Understanding Digital Innovation in the Era of the Internet of Value
As we transition from the Internet of Information to the Internet of Value, it is important to upgrade the compass we use to navigate the waters of digital innovation. In this post, we explore the process of venture building and how it is evolving to leverage the opportunities offered by blockchain.
Over the last decades, start-ups have represented the symbol of disruption brought by innovation to business models and value chains across industries.
But the process of venture building itself is not immune to disruption, especially when new foundational technologies come to fruition. When a new paradigm emerges, it challenges widely agreed assumptions, rules and barriers, making what used to be considered impossible, possible.
The advent of blockchain may undoubtedly be classified as a foundational paradigm shift, introducing several ground-breaking innovation primitives: digital scarcity and digital originals, reliable decentralized sources of truth (self-sovereignty), coordination at scale without trust, the separation between money and state, to name a few.
All these ingredients led to the birth of the Internet of Value, a new digital construct characterized by liquid, divisible and borderless assets leveraging a global and open innovation ecosystem.
In this post, we intend to investigate how the Internet of Value is exerting a significant impact on the process of venture building with specific reference to the intersection of governance, finance and management (Fig.1).
From Pipelines to DAOs
Before the advent of the Internet of Information, the standard way of conducting business was mainly leveraging pipeline models characterized by: high levels of labour intensity, asset-heavy balance sheets and a primary objective function of extracting value from a large customer base to channel it into the hands of a limited number of investors. Within this framework, the difference among customers, employees and shareholders was very clear-cut.
The first wave of digitalization witnessed at the turn of the century spawned the birth of the platform economy. A new breed of businesses (e.g. eBay, YouTube, AirBnB, Uber, Just Eat, to name a few) leveraging information and communication technologies to serve two-sided markets. This kind of business is: extremely cost-effective thanks to the presence of a limited workforce on payroll, highly profitable due to their asset-light structures and quickly scalable as a result of their negligible marginal costs. In platform setups, customers may take up a more active role by either contributing with some work (e.g. drivers, riders, hosts) and/or with some assets (e.g. cars, apartments, bikes) in exchange for compensation. In this type of venture, while the boundary between employees and customers is more blurred than in the pipeline model, the one between users and investors is still very clear-cut. In addition, initial customers do not get any meaningful compensation for igniting the network effects that make these platforms worth billions of dollars (e.g. the first Uber drivers/passengers or the first AirB&B hosts/guests).
At this point, a reasonable question to raise would be whether platform models represent the ultimate destination in the evolution of the way business is conducted or, rather, they represent a temporary station.
As the building of the Internet of Value moves from the infrastructural layer to the application layer, a new model of doing business seems to be emerging. Initially conceptualized in 2014 by Vitalik Buterin, the term DAO (decentralized autonomous organization) represents an archetype which communities and organizations alike have tried to explore to find a better way to: align incentives among stakeholders, create more resilient ventures and implement a fairer way to generate and distribute value (see Fig. 2). DAOs are non-hierarchical organizations governed by goal-seeking communities united by purpose and rules that operate through cryptographic routines [1]. Due to length constraints, this article will not get into the details of DAOs as a more in-depth discussion may be found in two posts previously published by Overtheblock [2] [3].
Within DAOs, the boundaries among users, employees and shareholders tend to disappear as each network participant may choose to play multiple roles while behaviours are influenced and incentivized through tokens design.
In July of this year, the State of Wyoming (USA) passed a bill officially recognizing DAOs as a new type of limited liability company or LLC. At the same time, a recent survey identified more than one hundred operational DAOs managing over 10 billion dollars in assets (Fig. 3) [4]. The study highlights the presence of eight types of DAOs with different specializations: developing tools to enable DAOs creation, leveraging proximity and small communities for improving grants allocation, capital pooling to take part in early-stage investments, curating digital art, socializing, etc. Whatever the object of their activities, DAOs represent interesting explorations of how the future of work may look like in a more liquid, borderless market where “subscribers are being replaced by supporters, angel investors by angel audiences, and collaborators by co-owners” [5]. In other words, we can say that they constitute a bet on the future of human organization.
From Shareholders Supremacy to Community Centricity
Governance and fundraising are tightly intertwined as people devoting cash to new ventures want to retain a certain amount of control over them. When it comes to financing start-ups, the ecosystem of actors and the procedures adopted have evolved significantly over the last decade. In 2018 SOSV released a brief summary of the 70 years of VC innovation [6]. As it is possible to note from Fig. 4, over the years, venture capital firms were gradually complemented by start-up studios, angel investors, incubators, accelerators, product- and equity-based crowdfunding platforms and ICOs (initial coin offerings). More recently, after 2018 additional ways of raising funds emerged, such as initial exchange offerings (IEO), initial farm offerings (IFO) and liquidity bootstrapping pools (LBSP). As the width of possibilities increased, the process of raising funds moved from involving a limited number of professional experts (VCs) usually geographically clustered in innovation hotspots to a much broader and more diversified audience globally dispersed. In addition, tokens emerged as a new way to encapsulate value and exercise governance rights as well as to contribute to the functioning of underlying technological infrastructures (e.g. in the case of Proof-of-Stake chains).
As a consequence, tokens have been gradually establishing themselves as the third pillar of capital formation in between dept (a claim on assets) and equity (a claim on profit & cashflows) representing a claim on future network growth.
From an investor point of view, the advent of tokens opened access to a global deal flow of opportunities on top of creating a secondary market of liquid assets connected to early-stage initiatives. From an entrepreneur perspective, instead, it allowed tapping into financial markets with no boundaries operating 24/7 as well as creating large international communities of early adopters and evangelists.
