promoting this vigorously. Why do they do this? They spare no effort to prove that the casino is not manipulated, except of course in an obviously manipulated way.

Let me give you a few 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 structurally deceived, 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), why should I share this information with the winners?

They have these dice calipers to ensure the uniform weight of the dice, all of which are to convince consumers that you have not been cheated and that you are playing fairly, even though the odds are against you, you will not be cheated or deceived.

The government and casinos actually invest together to make casinos safe. We forget that casinos are very legal and fast-growing, do 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, 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 the security and legality, we just need to adopt it at the social level, so the necessary wave this week - zero knowledge, right? This is a term we all know.

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

The issue is not about technology, we keep attending these conferences, keep discussing technology, but some 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 then we can be regulated by others.

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

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

Let me give you an example. What ZK and ASIC will ultimately research to unlock is simply the curse of ideology. You know that only a third-party identification of token holders who can prove the legitimacy of funds can enter a pool. This can be both permissionless and permissioned. 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 researching, which is a social graph where individuals prove the legitimacy of your funds and transactions, they observe behavior and say this is not something we want to be associated with. This is very different from centralization, very different from censorship, 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 what I am saying now.

So ZK has implemented this permissionless at the base layer 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 verification.

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

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

We do not try to impose ideology on users, let us give them the choice of where they want to go, this is ultimately the meaning of this space, it is about freedom, about autonomy.

Finally, we need to enhance security, we need to make it reliable, we need to make encryption a necessity rather than an option. We forget that the government is supposed to be composed at least by the voters, why were Uber and Airbnb once illegal, and now legal? Because someone walked up the steps of Congress and said, 'Unless I die, you can't take away my Uber,' someone did that, individuals did that, 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 that 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 released on Youtube titled "Jon Wu (Aztec) @ If Web3 is to Work... A BlueYard Conversation"

Original video link: