Crypto Commons
Many crypto enthusiasts are looking at blockchains as a way to correct the sins of the past (government over-reach, lack of sound money, expensive middlemen, centralized businesses, etc.)
The truly important question should be way bigger than this: How can crypto-powered businesses create new types of abundance? How will blockchains drive our standard of living forward exponentially? How will we see the creation of tens of trillions in new value like we did with the stock market in the last 150 years?
The answer lies in how crypto can transform the tragedy of the commons into the wealth of the commons.
There are many types of businesses
Throughout history, there have been many types of businesses. In ancient times people used barter. In medieval times we had feudalism. Later, mercantilism, then free-market trading along the lines of Adam Smith’s “invisible hand,” later augmented by the “visible hand” of the modern corporation. As long as we discover new ways to create value, new types of businesses will emerge.
In today’s world, there are four major types of businesses: A Sole Proprietorship, a Partnership, a Limited Liability Company, or a Corporation. Almost all big companies today are Corporations, consisting of a Board of Directors, Shareholders, Managers, and Employees. Startups take this form as well, since they want to be the big companies of tomorrow.
Large Corporations are relatively new
Because we have large corporations all around us, it’s easy to assume businesses have always looked this way. But in 1800, almost every business was a sole proprietorship. Then the railroad and the steam engine created a massive change event. The opportunity to span the country with a transcontinental railroad turned out to be a catalyst for large corporations that would bring enormous abundance to the world through mass production and mass distribution.
Nobody had the money to fund big railroads on their own. So, JP Morgan convinced people (mostly in Europe) to buy fractional ownership units called “shares” of stock to raise enormous sums of money. By pooling the resources of a lot of shareholders, large railroads became possible to fund. A share of stock was a new way to invest in the future profits of a large-scale corporation.
Would you have wanted stock in a railroad?
Investing in stocks is obvious today, but imagine you were a blacksmith or fur trader in 1870, and someone offers a share of stock in a railroad. It wasn’t “valuable” like money because you couldn’t go to the store and buy things with it. And you couldn’t say to a train conductor “I want to use my share of stock to take a ride on this train.”
Imagine you’re a British aristocrat in 1870, and your primary assets are in European land. Do you invest some of your “old money” wealth into the New World stock markets in search of better growth prospects? Land is tangible and known. Stock in a railroad is a walk on the wild side. Do you feel lucky?
Suppose you run a railroad. How do you organize it? How would you represent the interests of the shareholders since the CEO of the company is not the sole proprietor? The governance of corporations had to evolve through vision, as well as trial and error: a Board of Directors elected by the shareholders, a CEO chosen by the Board, and the rest of the organization reporting to the CEO. This structure was not obvious to people at the time: It was an emergent development.
If you find crypto capitalism dynamic and confusing, you can get a sense for the confusion these founders and investors had to navigate.
Scalable Corporations created massive abundance
Despite this initial uncertainty, the stock market created massive value for humanity. After taking the railroads public, JP Morgan proceeded to help organize US Steel, General Electric, and many other companies. GDP per capita increased 14-fold in real terms from 1800 to 2000. We often underestimate what a miracle the last 200 years have been for our standard of living.
Blockchains and crypto businesses can drive the standard of living forward even faster, by creating a new type of abundance centered around the wealth of the Commons. But we have to think bigger, beyond traditional corporate structures. We need 21st Century JP Morgans, Rockefellers, and Carnegies.
What is a Commons?
The notion of a “Commons” is not new. Centuries ago, farmers in England used common land for their livestock. The land was shared rather than centrally owned, and members of the commons had to follow a set of rules and etiquette (some might even say a “protocol”) to continue to participate.
In some cases, a commons can create value more efficiently than free-market ownership or government-enforced regulation. Open source software is a compelling recent example.
Why hasn’t the commons succeeded in producing abundance at scale?
It turns out that the commons is difficult to scale and is prone to abuse.
The “Tragedy of the Commons” was coined by Garrett Hardin in 1968 as a critique of the commons. It describes how individuals, acting independently according to their self-interest, can accidentally destroy a shared resource.
A real-world example is the Grand Banks Fisheries off the coast of Newfoundland, Canada. For centuries, explorers and fishermen marveled at this region’s endless supply of codfish. In the 1960s and 1970s, fishing technology improved and allowed much larger catches. By the 1990s, cod populations were so depleted that the Grand Banks Fisheries failed. It was too late for traditional governance in the form of regulation or private markets; the cod stocks were damaged irreparably.
