Token Economic Model, Human-Machine Collaboration and Democratic Governance

KingData ·2022-06-16

Author: tovarishch.eth

By studying The Commons Simulator, this paper analyzes and studies the token economic model, Web3 project mechanism coordination, human-machine-assisted social governance, and voting mechanism under the Web3 ecosystem.

  1. How to simulate a token economic model based on The Commons Simulator

Token Economics is "familiar" yet unfamiliar to some Web3 participants. Familiarity is that it seems that any project has to issue coins, so that there is a meme that "issues coins can solve problems".

But on the other hand, what content does the token economy involve, how does it affect each other, and what will be the final result? If it is issued in a decentralized virtual society, what kind of impact will it have? These seem to be things that economists and project parties will only consider. However, Gregory Mankiw, who has a little knowledge of economics, believes that the only thing that distinguishes us from other species is money in a considerable sense. Tokens are to some extent the currency that maintains the operation in the small universe created by the project party. Of course, when a token in a small universe communicates with the world outside the small universe, the token will also have a certain impact on the outside world. A good token economic system can make the small universe created by the project party vibrant, everyone can get reasonable benefits from it, and the small universe can operate and develop sustainably. Conversely, bad token design will bring devastating disaster.

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Therefore, whether it is investing or hoping to explore the future development of organizational forms and society through Crypto and Web3, the token economy is a threshold that cannot be bypassed. Based on the importance of the token economy, and in order to lower the threshold for people to learn, BlockScience and The Commons Stack have developed UI games on the basis of cadCAD, hoping to guide players in a simple and clear way to understand some of the future decentralized governance. Importance of new tools (belief voting, etc.). Through software simulation, it helps various DAO communities or projects to design token economy quickly and efficiently.

1.1 Game Background
The game is set as the world's ecosystem has collapsed, and the player as the protagonist travels back in time to teach the community to create regeneration with the help of cadCAD in the hope of saving the world. In the game, players need to determine the initial state of the new system, the distribution ratio of community funds, the voting speed, the exit mechanism, etc. In the end, the game gives the simulation results and the score of whether the world is successfully saved. The full score is 1000 points, higher than 500. The score was judged to be a successful rescue.

Players need to set 6 input variables in order.

The first variable is the number of initial founders. As an initial state, this variable can help determine RxC's reserve pool (funds that provide value to the RxC community token), funding pools (funds that fund community projects), the design of the Augmented Bonding Curve, and the initial start of society.

The second variable is the number of initial proposals. These proposals are project proposals for funding by the RxC community.

The third variable requires the player to decide the proportion of funding pool funds and reserve pool funds in the initial start-up funds. Funding pool funding is a system parameter that will directly affect the initial stages of the game simulation start.

The fourth variable players will determine the maximum percentage of funds in the funding pool that can be withdrawn in one go. The maximum amount of funds that can be withdrawn is dynamic and depends on the amount of funds in the funding pool. This variable is also a system parameter, but unlike the third variable that affects the beginning of the simulation, this variable affects the later stages of the simulation's development.

The fifth variable is voting speed. The game is set to use belief voting as a process for the community to decide whether to fund a proposal. Conviction Voting was proposed by Aragon, which is a continuous voting process. If a participant stakes his token in a proposal and holds it, his voting power (utility) will increase over time. The voting speed that players need to decide in this link refers to the number of days it takes for individual votes to account for 80% of the total. This is also a system parameter that affects the later stages of the simulation development process.

The sixth variable is withdrawal contribution, which means that when community participants decide to withdraw from the community and destroy their tokens, players need to decide what percentage of the funds should flow into the funding pool.

1.2 Competition process

We organized a group of small partners to conduct simulation challenge experiments based on The Commons Simulator. The community has devised different solutions to challenge the high score of meritocracy and the lower limit of the system to try to destroy.

Tournament Lows

The following is an excerpt of some of the wonderful insights of the participants.

qiwihui.eth: "First find a chaotic solution as a whole, get an initial score, then study the changes of each parameter in the entire parameter range, find a parameter that makes the score drop rapidly, and then fix this parameter to find other parameters, and keep going. Iteration, this process should be a fast downhill strategy, find the steepest place, similar to gradient descent. Computation time: It takes about 10-20 seconds to adjust the parameter page in this process, and the result calculation is about 20-40 seconds, so the overall One minute, so it is necessary to estimate which parameter has the greatest impact on the result, and when testing the parameters, each parameter is probably in the range of 1 to 100. You can try it with a step size of 10 or 20. Such a parameter is estimated to take 5 to 10 minutes as a whole. . This method is a pure calculation method, not universal, just have fun with it.”

