Rook Q3 Preview: Strategy

Hazard discusses the past and looks toward the future as the revamped Rook protocol emerges from the shadows of stealth mode.

Key Takeaways

A detailed Q2 Report is now available.
The DAO and Rook Labs have overarching goals, and the team would like to lay out the roadmap so the community fully understands the vision.
This period of reform marks a moment where the team will begin to more clearly express goals and progress to the community.
Rook’s intention is not to extract profit for its own gain, but rather to create a vehicle for users to capture value from their own order flow and become "Citadel as a public good."
Now that the updated protocol is out of R&D mode and unleashed into the wild we can see data flow, which will give the team important insights.
Rook depends on volume, but needs to go out and find a source of that volume. This is where business development comes into play in order to increase protocol usage and mindshare.
Easy scaling refers to the "build it and they will come" class of products – Uniswap and Curve, for example.
Jungle scaling refers to the class of products that need to actively push for adoption. A very successful example of this would be Chainlink.

"You can't just make something. Your market is kind of a jungle. It's overgrown, and you have to go in there and hack and slash your way through it and tame it somehow before you can unlock that ability to really scale and start reaching people." – hazard (10:47)

Application layer MEV doesn’t have a one-size-fits-all solution, so you have to properly identify the business scaling side of the problem by bringing in the various actors across the system.
One way of expanding the reach of a MEV-aware layer is by product-izing the solution, making it simple to integrate, and demonstrating its benefits with data.
Blockchain-layer MEV is easier to scale compared to application-layer MEV since the problem space is smaller, but the Rook team believes that MEV belongs to the application layer.

"The application layer is the high ground that nobody wants to figure out and capture. But that's why we're here. We were in a unique position at the end of 2021. We had the technology to do it, and we had the capital necessary to fund the kind of team... in terms of quality of expertise and in terms of just pure headcount, they could actually execute a strategy to go out and capture this opportunity.

So that's what we've been doing." – hazard (16:40)

Rook has processed $300m in volume in the past two months, with no token incentives. This growth is 3x faster than that of the previous Rook protocol.
Rook can capture roughly 0.1% of volume as MEV.
Rook Labs has 5-10 years of runway to accomplish their goals with the current headcount of ~30 contributors. This assumes zero revenue and takes into account distressed asset prices.
Rook can be considered to have reached "critical mass" when third parties reach out to us for integration, rather than our current "jungle scaling" scenario.
Long term, we hope that other protocols can easily self-service their integration with the Rook protocol.

"We think it would [be best] if all of the order flow processed on a blockchain were processed through Rook and its protocol, because that would mean the maximum benefit for users and applications." – hazard (29:05)

The team has identified that lack of transparency is a problem, and is working on improving this going into Q3 through better communication and more real-time reporting.
The Rook Product strategy can be distilled into three key verticals:
1. Orders (ERC-721): Signed orders, intentions, commitments. Projects that want to execute trades through the Rook HidingBook or our updated trading protocol.
2. Transactions/RPC: Projects that want to extract MEV from generic transactions or interactions with a remote procedure call.
3. Smart contract: Projects that want to extract MEV from interactions with smart contracts, such as AMMs or other products.

"But ultimately, all of that order flow goes to the same place. It goes to the coordination protocol. It's coordinated. MEV is captured and redistributed. So in the end, it all looks like volume for the protocol. What we're focused on is building intake mechanisms to capture these three types of order flow at the application layer." – hazard (57:15)

Transcript

[00:00:00.970] - Deetz
All right everybody. Well hey, looks like we're ready for another end of quarter event here. For folks that missed the last one on DAO Governance, we'll be posting that recap and recording in a little bit, but I'm excited to keep these events flowing. Event 2 of 5 here today. So this one we're going to be focusing on strategy, and how our short term and long term strategies have evolved over the DAO's history. And with that we'll be talking about not just where we've been, but what our long term strategy is going to be looking like going forward -- how that's going to play into different aspects and verticals within the DAO. And then we'll be taking questions from folks... So happy to really get folks up on stage interacting, asking questions about where we're headed. But with that, might as well just get this session started right off and take it over to Hazard to introduce us to strategy and talk about where it's going. So Hazard, take it away.

[00:01:19.610] - Hazard
Thanks, deetz. Hi, everybody. Really glad to set up this session — we thought it would be good to set up a session dedicated to strategy because we've been hearing a lot about how this quarter in particular, there's been... challenges with some communication, and that can mean small things like just what are the day to day activities looking like, but it also really means... the big overarching strategic goals that the DAO has that Rook Labs facilitates through the work of their contributors. And just a sense of: how is it going, where are we on our roadmap and where does that roadmap take us, and why is this a good idea? Why is that where we want to go?

[00:02:21.510] - Hazard
And it's important to have those things, because otherwise there's no shared sense of what kind of a journey are we on and how are we doing. There's numbers in a vacuum, right? And part of the reason we haven't been able to talk about it is because this quarter, obviously, we launched two huge products that are quite complex, and so we've been distracted. And even internally, there hasn't been as much time to talk explicitly about strategy or to prepare deliverables and things that we can share to kind of come together about strategy.

[00:03:02.530] - Hazard
So part of the reason for this session is to kind of mark a new intention to come together more and talk about strategy more and build those deliverables, whether it's a charter or a mission or a combined roadmap or just a strategy statement that gets revised periodically. But to kind of start that conversation, we... planned a session like this session. And the last time we really were able to talk about strategy in depth was back... I suppose late December of 2021, January. So just before the reorganization started.

