Crypto Turns Companies Into Communities
How Ethereum can enable a revolution in corporate governance and the birth of community-owned capitalism
If you haven’t been closely following the Ethereum space you may have missed the incredible innovation of the past six months. Ethereum has quietly enabled a system that allows companies to give ownership to all stakeholders — employees, customers and suppliers in addition to investors. For the first time, humanity has developed an economic organization system that fully aligns the goals of all those involved in the enterprise, and the potential is revolutionary.
Ethereum: The Basics
Six years after the launch of Bitcoin, the original highly secure Internet transaction network built on a blockchain, Vitalik Buterin launched Ethereum. Ethereum was designed to be a more flexible blockchain, enabling not just transaction and storage (i.e. Bitcoin), but a wide variety of applications by allowing “if, then” logic in its code. Much like the Internet is an application platform, allowing incredible applications like Google and Facebook to be built, Ethereum is as well.
Already, Ethereum is the foundation of a thriving digital economy with tens of thousands of applications, $100 billion residing and flowing through the network and over $1 trillion in annual transaction volume. Some applications on the network resemble small companies, with real customers, suppliers, employees and investors interacting and growing the enterprises.
Like Bitcoin’s network uses bitcoin to transact on it, Ethereum also has a digital token attached to its network — Ether. In addition, Ethereum allows applications to create uncopiable new tokens that can be transacted on the network, with developers giving them whatever functionality is useful to the application. Some projects have created tokens that represent shares in the project, much like stock in a company. These tokens allow owners to vote in important decisions made about the project, and sometimes also entitle holders to cash flows earned by the network — much like traditional equity does.
What is a Decentralized Company?
Uniswap is a cryptocurrency exchange application launched on Ethereum in 2018. Uniswap’s business model is similar to that of a traditional exchange, like the New York Stock Exchange (NYSE). Uniswap users are able to swap different cryptoassets like bitcoin and ether 24/7/365, with nearly instant settlement and low trading fees. Unlike the NYSE, which relies on the third parties called market makers to get liquidity and pair buyers and sellers, Uniswap uses an algorithm to match participants. To obtain liquidity, Uniswap incentivizes people to lend cryptocurrencies to Uniswap, providing lenders with a share of trading fees for doing so.
In addition to being an innovative peer-to-peer exchange service, Uniswap is interesting in that it is community-governed via its UNI token. Uniswap announced the token in September, initially providing a portion of the tokens to customers, lenders, investors, employees and advisors, with the intent of further distributing the majority of its tokens to users over the course of the next four years. Customers receive UNI for trading assets on Uniswap, as do lenders for lending assets that provide liquidity to customers. UNI token-holders have the ability to propose and vote on changes to the platform and will likely vote to provide themselves a portion of trading fee profits in the coming months, making the tokens very similar to share of stock.
While important in its own right, the focus here is not the token, but rather how it is able to be distributed. Prior to the invention of blockchains, it would have been difficult to track every stakeholder who interacted with a company and impossible to reward them all with a bit of stock for doing so. With a blockchain, transactions occur 24/7, are nearly instantly recorded and are publicly verifiable, making community distribution of company ownership on a global scale possible for the first time in history.
A Thought Experiment: Emily’s Lemonade Stand
8-year old Emily is bored over her summer break and wants to earn some money, so she decides to open a lemonade stand. Despite her young age, Emily is a savvy businessperson and goes about researching different structures for her soon-to-be lemonade empire. Let’s explore what might happen under each:
Being only eight years old, Emily does not have access to much capital outside of her $5 allowance. While she has saved up for a few months, she can barely afford lemons and sugar, much less any other ingredients to expand her product selection. She can’t afford to hire any employees, so she is forced to juggle customer service, marketing, purchases of new ingredients and creation of new lemonade. In the end, the lemonade stand is only modestly successful, limited by lack of access to capital and difficulty creating new customers.
Emily’s dad, John, knows of her business acumen and decides to help out, agreeing to split ownership of the company 50/50 with Emily doing the work and John providing $100 in startup capital. With the extra cash, Emily is able to purchase a variety of ingredients, adding pink lemonade to the product selection and even hiring a neighborhood kid to advertise the stand at the busy local mall. Thanks to the new capital, Emily’s business does a bit better, splitting the profits with John, though she still struggles to obtain customers.