Zuriaake: “From a parameter perspective, a good average seems to be reflected in small but sophisticated teams and proposals, and a tendency to give back to the treasury or community.”

ScaSte: "Although I didn't get the highest score, but after trying it, the meaning conveyed is quite clear. The startup team must be small, the treasury must be sufficient, the money cannot be used indiscriminately, and it cannot be refunded without losing some meat. Yes. I don't know if anyone has simulated other ideas."
vimky: "Summary: The smallest one can make a fortune."

ColdRainNight: "I used two completely different sets of numbers, and both got a score of 995, so I'm numb, and I don't know where the 5-point difference is. Few people participate, there are few projects, and the low exit fee is a kind of There are more people involved, more projects, and higher exit fees.”

Rebeccawong: "I scored a 1000 -point model to be super -collective, that is, a few people meant to cut leeks hahahahahaha, and then I did not first discover this from 1000 points. The result gave me the lowest known score -8299."

Ricky: "I'm wondering if what he wants to express is to have a certain degree of efficiency. If it is too centralized in the token mode, it may be easy to hang up and not be able to do it."

  1. Thoughts on token economy, human-machine collaboration and democratic governance

Below are some of our thoughts on the token economy, the mechanistic coordination of Web3 business and financial models, and computer-assisted decision-making and democratic governance, based on a simulation test based on The Commons Simulator.

2.1 Mechanism coordination

Since the invention of "transaction" by human beings, financial behavior and transaction behavior have been associated. However, participants who are currently involved in Web3 model design often ignore or even deliberately design the business model and the financial model separately, so as to ensure the win rate of the "mechanism-based dealership", which in turn leads to the Ponziization of the designed economy, and the randomization of the business model. The resulting death spiral.

First of all, we do not deny that the development of technology in the context of Web3 and Crypto has brought about a new way of building financial models, which in turn has spawned a development model in which financial models precede business models. As stated in Introducing the 2022 State of Crypto Report recently released by A16Z: In a Web3 environment, rising token prices drive interest in projects, which in turn drive ideas and activities, which in turn drive business models. Innovation.

However, if we look at the current Web3 project ecology from the perspective of traditional financial analysis, we will find that most projects have not realized the value capture of business models. The currency price of a large number of projects has risen only because of the continuous purchase of subsequent entrants, not because the services or products provided by the projects themselves have exchanged value in the social financial system. In other words, we only see a high-speed idling of the token economy, while the Income portion of the income statement is almost zero. For those who hold traditional financial investment views, it is undoubtedly Pond's. Take Buffett's highly respected indicator ROE as an example (ROE = Net income/Shareholder's Equity, this indicator is the percentage rate obtained by dividing the company's net profit by net assets, which is used to measure the company's efficiency in using its own capital and shareholders' equity. Generally speaking, the larger the ROE value, the higher the return on investment.) Buffett insists that only a company whose ROE is maintained at 20% to 30% all year round has long-term investment value.

From the above analysis, we can see that the ROE of the vast majority of Web3 projects is close to 0. Even if we open our minds and relax our standards, we believe that the value capture of tokens has both the liability attributes of pre-collected accounts and the attributes of owner's equity, that is, users who purchase tokens and enter the market can be regarded as the income of the project. Then, for a Web3 project that issues tokens, there is a rather exaggerated project financial leverage. This is also the source of the huge wealth-making effect of the popular Web3 project.

However, this kind of financial model is the first way, if the project party "does not think ahead" before the huge economic benefits, then the project's tokens will not become the products and services generated in the Unicom system to exchange with the value outside the system bridge medium. The reason why the purchaser of the token chooses to buy and hold the token is not the recognition of the project's business model or the expectation of its possible future social value contribution. The developers/contributors of the project, the benefits obtained through the token economy, do not come from the exchange of their contributions with the social system. In the same way, the ultra-leveraged business model of the project party is nothing more than transferring business risks to the investor's equity capital.