[00:03:46.460] - Hazard
And really this reorganization effort didn't come out of nowhere; there was an internal memo that was started and it started developing and we eventually released it publicly. It's called The New Citadel, right? It was about... a vision for what Keeper DAO at the time could be, and where our technology could take us. And part of this was based on internal research and an internal understanding at the time about what the technology was, because we had it and it was operating in test environments and prototypes, and we could kind of see it and touch it and manipulate it and play with it for the first time.

[00:04:36.620] - Hazard
And that's when you really sit back and start thinking: where is this really going? And what is this really like? What is it that we've invented here? And that's what led to the creation of this document. And what the document essentially drew was a parallel between what we're doing and enabling through the ability to capture and redistribute MEV on blockchains for users, and what you see happening in traditional finance when you have trade execution service providers like Citadel Securities, for example, who make arrangements with brokers such as Robinhood to pay them for their order flow for the right to execute their order.

[00:05:21.910] - Hazard
So there's some parallel that we drew between this relationship that exists in traditional finance called payment for order flow and this sort of relationship that we build between users or applications and searchers and their MEV in the blockchain. And this parallel was very intriguing to us, and it let us kind of understand what we were doing as sort of the anti-Citadel, right? Like a Citadel as a public good. Because we didn't design the system with the intention of extracting as much profit as possible for us, but as a mechanism to kind of capture and then slingshot that profit right back to the user who created it, right?

[00:06:13.230] - Hazard
So some kind of a vehicle for users and applications to capture the value of their own order flow. And part of the realization that we had when the realization was this is really what this is — steps that we needed to take then to ensure that that thing has the maximum chance of success — and doing the right things from a business perspective, from a strategy perspective, to allow that technology to succeed in a way that we had not been able to succeed with prior iterations of the technology, such as the hiding game trading product or the hiding vaults liquidation product.

[00:07:01.900] - Hazard
So to kind of try to learn from our past mistakes, and understand and use the knowledge that we gained about what it is we're building and what kind of market it is, to take a better shot at this and structure it properly so that we ensure that the efforts don't go to waste but actually take hold and start to grow and deliver on their potential. This quarter was big, because after about a year of research and development, these protocols finally went live. So we finally have data. So we started to restructure in anticipation of the release of these.

[00:07:41.710] - Hazard
We had, like I said, test versions of these. We could look at it and say: okay, so that's what it does. It's a system, right, that prints money when you put volume in. If you feed it volume, it spits out money. That's very interesting, right? But tech is working. Tech is working. And the problem is that we know you need a lot of volume, and we have to go out and get that volume. We can't just kind of launch it and wait. Like if you were at the hiding game, it won't work. You need to have a push. It has to be some kind of push to get it to reach critical mass, achieve that potential. There's many different ways to get volume and there's many different ways to add value.

[00:08:22.070] - Hazard
And so what we needed was a change to the way that we organized our contributors — the productive, fulltime people that work on the DAO's technology. Deetz, you can stop me when we get to a good stopping point and ask for questions. But I'll just kind of put to the dial the way that we view kind of the business challenge, the landscape, because it can help people to understand why we scaled when and the way that we did.

[00:09:03.490] - Hazard
I draw sort of a contrast between two types of scaling, two types of problems. There's kind of easy scaling — or auto-scaling or something. This is like: you build it and then they come. It's a magic switch that you flick, and all these customers appear. All this, let's say, volume appears. All this activity appears. And this is magic carpet kind of technology, right? It is, and everything just happens like dominoes falling. And you see this a lot in blockchain stuff. This is why we design protocols and tokenomics and incentives and things.

[00:09:49.290] - Hazard
And so there's a lot of famous examples. It's just: you turn it on and just starts happening, right? Like Uniswap or Compound or Curve or Convex. Many different examples of this. And in those scenarios, you really don't need a whole lot of people. You need a small core team, like five people or so. You build this thing; you can take your time because it's going to win. It just has to be kind of put out there, right? You put it out there and... I'm simplifying a lot. It's not that easy. If it were, then every fork would be just as good as the original and stuff.

[00:10:28.180] - Hazard
So it's not that easy. But it's that kind of problem. There are these kinds of scaling problems where the product does a lot of the work. The product speaks for itself and does a lot of the work. And then there's another kind of scaling problem. And I think about this like jungle scaling where you can't just make something. Your market is kind of a jungle. It's overgrown and you have to kind of go in there and hack and slash your way through it and tame it somehow before you can unlock that ability to really scale and start reaching people.

[00:11:11.980] - Hazard
And there are lots of reasons that things can become a jungle. A lot of times it's because there's no interoperability. So back in the days of early computers, it was hard to have software be portable so you could use it on any computer. So there's a bunch of different computers that had their own little software stacks and things. And nowadays we don't think about that too much. But even individual processors — before you had portable languages like C — individual processors, you had to write programs just for that processor. So if you had a different processor than me, we couldn't run the same code. We couldn't run the same programs, which is ridiculous, right?

[00:11:44.730] - Hazard
That's a jungle that had to be tamed. You needed to build a portable language, and then you could go your merry way. We see examples of this in crypto, too. Chainlink is a good example that we use a lot. Chainlink had to come up with this idea of oracles. Nobody's going to care; everybody's doing their own thing. And Chainlink had to go essentially door to door, right? They had to build a better product, but then they also had to go door to door and make sure that everybody stuck it in their smart contract or they needed to make sure that enough people did that. Suddenly that became the thing to do. And then you reach that tipping point where now people do bake Chainlink oracles and Chainlink stuff into what they do. They don't need to be told, they just do it. So they're past that tipping point. But they had to kind of tame this situation first, right? It's a many-to-one kind of problem. And what we do is in a very similar —it's a very similar kind of problem. The mission — if you want — that we have, is to unlock application layer MEV.

