Corporations are a Technology, and Blockchains are V2
We owe corporations credit for much of the last century’s growth and advancement. The profit-motivated and legally-backed corporation operating in a free market is the latest and greatest innovation in how humans cooperate to create things of value. Great corporations constantly reallocate resources to solve problems, and in the process provide for employees and improve products for the public. Amazon brings packages to your front door in two days, Trader Joe’s sells healthy food at an affordable price, and Google organizes information for anyone to consume.
Yet, corporations carry side effects. In the path to profit and value creation, they pull strings with governments, destroy communities, and extract wealth. Some corporations grow so powerful they start to capture more value from others than they create themselves. Amazon swallows up its most successful contractors, Walmart builds multiple supercenters to knock out local competition, and Facebook straight out copies competitors to stop their user growth.
Today, we have a better alternative. In many industries, the corporation is no longer the most effective way to organize and incentivize value creation. Here’s why:
Corporations hide their “secret sauce.”
Employees are often required to sign a proprietary inventions agreement when they begin working for a corporation. This agreement binds the employee’s ideas to the corporation. For instance, when one of Google’s developers writes code for their file storage product, that code is kept out of the public eye and owned by Google. If that code was public, another corporation could recreate Google’s product and introduce a new level of competition. This would depreciate Google’s value to shareholders and users. Future cash flow estimates determine the value of Google, the corporation. Those cash flows come from their proprietary inventions and data (“secret sauce”) that help them meet the needs of their customers better than their competition.
To keep their value, corporations keep their inventions private. When those ideas escape, they go on the offensive to protect them. For a quick example, take a look at Uber and Waymo’s headline-making lawsuit. Secrecy pays, and loose lips sink share prices.
Corporations explicitly hire people, trading their time for work.
Economist Ronald Coase believes corporations exist because of transaction costs. Let me explain: when the transaction costs of outsourcing a project are higher than the costs of handling it with a full time employee, the company will handle it internally. Google hires employees to work on its storage algorithm because getting contractors up to speed takes too long and the risk of leaking their valuable “secret sauce” algorithm is too high. Hiring is simply more efficient than managing contractors.
This employment relationship benefits both parties: the employee receives stable source of income and the corporation gains a steady supply of talent to tackle problems. However, these benefits hide trade offs for both employees and the corporation.
Self-employed contractors are paid differently for their work, since they usually price themselves in terms of the value they contribute rather than the time they spend working. Thus the price employees pay for stability is the difference between the value of their contributions and the paycheck they receive from Google.
Google also faces trade-offs. First, they overpay employees who under-contribute. Second, they fail to harness the productivity of all the developers they do not hire.
How can we improve upon the corporation?
Public blockchains are the next evolution in how humans will organize to create value. Before I get to why, let me introduce the concept of a blockchain:
Public blockchains define a protocol for creating and exchanging scarce assets across the internet. Most people are familiar with Bitcoin, the original “blockchain” marketed as a digital currency. Let me analogize corporations (using Google as an example) to a public blockchain:
So, how can a blockchain protocol replace a corporation as a vehicle for creating value?
Public blockchains benefit from sharing their secret sauce.
Corporations limit the exchange of ideas and inventions outside their borders, since that exchange can hurt their profits and competitiveness.
Public blockchains, in contrast, benefit from sharing ideas and inventions. On an elementary level, the protocol gains trust by being open-source and auditable (not to be confused with “audited” or “actually secure” as we have seen). In addition, sharing ideas and inventions brings outside parties closer to the happenings of that protocol. Take Ethereum, for example, which has garnered significant developer attention. Many of those developers are not stealing the code to create another network — they are building on Ethereum.
Public blockchains invite anyone to contribute.
While open source practices have existed for decades, closed-source code was always much easier to monetize. Blockchains change this by creating scarce digital assets which can be exchanged at the speed of the internet. These assets can be used as incentive mechanisms to fund improvements and value-add activities done by developers, marketers, entrepreneurs and more.
This openness means individuals need not be “hired” in a traditional sense in order to work on a project and get paid. Anyone can read about the project online, help out, and receive compensation in line with the value they contribute. Consider Dash, a digital cash solution with a “treasury” of its own coins. Large holders of Dash, called “masternodes”, can vote to allocate the treasury’s funds to marketing projects that promote Dash to businesses and consumers. Anyone, anywhere can submit a project for consideration.
Beyond improving and marketing the protocol, some protocols incentivize people to uphold the integrity of the network. The classic example of this system is “mining” for Bitcoin. Mining is the process by which computers do computations to secure the digital ledger of all Bitcoin holdings. People turn computers into Bitcoin miners because the protocol grants rewards of Bitcoins to the computers that validate transactions honestly and quickly. These miners are free to join and leave the network at any time, but they are incentivized to keep mining because of these rewards.
Through their openness and incentives, public blockchains redefine the barriers to participating in the growth of valuable services. In a corporation, an individual needs to be hired or contracted with to help build a product. Working on a public blockchain only requires an internet connection to access the freely available code and community resources. Payment for that work comes through community- or protocol-driven incentives. As a result, these individuals tend to earn in line with the value they create, rather than the time they put in. This results in a more efficient system for creating value and allocating rewards.
This paradigm shift to new ways of creating value together has just begun, but it will undoubtedly change the nature of employment. This accelerates a trend dating as far back as the 1980s, when corporations began spinning off non-core functions, like janitorial services, to contractors. Today, self-employment and “gig economy” careers are on the rise, with mixed results. To keep up, nations and social services will need to adapt to a world with less full-time employment and more project-based engagements. Individuals will need to learn how to manage their work and lives with newfound freedoms. Communities around blockchain protocols will need to figure out how to compensate network participants properly for the value they provide to the network, possibly by using systems like Colony.io or Aragon. We will quickly learn more about how the intangibles we find in today’s corporations, like company culture, drive success and failure of products. We will learn that transaction costs are never zero, and blockchains cannot magically make labor markets more efficient. Corporations will still exist, but blockchains will enable new types of organizations that blend the best of free markets in to corporate structures.
Blockchain technology gives us a way to include more supporters, contributors, customers and investors on a value-creating product. This tool will make it easier for participants to float in and out of these products whenever they choose, leading to increased efficiencies and personal freedoms that are harder to achieve within today’s traditional corporations.
Instead of spending some money on a few cryptocurrencies, spend some time engaging with their communities and protocols. These things may swallow a lot more of our time soon enough.
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