Take the recently widely discussed and controversial stablecoin project as an example. If the business model of the project is simply regarded as the value support behind the project, and centralization and decentralization are used as the second division dimension, then the existing currency system can be put into the coordinate classification system shown in the figure below.

In 1694, in order to fight the Anglo-French war, the British royal family borrowed a large amount of war money from 1,286 merchants in London in the form of a shareholding system of 8% interest. This loan led to the creation of the Bank of England. The British pound issued by the bank was initially only used to record the unit of gold, so its value fluctuated so widely that it was difficult to use widely. As a result, Newton, who was then the director of the Royal Mint, determined that 1 pound was anchored to 7.32238 grams of pure gold, stipulated the value behind the pound sterling token in the form of government law, and endorsed this value in a centralized form. . People no longer need to carry gold coins, just use British pounds, so a value transfer network based on British pounds is established.

As a tribute to Newton's contributions to science and the reformation of the pound, his portrait is printed on the back of the £1 note

In fact, as the British Empire established colonies around the world, as an intermediate exchange for the output value of each colony, the pound already has the ability to decouple from gold. On the contrary, Austrian economists believe that because of anchoring gold reserves, it will actually limit the issuance of currency, thereby restricting the rapid development of society and economy. This achievement was finally achieved by the dollar, which was decoupled from gold after Bretton Woods. The decoupling from gold has lost the backing of hard currency, and the dollar has not collapsed. Instead, it has resonated with the process of globalization and has made itself an irreplaceable existence in international trade settlement. Is the dollar really not supported in the air-to-air? Obviously not, as can be seen from the above description, although there is no such support as gold, which is difficult to transfer and rely on consensus to reflect value. But the global economic system that relies on the U.S. dollar as an intermediary for value transfer has become the backing of the U.S. dollar. Likewise, when a similar situation occurs in the context of decentralized Web3, unbacked algorithmic stablecoins should have a more enticing prospect than backed USDT. This view is also consistent with Hayek's ideal monetary system theory. However, at least at this stage, the reason we see the death spiral of algorithmic stablecoins is that they have neither actual support nor a business model that is broad enough to be implemented.

However, in the face of a large number of doubts about algorithmic stablecoins and even Web3 financial mechanisms, we believe that:

First of all, there is no need to "wear new shoes and take the old road": completely strip the economic system and business system of the Web3 project, abandon the existing way of token economy, and return Web3 to the form of traditional company stock. Our certainty comes from a large number of Blockchain technologies that the Web3 ecosystem relies on, and the extensive decentralized trust mechanism it brings. According to the viewpoint of sociological constructivism, the social relations constructed between people can be divided into Hobbesian society with no trust and complete competition, Lockean society with partial trust and partial competition, and complete competition. Trust a harmonious Kantian society. Representative scholars of constructivism such as Alexander Wendt, a professor of political science at the University of Chicago, and Professor Qin Yaqing, former dean of the my country Foreign Affairs University, believe that the enabling factors that promote the transformation of human society from Hobbesian to Kantian form are based on the Self-disciplined trust (Trust). Based on the theoretical point of view of constructivism, we believe that after the financial model of Web3 attracts a large number of social resources through the wealth-making effect, it has more constraints on project parties at least at the technical level than the previous "tulip bubble". and channels to build a foundation of trust among participants.

This kind of "technically deterministic" trust mechanism of Web3 has already had a huge impact in some unexpected environments. For example, in African countries, due to the lack of trusted third parties (such as the national financial system) required by the traditional centralized financial model, the trust mechanism of the blockchain and the wealth-making effect of the Web3 project make the encryption economy in this period. The region is booming. At present, Africa has become the second largest crypto-economic development region in the world. In the process of active participation of the African population in the practice of Web3, we should recognize the great social benefits brought by the so-called "Pond's" of Web3.