[00:12:56.910] - Hazard
So MEV for users and applications, protocols, smart contracts. And the application layer is very heterogeneous. It's very diverse. Every contract is different, right? Every protocol, every dApp is different. Every user, they use different wallets, different devices, they're on different blockchains, they're trading different assets. Everything is different. And you can't make a one size fits all kind of solution. Not yet. You could, but first you have to kind of tame all of this heterogeneity. You have to make something that's portable across all of it somehow. To do that, it's a jungle scaling problem.

[00:13:41.750] - Hazard
We tried to solve a jungle scaling problem like it was an easy scaling problem. Like when we launched the Hiding Game, we just put it out there. Some people used it and stuff, but it didn't really catch on it's because it's the wrong kind of — it's a good solution, but it was implemented for the wrong kind of market. We're not making that mistake this time. We understand now what we're doing to an extent that we can match our strategy to the business challenge properly. So now we know that it won't just bring its own volume. Not until we hit a certain tipping point.

[00:14:23.060] - Hazard
You have to go out and find it. You have to bring in market makers. You have to bring in integration. You have to bring in individual traders and users or automated traders. You have to bring in different types of order and transaction sources. And a lot of that is bilateral. You have to go essentially door to door until you reach that critical point where this becomes the thing to do. And as you go door to door, you learn enough about what's common between each of these protocols and each of their ways of doing things that you, and only you, can start to offer the industry a concept of what it means to build MEV aware protocols. You can offer standards, right? Standards for how you should create your interfaces, how you should interact with these things, and ultimately become that abstraction layer -- that portable layer that allows this to happen in a much more optimized way. But to do that, you have to send a bunch of people out into all corners of the application layer and get them to hammer down all these details and work out all these annoying problems. And they are annoying.

[00:15:37.440] - Hazard
That's why this market is up for grabs, frankly. That's why all the MEV extraction to date that you ever see or all the mitigation -- flashbots and Eden and anything you've ever read about -- it's all happening at the consensus layer. It's all happening with miners. It's because miners run one piece of software. All of them run that software. And if you change that software in one place, you can get a market effect. It's easy scaling down there, right?

[00:16:09.600] - Hazard
It's not easy scaling at the application layer. It's jungle scaling. And nobody wants to do that because it's expensive and it's annoying, and engineers don't like to do things that are annoying. But that presents an opportunity, right? Because MEV belongs to the application layer. It's created at the application layer. If you can capture it at the application layer, will it ever go down to the consensus layer? It won't. The application layer is the high ground that nobody wants to figure out and capture. But that's why we're here. We were in a unique position at the end of 2021. We had the technology to do it, and we had the capital necessary to fund the kind of team -- in terms of quality of expertise, and in terms of just pure headcount -- they could actually execute a strategy to go out and capture this opportunity.

[00:17:11.930] - Hazard
So that's what we've been doing. And ultimately what our strategy is, is to determine all of the sources of MEV-generating opportunities at the application layer and start to simplify them -- start to productize them, right -- put them into categories and say, oh, you're this type, you're this type, and you're this type. And for each type, we offer the following products and make it simple to plug in and easy to use -- tell stories about it with data, and demonstrate the efficacy to potential partners, and ultimately become a key piece of infrastructure for anybody building on any blockchain. That's the basic strategy.

[00:18:00.250] - Hazard
And I can give some brief story numbers to show how this is working out, which is to say it's working out well. And you'll see at the end of this call -- or I think just after -- we'll release the second quarter report which will have a lot more data in it, but we've processed about $300 million in volume in the last two months with the new protocol and application. And this is with no token incentives like we had in the old application. And this is three times the rate of growth that the old application achieved.

[00:18:35.910] - Hazard
And we haven't even had any major integrations come online yet, or any of the amazing work that we're doing, some of which you'll see in the quarterly report. It's not live yet. We don't even have market swaps. This is limit orders only in the first two months. So, annualized, it's almost $2 billion of volume. It's pretty good, right? And we know what kind of MEV-to-volume ratio -- we know about how much MEV we can capture per dollar of volume based on the data that we've got. It's about 0.1%. Which doesn't sound like a lot, but that volume scales and that goes way up, and most of that's going to be returned to users.

[00:19:19.170] - Hazard
But there's a clear path to profitability. It's very clear what we have to do. In business terms, it's a very easy game to play. It's hard because it's a competitive landscape and so on. But from a strategic point of view, once you know what you're doing and see what kind of a game it is, the game itself is not so hard to understand. And we have about five, depending on how you calculate it — and this is after a massive drawdown across crypto market — we have between five and ten years of runway to accomplish this with our current head count, which is 30 full-time engineers and operations specialists. That's a very strong business position to be in. This is exactly where we want to be -- where we're prepared to be. And I guess I'll end there, having talked for, like, 20 minutes about it. I get so excited about this stuff. But hopefully there's questions and we can get into more details about what we can expect in Q3 and what kind of long term strategic points we're looking at.

[00:20:26.310] - Deetz
Awesome. Yeah, it's a great pausing point. So if anyone's got questions so far, go ahead, raise your hand. We'll bring it right up on stage and have you ask a question. So does anyone have any thoughts, questions about strategic direction right now? So I've got... Here we go. Degendoc, let's bring you on up here.

