M y recent essay encouraging investors to rotate from the shares of FAANG to the coins of BEEStMoD turned out to be one of the most widely read and controversial things I’ve ever written. The reaction, which ranged from bemused to angry, confirmed my impression that most people simply can’t imagine a world where corporations don’t dominate their digital lives. To see why it’s possible, consider the following — even more unlikely — scenario:
Imagine a world where a handful of people invented a technology that created trillions of dollars in economic value, but that the inventors didn’t make a penny off of it. Instead, the people who used this technology to make a far less important economic contribution made a killing. It would be as if Edison and his lab made nothing from the lightbulb, but a random seller of quirky lampshades became a millionaire.
This shouldn’t be hard to imagine, because that’s the world we live in today. Tim Berners-Lee, the man who gifted us the World Wide Web, made less money off of his creation than Rebecca Black, the teenager who gifted us that famously awful YouTube video. Your average Instagram influencer probably makes more money off the internet than all of its founding fathers, combined.
To be fair, my lampshade analogy isn’t fully accurate, because Black didn’t make as much on her video as YouTube did. A better analogy would be if Edison made nothing, the lampshade designer made a little, and the shipping company that delivered the lampshades became a Fortune 100 company.
Our digital economy today is such that those who invented its underlying infrastructure, and those who create the content that makes that infrastructure appealing, capture less economic reward than the middlemen. Without TCP/IP and HTTP there’d be no search engines, and without interesting websites there’d be no reason to use search. Google is arguably the least important component of this triangle, yet it makes almost all of the money.
So before you tell me that it’s hard to imagine a future where highly profitable intermediaries like Google and Facebook don’t exist, consider that it might be even more implausible that they do.
None of this is anyone’s fault, per se. The protocols that make up the internet wouldn’t have worked if their creators had tried to monetize them. As Berners-Lee himself said: “If I had tried to demand fees … there would be no World Wide Web..There would be lots of small webs.”
And so, TCP/IP, HTTP, SMTP and various other protocols were just given away. The existence of these so called “thin protocols” — as so elegantly coined by Joel Monegro — is what made the rise of the “fat applications” of FAANG possible. At the time, their creation was a blessing, because a bad economic model is always better than no economic model. But today, that model has turned into a problem.
I n economics, any system where risk and reward are out of alignment is inherently unstable. A party that can capture almost all of the reward while taking none of the risk (thus having no Skin in the Game) is going to press its luck until something breaks. For a perfect example, see the 2008 financial crisis, which we can now summarize as the inevitable outcome of what happens when bonuses flow to one group while burdens to another.
Such is the state of FAANG & Company today. On any given day, millions of people take on the risk of publishing a song, driving an Uber, making a YouTube video, renting out an AirBnB, building a Twitter following, publishing a book or posting interesting content on Facebook. When they fail, which the vast majority inevitably do, they take home 100% of the loss. But should they succeed, a giant corporation that already has more money than it knows what to do with takes a massive cut. No wonder the tech giants are starting to eat themselves.
Just recently, Apple’s iTunes store booted an app owned by Facebook because it was a spying tool masquerading as a privacy one — proving once again that Facebook has no shame (the deceptive app literally had the word Protect in its name.) You would think that Mark Zuckerberg would have learned his lesson by now, but then again why should he? Your risk is always his reward. (Apple at least seems to have done the right thing, but perhaps only because the victims weren’t Chinese.)
There are many political and technological explanations as to why these companies keep stumbling from one controversy to another. My contention is that the problem is primarily economic. When risk and reward are not aligned, two outcomes become increasingly likely:
- The beneficiaries make a shitload of money.
- The beneficiaries make bad decisions.
Welcome to FAANG 2018.
The decentralized platforms that comprise my BEEStMoD index bring that relationship back into alignment. Blockchain technology allows us to replace corporate intermediaries with a decentralized platform that is owned and governed by its users. The benefits start with the financial — as taking out the middleman usually does — but go far beyond into the social and cultural. Consider payments as an example.
If you use PayPal for your company, then not only do you have to pay a hefty fee, but you also risk having a central authority tell you how to run your business. If you use it as a consumer, you face higher prices (as the fees get passed on to you) as well as a corporation dictating what books you shouldn’t read. But if you use Bitcoin, Ethereum or even a tokenized dollar, you take back control of your financial (not to mention literary) life.
I t should be noted that switching from FAANG to BEEStMoD doesn’t diminish user risk, it increases it. On a decentralized platform, not only does each cab driver or social media influencer still have the risk of losing to other cab drivers and influencers, they also shoulder the risk of their chosen platform failing, akin to employees at a startup getting some of their compensation in equity that might end up worthless.
But a stable economic system isn’t one with no risk. It’s one where rewards are handed out proportionally. Just as the risks are higher with BEEStMoD, so are the rewards. On a decentralized platform, not only can a cab driver or influencer earn more by beating the competition, they can also become wealthier if their chosen platform gains popularity, thanks (in part) to their own contribution. This — far more equitable — flow of value yields yet another reason why the world would be a better place if the biggest digital platforms were decentralized.
The ascension of FAANG & Co has been a major contributor to the growing wealth gap. While almost anyone can post a video on YouTube, virtually no one can afford the $1200 it costs to invest in a single share of its parent company, thus ensuring a constant flow of wealth from average citizens to a handful of billionaires. BEEStMoD realigns this relationship entirely, ensuring that the earliest adopters of a platform, and the people who make it appealing to others, benefit the most, as has already been the case with Bitcoin.
I understand that all of this seems unlikely. But the technological graveyard is filled with companies and platforms whose dominance once seemed permanent. It wasn’t that long ago when many of us couldn’t imagine living without AOL Instant Messenger, a platform that as recently as 2006 enjoyed greater than 50% market share in North America. Today, it doesn’t exist. When it comes to technology, the switch from the unlikely to the inevitable can happen in an instant, and if you wait until the writing is on the wall to adjust your investment portfolio, you’ll be too late.
Now is the time to sell FAANG and rotate into BEEStMoD.
Disclaimer: I’m a user of both FAANG and BEEStMoD, making me a value contributor for both, and an equity holder for one.