Secondly, we believe that we should "rely on DAO to open up new ways": through DAO, a brand-new form of human organization, to complement the conditions required by Kant society and explore a new paradigm of economic behavior. In constructivist theory, Trust is only the enabling factor to realize Kantian society. The realization of a harmonious and efficient society also requires the existence of one of the three positive factors of interdependence, common fate or cultural homogeneity in the system. The following diagram explains the definition and real-world examples of the three factors and Trust:

Although there are no specific cases of relying on DAO to achieve interdependence, common destiny and cultural homogeneity, take cultural homogeneity and interdependence as an example: At present, a large number of DAOs will issue corresponding documents based on their cultural characteristics (culture/vibe). PFP Avatar. When its members use these NFTs as explicit social media identity tags, first of all, they have stronger identity performance and recognition capabilities than the text-based identity tags in the Web1 era. Secondly, compared with the pure picture Avatar in the Web2 era, it often leads to the emergence of high dependence due to financial transactions in the secondary market. Under the influence of this new cultural identity mechanism, we have reason to be optimistic that with the blessing of DAO, the ecology of Web3 will open up a new path in addition to the traditional financial path.

2.2 Human-machine collaboration
In this test, we also tried applying scripts to explore the game and trigger thinking about quantitative decisions.

People always say that no matter how much you learn, you will not be able to live your life. Why so many quantitative principles and strategies cannot be implemented in community governance is essentially because they have not been quantified. Once the standard cannot be quantified, it is easy to tilt towards emotional behavior. Chongguan is angry, although all-in looks very "cool", but it often does not "make miracles" in social decision-making.

The purpose of using quantitative thinking to guide behavior is to lock emotions into the cage of the system in order to pursue long-term benefits that meet expectations. However, there is an end to manpower, and our brain "computers" are not designed to perform an infinite number of simple and repetitive back-tracking calculations. So when conducting quantitative research, we must rely on the help of computer-aided systems. But even with the participation of computers, there is still an insurmountable impossible triangle in the field of quantitative strategies: high returns, high success and high triggers.

High trigger means that the quantitative strategy we rely on computer-aided system design always meets the conditions to trigger actions. High success means that once the strategy is triggered, there is a high probability of a positive return. The final high return refers to the fact that after the successful implementation of this quantitative strategy, the amount of return it brings, both in terms of economic benefits and social well-being, is very large. However, this return may be positive or negative.

In the field of trading, the most popular high-frequency trading strategy used by institutions is to choose high trigger and high success and give up the amount of return obtained each time the strategy is executed. Retaining high returns and high success is "three years without opening the door, opening the door for three years". If you give up high success and choose high trigger and high return, only risk lovers with a negative risk aversion coefficient A in the Utility Function may be willing to choose this strategy. Here, U is the final utility of a strategy, and E(r) is the expected payoff. The simple understanding of utility is the benefit minus the disadvantage. The original meaning of the formula is the expected benefit minus the risk.

Then when this computer-assisted decision-making thinking is brought into community governance, high-frequency trading strategies may not be the most appropriate choice. As the ancient Chinese saying goes, "governing a big country is like cooking a small fish", communities often cannot withstand repeated adjustment of governance strategies. In fact, it is also well understood from the perspective of financial thinking, that is, the cost of friction is too high, so high-frequency strategies cannot be selected in governance. In the end, the only thing left is to use the assistance of computers and adopt the system policy design method of "high success" + "high return". After further sorting out the governance of human-machine collaboration under the Web3 ecosystem, we believe that the utility U above may be further refined by referring to the Worldwide Governance Indicators (WGI) in traditional political science.

Although we have already stated our point of view in the 2.1 mechanism coordination section: DAO is very likely to be of great significance for the realization of the token economic model under the Web3 ecology and for the iteration of the overall Web3 ecology. However, for the current investors, developers and ordinary users, how to choose a DAO as the target of investment and participation has not yet had a good measure. First of all, a large number of DAOs have not issued tokens at present, and their financial models and business models are often still in their infancy, so the discounted cash flow method has lost its usefulness. Furthermore, even for DAOs that already have tokens circulating in the secondary market, it is debatable whether the asset law is effective or not due to the different personnel ownership and value generation and distribution models of traditional enterprises. Finally, at the moment when the DAO ecology is flourishing, almost every DAO is in a different ecological niche, and it seems that comparable company law and transaction law cannot be used as an evaluation method. However, when we turn our attention to the essence of DAO: a new organizational form that combines man and machine, which may bring more social well-being to the society, the relevant indicators of Governance Utility may be the credentials for us to judge a DAO .