[00:20:49.830] - Degendoc
Hey, guys, thanks for the time today. Really appreciate it.

[00:20:53.800] - Degendoc
Love you guys setting the stage for this Q2 report coming out. Hazard, you were talking a little bit about reaching this critical mass, and I think that's a great way to think about this. I'd love to hear a little bit more as to how you quantify what that critical mass is. I think Chainlink is an excellent example. Obviously, it takes some time to, like, be in the trenches to get there, but how are you thinking about what that critical mass timing will look like for this? And thank you.

[00:21:30.030] - Hazard
Sure. Yeah, that's a great question. I don't think there's a day on the calendar you can point to where you'd be like: that's where we hit critical mass. There's a lot of ways to think about it. One way I think about it —it's pretty simple — is it's the point where you don't have to pick up the phone and call people. They're picking up the phone and calling you, right? So when people are doing things on their own to use our products, our technology, is the point where it's transitioned from this jungle scaling — this kind of struggle, right? — into more of an easy scaling scenario where now you're the market leader, you have the right product/ market fit, and you have everybody satisfied with your reliability and so on, and you have all of the right data and things to make people happy. So that's the point where you could say you've reached critical mass, because then it's basically... You're going to expand at the rate that the industry expands, right? So we're going from — let's say zero — to getting a good foothold in the industry, different products and blockchains and stuff, and maturing our offerings to the point where somebody can come in and almost self service, right?

[00:22:50.490] - Hazard
Whether that's a user, whether it's a protocol that wants to plug in, they can almost self service and they can go about all their planning and development and they can just kind of fold this into what they do. And that's why, you see, to use the example of Chainlink: they have a lot of resources for developers. If you go to their site, they're making it easier for developers, the next generation of products, to embed Chainlink products into those products, right? You make that very easy when you learn exactly all the problems that developers and protocols and stuff have.

[00:23:20.270] - Hazard
So every time we have a sale or a partnership or whatever you'd like to call it, we're learning more about what the state of the art is in the industry. We know a lot already, but each protocol has individual challenges, and talking to those developers is highly valuable. And as you do this, you learn. What are the commonalities like? What are the common pain points? And that's how you build great products, right? And so the point at which we hit a critical mass... It's less about a number in terms of volume — you could plot on a chart where we're going to be profitable and so on and so on — there's a lot of variables in that that can make that come at one number or at another number.

[00:23:59.710] - Hazard
But the point where you really hit that kind of product-market fit — whatever you want to say, inflection point — to me is that point where you're almost not involved in active sales (if you want to call it sales). You're not involved in the act of really going out and pursuing partners. They're pursuing you, right? They're pulling you off of the shelf, and you have such good product-market fit that that's the natural thing that they'll reach for to accomplish whatever it is that they want to accomplish. And that may be users liking a product that uses your stuff, or it might be builders using your stuff as part of whatever it is that they build. And so at that point then you're scaling with the industry itself, which is where we want to be. And that's why bear markets are useful, by the way, is because the industry expansion kind of pauses and that's a good chance to let you — if you're one of these kind of jungle scaling type of products or services or projects — to kind of catch up with where the boundaries of the industry are now and get that coverage.

[00:25:12.130] - Hazard
And then when it starts to expand again and come out of a bear market, it's carrying you with it, and you're going to expand at the rate that that industry expands. So it's a good opportunity for that. It's a good question.

[00:25:27.830] - Deetz
Yeah. Thanks to you, Degendoc. Do we got anybody else with any questions here? We can kind of keep chatting about some other items that Hazard hit on. I'd love to dig into a little bit, but I do want to just give the chance for anyone else to raise their hand. Oh, I didn't see you raise your hand, Matt!

[00:25:49.010] - Matt
I literally can't. It forces me up on stage. But I'm going to ask you a hard question, Hazard. It's looking pretty far ahead. So I know we're talking strategy, and I guess this is so much strategy, but: how does us being a DAO play into our strategy, versus more of like a centralized enterprise? Obviously we can move more nimbly if we were just a regular company, and there's other factors, I guess, to consider. But is us being DAO really critical to our strategy, or is it more about just controlling the power that we hope to wield at some point in time?

[00:26:20.750] - Hazard
That's a good question. It's hard because you can't pull a textbook off the shelf and be like: well, in my MBA we learned that DAOs are ideal for this, and this kind of business scenario, because nobody knows how to use a DAO. Rather, nobody knows a guaranteed formula for using a DAO. We think we know when they're good and when they're appropriate, but we are still learning — and "we" meaning everybody in this industry.

[00:26:45.520] - Hazard
The reason that we're a DAO — this project is a DAO — is because the founders made it a DAO. I didn't have a say in that. I'm not a founder, actually. So I chose to become involved in this project because it was a DAO, though. And the reason that I am the CEO — somebody who started in the community's chat room on Discord — is because we're a DAO. And I know that's the reason that both of you, Deetz and Matt — as well as many of the other team members in the audience — are working for Rook Labs now, because it's a DAO that has this amazing regenerative power to recruit people into its mission: the mission of this DAO. So that's obviously very useful for a new business.