How do we avoid the tragedy of the commons? Conventional wisdom offers two ways:
You can use the force of government regulation to govern how many fish to catch. The government has the power to enforce the law by fining you or even putting you in jail if you refuse to comply.
Or, private property rights allow a business owner to charge a market-clearing price to prevent abuse of the limited resources.
Enter Elinor Ostrom
Elinor Ostrom saw something different. She proposed that a Commons can create value if a set of rules are consistently applied and respected by all of its members. She compiled eight specific rules for managing the commons. Her examples focused on small groups, and her ideas were groundbreaking, winning her the Nobel Prize in Economics in 2009. (check this out if you would like to learn more).
Although her ideas were trailblazing, it was hard to see how they could scale beyond niches where people knew each other face to face. You might avoid abuse of shared resources, but people had to know each other to make the rules enforceable and to hold people accountable. What could work in an informal and small fishing village, would not work at the scale of a large corporation or nation-state.
Crypto creates a scalable governance model for the Commons
Keep in mind that what makes the commons fail is a lack of scalable governance because there is no centralized control by a corporation or a government. Instead, you are limited to informal relationships among people who know each other.
One of the biggest value propositions of crypto is scalable governance without informal localized trust.
This could be a big idea just like a scalable stock market was a huge breakthrough 150 years ago.
Blockchains create “Governance Markets”
In its simplest form, a market is a medium that allows buyers and sellers of a specific good or service to interact to facilitate an exchange.
“Stock” markets create a market for buyers and sellers to exchange shares of stock. We needed a stock market to allow companies to sell ownership stakes for money they would use to build large-scale corporations.
In the case of crypto, Satoshi’s white paper shows how to leverage mass computation and connectivity to create “governance markets.” Governance markets allow the commons to scale and create abundance in the same way that the stock markets enabled corporations to scale.
“Governance” markets? Why would people want to buy and sell governance?
Blockchains facilitate precisely this. They create the first medium for people to be rewarded for enforcing decentralized “governance” at scale.
Whether we are talking about Bitcoin, Ethereum, or any blockchain ecosystems, the big idea is the same: Governance markets reward those who contribute to consensus. A “market” is created to award coins to those who enforce the governance rules of the protocol.
Governance Markets will enable the Commons to scale…like the Stock Markets enabled Corporations to Scale
Without a governance markets for a Commons, you will see a tragedy of the commons or the rule of the mob when you try to scale. But if you have scalable decentralized governance at the core, you now have a new platform to fuel new businesses that create massive abundance in ways never before possible.
Just like a stock market was a financial platform for creating the scalable corporation, blockchains can be governance platforms for enabling the scalable commons.
In the not-too-distant future, a new form of networked governance will allow new types of value creation with crypto assets rather than shares of stock, contributors rather than employees, and decentralized collaboration rather than centralized ownership.
What would JP Morgan do?
This is why people are missing the point when they talk about the businesses that crypto will “disrupt” or “disintermediate.”
The better question is “What would JP Morgan do if he were alive today?” What would Rockefeller, Carnegie, and Edison do?
Cornelius Vanderbilt did not say, “I want to replace the stagecoach.” Thomas Edison didn’t say, “Death to kerosene and whale oil lamps.” Henry Ford didn’t say “No more horses and carriages.” The stock market was a new thing that helped entrepreneurs create new businesses that advanced the standard of living. Abundance happened because ambitious people were looking forward and trying to make new things that were exponentially better.
150 years after the first railroad IPOs, the US stock market alone is worth more than $30 Trillion.
The next $30 Trillion in abundance?
Prediction: Crypto-powered governance markets will solve the tragedy of the commons and drive future abundance at the same level of scale as the stock market and the corporation. In a pervasively connected world, it will be more global and democratized than what we’ve seen before.
Whether you are in Silicon Valley or Zimbabwe, Shanghai or Caracas, harnessing this new power is one of the most important duties for those who want to build an abundant future.
Thanks to those who were kind enough to review and provide feedback on this post: Naval Ravikant, Marc Andreessen, Vinny Lingham, Arianna Simpson, Albert Wenger, Kyle Samani, Tushar Jain, and Alok Vasudev.
Extra gratitude to Elinor Ostrom and Satoshi Nakamoto for pulling together a set of ideas that will help move us to a better future.
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