Limited Liability Corporation (LLC)
While many people who know Emily would be interested in investing alongside her, they fear the aggressive local anti-sugar activists known to sue any business thought to be active in the sugar market. In an LLC structure, these would-be investors have no personal liability, only the capital they risk is at stake. Emily receives financing from 10 different neighbors, providing essentially unlimited funding. She is able to offer a variety of products, advertise all over town, and hire people to run day-to-day operations while focusing on her specialty, product development. Investors reap good profits, while Emily retains enough ownership to do well for herself. Still Emily wonders if they might have been able to do better, seeing potential customers not convinced by her advertising blitz.
After getting an initial investment from some neighbors, Emily and her lemonade stand’s shareholders decide to implement a “community ownership plan” to jumpstart the growth of the business. For the first month in business, every customer and supplier gets a bit of stock each time they do business with Emily. The local grocery store owner who sells her ingredients accumulates a decent stake and proudly tells every customer who comes through that he is the sole supplier to Emily, encouraging them to head over to her stand.
Emily’s friend Rachel is the first customer and becomes a part-owner with her lemonade purchase. Seeing the potential for easy money, Rachel brings three of her friends to try Emily’s lemonade, who also become part-owners and recruit their friends to come to the stand. These new friends enjoy the lemonade, but inform Emily that they, and many in the community, prefer orange juice on a summer day. Using their power as co-owners, they propose adding orange juice to the list of products, which is approved by the other shareholders.
The community propagates itself, with owners actively seeking new customers and community members contributing their expertise to the business to maximize profits for themselves. Despite the greater number of owners, Emily does very well as most of the town patronizes, supplies or owns the business. Early community members share in the growth, rewarded for their early adoption. Emily’s Lemonade Stand drives most other sole proprietorship, partnership, and LLC governed local stands out of the market due to its innovative products and dedicated community. New market entrants start their own decentralized companies just to compete.
The Potential Of Community-Owned Capitalism
In the Emily’s Lemonade Stand example, we see the potential for greater efficiency that a decentralized company has compared to other governance options. However, we can also imagine a future where such activity is organized on an economy-wide scale.
While capitalism has undeniably been incredibly successful at growing the economic pie, it does a poor job distributing that growth. Across the developed world of capitalist economies, we see widespread economic inequality with managers of companies making hundreds of times the income of lower level employees. Ownership of capital is even more skewed, with the top 1% of capital owners in the U.S. owning 15x more wealth than the bottom 50%. Meanwhile, rapid improvements in technology have meant the lower wage jobs that are available pay less and are harder to come by, making the disparity even worse. The vast majority of the benefit of these technologies has gone to users, who get incredible products but are no financially better off, and capital owners, who make huge financial gains. The growing disparity has contributed to the rise of populism on the left and right in recent years as citizens see they are being cut out of the benefits that our system offers.
Decentralized companies and community-owned capitalism can help alleviate these problems, combining the best aspects of capitalism and alternative systems. Community-owned capitalism retains the market incentives offered by capitalism, playing to human nature by creating a profit incentive to build companies, provide labor and invest capital. However, community-owned capitalism provides a more equitable distribution of wealth in society by giving part ownership to those left behind in the current system, namely employees and consumers. It also encourages an unprecedented amount of cooperation between stakeholders by giving them a financial incentive to increase the value of their share of the company.
When everyone has an ownership stake in the technologies creating the future, the distribution of wealth becomes more equitable and adoption of new technologies is rapid. While not jobs in the traditional sense, governing these companies will become responsibilities as well, with owners incentivized to participate actively in governance to grow the value of their stake in the company. The alignment of incentives this system provides may make companies more innovative, boosting the economy and creating new jobs.
While not a perfect system by any means, decentralized companies have the potential to usher in a new era of capitalism, one where companies move closer to becoming public goods governed by their communities, more equally rewarding all stakeholders in the community instead of accruing most benefits to investors and users. By aligning the incentives of users, investors, employees and suppliers, decentralized companies will potentially be massively more efficient than traditional corporations, accelerating innovation and economic growth.
While we are undoubtedly incredibly early in this potential transition, the activity happening on Ethereum right now gives us a glimpse at what might be coming and the potential it has to change our economic system, organizational structures, and society at large for the better.
The materials in this article are for education and discussion purposes only and do not constitute investment advice. Opinions and projections included are provided as of the date of publication, may prove to be inaccurate, and are subject to change without notice. No recommendations are made to invest in any asset. Past performance is no guarantee of future results.
Disclosure: The author owns ETH and UNI at the time of writing.