[00:27:44.690] - Hazard
If startups had that power, maybe some of the ones that don't work could end up working in the end. We'll see. More looking to the future: why would it be good, or why is it good, that we're a DAO? There's positives and negatives. I think every organizational structure you choose has nothing that's perfect. They all involve tradeoffs. And so although we don't know as much about DAOs as we do about corporations or other kinds of common enterprise that have hundreds of years of history and study behind them, it's reasonable to assume that there are tradeoffs and that this is not a perfect vehicle for any particular thing. But it has really exciting attributes that are useful in our particular line of work, because our ambition — if we can call it that, our mission — is to embrace all of the order flow, right? All sources of order flow on all blockchains. Why would you limit yourself if it's a mission? This is our point of infinity, right? We think it would be better... It would be best if all of the order flow processed on a blockchain were processed through Rook and its protocol, because that would mean the maximum benefit for users and applications and so on.

[00:29:21.550] - Hazard
However, that would be asking the participants on those blockchains and those users and those applications to do something that could be viewed as very dangerous, right? Order flow or transaction flow is sensitive. A bad actor could use that to somehow censor transactions, or harm users, or siphon off profits that would ultimately lead to centralizing the network through outsized profit capture -- rent extraction. So how do you prevent that?

[00:30:04.760] - Hazard
Because the ideal outcome -- the most efficient and optimal blockchain -- is to have this type of coordination for order and transaction flow. You want that because that will yield the most efficient system, but it also makes it vulnerable to this sort of centralization point that could be a big turn-off to potential partners, and it could limit our scale. It could limit and hamper our mission. But if it's sort of a headless enterprise, right? If it's just a DAO, it's a DAO, and it is accountable — publicly accountable, directly accountable — through governance mechanisms designed to ensure that certain invariants stay true -- invariants that protect the integrity of the network and the users, and that it can operate as a kind of blind force without the ability to be corrupted by, you know, the random whims of squishy humans that run it...

[00:31:17.640] - Hazard
Well, that would ultimately, that would be ideal, right? And we're not there certainly there's a lot of squishiness of what we do today. That's by design, because that's the phase that we're in. But being a DAO is also a kind of mission, right? It's a commitment to this future in which the things that we do, and that our protocol enables to happen, are bound in a kind of algorithmic trust so that they're safe and usable at any scale. They can unlock that value. And that's part of being a DAO, is enabling that. But you have DAOs that have all kinds of different profitability and business ventures. There's profit maximalist DAOs. You can have that. There's nothing... No law against that. But other aspects of things that we do, that we can encode into our mission, into our charter, into our protocol — perhaps ultimately — are designed to support this.

[00:32:16.220] - Hazard
We operate as we intend to operate, as a public good. It's something that's accessible to everybody. It's not rival risks, and it doesn't cost anything to use. It can be used for free. So today you can't ask Citadel to settle your trades for you just randomly, but you could ask our system to do that and be paid for it, right?

[00:32:41.390] - Hazard
And to maximize the amount of value in a credibly neutral way — use credibly neutral mechanisms that are incentive-compatible, not just what we decide, what we handshake on — to ensure that users or applications are getting the maximum possible value for their order flow as discovered. So we have all of these mechanisms that play into this strategy to ensure that we scale, and we can scale to accommodate these large responsibilities without endangering any of the key properties that make blockchains unique... And ultimately, we think, the future of all of this type of economic activity.

[00:33:23.790] - Deetz
Aya, it looks like you have a question here. Why don't you go ahead and unmute and share with us? If you're talking, we can't hear you. Hi, are you there? We'll circle back to you. Looks like Sha_har has a question. Sha_har, why don't you go on ahead and unmute and share?

[00:33:41.490] - Sha-har
Hey, can you hear me?

[00:33:42.970] - Hazard
Yes.

[00:33:43.760] - Sha-har
Awesome. Yeah, really cool call format. I'm excited for the rest of the calls on this. So, Hazard, you mentioned that we have five to ten years of runway — that seems like a fairly big range — but even if it's just five years, that's fantastic. It puts us in a much better position than a lot of other projects and businesses in this environment. So, props on that. You mentioned we have about 30 FTEs now. I was wondering if you could just comment. Do you think we need to scale up some more in terms of headcount? Do you think we have the right kind of team in place to accomplish what we want going out a few quarters or over the next year? And I know there's like a sort of hiring freeze right now and maybe like a KIP will kind of undo that, but just wondering if we have plans to substantially increase the head count, or increase that would affect kind of the remaining runway.

[00:34:50.490] - Hazard
Yeah, great questions. So first, the reason for the range is because of uncertainty about compensation structure in the future. So as people may know, we've been transitioning from our sort of legacy compensation model to a compensation model that's now under design. So you can slice the numbers up in different ways. You can take an optimistic or pessimistic approach to how much people are going to be paid, and you can get a range like that. So if I say we have a decade of runway, I'm perfectly happy to argue that we do, and we can pull out figures and talk about it, and somebody could probably counterargue that it's five years of runway and pull out things and figures. So the point is that we have enough runway to easily accommodate our current crop of contributors and then some. So we actually build in additional wiggle room for additional FTs when we make these estimates. And we'll publish all of the data on all of this today, actually. Wow. Yeah. Right after this call, we'll have a bunch of stuff. So runway is one of these numbers that you want to hear that it's big enough that you don't have to worry, I think.

[00:36:10.610] - Hazard
And so I think that's the key to understand here: is that it's big enough that we don't have to worry. To materially impact this, we would have to grow quite substantially. And what I can say now is that during this quarter, you've seen growth slow. So we had a planned growth spurt in Q1, and then we throttled back. We actually started throttling back well before the sort of market collapse that occurred during this quarter. This was planned. And we've only added a handful of contributors this quarter. And I think that we may add even less during this quarter. We may zero out on net the amount of headcount change this quarter, perhaps. We may add a couple. There's a tension, right? Because I think the size of the team that we have now is good. And most people inside of Labs are happy and agree with that. And we've had a quarter to sort of catch our breath, right? Because for those who don't know, we just about doubled our head count during Q1, which is a lot of change for any organization. And so this quarter has been about us kind of settling into that, getting to know each other and building ways to work together.