The Global Governance Index (WGI) is a data survey project jointly implemented by the World Bank, the Natural Resource Governance Institute, the Brookings Institution and other institutions. The data contains six main indicators to evaluate traditional governance: voice and responsibility (Voice and Responsibility). Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. In the previous section of this section, we have analyzed how to ensure political stability when relying on computer-assisted governance within the DAO in the context of Web3 from the perspective of quantitative strategies. Other aspects of the indicator, such as voice and responsibility, can be mapped to whether to support blockchain-based voting. Governance efficiency, rule quality and rule of law can be judged by analyzing community data after a specific voting process. Corruption control can be more easily judged based on the characteristics of the blockchain to check whether the wallet is multi-signed and the contract is audited. Whether it is based on qualitative comparative analysis (QCA) or further quantitative analysis, we believe that it may be a feasible way to evaluate DAO in the future.

It should be said that although Web3 is built on a series of technological innovations such as blockchain and smart contracts, Web3 is closer to the innovation of social tools than engineering innovation. The society is not a machine and a program, and talent should be the core of its essence. This idea of ​​organically combining humans and computers and ultimately creating more social well-being is actually consistent with the relevant theories of cybernetics. The builder of Web3 should not only create technically, but also have philosophical and sociological guidance.

2.3 Voting Mechanism

2.3.1 Traditional voting system

The famous sociologist and economist Gordon Tulloch pointed out that the voting mechanism is a matter of public choice, which is particularly important in a democratic system. The same voter, even under the same personal will, may lead to completely different voting results due to different voting mechanisms, thereby affecting organizational construction and social development.

Combined with the content of this book, we can briefly sort out the advantages and disadvantages of several voting systems. For a better explanation, this article assumes that there is a Voting DAO, in which there are four guilds A, B, C, and D. Now they need to vote to decide which guild to use for a Funding exclusively. Among them, there are 42 people in Guild A, 26 people in Guild B, 15 people in Guild C, and 17 people in Guild D. Next, let's take a look at what the results of different traditional voting systems will bring:

  1. Plurality Voting: One person has one vote. When voting, voters have one chance to choose one of the issues, and the proposal with the most votes is passed. Obviously, in this case, Guild A is the easiest to obtain Funding, but in this case, for the entire DAO community, the interests of 26+15+17=58 people (>42 people) have not been guaranteed and reflected. In other words, the majority interests of 58% of the community are not reflected under a seemingly democratic and reasonable voting system. It is difficult to say that such a method reflects fairness.

  1. Instant Runoff Voting (Instant Runoff Voting): Also known as "sequential voting" or "priority voting". Voters rank their favored candidates on the ballot paper by preference. When the votes are counted, the candidate with the least number of people in the first place is first excluded, the preferences of the voters are rearranged, and then the candidate with the least number of people in the first place is eliminated until there are two candidates left. This voting method is still the mechanism used by many sovereign countries (Eg. Australia, Ireland, etc.) to vote. In this hypothetical case, we consider each guild member to vote the same, as shown in the following diagram:

In the first count, Guild C received the fewest votes and was excluded. At this time, Guild C's second preference is Guild D. So in the second count, guild D has 17+15=32 votes, guild A has 42 votes, and guild B has 26 votes. Guild B has the least votes, so Guild B is excluded. At this time, Guild B's second choice is Guild C, but since Guild C has been excluded, guild D is the third choice. So in the third count, Guild D has 17+15+26=58 votes and Guild A has 42 votes. There are only two options left at this point, so the final calculation can be made, D 58 votes > A 42 votes, and the D guild wins.

This voting method does overcome the drawbacks of majority voting, in which the will of the 58% majority of the community is not reflected. However, in the initial preference ranking, guild D has 17 votes, which is located in the bottom 32% of the preference ranking of the entire community, and from the individual preference rankings of each guild (guild A ranks D at 3, B ranks D in the ranking 3, C ranks D in 2, D ranks D in 1). But it is such that the "dark horse" that is obviously not everyone's favorite has finally become the winner in the sorting check system.

