Tokens (Part 1)
Tokens (Part 1)
From the Internet's Original Sin to the Vanguard of Governance
gm.
Tokens have been celebrated for their ability to align incentives and introduce a superior way to solve the infamous cold start problem. This is important.
However, I think the competitive systems of governance they will unleash is a bigger deal and relatively under-explored.
This week, we explore:
The internet’s original sin and how tokens present a solution
The journey from Porter’s 5 Forces → Aggregation Theory → Crowning Community
Digital Land Reform - from the Asian Tigers to the metaverse
The competitive governance unlock - bringing consistent rule of law, enforceable contracts, digital property rights, and market-based incentives to billions
The Internet’s Original Sin
A lack of digitally native payments and property rights on the internet has had a lot of weird second-order effects.
For example, take ad-driven Web 2.0 monetization models. Algorithms optimizing for increased engagement (outrage). Large megaphones provided to the 2% most extreme voices on either side of a given political issue. Polarization ripping apart the social fabric of many democracies as constituents receive different sets of facts.
An unfortunate externality to be sure.
Or maybe it’s the rise of online aggregators. Because we did not have a way to build trust or automated contracts online, we have been left with swelling intermediaries who broker trust between transacting parties. By aggregating supply and demand, big tech provides a valuable curation service and reduces friction, but also levies increasing economic rents, crushing competitors, squeezing returns to merchants and creators, and exploiting participant data to the gain of a relatively narrow shareholder base.
It’s not popular to admit this amidst the tech-lash, but I don’t hate big tech. On the contrary, many of the products are amazing. The app-store, search, twitter threads, global video calls, two-hour Amazon deliveries, on-demand Grab Food… all from a couple of finger taps? Magical. Examining benefits from global access to information, efficient supply-chains, pocket super-computers, and instant-global communication, we are better off than we were 20 years ago. Full stop.
The argument is not these products are the bane of modern civilization. They’re often delightful. The issue is the negative externalities from fundamentally misaligned incentives driven by the internet’s original sin.
The arrival of digitally native property rights - tokens - provides an opportunity to create valuable networked-economies with more aligned incentives which do not require ads to monetize or aggregators to facilitate trust.
Like the arrival of the internet, we should now update our frameworks as to how industries will develop and where value will accrue.
Companies → Platforms → Communities
When I was in college. Michael Porter’s 5 Forces was still at the core of every business or strategy class: Competition, New Entrants, Power of Suppliers, Power of Customers, Threat of Substitutes. The original paper was published in 1980 and still reigned supreme on college campuses and corporate board rooms more than 30 years later; the go-to framework for analyzing companies and industry dynamics.
But dynamics were shifting.
With the rise of internet business models and zero marginal costs, the better framework for analyzing businesses was OG Ben Thompson’s aggregation theory. By capturing the demand, platforms could collect distribution fees for matching supply to their captive demand.
Traditional Econ 101 principles were challenged. What happens to my supply and demand curves when supply is theoretically infinite? What about when supply and demand are reflexive? Netflix promoting a show or Amazon a product is bound to boost said demand… the curves are intertwined.
Pricing is no longer the outcome of supply and demand curves, but of demand capture. How do I subsidize market growth to capture as much economic demand as possible and then charge suppliers for the privilege? Aggregators can then extract ever more rents out of the ecosystem as it matures. Milking the monopoly.
The earlier an investor replaced Porter’s 5 Forces with aggregation theory as the primary lens for evaluating companies in the digital era, the higher likelihood of outperformance over the last two decades.
We are now undergoing a similar shift. A shift from aggregation theory - platforms, network effects, demand capture, and economic rents - to the formation of open networks and communities. Digital economies.
Making the transition early should be as or more lucrative than being an adopter of aggregation theory in the 2000s.
Digital Land Reform
Distributed systems provide us with a novel wrinkle. As opposed to trusting a centralized platform to aggregate supply and demand for a fee or monetizing user data to third-parties, what if there was another mechanism for coordinating large groups?