[00:37:38.850] - Hazard
And I think when you onboard contributors, it's all about — and rightfully — the DAO should ask, what is this doing for us? What's this unlocking? And so there's two aspects. Like, one, you need to sometimes add headcount, but then you can also build ways to allow the contributors that you have to work more effectively and to deliver more value. And so in this quarter —and likely throughout quarter three — the story is not so much going to be about adding new contributors as it is about unlocking the full potential and the full power of the 30 or so contributors that today make up Rook Labs. With the exception that we always have for the fact that the right candidate can always make the case to fill a particular role to be added to the team. And during bear markets and market strife, sometimes candidates that you would never otherwise have been able to access become available. And so certainly, that's something that we would consider. But we have a fairly tight idea about our runway, and don't have any plans to endanger it in any material way — certainly not to lower it past, let's say, five years.

[00:39:14.820] - Hazard
We want it to be a comfortable buffer. And again, this is after 70% drawdown in asset prices for most of our volatile treasury assets. And this is also assuming zero revenue generation and zero everything. So we're never making any money. And that's another important thing to note in terms of strategy — and you'll see some of this in the quarterly report — is we are on a pathway to profitability. There's a machine out there that we've built that converts volume into money, into revenue. We just have to rev up that machine, and we know exactly how much we need to rev it up to where we'll be profitable. So there's just this pretty simple curve you can extrapolate into the future. And the game is just to figure out how to get from where we are to where that curve intersects with our current expenses. And we're good. And we have so many different ways to get there, some of which we'll be able to talk about tomorrow and you'll see in the report as well. But it's a good question. It's a really important question. We should always be keeping an eye on that number, that runway number and burn rate and everything.

[00:40:27.030] - Hazard
Those are all very important because we want everything to be survivable, right? We want to be able to take anything in this market, which we all know is brutal. We want to be able to take anything that it can dish out. So, good question.

[00:40:42.370] - Deetz
aia, you want to see if your mic is working? Let's try this again. Oh, there we go. We can hear you.

[00:40:53.690] - aia
I tried the computer after. Still failed. This is the phone. So my question is about DAOs and some of the appeal being a lot greater transparency — and that clearly happens here with the governance. And I'm new, and I will admit I haven't taken the time to do the level of research in the Discord server. I really would like to, but I don't find it easy to — like you talked about, being a CEO, hazard — so that implies organization and that structure, the parts of it and transparency to the work going on. Granted, not all that can necessarily be public, and some DAOs will gate based on owning tokens or NFTs or both. But I don't know if that information is available, is planned to be made available, because it makes it easier for those who do have interest — if they can find the way to kind of dig into what they really care about and how they think they might be able to help. And I was curious just looking for like, "Gee, who's coming up with the plans to like, you know, find the initial key partners to work with and doors to knock on to try and get to that tipping point?"

[00:42:20.130] - Hazard
This is such a great question. In some ways this is the question for this quarter. And you'll see in the quarterly report, because we talk about the good and we talk about the bad. And one of the biggest things that we've done wrong this quarter is that we haven't — and we had to sit down, and we realized this — we haven't talked about what happens with these 30 wonderful contributors of ours. What do they do on a day to day basis? What are they up to? What are they working on? What is exciting them? What kind of breakthroughs are happening? Who are they talking to? What kind of work is getting spun up? What are the successes and failures and interesting things going on? And in many ways, that's half or more of the vibrant and exciting stuff happening. And we're kind of keeping it all to ourselves, right? And it's a huge problem. That's a huge problem. And we've had some discussions about this with people in the community in the past. And I hate the term community because it implies to me like a dualism, like a difference that there's the "out there" — the community — and then there's the "in there" — the labs or the workers or whatever — and I hate that.

[00:43:49.570] - Hazard
It's like a mental thing that starts this "us versus them" — different sides of some kind of chasm sort of thinking — and it's so hard to avoid. It may be impossible to avoid. I don't know. Because I was once a community member, and I still consider myself a community member. When I started being the CEO, I got myself in some trouble by wearing a community member hat too much, and I had to kind of button up a little bit. And I think that has affected the organization some, that buttoning up, and we've gone too far. We've definitely gone too far. And historically speaking the reason for it was we were in stealth mode, and we only had a couple of engineers and a couple of folks working on some things here and there, and we were small and building something new that we didn't want to get scooped on, because this was it. This was our shot. And keeping that secret — because this is a hyper-competitive corner of what is already a hyper-competitive industry — MEV is as PvP as it gets. So we played everything close to the chest because you never know what it is in what you say that's going to be exploited or used to take away some advantage, some competitive advantage, that you would otherwise have.

[00:45:21.030] - Hazard
And so we played things close to the chest, and that was our culture. That was the culture when I came on board and — to some extent, to my disappointment — it's still the culture. We default to not saying anything. We don't want to give deadlines, because things can happen and we don't meet them and we disappoint. We don't want to share what we're working on, because what if our rivals learn about it and beat us to it? We don't want to talk about partnerships, because what if the partner gets upset and they want a confidentiality? But if you go around the industry, you find that other projects have to various degrees tried to solve this. And I've experienced it myself, prior to working in web3, in different ways too. And I think what we need to do as Labs— but as a DAO as a whole— is to start embracing and breaking down some of the barriers that have been inherited, really, from the days when we were small and scrappy — which we still are. But an important part of continuing to accelerate our growth and to cultivate a healthy community, including a healthy technical community.