While recurring to a wide audience of small investors was not something unheard of, thanks to equity crowdfunding platforms such as Seedrs, Crowdcube or AngelList, the emergence of community-centric ventures and tradable tokens led to a deeper involvement of initial investors in the governance, testing and marketing of the services developed.
In a way, tokens have put open innovation on steroids, by combining the impact of co-creation, equity crowdfunding and crowdsourcing. All practices that, previously, were employed separately through single purpose platforms but were rarely leveraged together in a single recipe.
This evolution generated an explosive potential for the testing of problem-solution and product-market fits, the generation of constant inflows of user-driven innovation as well as more effective marketing expenses thanks to a massive recourse to word-of-mouth over display-based advertising.
In addition, the use of tokens as funding instruments opened the door to the exploration of new avenues in the management of the venture lifecycle. One of them is represented by the Exit to Community proposed by Nathan Schneider of the Univesity of Colorado. In the Exit to Community, founders can gradually transfer the ownership of the platform they built to the users while at the same time being rewarded for the work put into bootstrapping the network.
As Vitalik Buterin highlighted:
‘The optimal governance structure for early-stage projects is founder dictatorship. The optimal governance structure for mature projects has large user/stakeholder involvement. “Exit to community” continues to be underrated as a way to get both’.
It goes without saying, that enacting this kind of strategy requires building a significantly different type of organization where openness, transparency, collaboration and education represent key ingredients.
The Art of Community Management
As the fabric of what keeps people together in the accomplishment of a mission is gradually evolving, leaders or rather “community bootstrappers” are presented with new and vital challenges.
Building a community is more complex than building a traditional bureaucratic organization mainly managed through contractual arrangements. A community is a purpose-driven group of people sharing common values and a sense of belonging with an implicit expectation of reciprocal care and individual contribution. Communities may generate solid identity bonds in their members but, at the same time, leave participation to a voluntary choice with weak contractual constraints. In this setup, community leaders are required to show deep beliefs in the mission pursued and an existential alignment between their role and their call in life.
In addition, community expectations often exceed legal requirements, that is why legal compliance is necessary but not sufficient to keep a community together and make it grow. In this respect, radical transparency, coherence between daily actions and values and an attitude of community care are key ingredients to build the level of trust necessary to generate the glue that keeps members committed and makes communities flourish. Implementing high levels of transparency often leads to running a start-up similarly to a publicly-traded company where information and expectations management plays a key role. In the crypto space, founders often engage in periodic live events (usually referred to as Ask Me Anything or AMA). In so doing, they share advancements, explain the rationale behind strategic choices and collect constant feedback from stakeholders.
A final aspect to manage for keeping a community alive and vibrant is the trade-off between the incentives provided for long term contributors and those offered to new recruits. In a way, it is important to nurture the roots of the community without sacrificing its ability to evolve and constantly benefit from an inflow of new energies, views and competencies. While network effects play a key role in determining the value of a community, scaling them represents a significant challenge. In this respect, the adoption of concentric circles of incentive alignment and expected contributions may represent a potentially viable approach.
Moving from challenges to opportunities, people belonging to healthy communities are usually much more loyal users and characterized by a higher sense of ownership than people mainly driven by extrinsic motivations. In this respect, communities may represent a significant and sustainable competitive advantage as they are hard to replicate or divide. This is due to the fact that being part of a community becomes part of a person’s identity, an aspect of life that people are reluctant to change.
Final Takeaways
As the world of venture building takes its turn at being disrupted, it is useful to highlight some final takeaways that may not currently apply across all industries, but definitely represent weak signals with the potential to become a future dominant approach:
- Build a community alongside an excellent product/service
- Leverage tokenization to align incentives and tap into the global pool of financial capital
- Use open innovation at 360° by combining swarm intelligence, crowdfunding and crowdsourcing
- Reward early adopters while keeping in mind that network effects are essential for survival.
Finally, as corporations are called to play a more important social role in the improvement of the state of commons (environment, public health, democratic levels, etc.), DAOs may represent a new value architecture to explore viable paths towards triple sustainability. As a matter of fact, they widen the range of governance options, implement a fairer way to generate and distribute value by reducing shareholders’ supremacy to the benefit of community centricity.
[1] Voshmgir, S. (2019). Token economy: How blockchains and smart contracts revolutionize the economy. Shermin Voshmgir-BlockchainHub.
[2] Canova C., Corrias G., Ferro E. and Moncada R. (2020), Blockchain-Based Governance: A Paradigmatic Shift, OverTheBlock Innovation Observatory, retrievable at link
[3] Moncada R., Ferro E., (2020) Decentralized Autonomous Organizations (DAOs) in Decentralized Finance (DeFi), Overtheblock Innovation Observatory, retrievable at link
[4] Coopahtrooper (2021) DAO Landscape, retrievable at link
[5] Debruin, J. (2021) The Dream of Interoperability, Forefront, retrievable at link
[6] Joffe, B.(2018) 70 years of VC innovation, SOSV, retrievable at link
Please cite as:
Ferro E., Moncada R. (2021) Understanding Digital Innovation in the Era of the Internet of Value, Overtheblock Innovation Observatory, retrievable at link
OverTheBlock is a LINKS Foundation’s initiative carried out by a team of innovation researchers under the directorship of Enrico Ferro. The aim is to promote a broader awareness of the opportunities offered by the advent of exponential technologies in reshaping the way we conduct business and govern society.
We are chain agnostic, value-oriented, and open to discussion.