  1. Condorcet Voting: In the first two voting methods, we found that there seemed to be insurmountable institutional drawbacks, so the French mathematician and politician Condorcet invented a dual-order voting system. Under the Condorcet voting system, voters rank candidates according to their preferences, for example, write "1" for the first preference, "2" for the second preference, and so on. This method compares each option against all other options, one at a time, and the option that beats all the others is the winner. As long as one option ranks higher on the majority of votes than another, it defeats that option. Taking Voting DAO as an example, 100 members of 4 guilds all need to vote on the 1-1 pairing options of the 4 guilds (it is also considered that members of a guild vote in the same way, and the preferences of each guild are as follows: shown in the selection). The result is shown below:

So, guild A wins 0 times, guild B wins 3 times, guild C wins 1 time, and guild D wins 2 times. So the final vote was won by the B guild. Condorcet voted 1-1 to select the option that was least excluded by the community. However, the Condorcet method still has drawbacks. If there are only three guilds A, B, and C, and A, B, and C like each other, forming a cycle of continuous defeat, it will lead to the Condorcet paradox with no winner. .

2.3.2 Web3 voting status

On Snapshot, the most widely used voting governance platform, the following voting systems are prepared for proposals:

Single-Choice Voting: Choose only one option.
Weighted Voting: Spread their votes over multiple options.
Quadratic voting: Weighing results based on individual addresses and voting power.
Approval Vote: Approve a certain number of options.
Sort Choice Vote: Arrange the different choices in the order of their preference.
Basic Voting: Ability to abstain from voting while still participating in statutory voting.

It should be said that if quadratic voting is a means of emerging democratic participation that can only be achieved with the development of blockchain technology (interested partners can check the relevant articles written by Buterin), then it should be in Web3 widely used in the context. However, we found that most of the proposals on the Snapshot only applied the most basic single-choice voting model. Taking the eight projects with the most members in Snapshot (ENS, GitCoin, Aave, Sushi, Uniswap, OlympusDAO, Bankless DAO, and PancakeSwap) as an example, the ratio of using only single-choice voting reached 82%.

In response to this phenomenon, we believe that it may be caused by the fact that the vast majority of Web3 participants do not have sufficient knowledge of relevant sociology and political science, and do not reasonably use existing technical means. This is why we conducted this study to popularize the theory outside of Web3 technology.

2.3.3 Outlook of Web3 Voting Mechanism

There are currently some noteworthy and exciting developments in voting and democracy building in Web3. For example, the weighted belief multiplier voting system used in the Polkadot ecosystem. It adds more "anti-giant whale" mechanisms on the basis of traditional belief voting.

Belief multipliers are a way of distributing power in favor of individual users. In a decentralized system, methods such as one-person-one-vote/one-yuan-one-vote or even quadratic voting methods cannot completely avoid Sybil attacks. Although belief voting can reflect the contributions made by participants to the organization in the voting results to a certain extent, when faced with the "money ability" of giant whales, the power of individuals is still weak. The belief multiplier can curb this phenomenon to a certain extent.

For example, if Participant A really wants a proposal not to pass, and it only has 100 tokens. Under the belief multiplier mechanism, A can choose 10 times the belief multiplier to vote. Then, A's vote will have 10 times the "virtual power". It is equivalent to A using 100 tokens to achieve the same voting weight as a whale that does not choose to stack belief leverage but holds 10,000 tokens. For this, A’s tokens will be locked for approximately 1500 days, which is almost 4 years. In contrast, in order to further reflect the meaning of "belief", it is true that the will of the participants who really care about one thing is reflected. The belief multiplier mechanism also allows for voting without locking any tokens. But at this time the weight of the vote will be only 1/10 of the normal weight. This mechanism has to be said to be relatively radical, and it has the taste of "every man's anger". But it reflects that under the concept of Web3 decentralization, technology can indeed provide some feasible ways to fight against centralized authority.

  1. Summary

In this article, starting from The Commons Simulator, we extend the discussion of token economic model, Web3 project mechanism coordination, human-machine-assisted social governance, and Web3 voting mechanism. We believe that Web3 is still in an extremely early stage. Therefore, first of all, at the engineering level, all Builders should insist on increasing the utility of the Web3 project's token economy, contributing more benefits to the society, and striving to promote the overall ecological construction of Web3. At the same time, we should also see the Web3 token economy as a social tool whose significance extends far beyond finance and engineering. We hope that this article can attract more cross-field experts, scholars and practitioners to strengthen the social theoretical research and practical application of Web3 technology.

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