[00:46:31.630] - Hazard
And the next wave perhaps of contributors is to not freeze in place whatever kind of organizational structure we have now behind some kind of iron curtain. We need to be working more in the open and sharing more of what we do, is my opinion, and making it so that it's more accessible to everybody. And how we do that is a very... There's no one button to push. We have to have a strategy on this for our partnerships. So for example we should bake into the conversation and say at the outset: "Well, we have to do things in the open. We're a DAO and this is how it works." And so we're going to need to disclose that you and I talked. Could this lead to people in the DAO drawing the wrong conclusion? Yep. Would they then put pressure on that partner or cause a ruckus? Sure. We need to mitigate that. We need to think of ways — maybe we can call them infrastructure provider A or something. But enough information needs to be shared so that people kind of understand what's going on. You can see, I think, Tallyho now, the wallet, has done a great job of making sure that their integrations are in the open.

[00:47:49.140] - Hazard
Really cool. But then we need another strategy for reporting on stand-ups, for engineering stand-ups. Or when new projects are happening — what kind of progress milestones are there? So we did a good demo when we released the coordination protocol where we had a status hub set up. We didn't know, let's say when, but we knew what needed to happen before it released. And so we built this pretty easy little site with checkboxes with all the different milestones and things that needed to happen before we could launch. And then as those things were hit, engineers would take 5 seconds and check the box and the community could see the progress happening... In real time. And that was really successful. And I think we should do stuff like that for the rest of our projects and make it clear who's working on what, what's adding value, and bring even more of our research and discussion that we have internally — that's very robust and very exciting — out into the open and allow people to see it and participate with it. And this goes to our governance too. But really we do a good amount of that in the open, and it could be better.

[00:48:55.230] - Hazard
But we really do a poor job, I would say, about doing it with our productive day to day work for labs. And that's something that's been bothering me since even before we started this reorganization. And we need a better strategy there for sure. It's about a culture change, and there's still risk to working in the open. There's some risk. We're still small, right? We're still fairly early stage. But at the same time, this is an industry where so much is going on that, for a lot of things, nobody fucking cares. Like nobody's going to be hanging out and paying attention unless they're just like fixated on you for some reason. And usually the reason is good. Usually it's because they're interested. And you know what, maybe they'll want to work together, right? Or maybe they'll be scared off by how amazing our team is, right? We're at that point. So I think this is exactly the kind of thing that we need to be thinking about and implementing during Q3. And we've already got some ideas and we've tasked some folks with trying to carry that out and open that up, so that more of that can happen in the open and people can be more aware of what's going on.

[00:50:06.710] - Hazard
Because the team is one of our greatest assets. The DAO and the team, these are — the broader DAO, the community, and the team which is embedded in that DAO — are two of our greatest assets. And the fact that they can't talk and come together on the things that we do is a huge failure in communication, in my view, that we need to fix and we're going to start fixing during Q3.

[00:50:30.250] - Deetz
Yeah, another just back to back... Great questions there. Does anyone else have anything that regarding strategy short term, long term, or different aspects of it that they want to ask here? All right, Starfire, let's bring you on up.

[00:50:48.610] - Starfire
I was muted. Hazard, you talked about reaching a tipping point, and I was curious: what areas in crypto in the sector do you think we can have the biggest impact, or where our technology will be the most impactful?

[00:51:09.610] - Hazard
Yeah, that's a good question. So it lets me talk about another thing you'll see in the quarterly report that we've developed over the last quarter. Which is really important and helpful for us because, like I said, we started the quarter and we started this project looking into a jungle, and it's just a tangle of stuff. There's all these different applications, and all seemingly all these different ways that MEV happens. And what we've done is we've been able to start building what you might call categories or product verticals, and we have essentially three main ways that we see MEV extraction happening at the application layer. The first one is the one that everybody's most familiar with — and that we've done pretty much since the beginning — which is order flow. Orders. Not transactions, signed orders or commitments. Intentions like ERC-721 data structures to exchange tokens and some amount, some prearranged price or so on. It could be more general purpose types of commitments or intentions. These typically are used for things like off-chain order books such as the Hiding Book which we use to facilitate trades. They can be used for a number of other different types of exchange and other kinds of things.

[00:52:32.190] - Hazard
But this is sort of one category of order flow. We think about things in terms of order flow, so we need to be able to embrace the different streams or families of order flow. One of them is going to be these orders, these signed commitments that happen. And one of the major places that you can find these is on our own app and our own infrastructure, right? So we facilitate this happening directly. We are not the only type of order book. We're not the only source or sync of ERC-721 orders. The other, the second type, is sort of transactions — so not orders. These are transactions that have essentially been created by a user somehow using their wallet, or interacting with some other type of smart contract. You can think about it more generic. The systems you would build to capture MEV from these are more generic. They can take basically whatever you do on the blockchain — whether you is a user, or whether it's an application that's broadcasting something — and ensure that the MEV that it creates is extracted and returned to that user. And we have some really exciting products that are going to be able to tap into this huge source of application layer MEV and unlock it, pass it through the coordinator, unlock it.

[00:54:15.810] - Hazard
And so if an example of this order type order flow is the Rook trade app, an example of this kind of transaction type order flow is like what we're doing with GMX, right? So GMX has oracle updates, transactions that we're able to extract MEV from, or oracle extractable value from, and return to the GMX protocol. And this is nice because in the future, this general purpose infrastructure will let anybody just blindly plug in, pass their transactions through, and start earning the MEV that those transactions create. It's a very powerful product category.