What if we could design systems, with aligned incentives, without a central coordinator extracting rents? What if developers, users, and creators can participate in the value of the networks they help create as opposed to a smaller group of equity holders? What if large swaths of the internet were mass collections of co-ops as opposed to feudal lords and plebs?
Incentives matter.
Categorically, land reform and private ownership for small farmers led to increased agricultural yields (they kept the surplus) allowing for re-investment in machinery, industrialization, urbanization, and higher standards of living across the globe. The same pattern played out in Europe, the U.S. and then the Asian Tigers over the last two centuries.
Similarly, “digital land reform" - allowing smaller participants digital ownership - will lead to more inclusive, healthier societies. Ultimately, liberal values, property rights, and market incentives have done more to boost individual well-being than any other innovations in history.
I’m excited to see these mechanisms take hold in the digital realm; the growth engine of the 21st century.
On a global scale.
Smart Contracts & Tokenomics - Competitive Governance Unleashed
No longer are we simply building companies but are constructing digital economies. Architects set the ground rules for how communities interact but cede control to the users over time. In many ways, building protocol ecosystems has more in common with nation-building than company building.
The architects behind nation building today are no longer Alexander Hamilton, Ito Hirobumi, Park Chung-hee, and Lee Kuan Yew. The axes have shifted. The most vibrant communities today are coalescing in the cloud - building, transacting, and coordinating on the rails built by Satoshi, Vitalik, Anatoly, and Do Kwon.
Those comparisons may seem laughable to some, but the data is increasingly difficult to argue with as the settlement value of Ethereum alone (US$6.2 trillion) is likely to reach the combined GDP of Japan (~US$5 trillion1) + South Korea (~US$1.6 trillion2) + Singapore (~US$340 billion3) by year end 2021.
Obviously, this is not an apples-to-apples comparison, but goes to show the magnitude of economic activity atop these digital economies. Economies which unlock novel, often better tools for coordination and governance. Their rapid growth is a testament to user demand for upgraded systems.
Instead of an arbitrary legal system dependent on your birthplace, participants can now rely on automated, transparent rules coded on-chain and more defined economic incentives. In places like the US, EU or Singapore with consistent legal systems, the unlock will be less noticeable than for the majority of global inhabitants often subject to a more opaque rule of law. Enforceable contracts, consistent, transparent rules, market-based incentives, and tools for frictionless coordination of groups - unlocked for 5 billion people with an internet connection.
Incentives matter. Governance matters.
The American experiment has been successful thanks to its emphasis on individual rights, consistent rule of law, entrepreneurial incentives, political accountability, and a well-architected system of checks and balances to help tame the predictable overreaches of human nature.
Smart contracts and tokens may allow netizens globally to “opt-in” to digital economies with superior frameworks for facilitating exchange. They unlock competitive governance where users choose the structures they wish to deploy their time, energy and resources.
As opposed to the friction of immigrating to a new nation-state, a new protocol is always just a key signature away. Despite modern day techno-bureaucrats like Vitalik architecting the design, the system’s legitimacy is bestowed upon it by the users. If a small oligarchy manipulates the system unfairly, the masses can simply fork the opensource code and begin anew.
The systems are transparent. They are competitive. They are easily exited. And they require legitimacy from social consensus.
In Summary…
Most crypto writing I see today, celebrates the token’s role in solving the internet’s original sin. We have aligned the interests of the participants in the network - the users, the devs, and the infra providers which should lead to less negative externalities in terms of rent extraction or ads-driven business models. That’s a big deal.
We have moved from small community and SMEs, to global companies, to internet aggregators, and back to communities (now on a global scale).
More importantly, however, we have unlocked competitive systems of governance. Transparent protocols, smart contracts, and token incentives have the potential (over time) to bring consistent laws, enforceable contracts, digital property rights, and market-based financial incentives to billions as they join the digital economy. Many around the globe will access these properties for the first time this decade.
We are still very early, but the unlock in places like Southeast Asia, India, LATAM and Africa should be enormous.
***
Up only :)
2019 GDP
2020 GDP
2020 GDP
Nice piece!