Decentralized crypto networks are driving the cost of shared ownership to zero
There is a well-established pattern to how great American network infrastructure has been built:
- Boom — A new technology (e.g. telegraphs, railroads, the Internet) with huge potential is identified and evangelized by visionaries and early entrepreneurs. Capital and entrepreneurs start rushing into the space to build out capacity.
- Mania — “Speculators” bid up prices into bubble territory. Network capacity becomes hugely over-built.
- Bust — The bubble pops. Network operators are forced to slash rates; opportunists who came in late suffer heavy losses. Companies go bankrupt. “Speculators” responsible for the “mania” are roundly criticized and mocked.
- Payoff — Slowly but surely, the network fulfills its potential. The existence of the now widely-available infrastructure enables a new generation of commercial interests and use cases to ride on top. The transformative impact of the technology over decades turns out to have been under-estimated by even its most ardent promoters.
Well-studied examples include the railway network & the Internet (see for example Railways and the Electronic Age & Why Bubbles Are Great For the Economy). I will argue here that the rapid expansion of decentralized crypto networks is following the same pattern.
Each successive infrastructure buildout helped to reduce an important business cost dramatically:
Railway — The buildout of the railway system in the mid 19th century drove down the cost of transportation dramatically (95% by some estimates). Afterwards, use of nation-wide shipping & transport exploded, and mail-order retailers like Montgomery Ward and Sears, as well as consumer products companies like Procter & Gamble and Coca-Cola were able to build highly efficient national enterprises and brands on top.
Internet — Later, the buildout of the Internet in the late 20th century drove down the cost of communication to near-zero. Communication and Internet-based commerce exploded, enabling companies like Amazon, Google, and Facebook to build massively successful Internet-based e-commerce & advertising businesses on top.
Crypto — If the rapid buildout of decentralized crypto networks is our next large-scale infrastructure project, what are the costs it is helping to drive down?
There are actually several costs we could potentially point to — such as the cost of accessing financial services (via smart contracts). But the one I want to focus on here is the cost of shared ownership.
The Magic of Shared Ownership
Silicon Valley has known for years that there is powerful magic in shared ownership. The culture of employee ownership via stock options has been at the core of startup thinking and practice for over 30 years, for good reason. Shared ownership aligns incentives between investors (VCs, management, and employees), and helps otherwise disparate interests & parties to self-organize and row in the same direction. Equity compensation is the primary tool used by public market investors to align incentives with top management at larger enterprises as well.
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” — Upton Sinclair. You want this working in your favor.
Shared ownership affects humans at a fundamental level and influences the way that they think. Things that you own are seen as an extension of the “self” as opposed to the “other”. Try an experiment with yourself: observe how your own thinking changes before and after you buy an ownership stake in something. It is impossible for it to not affect your thinking (assuming you’re being honest with yourself).
Shared ownership is the most powerful force in the financial universe for aligning human action around common goals.
Driving Down the Cost of Shared Ownership
We have seen innovation in shared ownership previously. We’ve expanded from simple Partnerships, to the Joint-Stock Company, to the modern corporation. Each of these developments represented an advancement in the sophistication by which humans could organize ownership. As legal concepts, these of course varied by jurisdiction and relied on courts for adjudication and enforcement.
Establishing structures of shared ownership takes time, money, and lawyers. There has been no technological or Internet-native solution for this up to this point, because there has been no Internet-native concept of ownership. Shared ownership has therefore been strictly a meatspace legal concept. Until now.
Crypto provides a new, global and Internet-native infrastructure for ownership that is based on pure information (knowledge of private keys) with adjudication via protocol rules and open-source smart contracts. As we’ve covered previously in The Triumph of Open Protocols, the development of Bitcoin represented a breakthrough in human cooperation, giving random strangers on the Internet with no reason to trust each other a rules-based protocol that allows them to collaboratively manage ownership rights over a new kind of scarce digital property. In Crypto Tokens: A Breakthrough in Open Network Design, Chris Dixon points out that the incentive alignment mechanism of tokens allowed for the first time for significant, expensive deployments of Internet-scale infrastructure to be built & operated outside the context of traditional corporate ownership & need for value capture.
Regulation
“Wait, so aren’t you saying crypto tokens often basically function like equity? Doesn’t that mean they would be illegal securities in the U.S.?”
Yup. I’m saying that. But if history is any guide, regulators have a way of adapting sensibly to realities on the ground, after the fact. The railway network expansion also initially ran well ahead of legal guidance, and a raft of new legislation followed (including the Hepburn Act, the Mann-Elkins Act, & Interstate Commerce Act), helping to rationalize things afterwards. Congress is only now beginning to even try to rationalize the rapid Internet expansion.
Crypto-luminaries like Chris Dixon and Mike Novogratz can’t talk publicly about the “equity-replacement” role of tokens, at least in so many words, since they are in the business of positively influencing U.S. regulators. So they talk about Web3 instead. This is one of the decisive advantages of being a rando blogger: I can say whatever I want.
Innovating on Top of Ownership Infrastructure
It is in this context that emerging crypto phenomena such as NFTs and DAOs start to make more sense. The new shared infrastructure of ownership has driven down the cost of establishing structures of aligned financial interests, and we are just starting to see the innovation that this enables. People buy NFTs or join DAOs in large part to participate in communities where aligned financial incentives come as part of the package.
Imagine membership clubs, where every member is an owner and can participate in the financial success of the club as it grows. There would be nothing more natural than seeing member-owners working hard to add value, and that is exactly what we see.
This powerful new ownership infrastructure opens up a vast design space for sophisticated & complex crypto-economic incentive schemes (such as what we see in Terra’s mint-and-burn relationship between LUNA and its system of algorithmic stablecoins, or Thorchain’s “3x TVL” relationship between RUNE and the other assets in its cross-chain DEX). We are only at the beginning of seeing what the human mind can devise here.
We are extremely early in the development and rollout of this new infrastructure. If history is any guide, the surprise as to its ultimate impact will be greatly to the upside.
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