[00:55:05.480] - Hazard
And then the last and least explored product category, or order flow category, is direct smart contract integrations. This is sort of the ultimate high ground, right? You're baked in at the smart contract level, like a Chainlink oracle is baked in. And an example of this would be what we're doing with B protocol. We have a different fee structure than other liquidators on one of the protocol's backstop, AMNs. Another example is what we proposed to work on with mStable for their stablecoin AMMs. And what we've been working on with the research team developing a TWAMM, a time weighted average market maker contract, that was awarded a grant from the DAO early in the quarter.

[00:56:07.710] - Hazard
So these types of integrations you don't see a lot of yet, because this is the ultimate deep in the jungle stuff, right? You're working contract to contract. But if you can productize that and provide an interface for builders to directly capture at the protocol level the MEV generated through user orders — transactions — for the benefit of that protocol, then you're at the stage where you're looking at MEV-aware protocol design, and you're building a product to enable that directly in the smart contracts that make up the application layer.

[00:56:45.810] - Hazard
And that could be a huge source of volume. It's the hardest to unlock compared to the other two, but ultimately that is the ultimate high ground, right? But all three of these are important. They're important categories, and they have their own unique customers and users and use cases and MEV profiles. And they each require slightly different technology to capture as order flow. But ultimately, all of that order flow goes to the same place. It goes to the coordination protocol. It's coordinated. MEV is captured and redistributed. So in the end, it all looks like volume for the protocol. What we're focused on is building intake mechanisms to capture these three types of order flow at the application layer.

[00:57:35.430] - Hazard
And if we can do that, then we're good. But it's hard to say which one of those we see the most potential in, really. Without all three, you're leaving MEV on the table.

[00:57:55.490] - Deetz
All right, well this has been absolutely humming along. I wanted to just kind of give a last opportunity for anybody to ask questions here during this session. I know that Hazard has referenced a bunch about the end of the quarter report that's going to be published shortly after this call. And just to repeat, we will be running through both the operations and the engineering different sections through that report during two different calls tomorrow as well. So we'll be able to dig into some of the products that are being built and a bunch of other things that people might be tied into — that might want to ask questions about that might be tied into strategy — but also kind of where engineering or operations has gone. And so we will be digging into a lot of that stuff tomorrow. But while we're still here, still just want to give anybody a last shot to ask any questions —or I can ask Hazard — did we not cover anything?

[00:59:01.190] - Hazard
If you want to do another 3 hours we can keep covering stuff, but I think we hit a lot of the major points. The only thing I'll say is that talking is one thing — and fortunately we're hopefully going to have wonderful transcripts and make all of this accessible and searchable for everybody in the future. But we still need to focus on building processes and deliverables that let people — everybody, all of us in the DAO — have a shared understanding about this arc that we're on, and where we are in this journey, so that we can always do this.

[00:59:30.330] - Hazard
Because quarterly reports are great — we are really proud of this one and it's wonderful — but you shouldn't wait three months to have a big group discussion. And ultimately when people talk about regulation and stuff like that, I think a DAO should be held — and can be held — to really a higher standard than like a public corporation. They have to report quarterly. They file some inscrutable report that it takes an expert to dissect, every quarter, a 10Q — the SEC in the United States at least. And it's full of good information, but I think personally it would be cooler if we just had a continuous — the equivalent of a continuous 10Q — that you could always check and see the latest information. And that we were almost building the quarterly report as we go throughout the whole quarter, and all the numbers and everything we're updating as we go. And then you take a snapshot at the end and you put it on Twitter, and that's your report.

[01:00:26.580] - Hazard
But really it's this continuous thing that you can see at any time. I think that would be much more DAO -like and much more interesting, and we're able to do that. And so I think things like that are innovations that hopefully we'll be able to slowly build over time and move away from these kind of grand quarterly reports and start to open things up into a more continuous model of information sharing. That would be awesome.

[01:00:54.050] - Deetz
Last pause and give anybody else a chance here to ask anything. All right, well, just as we ended the previous call, we'll just end with a little bit of reminder and housekeeping. So stay tuned for two separate items to get published in the next 24 hours. First, you've got the end of quarter report, and then the proposal for the extension on KIP-21 as well.

[01:01:24.410] - Deetz
Looking ahead to tomorrow, starting at 11:00 A.M. Eastern time, we will be jumping into the Q2 recap, and that will start with Engineering at 11:00 A.M. tomorrow. Then we will hit our talk about Rook narratives and how we see ourselves positioning across the crypto verse. That's at 01:00 P.M. And then we'll wrap up the end of the Q2 recap at 03:00 P.M. with the operations side. So really excited to get all of this kind of in front of the DAO, keep things moving forward. I've been having a lot of great questions throughout these calls.

[01:02:11.770] - Deetz
And while this wraps up the calls for today, we still have the end of the quarter channel in the Citadel, the EoQ2 channel. That's a forum style post where you can post different topics that we want to discuss around the end of the quarter so we can do a little bit of asynchronous conversation around this. But for everyone that hopped into this call, just another big thank you for being here, for listening, and for sharing your questions. And we'll go ahead and see you all tomorrow at 11:00 A.M.. All right, thanks everybody. Go ahead and end it for the day today.

[01:02:53.630] - Hazard Thanks, everyone. Bye. All right.

Quarterly Recap Rook Q3 Preview: Strategy

Key Takeaways

Transcript